Mitigation of Foreign Ownership, 

Control, & Influence

The Experience Under the 

NISPOM

June 19, 2013

Christopher R. Brewster

for the Nuclear Energy Institute 
U.S. Defense Policy Encourages Foreign 

Investment in the Defense Industrial Base

“Foreign investment can play an important role in maintaining the vitality of 

the U.S. industrial base. Therefore, it is the policy of the U.S. Government 

to allow foreign investment consistent with the national security interests 

of the United States. The following FOCI policy for U.S. companies subject 

to an FCL [facility security clearance] is intended to facilitate foreign 

investment by ensuring that foreign firms cannot undermine U.S. security and 

export controls to gain unauthorized access to critical technology, classified 

information, and special classes of classified information.

National Industrial Security Program Operating Manual (“NISPOM”) Section 2-300.

(DoD 5220.22-M, 2/28/2006) [Emphasis added.]
The Regulatory Framework

Protecting Classified Information

• A U.S. company is considered under Foreign Ownership, Control, or Influence (“FOCI”) “whenever 

a foreign interest has the power, direct or indirect, whether or not exercised, and whether or not 

exercisable through the ownership of the U.S. company's securities, by contractual arrangements or 

other means, to direct or decide matters affecting the management or operations of that company in a 

manner which may result in unauthorized access to classified information or may adversely affect 

the performance of classified contracts.” 

• “Whenever a company has been determined to be under FOCI, the primary consideration shall be 

the safeguarding of classified information.” 

• “A U.S. company determined to be under FOCI is ineligible for an FCL unless and until security 

measures have been put in place to negate or mitigate FOCI. When a contractor determined to be 

under FOCI is negotiating an acceptable FOCI mitigation/negation measure, an existing FCL shall 

continue so long as there is no indication that classified information is at risk of 

compromise....An existing FCL shall be revoked if security measures cannot be taken to remove the 

possibility of unauthorized access or adverse affect on classified contracts.”

• “If the company does not have possession of classified material, and does not have a current or 

impending requirement for access to classified information, the FCL shall be administratively 

terminated.”

NISPOM 2-300 [Emphasis added.]
A Risk-Based System

• Under the NISPOM, FOCI negation or mitigation is triggered by the requirement for a Facility 

Security Clearance (“FCL”). No mitigation is required unless a foreign owned contractor requires 

an FCL. FOCI reviews and mitigation determinations are risk-based.

• The FOCI assessment reaches all manner of foreign ownership and control – but the key concern is 

the ability of the foreign owner “to direct or decide matters affecting the management or 

operations of that company in a manner which may result in unauthorized access to classified 

information or may adversely affect the performance of classified contracts.”

• The primary consideration is the safeguarding of classified information. 

• If the company does not possess classified material, and “does not have a current or impending 

requirement for access to classified information, the FCL shall be administratively terminated.”
A Risk-Based System

FOCI reviews are managed for the DOD and many other agencies (e.g., FBI) by the 

Defense Security Service (“DSS”). The Department of Energy and the National 

Nuclear Security Administration do their own FOCI assessments, but it is fair to say 

that DOE/NNSA policies are informed by DSS guidance. The DSS website and the 

NISPOM (2-301) note that the following factors are to be considered “in the aggregate” 

in determining whether a company is under FOCI, whether it should receive an FCL, 

and what protective measures should be required:

– Record of economic and government espionage against U.S. targets;

– Record of enforcement and/or engagement in unauthorized technology transfer;

– The type and sensitivity of the information that shall be accessed;

– The source, nature and extent of FOCI;

– Record of compliance with pertinent U.S. laws, regulations and contracts;

– The nature of any bilateral and multilateral security and information exchange 

agreements that may pertain; [and]

– Ownership or control, in whole or in part, by a foreign government.

Reviews are considered on a case-by-case basis. There is no entitlement to an FCL or a 

mitigation plan.
Forms of FOCI Mitigation/Negation

In majority control cases:

• Voting Trust -- Ownership is vested in an independent Trustee 

• Proxy Agreement -- Voting rights are exercised by independent 

Proxy Holders 

Limited reservation of rights

Consultation permitted with foreign owner per terms of 

agreement.

• Special Security Agreement – Foreign owner permitted direct 

representation on the Board of cleared company, provided that 

Board includes independent, cleared U.S. citizen Outside Directors 

(Outside Directors must outnumber directors representing foreign 

owner). Board will also include U.S. citizen Officer-Directors.

