Final Rule Revises National Industrial Security Program

HIGHLIGHTS:

• The Information Security Oversight Office (ISOO) has issued a Final Rule to its 32 C.F.R. Part 2004 National Industrial Security Program (NISP) Directive, which is the overarching policy for federal agencies involved in industrial security.
• The new rule focuses mainly on high-level administrative issues but also includes new policy regarding specific, operational matters.
• The rule references national insider threat policy and minimum standards, and also recognizes the Office of the Director of National Intelligence (ODNI) and the Department of Homeland Security (DHS), each, as a Cognizant Security Agency (CSA).

The Information Security Oversight Office (ISOO) has issued a Final Rule to its 32 C.F.R. Part 2004 National Industrial Security Program (NISP) Directive. ISOO is part of the National Archives and Records Administration, and the NISP Directive is the overarching policy for federal agencies involved in industrial security. The new rule, issued on May 7, 2018, focuses mainly on high-level administrative issues. However, the rule also includes new policy regarding specific, operational matters.

Administrative Highlights

Administrative issues addressed in the rule include:

• Insider Threat. The rule references national insider threat policy and minimum standards.
• ODNI and DHS. The rule recognizes the Office of the Director of National Intelligence (ODNI) and the Department of Homeland Security (DHS), each, as a Cognizant Security Agency (CSA).
• Coordination and Deconfliction. The rule clarifies the roles and responsibilities of ISOO, each CSA and each Government Contracting Activity (GCA) in the NISP.

Operational Highlights

Operating issues addressed in the rule include:

• KMO. The rule adds a new definition for Key Managers and Officials (KMO) – superseding the term Key Management Personnel (KMP). KMOs are the persons who will be required to maintain personnel security clearances in connection with the Facility Security Clearance (FCL). KMOs include the senior management official, the facility security officer and the insider threat senior management official, in addition to others whom the CSA determines have authority to influence or decide certain matters. The new rule expressly adds that the CSA may include individuals with majority ownership as KMOs.
• Eligibility. The rule adds new criteria for FCL eligibility. For example, when assessing a company's eligibility, the CSA is directed by the new rule to deny eligibility unless the company meets all requirements that the CSA or the authorizing law, regulation or government-wide policy establishes for access to the type of classified information or program involved. In addition, with respect to companies under Foreign Ownership, Control or Influence (FOCI), the new rule directs the CSA to 1) agree that sufficient mitigation is in place, 2) determine that a limited FCL (see discussion below) is appropriate or 3) determine that the entity is not eligible. These changes would seem to afford the government wide latitude to exact conditions on the granting of the FCL.
• FOCI. The new rule includes several detailed provisions on FOCI, including:
  • Effect on FCL. The new rule directs that the CSA must consider a new FCL applicant ineligible if it is under FOCI, and the CSA may not determine that the entity is eligible to access classified information until the entity mitigates, negates or is not under FOCI. However, if the entity already has an FCL, the new rule permits the CSA to allow access while the parties are negotiating mitigation. As a practical matter, parties to a relevant merger and acquisition (M&A) should be prepared to discuss FOCI mitigation agreements and their supplements with the CSA prior to closing.
  • CCIPP. The new rule includes some discussion of special FOCI mitigation procedures relating to the DHS Classified Critical Infrastructure Protection Program (CCIPP).
  • Tiered Mitigation. The new rule addresses a concern about "combination" agreements that use a Special Security Agreement (SSA) at a parent company and a Proxy Agreement at a subsidiary level. The new rule directs the CSA to identify this method and "coordinate" the applicable terms with the relevant controlling agency prior to release of proscribed information – Sensitive Compartmented Information (SCI), certain Communications Security (COMSEC) information, Restricted Data (RD) information, Special Access Programs (SAP) information or Top Secret information.
  • FOCI Supplements. The new rule directs that the CSA cannot consider a FOCI mitigation final until it approves the required supplements, such as the Technology Control Plan or Electronic Control Plan. In the past, the Defense Security Service (DSS) would grant the FCL upon signing of the FOCI Mitigation Agreement, with the supplemental plans to be implemented as a follow-on action.
  • Director Qualifications. The new rule directs the CSA to find that Outside Directors must be "completely disinterested with no prior involvement with the entity" while making no express reference for granting an "exception" as is currently contained in the NISP Operating Manual (NISPOM). DSS recently distributed a white paper to Outside Directors regarding potential DSS policy actions relating to director qualifications. The DSS paper expresses a preference for retaining some discretion regarding the "completely disinterested with no prior involvement with the entity" standard. In addition, the new rule directs the CSA to consider the number of other boards where the director nominee serves as a director and the length of service on other boards. The DSS white paper is consistent with the new rule, and we expect that DSS will adopt specific limits on the number of outside directorships.
  • NID. National Interest Determinations (NID) have traditionally served the function of an additional security review prior to allowing a company cleared under an SSA to access proscribed information. The new rule is designed to speed up the process by directing the CSA to produce the NID as part of its eligibility determination. If the proscribed information is the responsibility of the CSA, the NID may be issued during the CSA's initial review. However, where an outside concurring agency is involved, the rule directs the concurring agency to respond to the CSA within 30 days. Still, the concurring agency is permitted to restart the process every 30 days by providing questions about the matter to the CSA. The new rule also clarifies that the CSA may allow access to one category of proscribed information as the relevant concurrence is received – eliminating the need to wait for all concurrences that may be involved. In addition, the rule clarifies that a prior NID decision may be applied to new tasks orders and contract renewals.
• Limited FCLs. The new rule addresses the issue of Limited FCLs, which have traditionally allowed GCAs to sponsor a company under FOCI for an FCL, acknowledged only to the sponsor, without the need to impose mitigation measures. The new rule expands this concept so that foreign governments are expressly permitted to directly sponsor U.S. subsidiaries of foreign companies for Limited FCLs. In addition, the new rule clarifies that a CSA cannot grant a Limited FCL if the company requires access to proscribed information and if foreign government ownership or control is present. Moreover, the new rule would permit the use of Limited FCLs in non-FOCI situations. The new rule would allow sponsors to request a non-FOCI Limited FCL, but the FCL applicant must still meet the normal requirements for entity eligibility.

Conclusion and Considerations

It will be interesting to see the effect of these new rules on transactions notified to the Committee of Foreign Investment in the United States (CFIUS) in cases of concurrent CFIUS and DSS review. DSS is in the process of revising the NISPOM, which is assumed to generally track the policies set out in this new NISP Directive. It is surprising that ISOO provided this level of detail regarding specific operational issues given the NISPOM revision exercise. While we are not yet certain of the exact parameters of a final, revised NISPOM, Holland & Knight is watching this closely and will provide updates as warranted.

Please contact the authors or another member of Holland & Knight's CFIUS and Industrial Security Team should you have a question regarding industrial security obligations, or if you desire assistance in your review or completion of a related report, application or proposal.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.