Federal Acquisition Regulation: Prohibition on Certain Semiconductor Products and Services

Published date03 May 2024
Record Number2024-08735
Citation89 FR 36738
CourtGeneral Services Administration,National Aeronautics And Space Administration
SectionProposed rules
Federal Register, Volume 89 Issue 87 (Friday, May 3, 2024)
[Federal Register Volume 89, Number 87 (Friday, May 3, 2024)]
                [Proposed Rules]
                [Pages 36738-36742]
                From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
                [FR Doc No: 2024-08735]
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                DEPARTMENT OF DEFENSE
                GENERAL SERVICES ADMINISTRATION
                NATIONAL AERONAUTICS AND SPACE ADMINISTRATION
                48 CFR Part 40
                [FAR Case 2023-008, Docket No. FAR-2023-0008, Sequence No. 1]
                RIN 9000-AO56
                Federal Acquisition Regulation: Prohibition on Certain
                Semiconductor Products and Services
                AGENCY: Department of Defense (DoD), General Services Administration
                (GSA), and National Aeronautics and Space Administration (NASA).
                ACTION: Advanced notice of proposed rulemaking.
                -----------------------------------------------------------------------
                SUMMARY: DoD, GSA, and NASA are considering amending the Federal
                Acquisition Regulation (FAR) to implement paragraphs (a), (b), and (h)
                in section 5949 of the James M. Inhofe National Defense Authorization
                Act for Fiscal Year 2023 that prohibits executive agencies from
                procuring or obtaining certain products and services that include
                covered semiconductor products or services effective December 23, 2027.
                DATES: Interested parties should submit written comments to the
                Regulatory Secretariat Division at the address shown below on or before
                July 2, 2024 to be considered in the formation of the proposed rule.
                ADDRESSES: Submit comments in response to FAR Case 2023-008 to the
                Federal eRulemaking portal at https://www.regulations.gov by searching
                for ``FAR Case 2023-008''. Select the link ``Comment Now'' that
                corresponds with ``FAR Case 2023-008''. Follow the instructions
                provided on the ``Comment Now'' screen. Please include your name,
                company name (if any), and ``FAR Case 2023-008'' on your attached
                document. If your comment cannot be submitted using https://www.regulations.gov, call or email the points of contact in the FOR
                FURTHER INFORMATION CONTACT section of this document for alternate
                instructions.
                 Instructions: Please submit comments only and cite ``FAR Case 2023-
                008'' in all correspondence related to this case. Comments received
                generally will be posted without change to https://www.regulations.gov,
                including any personal and/or business confidential information
                provided. Public comments may be submitted as an individual, as an
                organization, or anonymously (see frequently asked questions at https://www.regulations.gov/faq). To confirm receipt of your comment(s),
                please check https://www.regulations.gov, approximately two to three
                days after submission to verify posting.
                FOR FURTHER INFORMATION CONTACT: [email protected] or call 202-969-
                4075. Please cite FAR Case 2023-008.
                SUPPLEMENTARY INFORMATION:
                I. Background
                 Semiconductors are tiny electronic devices that are essential to
                America's economic and national security. Semiconductors power our
                consumer electronics, automobiles, data centers, critical
                infrastructure, and virtually all military systems. These devices power
                tools as simple as a power adapter and as complex as a fighter jet or a
                smartphone. They are also essential building blocks of the technologies
                that will shape our future, including artificial intelligence,
                biotechnology, and clean energy. For additional information on
                semiconductors, visit https://www.nist.gov/semiconductorsandchips.gov.
                See the section containing definitions in this advance notice of
                proposed rulemaking for the definition of ``semiconductor''.