• Trustees, Proxy Holders, Outside Directors are chosen by foreign 

owner with approval of US Government. Removal requires notice 

to USG (permitted unless USG objects).
Forms of FOCI Mitigation/Negation

• Voting Trust – Exceedingly rare

• Proxy Agreement – Uncommon 

• Special Security Agreement 

– SSA is Most Common Mitigation in Majority Control 

Cases

• SSAs require National Interest Determinations (NID) for 

access to Proscribed Information (e.g. TS, RD) 

– NIDs require agency finding that award is 

consistent with U.S. national security.

• Voting Trusts/Proxy Agreements have no access limitations 

and do not require NIDs.
Forms of FOCI Negation/Mitigation

• Minority Interest + Board Representation

– Security Control Agreement

– Outside Director Required

– No access limitations

• Significant Minority Interest but no Board 

Representation

– Board Resolution

– No access limitations
Limited FCL

• Although rarely used, the NISPOM allows 

Limited FCLs without additional FOCI mitigation 

if:

– There is an Industrial Security Agreement with foreign 

government of country where foreign owner is 

domiciled;

– Release of classified information is consistent with US 

National Disclosure Policy; or (even without these 

factors)

– There is a compelling need, consistent with U.S. 

national security interests.

Limited FCLs carry access restrictions
Government Security Committee

• Common to Voting Trust, Proxy, SSA, and SCA

• Board-level committee comprised of cleared U.S. 

citizen directors (Officer-Directors and Outside 

Directors)

• Oversight of compliance with

– Security agreement and its implementing procedures

– Rules governing protection of classified information

– ITAR/EAR rules governing exports

As directors, the members of the GSC have a fiduciary 

obligation to the Shareholder – but also have an obligation to 

the USG to ensure compliance with the agreement and US 

law.
Other FOCI Protections

• Visitation plans – OD or FSO approval required for visits 

with Parent (and with Affiliates outside the FOCI agreement 

-- including U.S. affiliates (“Affiliates”).

• Communications plans – Correspondence by the cleared 

company with Affiliates is monitored by Facility Security 

Officer and GSC.

• Shared administrative services with Affiliates (e.g., payroll 

processing, HR) require USG approval and may be 

restricted.

• Technology Control Plan must be in place to protect 

classified and export-controlled information.

• USG Approval required for co-location of facilities and 

secondment of personnel between companies. 
Foreign-Owned US Government Contractors

• Some of the largest U.S. Government 

contractors are parties to FOCI mitigation 

agreements: 

– BAE Systems plc

– Finmeccanica SpA

– Accenture plc

– Rolls-Royce Group plc

– European Aeronautic Defence and Space Company 

EADS NV
Foreign Investment and DoD

• DoD’s Foreign Ownership, Control or 

Influence (FOCI) program includes more than 

300 companies. 

– ~30 Proxy Agreements

– ~100 Special Security Agreements

– ~25 Security Control Agreements

– Over 150 Board Resolutions
Core Values to FOCI Negation/Mitigation 

Plans as Implemented by DSS

• Facilitating foreign investment in the US defense 

industrial base, consistent with US national security.

• Protecting classified and export-controlled information 

against unauthorized disclosure.

• Protecting performance of classified contracts against 

“undue influence.”

• Ensuring that programs and policies are in place to 

promote compliance and allow for effective oversight. 

• Ensuring transparency – Visits, communications, and 

shared services are disclosed and subject to review. 

USG can block or impose restrictions as it deems 

necessary. 
Lessons from the NISPOM Experience

• The NISPOM is designed and intended to protect 

classified contracts and programs, and in this sense is 

not a perfect model for the NRC. Nevertheless, the 

DSS experience may inform the NRC’s review of its 

foreign ownership policies.

• Case-by-case review allows FOCI mitigation to be 

tailored to the company and its risk profile.

• Decades of experience under the NISPOM demonstrate 

that FOCI can be effectively mitigated.

• The controls in place at companies operating under 

FOCI mitigation plans serve to enhance compliance 

across the board.
Value to the U.S. Defense Program

“[Foreign domiciled firms with US subsidiaries] 

are adding value to the US defense program by 

bringing investment and advanced technology to 

the defense market that expands and strengthens 

the defense industrial base resident in the US.” 

Testimony of William Schneider, Jr., Chairman, 

Defense Science Board, US Department of Defense, 

Washington, D.C. before the Committee on the Armed 

Services, US House of Representatives, 2008.
Christopher R. Brewster

202.739.2800

1875 K Street, N.W.

8th Floor

Washington, DC 20006

cbrewster@stroock.com

www.stroock.com