By Emelie Rutherford

As the Defense Department finalizes new rules for thwarting organization conflicts of interest (OCI) with defense firms, some industry officials are saying the Pentagon is going beyond the law and applying the rule to too many contractors.

As directed by the Weapon Systems Acquisition Reform Act (WSARA) of 2009, the Defense Department on April 22 unveiled a draft rule for limiting OCIs that occur when one company both develops or builds a defense system and also provides systems-engineering-and-technical-assistance (SETA) input on it (Defense Daily, April 27).

Some industry officials said they are concerned the Pentagon’s draft rule would go beyond the acquisition-reform law, which directed the defense secretary to craft regulations tightening OCI requirements for contractors of major defense acquisition programs. The Pentagon’s draft addresses OCI regulations for nearly all Defense Department procurements, with some exceptions.

The Pentagon is expected to unveil its final rule this fall. In the meantime, industry is airing its concerns in public comments submitted on the proposed rule by a July 21 deadline.

“Congress did not mandate that (the Defense Department) DoD adopt new regulations to completely rewrite the OCI rules applicable to all DoD procurements or even suggest that DoD should do so,” TechAmerica said in comments on the draft rule. “We believe that DoD’s expansion of the rulemaking beyond MDAPs is unnecessary, inefficient, and counterproductive. We recommend that DoD limit the scope of this rulemaking to address the specific MDAP concerns identified by Congress in WSARA.”

TechAmerica, a technology-industry trade group, suggested the Pentagon and Federal Acquisition Regulatory Council use the acquisition-reform law’s mandated changes as a pilot program, and then evaluate the results of the changes when crafting Pentagon-wide and government-wide OCI regulations.

The Defense Department is conducting this rulemaking as the Federal Acquisition Regulatory Council’s is revising Federal Acquisition Regulation OCI regulations.

The Pentagon has said it will revoke the OCI rules for contracts beyond those for major defense acquisition programs after the Federal Acquisition Regulatory Council issues the broader government OCI rule. Still, TechAmerica argues it “It would be inefficient for DoD to conduct a comprehensive rulemaking to develop broad OCI rules that will be superseded by a FAR rule that is expected in the near future.”

Other trade groups–including the Aerospace Industries Association, which represents aerospace and defense manufacturers and suppliers, and the Professional Services Council, which represents the government professional and technical services industry–cite qualms with the draft rule applying the OCI standards to nearly all Pentagon procurements and not just the major defense acquisition programs.

The Pentagon’s proposed OCI rule has come under fire on several other fronts.

The Senate Armed Services Committee (SASC) maintains the draft rule is broader in scope than Congress intended, because it states SETA contractors could be involved with the development or construction of weapon systems when mitigation steps are taken. The SASC, in its report on the fiscal year 2011 defense authorization bill, says Congress did not intend for the rule to show an “overall preference for mitigation over avoidance” and directs the defense secretary to “ensure that the final…rule is consistent with the requirements of the statute.”

Some industry comments on the draft rule similarly expressed a preference for an approach of avoidance over mitigation for OCI cases, while others said they want more clarification on the mitigation approach.

The pending OCI rules have prompted some industry reshuffling.

Northrop Grumman [NOC] sold its advisory services business TASC, Inc. to private-equity investors and Lockheed Martin [LMT] arranged to sell its Enterprise Integration Group unit to avoid any OCI.