                 The National Counterintelligence and Security Center, located in
                the U.S. Office of the Director of National Intelligence, has
                identified semiconductors as one of the technology sectors where the
                stakes of disruption are potentially greatest for U.S. economic and
                national security. There are numerous opportunities for adversaries and
                other threat actors to introduce hardware backdoors, malicious
                firmware, and malicious software into a semiconductor during
                production. Since semiconductors are key components of U.S. critical
                infrastructure (e.g., information technology, communications) and have
                many military applications, it is vital that these threat vectors are
                addressed during the production process. Chips are ultimately
                integrated into end products, so it can be difficult to identify and
                mitigate risks to semiconductor hardware, firmware, and software.
                 Due to this significant national security risk, Congress included a
                prohibition for certain covered semiconductors in section 5949 of the
                James M. Inhofe National Defense Authorization Act (NDAA) for Fiscal
                Year (FY) 2023 (Pub. L. 117-263). The statute states that ``[t]he head
                of an executive agency may not (A) procure or obtain, or extend or
                renew a contract to procure or obtain, any electronic parts, products,
                or services that include covered semiconductor products or services; or
                (B) enter into a contract (or extend or renew a contract) with an
                entity to procure or obtain electronic parts or products that use any
                electronic parts or products that include covered semiconductor
                products or services''. However, executive agencies are not required
                to--
                 (1) Remove or replace any products or services resident in
                equipment, systems, or services, prior to the effective date of the
                prohibition.
                 (2) Prohibit or limit the utilization of covered semiconductor
                products or services throughout the lifecycle of existing equipment.
                 DoD, GSA, and NASA plan to implement section 5949 of the NDAA for
                FY 2023 in the FAR via FAR Case
                [[Page 36739]]
                2023-008, Prohibition on Certain Semiconductor Products and Services.
                A. Prohibition Scope
                 The statute's prohibition applies to products, parts, and services.
                The term ``products'' is currently defined in FAR 2.101 to mean
                supplies, which in turn includes all types of property including parts,
                except land and interests in land. Thus, under the FAR's definition,
                the term ``product'' already covers ``parts'' (see FAR 2.101). To avoid
                redundancy, DoD, GSA, and NASA are planning to use the following
                language, which removes the term ``part'', to implement the statutory
                prohibition:
                 Section 5949(a)(1)(A) of the NDAA for FY 2023 prohibits
                executive agencies from procuring or obtaining electronic products or
                electronic services that include covered semiconductor products or
                services.
                 Section 5949(a)(1)(B) of the NDAA for FY 2023 prohibits
                executive agencies from procuring or obtaining electronic products that
                use electronic products that include covered semiconductor products or
                services; however, this prohibition does not apply to electronic
                products used in systems that are not critical systems.
                 Section 5949(a)(1)(B) goes beyond the prohibition in section
                5949(a)(1)(A) by prohibiting Federal agencies from acquiring electronic
                products used within critical systems that use electronic products that
                incorporate covered semiconductor products or services. For example,
                section 5949(a)(1)(B) could restrict a Federal agency from acquiring a
                replacement control panel within a critical system that enables an
                Internet of Things (IoT) device that includes a covered semiconductor
                product or service and was purchased prior to the effective date of the
                prohibition.
                B. Definitions
                 DoD, GSA, and NASA are considering incorporating the following
                definitions that are referenced in section 5949 of the NDAA for FY
                2023:
                 Covered entity (section 5949(j)(2)).
                 [cir] An entity that--
                 [ssquf] Develops, domestically or abroad, a design of a
                semiconductor that is the direct product of United States origin
                technology or software; and
                 [ssquf] Purchases covered semiconductor products or services from
                an entity described in the first or third paragraph of the definition
                of covered semiconductor product or services.
                 Covered nation (section 5949(j)(5) and 10 U.S.C. 4872(d))
                 [cir] The Democratic People's Republic of Korea (North Korea);
                 [cir] The People's Republic of China;
                 [cir] The Russian Federation;
                 [cir] The Islamic Republic of Iran.
