SBA Fixes Joint Venture Security Clearance Problem

For joint ventures operating under the SBA’s regulations (including SBA-approved mentor-protege joint ventures), dealing with security clearances has been a particularly vexing issue: some contracting officers have insisted that a joint venture (an unpopulated, limited-purpose entity) separately obtain a Facility Security Clearance, even when both joint venture members hold FCLs.

Soon, though, joint venturers will be able to stop worrying about obtaining separate FCLs for their unpopulated joint ventures. A new SBA regulation taking effect next month allows a joint venture to rely on the security clearances of its members.

Under SBA’s regulations, a joint venture must be a limited-duration entity. Current regulations limit a joint venture to no more than three contract awards over a two-year period, although another portion of the same new SBA regulation will delete the “three” component.

The SBA also requires joint ventures to be unpopulated. An unpopulated joint venture is prohibited from employing individuals who will perform work on contracts. Although a joint venture is permitted to employ administrative personnel, in my experience, this is somewhat rare. Most joint ventures operating under the SBA’s rules have no employees and no facilities of their own. Instead, everything is done through the members.

Despite the limited-duration, unpopulated nature of SBA joint ventures, some procuring agencies have required these joint ventures to separately obtain FCLs, even in cases where both joint venture members held the appropriate security clearance. This, in turn, has caused all sorts of headaches.

For example, a contractor cannot obtain an FCL without employing a Facility Security Officer. This meant that “unpopulated” joint ventures had to hire at least one employee. In addition to the potential administrative burdens, it hasn’t been entirely clear whether hiring an FSO was permitted under the SBA’s regulations.

Additionally, under the FCL sponsorship rules, a cleared company cannot sponsor an uncleared company without demonstrating a need for the uncleared company to access classified information in connection with a government requirement. This sometimes left cleared joint venture partners scrambling to subcontract classified work to their own unpopulated joint ventures, to establish the prerequisite for sponsorship. Adding to the confusion, it was uncertain whether such subcontracts would count against joint ventures’ three-contract cap under the “three-in-two” rule.

Fortunately, SBA has come to the rescue of beleaguered joint venturers. In its commentary accompanying the publication of the new regulation, SBA said:

SBA understands that some procuring agencies will not award a contract requiring a facility security clearance to a joint venture if the joint venture itself does not have such clearance, even if both partners to the joint venture individually have such clearance. SBA does not believe that such a restriction is appropriate.

SBA has taken two steps to solve this problem.

First, SBA has clarified that a joint venture may hire an FSO and remain “unpopulated” within the meaning of the joint venture regulations. It’s a helpful clarification, although it’s what most of us assumed already.

Second, and much more importantly, the SBA has adopted a rule allowing a joint venture to rely on the security clearances of its members. The new rule states:

4) Facility security clearances. A joint venture may be awarded a contract requiring a facility security clearance where either the joint venture itself or the individual partner(s) to the joint venture that will perform the necessary security work has (have) a facility security clearance.

(i) Where a facility security clearance is required to perform primary and vital requirements of a contract, the lead small business partner to the joint venture must possess the required facility security clearance.

(ii) Where the security portion of the contract requiring a facility security clearance is ancillary to the principal purpose of the procurement, the partner to the joint venture that will perform that work must possess the required facility security clearance.

I’ve occasionally heard from people who believed, incorrectly, that an uncleared small business protege can “use” the security clearance of its mentor by forming a joint venture with the mentor. Logically, though, that cannot be true: think about the national security implications of allowing a small business to bypass the FCL process merely by signing an SBA mentor-protege agreement.

Appropriately, the new rule does not allow an uncleared company to perform classified work simply by forming a joint venture with a cleared company. Whichever joint venture members will perform the classified work must possess the necessary security clearances. Where that work is primary and vital to the contract, the small business lead member must be cleared.

Kudos to SBA for identifying this significant problem and solving it in a thoughtful manner. The new regulation takes effect November 16, 2020.

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