Scott Freling and Heather Finstuen were also featured on Federal News Network's Federal Drive podcast discussing the proposed rule.
Scott Freling, co-chair of Covington's Government Contracts practice, and Heather Finstuen, a national security lawyer at Covington, were quoted by Federal News Network on a sweeping proposed Defense Federal Acquisition Regulation Supplement (DFARS) rule that would expand the government's scrutiny of foreign ownership, control or influence (FOCI) across the defense industrial base—requiring tens of thousands of uncleared contractors to comply with security requirements historically applied only to companies handling classified information.
Scott addressed the difficulty of implementation. "While this is a requirement that Congress put out in the fiscal 2020 National Defense Authorization Act, I think putting it into practice is a lot more challenging. It's a big ask of the Department of Defense to implement a structure like that," Scott told Federal News Network. "DCSA has historically been focused on companies that perform on classified contracts and with this new mandate, it's going to sweep in a large swath of companies that serve the national defense but do so without needing access to classified information. Companies are now going to become subject to the disclosure obligations and the review and assessment process, and so I think part of the reason that it's taken so long is certainly the department has been trying to figure out how best to implement this and operationalize it in a way that works for their interests, but also the contractor community," he added.
Scott noted there is "going to be burden shared on both sides." He also flagged the practical challenge of completing the required disclosures. "The main challenge is going to be for a contractor to complete the standard form, the SF-328 and to provide the required supporting documentation called out in the proposed rule. Our sense from having worked with companies of all sizes, it's not a form to just pick up and fill out without any perspective or training on how to go about completing the form. It'll be incumbent on companies to reach out to counsel to get the advice as it relates to their particular ownership structure," Scott said.
He added that the rule could be especially challenging for companies with complex ownership structures. "In the public company context, there may be thousands or hundreds of thousands of shareholders in a particular company. It's often the case that the public company does not have a pristine roster of all of its shareholders, and the proposed rule as it's constructed right now seems to suggest that there needs to be disclosure of foreign beneficial owners, regardless of the size of their ownership, which is very different from how the SF-328 is currently constructed," Scott said.
Heather described how the Defense Counterintelligence and Security Agency (DCSA) has been preparing for what it calls the "FOCI expansion mission." "DCSA is used to doing this in the classified space, but the scale is now going to be vastly expanded, and there's going to be new timing considerations because it's occurring in the context of a procurement process," Heather said. "It's going to be operating at a scale that it's never had to operate at before."
Heather also addressed the proposed rule's provision allowing DoD to apply the requirements to certain commercial products and services contracts. "That's a pretty broad standard," Heather said. "The senior DoD official will have some broad discretion to make those determinations on whether the commercial exemption applies or not."
Scott said it remains to be seen how broadly the exemption will ultimately be applied. "Our fear is that it could be applied quite broadly to sweep in a host of companies that serve the department and that's a definite open question from our perspective. The commercial exemption has its roots in the National Defense Authorization Act, so this is something that we expect to be in the final rule. But it would be nice if between the issuance of the proposed rule and the final rule the department can provide some better clarity for industry in terms of how and when they ought to expect the clause and the requirements to appear in contracts for commercial products and services," Scott said.
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