                 Covered semiconductor product or service (section
                5949(j)(3))
                 [cir] A semiconductor, a semiconductor product, a product that
                incorporates a semiconductor product, or a service that utilizes such a
                product, that is designed, produced, or provided by Semiconductor
                Manufacturing International Corporation (SMIC) (or any subsidiary,
                affiliate, or successor of such entity);
                 [cir] A semiconductor, a semiconductor product, a product that
                incorporates a semiconductor product, or a service that utilizes such a
                product, that is designed, produced, or provided by ChangXin Memory
                Technologies (CXMT) or Yangtze Memory Technologies Corp (YMTC) (or any
                subsidiary, affiliate, or successor of such entities); or
                 [cir] A semiconductor, semiconductor product, or semiconductor
                service produced or provided by an entity that the Secretary of Defense
                or the Secretary of Commerce, in consultation with the Director of the
                National Intelligence or the Director of the Federal Bureau of
                Investigation, determines to be an entity owned or controlled by, or
                otherwise connected to, the government of a foreign country of concern,
                provided that the determination with respect to such entity is
                published in the Federal Register.
                 Critical national security interests mean any interests
                having a critical impact on the national defense, foreign intelligence
                and counterintelligence, international and internal security, or
                foreign relations of the United States.
                 Critical system (section 5949(j)(4))
                 [cir] National security system (see 40 U.S.C. 11103(a)(1));
                 [cir] Additional systems identified by the Federal Acquisition
                Security Council; or
                 [cir] Additional systems identified by the Department of Defense,
                consistent with guidance provided under section 224 of the NDAA for FY
                2020 (Pub. L. 116-92).
                 [cir] Does not include a system that is used for routine
                administrative and business applications (including payroll, finance,
                logistics, and personnel management applications).
                 Foreign country of concern (15 U.S.C. 4651)
                 [cir] A country that is a covered nation; and
                 [cir] Any country that the Secretary of Commerce, in consultation
                with the Secretary of Defense, the Secretary of State, and the Director
                of National Intelligence, determines to be engaged in conduct that is
                detrimental to the national security or foreign policy of the United
                States.
                 National security system (40 U.S.C. 11103(a)(1))
                 [cir] A telecommunications or information system operated by the
                Federal Government, the function, operation, or use of which--
                 [ssquf] Involves intelligence activities;
                 [ssquf] Involves cryptological activities related to national
                security;
                 [ssquf] Involves command and control of military forces;
                 [ssquf] Involves equipment that is an integral part of a weapon or
                weapons system; or
                 [ssquf] Is critical to the direct fulfillment of military or
                intelligence missions.
                 [cir] This term excludes a system to be used for routine
                administrative and business applications (including payroll, finance,
                logistics, and personnel management applications).
                 DoD, GSA, and NASA are also considering using the following
                definitions in the FAR rule:
                 Affiliate means associated business concerns or
                individuals if, directly or indirectly either one controls or can
                control the other; or a third-party controls or can control both. See
                FAR 2.101.
                 Electronic products means products that include
                technology, parts, or components that have electrical, digital,
                magnetic, wireless, optical, electromagnetic, or similar capabilities.
                See 15 U.S.C. 7006.
                 Electronic services means services that use electronic
                products.
                 Reasonable inquiry means an inquiry designed to uncover
                any information in the entity's possession about whether any electronic
                products or electronic services that are provided to the Government--
                 (1) Include covered semiconductor products or services; or
                 (2) Use electronic products that include covered semiconductor
                products or services.
                 A reasonable inquiry may reasonably rely on the certifications of
                compliance from covered entities and subcontractors who supply
                electronic products or services. This inquiry is not required to
                include independent third-party audits or other formal reviews but may
                be required to include other mechanisms of diligence review depending
                on the facts and circumstances. Diligence review shall be required with
                regard to entities that are established or operated in foreign
                countries of concern, even when they certify compliance with this rule.
                 Routine administrative and business applications means
                applications for payroll, finance,
                [[Page 36740]]
                logistics, and personnel management applications primarily used for
                standard commercial practices and functions.
                 Semiconductor means an integrated electronic device or
                system most commonly manufactured using materials including, but not
                limited to, silicon, silicon carbide, or III-V compounds, and processes
                including, but not limited to, lithography, deposition, and etching.
