What is the policy/guidance around using Schematron in NIEM?

There is no formal policy with respect to use of Schematron with NIEM.

Georgia Tech Research Institute (GTRI) uses Schematron (in fact, publishes the Schematron rules) for the NIEM Conformance Tool. Schematron checks that IEPD schemas do not violate the NIEM Naming and Design Rules (NDR). However, Schematron could certainly be used to tighten constraints on schemas or instances for IEPD/IEPs that could not otherwise be checked by an XML Schema validator. As a result, the use of Schematron is be encouraged.

Originally, the concept of a constraint schema with two-pass validation was developed as the way to tighten constraints on XML instances if one cannot, or does not want to, design and apply Schematron rules.  A constraint schema does not have to follow the NIEM NDR because it is used for a completely independent 2nd pass validation of an instance.  So, as long as an instance passes the conformance validation (1st pass) with the NIEM subset (plus extensions and exchange schema), then it is conforming. A constraint schema can tighten the constraints without impacting conformance (because it's an additional pass with a constraint schema (usually a modified subset schema) that is independent of the first.

The disadvantage of this approach is that it requires a 2nd validation pass with a modified subset. However, Schematron also requires its own pass over the schema or instance being checked.  In addition, you must write the Schematron rules - which are not always easy.  For example, the Conformance Tool sometimes has to employ a set of as many as 3-4 Schematron rules to check a single NDR rule.

Many business rules can be formally designed and applied in Schematron.  Lastly, since Schematron is the means by which NIEM conformance is achieved, the recommendation from a consistency point of view is to use the Schematron approach for complex business rules validation.