A change to a Pentagon personnel policy three months ago loosens the rules barring transgender troops from serving in the U.S. military, giving the individual services leeway to retain these personnel.

Legal and military experts with the Palm Center, a San Francisco-based think tank focused on lesbian, gay, bisexual and transgender military service, made that startling charge in a new report.

The update — to Defense Department Instruction 1332.18, Disability Evaluation System — provides a loophole for the services to let transgender troops serve instead of requiring administrative separation, the Palm Center says.

The old policy listed transgender identity as a "congenital or developmental defect" that mandated administrative separation.

The instruction issued Aug. 5 drops that provision, which the activists, including three retired flag or general officers, representatives from the ACLU, the Transgender American Veterans Association and others, say means the services now can discharge individuals with perceived defects only if those defects interfere with their performance or duty assignment.

"By this new regulation, the Pentagon has gotten out of the business of deciding when service members are fit or unfit for duty, and that's a big policy change," said Diane Mazur, an Air Force veteran and professor of law emeritus at the University of Florida College of Law.

The change, which dropped an entire list of disqualifying conditions from the DoD instruction, places the onus on the services to update their policies, now based on "a list that no longer exists," Mazur said.

Pentagon spokesman Lt. Cmdr. Nate Christensen said Monday the change to the instruction does not mean the Pentagon has altered its policy prohibiting service by transgender individuals.

He said the policy update included examples of nonphysical disability medical conditions, which the department determined were inappropriate for a physical disability policy.

"It was not an all-encompassing list. ... The deletion of that enclosure does not change or have any effect on the department's policy regarding separations and consequently does not affect the department's policy regarding military service by transgender individuals," Christensen said.

Other examples of conditions listed as disqualifying in the old instruction included mental retardation, homosexuality, unsanitary habits including repeated venereal disease infections and phobic fear of air, sea and submarine modes of transportation.

The landmark repeal of the "don't ask don't tell" policy in 2011 allowed gays and lesbians to serve openly in the military. But bottom line, DoD accession policy bars transgender individuals from enlisting or being commissioned in the military.

A March 2014 report from the Transgender Military Service Commission estimates that nearly 15,500 transgender individuals serve in uniform across all branches.

Retired Army Lt. Gen. Claudia Kennedy, retired Army Maj. Gen. Vance Coleman, retired Rear Adm. James Barnett, retired Senior Chief Special Warfare Operator (SEAL) Kristin Beck, retired Army 1st Sgt. Dayna Walker and others said the services should comply with the DoD regulations by removing transgender identity as a disqualifying condition in their own policies.

They also recommended that the Pentagon eliminate all regulatory prohibitions against transgender service and implement an inclusive policy addressing administration and medical aspects of transgender service.

"If the DoD declines to eliminate discriminatory policy, the commander-in-chief should take executive action to effect the change," they wrote.

At least 18 countries allow transgender individuals to serve openly in their armed forces, according to the Palm Center.

Defense Secretary Chuck Hagel said earlier this year he was open to reviewing the policy that bars transgender individuals from serving but no formal review is underway.

Mazur expressed hope that the omission of the list signals a sea change at the Pentagon regarding transgender service.

"We're closer to transgender service than we've ever been," Mazur said.