                Such devices and systems include, but are not limited to, analog and
                digital electronics, power electronics, and photonics, for memory,
                processing, sensing, actuation, and communications applications. See
                Creating Helpful Incentives to Produce Semiconductors (CHIPS) Program
                Office, National Institute of Standards and Technology, Department of
                Commerce rule published September 25, 2023 (88 FR 65600).
                 Subsidiary means an entity in which more than 50 percent
                of the entity is owned directly by a parent corporation or through
                another subsidiary of a parent corporation. See FAR 9.108-1.
                C. Solicitation Provision
                 DoD, GSA, and NASA are planning to require a provision in all
                solicitations that would require offerors to certify, after conducting
                a reasonable inquiry, to the non-use of covered semiconductor products
                or services in electronic products or electronic services provided to
                the Government in accordance with section 5949(h)(1)(A).
                D. Contract Clause
                 DoD, GSA, and NASA are planning to require a clause in all
                solicitations and contracts that incorporates the prohibitions in
                section 5949(a)(1)(A) and 5949(a)(1)(B), and the requirements in
                section 5949(h). The clause would--
                 (1) Direct contractors to apply the prohibition in section
                5949(a)(1)(A);
                 (2) Direct contractors to apply the prohibition in section
                5949(a)(1)(B) unless the agency identified a non-critical system that
                is not subject to this specific part of the prohibition;
                 (3) Require contractors to conduct a reasonable inquiry to detect
                and avoid the use or inclusion of covered semiconductor products or
                services in electronic products and electronic services;
                 (4) Require covered entities that are Federal contractors or
                subcontractors to disclose to direct customers the inclusion of a
                covered semiconductor product or service in electronic products or
                electronic services;
                 (5) Require that any Federal contractor or subcontractor, including
                any covered entity, who becomes aware, or has reason to suspect, that
                any product to be used in a critical system purchased by the Federal
                Government, or purchased by a Federal contractor or subcontractor for
                delivery to the Federal Government for any critical system, that
                contains covered semiconductor products or services shall notify
                appropriate Federal authorities in writing within 60 days;
                 (6) Require that a contractor or subcontractor that provides a
                notification under paragraphs (4) and (5) above regarding electronic
                parts or products that are manufactured or assembled by an entity other
                than the contractor or subcontractor shall not be subject to civil
                liability nor determined to not be a presently responsible contractor
                on the basis of such notification;
                 (7) State that a contractor or subcontractor that provides a
                notification under paragraphs (4) and (5) above regarding electronic
                parts or products manufactured or assembled by such contractor or
                subcontractor shall not be subject to civil liability nor determined to
                not be a presently responsible contractor on the basis of such
                notification if the Federal contractor or subcontractor makes a
                comprehensive and documentable effort to identify and remove the
                covered semiconductor products or services;
                 (8) Provide that a covered entity that is a Federal contractor or
                subcontractor that fails to disclose the inclusion to direct customers
                of a covered semiconductor product or service in electronic parts or
                electronic services shall be responsible for any rework or corrective
                action that may be required to remedy the use or inclusion of such
                covered semiconductor product or service;
                 (9) State that any rework or corrective action that may be required
                to remedy the use or inclusion of a covered semiconductor product or
                service is not an allowable cost;
                 (10) State that contractors and subcontractors may reasonably rely
                on the certifications of compliance from covered entities and
                subcontractors who supply electronic products or services when
                providing proposals to the Federal Government and are not required to
                conduct independent third-party audits or other formal reviews related
                to such certifications.
                E. Subcontractors
                 Since section 5949(c) mandates prime contractors to incorporate the
                substance of these prohibitions and applicable implementing contract
                clauses into contracts, DoD, GSA, and NASA are planning to require that
                prime contractors insert the clause developed for FAR Case 2023-008
                into all subcontracts for the supply of any electronic products.
