Joint Ventures & Facility Security Clearances – Almost Squaring the Circle

Introduction

For years, there has been a continuing tension – if not outright inconsistency – between the Small Business Administration’s joint venture affiliation rules relating to contractor requirements for a facilities clearance to perform on classified U.S. Government contracts, and the facility security clearance access rules issued by the Department of Defense (DoD). It has taken congressional action, Government Accountability Office bid protest decisions, and now (maybe finally), a new directive from DoD to get all of the government entities, and all of the rules, into alignment. Or maybe not yet.

DoD is the primary federal agency for issuing regulations relating to contractor access to classified national security information, and for maintaining the National Industrial Security Program (NISPOM) and its related policies and procedures affecting government contractors. In addition, over the last few years, DoD has also become the primary federal agency for reviewing and approving a sponsored individual’s request for a personal security clearance.

On July 19, DoD issued a directive-type memo titled “Facilities Security Clearance Requirements for Covered Joint Ventures”[1] that provided updated intra-agency guidance to DoD organizations. It more closely aligns to the statutory change but introduces new requirements on contractors that may devalue other changes.

Congressional Action

In the Fiscal Year 2020 National Defense Authorization Act, enacted on December 20, 2019, Congress responded to numerous complaints by joint venture companies, and particularly from small businesses who were forming joint ventures under various federal socioeconomic and mentor-protégé programs, that there was an inconsistency in how DoD buying activities were addressing the requirement for a joint venture to have (or not have) a facility clearance in order to be awarded, or to perform on, a DoD contract requiring access to national security information.

As a result, Section 1629 of that Act provided:

A clearance for access to a Department of Defense installation or facility may not be required for a joint venture if that joint venture is composed entirely of entities that are currently cleared for access to such installation or facility.

Regrettably, despite the clear language of the law, that legislative change was not, and has not yet been, incorporated into the Defense Federal Acquisition Regulation (DFARS). Will it ever be?

SBA Changes Its Rules

To its credit, on October 16, 2020, SBA amended its regulations relating to affiliation[2] to add the following:

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.

The full text of SBA’s regulation[3] on facility security clearances now provides:

(h)(5) 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.

Joint Notice Provides Guidance

In an effort to reconcile the continuing inconsistencies between the DoD and the SBA rules, on October 5, 2023, SBA and the National Archives’ Information Security Oversight Office (ISOO) issued a joint notice titled “Joint Ventures and Entity Eligibility Determinations.”[4] According to the notice:

This Joint Notice provides guidance on entity eligibility determinations (EEDs; also, sometimes called facility security clearances (FCLs)) for joint ventures (JVs) in the National Industrial Security Program (NISP) … This notice provides agencies with guidance clarifying how the SBA regulations interact with NISP requirements.

By and large, the joint notice provides very useful guidance for both agencies and contractors by addressing the more common forms of joint ventures used in federal contracting, including by small business under any of the socioeconomic set-aside contracting programs, and how to treat those joint ventures seeking to obtain a facilities security clearance for access to classified information.

DoD “Directive-Type Memo

On July 19, 2024, DoD issued an intra-agency Directive-type Memo (DTM) titled “Facility Security Clearance Requirements for Covered Joint Ventures.”[5] In it, DoD provides updated policy requirements to its various components and supersedes the guidance on implementation of Section 1629 that was addressed in DoD Manual 5220.32, which was last updated in December 2021.

In its own unique verbiage, this DTM aligns generally with Section1629 and the SBA regulations for “covered JVs”. However, the DTM adds additional requirements for these “covered JVs” that may undercut the advantage Congress and the SBA rules sought to provide. For example, the DTM requires that the covered JV submit a security plan for each classified contract awarded to them (emphasis added), but then requires approved JV security plans to be submitted to the Defense Counterintelligence and Security Agency (DCSA) for each classified contract (emphasis added). Elsewhere, the DTM provides that DoD buying activity shall:

Indicate in the DD Form 254 if subcontracting to a covered JV is authorized and provide direction for (government) approval of security plans before a prime contractor awards a contract to a covered JV…” (emphasis added).

These additional requirements are not particularly onerous, but they go beyond the clear and unambiguous requirement of Section 1629 and SBA’s regulations and may be yet another way that DoD is seeking to exercise its superiority over access to classified information, and without amending the DFARS to provide guidance to DoD contracting officers and its contractors and prospective contractors.

Conclusion

This July DTM is likely not the final word on this continuing saga of joint ventures seeking a facilities clearance to gain access to classified national security information. It remains to be seen how the DTM will operate in practice when the time comes for implementation. But still, there is no provision in the DFARS in place, nor one even proposed, to help DoD contracting officers and its contractors navigate through these scenarios.

At Centre Law, we have extensive experience working with contractors to properly form Joint Ventures and assess how to approach facility security clearance issues. If you have any questions or need any additional information, please do not hesitate to contact the author or the Centre Law attorney with whom you normally work.

[1] Department of Defense Directive-type Memorandum (DTM) 24-004, “Facility Security Clearance Requirements for Covered Joint Ventures,” available at https://www.esd.whs.mil/Portals/54/Documents/DD/issuances/dtm/DTM-24-004.pdf?ver=axzxVNcGSZlbSqCzADF0UA%3D%3D#:~:text=PROCEDURES-,1.,b (last viewed August 9, 2024)

[2] 13 C.F.R 121.103 (October 16, 2020), available at:  https://www.ecfr.gov/current/title-13/chapter-I/part-121 (last viewed August 9, 2024)

[3] Id.

[4] ISOO Joint Notice 2024-01: Joint Ventures and Entity Eligibility Determinations (Oct 5, 2023), available at: https://www.archives.gov/files/isoo/notices/isoo-joint-notice-2024-01-nisp-sba-re-jvs.pdf.(Last viewed August 9, 2024)

[5] See Footnote 1 supra.