Defense Trade Advisory Group Review of the Draft Brokering Rule

1. Defense Trade Advisory GroupReview of the Draft Brokering Rule Plenary Session November 28, 2012

2. Agenda • Working Group Members • Task Summary • Research • General Assessment • Discussion of Proposed Rule • Concerns • Suggested Revisions • Summary • Questions • Decision Tree

3. Task 2 Working Group Members • Lisa Bencivenga, Lisa Bencivenga LLC • Dennis Burnett, EADS North America • Rebecca Conover, Intel • Mike Cormaney, Luks Cormaney LLP • Kim DePew, GE-Aviation • Barbara Dudas, Northrop Grumman • Andrea Dynes, General Dynamics • Greg Hill, DRS Technologies, group co-chair • Jeremy Huffman, Huffman Riley Kao • Krista Larsen, FLIR Systems • Spencer Leslie, Tyco International • Christine McGinn, Interglobal Trade Consulting, Inc. • Beth Mersch, Northrop Grumman • Roger Mustian, Daniel Defense • Brenda Nicacio, PPG • Terry Otis, Otis Associates • Beth Parrish, Lockheed Martin • Dale Rill, Honeywell International • Debbie Shaffer, Southwest Research Institute, group co-chair

4. Task 2 Review the latest draft regulation for brokering that takes into consideration the public comments received on the proposed rule*. Report on the potential impacts to industry if the proposed rule is adopted as final. *proposed rule published Dec 2011

5. Working Group Research • Review of the latest draft rule • Review of public comments submitted regarding the December 2011 proposed rule • Applicable sections of the Arms Export Control Act, 22 U.S.C. Sec. 2778, and the International Traffic in Arms Regulations, 22 C.F.R. Parts 120-130

6. General Assessment • Proposed rule significantly changed and greatly improved the December 2011 proposed rule • In order to be subject to registration/licensing requirements, a series of checkpoints must be evaluated • New regulation significantly narrows persons and activities subject to registration/licensing requirements • Addresses major concerns expressed over December 2011 proposed rule (extraterritoriality, lack of clarity, overly broad) • DTAG has concerns with • Determining when brokering begins • Potential double licensing

7. Brokering At a Glance IF 129.2(a) 129.2(b) THEN check if need… 129.3 129.4 Don’t forget reporting (129.10), records (129.11), etc. Subject Person Subject Activities To Register? (Check Exemptions) Obtain License? (Check Exemptions)

8. Subject Persons • §129.2 Definitions. • (a) Broker means any person (see §120.14 of this subchapter) described below who engages in the business of brokering activities: • (1) Any U.S. person wherever located; • (2) Any foreign person located in the United States; • (3) Any foreign person located outside the United States where the foreign person is owned or controlled by a U.S. person; or • (4) Any foreign person located outside the United States involving the temporary import into the United States of any defense article or service.

9. Subject Activities • §129.2 Definitions. • (b) Brokering activities means any action on behalf of another to facilitate the manufacture, export, import, or transfer of a U.S. or foreign defense article or defense service, irrespective of its origin. • (1) Such action includes, but is not limited to: • (i) Financing, insuring, transporting, or freight forwarding defense articles and defense services; or • (ii) Soliciting, promoting, negotiating, contracting for, arranging, or otherwise assisting in the purchase, sale, transfer, loan, or lease of a defense article or defense service. • (2) Such action does not include: • (i) Activities by a U.S. person in the United States that are limited exclusively to U.S. domestic sales or transfers (e.g., not for export); • (ii) Activities by employees of the U.S. Government acting in an official capacity; • (iii) Activities that do not extend beyond administrative services, such as providing or arranging office space and equipment, hospitality, advertising, or clerical, visa, or translation services, or activities by an attorney that do not extend beyond providing legal advice to their client; or • (iv) Activities performed by an affiliate on behalf of another affiliate.

10. New Definition • §120.40 Affiliate. • An affiliate of a registrant is a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such registrant. • Note: For purposes of this subsection, control means having the authority or ability to establish or direct the general policies or day-to-day operations of the firm. Control is presumed to exist where there is ownership of 25 percent or more of the outstanding voting securities if no other person controls an equal or larger percentage.

11. Concerns • 129.2(b) activities regarding promoting/soliciting • Lack of a clear line as to when brokering begins versus preliminary/basic marketing • US Person (Consultant) introduces your company to a foreign government for a “specific” opportunity is brokering. Otherwise, general introduction or data/information gathering is not. • Normal activities by Trade Associations and Business Councils might be captured as brokers/brokering activities. • 129.5 Exemptions from Approval • Does not include scenarios where parties are already named on a specific ITAR authorization (potential double licensing situation)

12. Suggested Revisions: 120.40 Definitions An affiliate of a registrant is: • a) a person that directly or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such registrant; or • b) is any party listed on a US Person’s Statement of Registration. • Note: For purposes of this subsection, control means having the authority or ability to establish or direct the general policies or day-to-day operations of the firm. Control is presumed to exist where there is ownership of 25 percent or more of the outstanding voting securities if no other person controls and equal or larger percentage.

13. Suggested Revisions: 129.2 Definitions • (a) Broker means any person (see §120.14 of this subchapter) described below who engages in the business of brokering activities: • (4) Any foreign person located outside the United States involvinginvolved in the temporary import into the United States of any foreign defense article or service that is not the subject of a temporary import license or exemption.

14. Suggested Revisions: 129.2 Definitions • (b) Brokering activities means any action on behalf of another to facilitate the manufacture, export, import, or transfer of a U.S. or foreign defense article or defense service, irrespective of its origin. • (2) Such action does not include: • (iii) Activities that do not extend beyond administrative services, such as providing or arranging office space and equipment, hospitality, advertising, or clerical, visa, or translation services, research and data gathering (such as collecting product and pricing information from non-US suppliers to prepare a response to Request for Proposal), general business promotion activities (such as promoting company goodwill or capabilities at trade shows), or activities by an attorney that do not extend beyond providing legal advice to their client; or • (iv) Activities performed by an affiliate, as defined in 120.40, on behalf of another affiliate; or • Add new 129.2(b)(v): Activities performed by a regular employee as defined in §120.39.

15. Summary • This proposed regulation is really, really, really, good. • Provides clarity on WHO is a broker, WHAT is a brokering activity. • Minimal recommended changes reduce unintended negative impact • Reduces concerns regarding extraterritorial jurisdiction.

16. Questions?