                F. Applicability to Contracts at or Below the Simplified Acquisition
                Threshold (SAT) and for Commercial Products (Including Commercially
                Available Off-the-Shelf (COTS) Items), or for Commercial Services
                 DoD, GSA, and NASA are planning to require the provision and clause
                in all solicitations and contracts, including those valued at or below
                the simplified acquisition threshold, for the acquisition of commercial
                products and commercial services, and for the acquisition of COTS
                items, because the prohibitions impact any product or service that uses
                or provides electronic products or electronic services to the
                Government. Due to the prevalence of electronic products and services,
                DoD, GSA, and NASA anticipate this would impact a large majority of
                contracts and orders. If this prohibition was not included in every
                solicitation, it would be very difficult for the contracting officer to
                identify which offerors would not be providing an electronic product or
                electronic service.
                G. Applicability to Micro-Purchases
                 DoD, GSA, and NASA anticipate applying these prohibitions to micro-
                purchases. The statute does not exempt micro-purchases and there would
                be national security risks associated with allowing purchases of
                covered semiconductors under the micro-purchase threshold. Many
                electronic products and electronic services are procured under the
                current micro-purchase threshold that are critical to the mission of
                the Federal Government, and it is important that this rule address such
                risks.
                H. Means of Identifying Elements and Components
                 DoD, GSA, and NASA are considering requiring offerors to identify
                the provenance of the supply chain for the semiconductor components for
                each electronic product provided to the Government. This information
                could allow the Government to validate contractor compliance with this
                prohibition. The required provenance information for semiconductor
                products could include, but is not limited to, identification of
                vendors and facilities responsible for the design, fabrication,
                assembly, packaging, and test of the product, manufacturer codes used
                for the product, and distributor codes used for the product. DoD, GSA,
                and NASA plan to assess existing supply chain
                [[Page 36741]]
                provenance initiatives (e.g., Uyghur Forced Labor Prevention Act
                Operational Guidance for Importers at https://www.cbp.gov/document/guidance/uflpa-operational-guidance-importers) to align any provenance
                requirements in this rulemaking with current industry practices.
                I. Government List of Electronic Products With Prohibited
                Semiconductors
                 DoD, GSA, and NASA are considering referencing in the proposed rule
                a web page or report being considered that could be issued by the
                Department of Commerce that would identify a list of electronic
                products and services that include covered semiconductor products or
                services that utilize such products, such as telecommunications and
                cloud storage or computing services. As precedent, the Department of
                Commerce published a report in January 2022 that identified key
                semiconductor products that were in short supply, and the downstream
                industries that depended on those products, based on the results of a
                public request for information. Going forward, such a public list of
                covered semiconductor products could assist offerors and contractors
                with identifying electronic products and electronic services that are
                prohibited.
                J. Waivers
                 DoD, GSA, and NASA are planning to clarify that the waiver
                authority for the Secretary of Defense, Director of National
                Intelligence, Secretary of Commerce, and Secretary of Energy allows
                each of these officials to grant a waiver for any executive agency in
                accordance with the statutory requirements. The waiver authority would
                be in addition to the waiver authority granted to the head of each
                executive agency. See section 5949(b).
                K. Impact
                 DoD, GSA, and NASA anticipate that entities will be impacted by
                this rule in the following ways:
                 Education and training--time to review and become familiar
                with the rule.
                 Time to update existing contractor business policies.
                 Time to conduct an investigation to determine whether the
                entity uses prohibited semiconductors.
                 Time to complete the certification.
                 Given that every unique awardee with electronic products or
                services would need to conduct a reasonable inquiry, as part of its
                initial analysis, DoD, GSA, and NASA anticipate using the following
                assumptions:
                 75 percent of all unique awardees have electronic products
                or services that will be impacted by this prohibition.
                 For impacted contracts, it is estimated that each contract
                will involve an average of 5 to 15 products with semiconductors.
                 For these semiconductors, it is anticipated that an
                average of 10 to 20 percent of the semiconductors are not currently
                compliant with the prohibition. While this represents an average across
                economic sectors, it is recognized that the prevalence of covered
                semiconductor products and services is higher in certain industries.
