Proposed Rule Would Increase Disclosure Requirements for Most Federal Contractors With Foreign Ownership, Control, or Influence

Bottom Line Up Front

On May 7, 2026, the Department of War (DOW) published a proposed rule that would significantly expand obligations related to foreign ownership, control, or influence (FOCI) and beneficial ownership disclosures for certain defense contractors and subcontractors. The proposed rule reflects the DOW’s continued emphasis on supply chain transparency and foreign-influence risk management, and it may affect diligence and structuring considerations for mergers, acquisitions, and private investment involving defense-adjacent businesses.

Background

The proposed rule builds on the DOW’s earlier implementation of Section 847 of the National Defense Authorization Act for Fiscal Year 2020, which we have previously discussed, directing the DOW to establish enhanced procedures for identifying, assessing, and mitigating FOCI risks involving covered defense contractors and subcontractors, including mandatory beneficial ownership disclosures and ongoing reporting obligations. If adopted, the proposed rule would amend the Defense Federal Acquisition Regulation Supplement (DFARS) to add part 240 (“Information Security and Supply Chain Security”), including section 240.27X (“Mitigation of Risks Related to Beneficial Ownership or Foreign Ownership, Control or Influence”), which would introduce a new solicitation provision and a new contract clause. 

What the Proposed Rule Would Require

The proposed rule would impose new disclosure, eligibility, and mitigation requirements on covered contractors¹ performing DOW contracts valued at $5 million or more. Notably, the rule would apply regardless of whether classified information is involved. The rule would not apply to contracts for commercial products (including commercially available off-the-shelf items) or commercial services unless the DOW determines that FOCI presents a national security risk.

1. Mandatory ownership and FOCI disclosures: The proposed additions to the DFARS would require offerors on covered contracts to submit their Standard Form 328 (Certificate Pertaining to Foreign Interests); identify each beneficial owner, including contact information; and provide supporting ownership documentation through the National Industrial Security System (NISS). 
2. NISS eligibility as a condition to award and performance: Contracting officers would be prohibited from awarding, modifying, extending, or exercising options under covered contracts unless the contractor maintains an “eligible” status in the NISS. This requirement would apply not only when a contract is awarded but also for the entire duration of the contract.
3. FOCI risk mitigation requirement: Where the DOW determines that beneficial ownership or FOCI presents a risk or potential risk of compromise to national security that may be mitigated, contractors would be required to implement a mitigation strategy within 90 days of contract award. 

Taken together, these requirements would provide the DOW substantially greater visibility into contractor ownership structures and strengthen its ability to restrict or condition contract performance based on FOCI-related risks. 

Practical Implications

For private investors, family offices, private equity firms, and venture capital firms, the proposed rule will increase diligence and execution risk in transactions involving DOW contractors. Companies doing business with the DOW or seeking DOW contracts will face enhanced disclosure requirements regarding foreign ownership and face ongoing eligibility requirements tied to the NISS that will be affected by changes in foreign ownership or control. Merger and acquisition activities, investments (including minority investments), board membership composition changes, and other transactions involving these companies will trigger a detailed analysis of foreign investment, both direct and indirect, and an assessment of whether a proposed transaction will affect eligibility for future DOW contracts. For companies that will have foreign ownership, foreign board members, or other ties to foreign persons, entities, and governments, they will be forced to consider whether mitigation actionable measures could be required and implemented after close.

What Comes Next

The proposed rule reflects the DOW’s continued focus on FOCI risk management in the defense industrial base. Companies with foreign investors, complex ownership structures, or operations supporting the defense industrial base should consider the potential impact of this rule. The proposal is subject to public comments, which are due on or before July 6, 2026. 

Goodwin’s Government Contracts and Grants team has significant experience counseling clients on matters involving FOCI considerations. Please contact the authors of this alert for assistance with evaluating the potential impact of the proposed rule or with the preparation and submission of public comments.