It sometimes takes a little time for federal statutes to be reflected in federal regulations. Recent proposed updates to DFARS regarding Foreign Ownership, Control, or Influence (FOCI) is a good example of this. These updates, meant to implement sections of the National Defense Authorization Acts of 2020 and 2021, are meant to mitigate risks related to FOCI or beneficial ownership. Today, we shall explore these updates and what they mean for federal contractors.
As a brief refresher, a beneficial owner, as defined by 17 C.F.R. § 240.13d-3, means “any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares: (1) Voting power which includes the power to vote, or to direct the voting of, such security; and/or, (2) Investment power which includes the power to dispose, or to direct the disposition of, such security.”
FOCI, as noted in 32 C.F.R. § 117.11, is when “(i) A foreign interest has the power to direct or decide issues affecting the entity’s management or operations in a manner that could either: (A) Result in unauthorized access to classified information; or (B) Adversely affect performance of a classified contract or agreement,” or “(ii) The foreign government is currently exercising, or could prospectively exercise, that power, whether directly or indirectly, such as: (A) Through ownership of the U.S. entity’s securities, by contractual arrangements, or other means, or; (B) By the ability to control or influence the election or appointment of one or more members to the entity’s governing board.”
On May 7, 2026, the Department of Defense proposed a rule that would implement section 847 of the 2020 NDAA and section 819(c)(2) of the 2021 NDAA. As the proposed rule itself states, Section 847 requires covered contractors and subcontractors to disclose their beneficial ownership and whether they are under FOCI to the Defense Counterintelligence and Security Agency (DCSA), as well as update DCSA regularly for changes on the same. As for Section 819(c)(2), that provision is simply a statutory deadline for DoD to make these changes. (Of note, the statutory deadline was July 1, 2021).
With regards to the actual proposed rule, first, DoD seeks to define “covered contractor or subcontractor” as “existing or prospective contractors or subcontractors, at any tier, of DoD with a contract or subcontract valued above $5 million.” As for what is required of said covered contractor/subcontractors, the proposed regulation states that such entities must:
- disclose to DCSA their beneficial ownership and whether they are under any FOCI;
- update DCSA when changes occur (it does not specify if this means all changes to ownership or just changes that involve beneficial ownership or FOCI)
- if under FOCI, disclose contact information for each of the entity’s foreign owners that is a beneficial owner
- Effectively mitigate FOCI risks throughout the duration of the contract or subcontract
Note that apparently, if the contract or subcontract is a commercial products/services contract or subcontract, the above disclosure requirement does not apply unless DoD determines the contract has a certain risk to national security or could compromise sensitive data. This latter exception to the exception was added by DoD out of fear that excluding all commercial item contracts would endanger national security. Of course, if you have some other contract or subcontract above $5 million, the disclosure requirement will apply during those contracts anyways.
Meeting such disclosure requirements would apparently result in the contractor being marked as “eligible” in the National Industry Security System. Contracting officers would be forbidden from awarding, modifying, exercising an option, or extending a contract or order with a value in excess of $5 million if the contractor lacks this eligible status unless it is a commercial procurement as discussed above.
Additionally, if approved as proposed, contractors can expect a new solicitation provision in these larger procurements that speaks to disclosure of beneficial ownership and FOCI. One important aspect of this provision is that it puts offerors on notice that if the contracting agency determines FOCI or beneficial ownership poses a risk to national security that can be mitigated, the offeror must agree at the time of award to implement a risk mitigation strategy within 90 days of said award.
The one thing that stands out is that, with the definition of “beneficial ownership” as used in 17 C.F.R. § 240.13d-3 apparently applying, it would appear that disclosure must be made of any owner and change in ownership, not just foreign owners and changes in ownership involving foreign owners. The proposed solicitation clause on disclosure states: “If the Contractor has any changes in FOCI or beneficial ownership during performance of the contract, or if the Contractor is notified of such by a subcontractor at any tier or supplier, the Contractor shall report the changes by submitting an updated SF 328, Certificate Pertaining to Foreign Interests, in the National Industrial Security System.”
If the change results in the contractor or subcontractor coming under FOCI, the prime would then have to report the foreign owner’s name, relevant information, and any available information about risk mitigation within three business days and, within 10 business days of notice from DCSA, initiate a plan to implement DCSA recommended actions. But even if the change doesn’t involve FOCI, it appears it must be reported to the National Industrial Security System. We will see if this rule gets tweaked a little more. Comments are welcome until July 6, 2026.
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