One of the issues that has haunted the efforts by the Directorate of Defense Trade  Controls (“DDTC”) to amend its brokering rules has been what to do with lawyers. Are lawyers that assist their clients with transactions involving defense articles brokers or not? Do they need to pony up registration fees? Worse, are there situations where they must get permission from DDTC before counseling clients on defense related transactions?

To be fair about the issue, DDTC is trying to fix an issue that arises from the overly broad definition of brokering services in the current rules. The current definition covers anyone who acts “as an agent for others in negotiating or arranging contracts, purchases, sales or transfers of defense articles or defense services in return for a fee.” The minute a lawyer calls the lawyers for the other side, the issue arises as to whether the lawyer has become a broker. It’s easy to say that the lawyer isn’t in that case an “agent” for his client in the traditional sense, except for the fact that DDTC has made clear that “agent” here is meant in a very broad sense that goes beyond the notion of an agent under the common law of agency. No lawyers have been registering as brokers, and DDTC has so far never suggested that it had any interest in pursuing lawyers.

The newly released “interim final” rule attempts to address this issue, and by explicitly raising the issue may make the situation even worse than it was when the rules were silent on the issue. The “interim final” rule says that brokering activities do not include “activities by an attorney that do not extend beyond the provision of legal advice to clients.” Not surprisingly, there is no definition of “legal advice” but DDTC tries to clarify it with this comment at the beginning of the Federal Register notice on the “interim final” rule:

The Department has clarified that “activities by an attorney that do not extend beyond the provision of legal advice to clients” is not within the definition, and notes that “legal advice” includes the provision of export compliance advice by an attorney to a client.

Two problems now are posed by the “interim final” rule. First, the exemption applies only to the extent that a lawyer is communicating with his own client. If he or she talks to the other lawyers in a transaction, the lawyer has arguably become a broker. Second, lawyers in a transaction involving defense articles are going to provide legal advice far beyond the “provision of export compliance advice.” Simple advice to the client about whether the contract should include an arbitration clause, or whether the law of New York or California applies. Those might be clear examples of legal advice but what if the lawyer provides his or her thoughts on certain risks that the transaction might pose?  Is that business or legal advice?  Has the lawyer stepped over the line and become a broker?

And here’s the most terrifying thought. If the transaction involves a “foreign defense article,” then under the “interim final” rule, a lawyer will need State Department approval before advising his or her client on whether to include an arbitration clause or before the lawyer calls opposing counsel to discuss contractual issues. I suspect that many lawyers will ignore these requirements but that is going to be harder to do under the new language in this rule when (and if) it goes into effect on October 25 of this year.

It seems like the Directorate of Defense Trade Controls (“DDTC”) has been working on the amendments to the brokering rules in Part 129 of the International Traffic in Arms Regulations since sometime during the Taft Administration. So when the latest iteration of these rules, oxymoronically labelled as the “Final Interim” Rule, appeared early this week I wearily clicked through to the Federal Register notice, fully prepared to revisit the horror that I had experienced some many times before. But, but, I soon realized that the lengthy gestation of the rules and the numerous rounds of public comment had borne fruit. Although not perfect, this new version fixes a number of the problems that plagued the previous versions.

I will over the next several days review various parts of the new rules, but I want to start with the best news. Cue music for a happy dance: DDTC has finally gotten the jurisdictional scope of the rules right.  As many of you know far too painfully, DDTC had, starting with some improvident remarks made by at least one former staffer at the agency, argued that the brokering rules, even before any proposed amendment, covered foreign persons in foreign lands if a U.S. origin defense article was involved. The earlier versions of the proposed rules made this explicit, covering U.S. persons, all persons in the United States and

any foreign person located outside the United States involving a U.S.-origin defense article or defense service.

The Final Interim rule completely eliminates this last category and, at last, returns to the original intent of the Brokering Amendment to the Arms Export Control Act, the authority for the brokering rules in the first place. As DDTC says in its comments on the Final Interim rule:

In conformance with the statutory requirements for the brokering of defense articles and services, the Department has revised the proposed changes to these definitions to clarify their scope. In particular, the Department has clarified that foreign persons that are required to register as brokers are those that are in the United States and those foreign persons outside the United States that are owned/controlled by a U.S. person. And the Department has removed from the definition of ‘‘brokering activities’’ the activities of any foreign person located outside the United States acting on behalf of a U.S. person.

This is great news and eliminates an enormous headache for exporters that use foreign reps and agents to distribute their defense articles abroad.

The only downside is that this new language makes clear the foreign subsidiaries may have to register, something that had not been required by previous versions of the rule which covered activities “for others” and which some at DDTC had said informally did not cover companies under the same “corporate umbrella,” although some others at the agency have said informally that all foreign subsidiaries were covered if they were involved in the parent company’s sale of defense articles.