Brokering: Redux

Frequent readers of this column will note many comments and criticisms of the current U.S. brokering regulations- stating they are flawed; overly broad, difficult to understand, and nearly impossible to ensure effective compliance.  Efforts to elicit an official response from the U.S. State Department have (thus far) been rebuffed and ignored.  It is with some degree of pleasure to announce that proposed changes to the brokering regulations were released on December 19, 2011.  Those interested in reading the proposed regulations can find them online at:  In the event that the State Department removes the proposed regulations from its website, the proposed regulations may be found online via the official Federal Register citation: 76 FR 78578.  Upon close reading, the proposed regulatory changes are a mixed bag of good, bad, and indifferent.  First, the good:

Prior Notification and Approval
Under the old regulation, a broker was required to pass through a three step process – provide prior notification of the brokering activity, get approval for the brokering activity, and then submit an annual report of brokering activity performed.

The regulatory requirement to provide advance notice of brokering activity to the U.S. State Department was eliminated via a 2011 amendment.  The proposed amendment goes one step further in confirming that prior notification is no longer required, and states that detailed guidance on how to obtain authorization of brokering activities will be provided.  In the past, written correspondence was submitted to the U.S. State Department, and a written response (either approving or denying the transaction) was sent back.

Scope of the Brokering Regulations
Under the current regulation, a person performs brokering when “taking of any other action that facilitates the manufacture, export, or import of a defense article or defense service, irrespective of its origin.”  Under a very strict reading, a foreign broker negotiating non-U.S. made goods to a non-U.S. buyer would be considered a broker, and be required to register with the U.S. State Department.  As written, the current regulation is nearly unenforceable, and likely exceeds the jurisdiction of the U.S. State Department.

The new regulation clarifies that under § 129.2(e)(3) “brokering does not include 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 does not include activities beyond the provision of legal advice by an attorney to his client.”  The proposed change is a step in the right direction, but still demonstrates the seeming desire of the U.S. State Department to control the movement of arms worldwide.

Manufacturers and Exporters Need Not Register as Brokers
Currently, manufacturers of defense articles must register with the U.S. State Department.  The registration fee is $2,250, even if no export activity is performed by the manufacturer.  If the registrant conducts export transactions, the annual registration fee increases with the number of exports that are performed within a twelve month period.  If a registered manufacturer also performs brokering activities, the current regulation requires the manufacturer to also register as a broker.  The annual registration fee for brokering is fixed at $2,250, regardless of the number of transactions that are performed.  It is not usual for a party to be forced to pay both fees – resulting in a minimum fee of $4,450 per year to manufacture and broker defense articles.

Under the proposed regulation, manufacturers and exporters would no longer be required to also register as brokers, as long as the manufacturing/exporting registration was current.  The proposed regulation proposes that:

“U.S. persons who are registered as a manufacturer or exporter in accordance with part 122, including their U.S. or foreign subsidiaries, joint ventures, and other affiliates listed and covered on their Statement of Registration, and who are required to register under part 129, are not required to submit a separate broker registration or pay a separate broker registration fee as long as they have listed and identified themselves as brokers within their manufacturer or exporter Statement of Registration.  All other requirements of part 129 would apply to such brokers and their brokering activities.”

If adopted as proposed, this would lift a large burden off those parties that both manufacture and broker defense articles and services.

The Indifferent
Under the proposed amendment, it would be easier for foreign parties to register.  The paperwork is reportedly being amended and consolidated to make it easier for foreigners to understand and complete.  In addition, the requirement for all parties to make registration fee payment via electronic funds transfer means that foreign parties no longer need to submit U.S. funds drawn on a U.S. bank as previously required.

In addition, the procedure for prior approval of brokering activities is being touted as “new and improved,” but remains unchanged in practice.  The request for prior approval shall describe fully the brokering activities that will be undertaken, including:

(1) The action to be taken by the applicant to facilitate the manufacture, export, import, or transfer of a defense article or defense service;

(2) The name, nationality and country where located of all persons who may participate in the brokering activities;

(3) A description of each defense article or defense service that may be involved, including:
(i) The U.S. Munitions List category and sub-category;
(ii) Name or military nomenclature of the defense article;
(iii) Whether the article or service is significant military equipment;
(iv) Estimated quantity of defense articles;
(v) Estimated U.S. dollar value of defense articles and defense services;
(vi) Security classification; and (vii) End-user and end-use;

(4) A statement whether the brokering activities are related to a sale through commercial channels or under the U.S. Foreign Military Sales Program or other activity in support of the U.S. Government; and

(5) The type of consideration received or expected to be received, directly or indirectly :
(i) by the applicant;
(ii) by other persons who may participate in such brokering activities from or at the direction of the applicant, and the identity of such other persons; and
(iii) the U.S. dollar value amount and source thereof.

Most of this information is already required in a broker approval request; the guidance isn’t significant to get very excited about.

The Bad: Employees are Brokers?
Under the proposed amendment, employees may be considered as brokers, resulting in all part-time, and potentially some full time employees being required to register.  In addition, prior approval may be required before being able to work on export projects.

Under the current regulation, employees are not considered brokers, as the rules make it very clear that one must be “acting as an agent for others” in order to rise to the level of being a broker.  The employee is not acting as an agent; the employer is likely the agent acting for the foreign party.  Under the proposed regulation, one no longer need to “act as an agent for others.”  Instead, brokering is defined as “any person that engages in brokering activities.”  Brokering activities are defined as “any action to facilitate the manufacture, export, re-export, import, transfer, or retransfer of a defense article or defense service.”

The proposed regulation provides some exemptions from brokering activities.  U.S. Government employees are exempt from brokering registration.  In addition, work of a clerical and administrative nature would also be exempted.  Under the proposed regulations, full time employees working for a manufacturer may be exempt, if the employer elected to also register as a broker within the registration form.  Sadly, there is no exemption for part-time employees, sales agents, or other parties that are frequently party to a transaction.

Will employees be forced to register?  In all likelihood, no. Instead, the proposed language demonstrates sloppy drafting, questionable policy making, or a failure to understand how the industry operates.  Given the overreaching jurisdictional issues in the current (and proposed) regulation, it may be impossible to answer what the U.S. State Department had in mind when writing this aspect of the proposed regulation.

As the proposed regulations have not been implemented yet, there is no way to predict how the final regulation will be adopted and implemented.  Readers are warned to continue to follow existing law and regulation until official notice is published on the final rule.  Sadly, the comment period for the proposed regulations closed on February 17, 2012, and no additional comments can be made in favor or against the proposal.  Stand by – the final amendment may not be released until Autumn 2012, but you can be assured that Small Arms Defense Journal will report on the final version of the regulation.

Mr. Wong is a Washington licensed attorney.  He regularly provides legal counsel to the firearm and defense industry via his law firm, The Firearms Law Group.  Mr. Wong also maintains Hurricane Butterfly, an import/export company that assists U.S. firearm manufacturers and foreign buyers that do not wish to wade into the regulatory morass of U.S. import/export regulation.  He may be contacted via email at

The guidance provided within this article was correct and current at the time it was written.  Policies and regulations change frequently.  The preceding article is not intended as legal advice, and should not be taken as legal advice.  If the reader has specific legal questions, seek competent legal counsel.