                 For each non-compliant semiconductor product or service,
                it is anticipated to cost on average $10,000 to come into compliance by
                providing an alternative product or service or updating a product or
                service to remove prohibited semiconductors.
                L. Future Rulemaking
                 While this advance notice of proposed rulemaking is focused on DoD,
                GSA, and NASA's implementation of the prohibition in paragraphs (a),
                (b), and (h) of section 5949, DoD, GSA, and NASA anticipate addressing
                through separate rulemaking the requirements in paragraph (g) for
                mitigating supply chain risks for semiconductor products and services
                that are not otherwise prohibited by section 5949. As friendly and
                allied nations expand their production and the United States continues
                to build out our domestic semiconductor production capacity through the
                CHIPS and Science Act and the Department of Commerce's CHIPS for
                America program, DoD, GSA, and NASA anticipate this additional
                rulemaking will help ensure that Federal contractors will increasingly
                have a diverse and more trustworthy source of suppliers that can
                provide secure and resilient semiconductors.
                II. Request for Public Comment
                 DoD, GSA, and NASA welcome general input from the public on the
                amendments to the FAR being considered to accomplish the stated
                objectives when implementing section 5949 of the NDAA for FY 2023.
                Respondents are encouraged to offer their feedback on the following
                questions:
                 (a) Do you have any recommendations for how DoD, GSA, and NASA can
                further clarify the scope of the prohibition?
                 (b) Do you have any comments on the proposed definitions being
                considered for this rule, including the definition for reasonable
                inquiry?
                 (c) Are there any definitions that should be added?
                 (d) Do you have any comments on DoD, GSA, and NASA's plan for
                requiring a solicitation provision and contract clause?
                 (e) Are there any details regarding the waiver authority that would
                be helpful to clarify?
                 (f) Do you have sufficient visibility into your supply chain to
                understand whether your supply chain uses any covered semiconductor
                products or services? What information is normally requested from
                subcontractors and suppliers about semiconductor provenance?
                 (g) What procedures do you anticipate using to conduct a reasonable
                inquiry into your supply chain to understand whether your supply chain
                uses any covered semiconductor products or services? How do you
                currently or how do you plan to detect the inclusion of covered
                semiconductor products and services in your supply chain?
                 (h) If your organization does use covered semiconductor products or
                services, how much of an impact will this prohibition have on your
                organization?
                 (i) Do you have any comments on DoD, GSA, and NASA's estimated
                impact of a future rule to implement section 5949?
                 (j) Are there any categories of products or services you currently
                provide to the Government for which you anticipate needing a waiver
                when the prohibition is effective in December 2027? If so, which
                categories of products or services?
                 (k) For categories of products or services for which a waiver may
                be necessary, how long do you anticipate it will take to find
                alternative semiconductors that are compliant?
                 (l) What impact will implementation of section 5949 in the FAR have
                on small businesses, including small disadvantaged businesses, women-
                owned small businesses, service-disabled veteran-owned small
                businesses, and Historically Underutilized Business Zone (HUBZone)
                small businesses? How should DoD, GSA, and NASA best align this
                objective with efforts to ensure opportunity for small businesses?
                 (m) What additional information or guidance do you view as
                necessary to effectively comply with a future rule to implement section
                5949?
                 (n) What challenges do you anticipate facing in effectively
                complying with a future rule to implement section 5949?
                 (o) What would be the best method or process for identifying the
                provenance of the supply chain for the
                [[Page 36742]]
                semiconductor components? Are you aware of existing guidelines or best
                practices for identifying and documenting the provenance of the supply
                chain for electronic products and electronic services? Do you have any
                suggestions for how and when the Government should validate supply
                chain provenance information and documentation?
                 (p) If the Department of Commerce establishes a public list that
                identifies electronic products with prohibited semiconductors, would
                this be helpful for implementing this prohibition?
                 (q) Do you have any feedback regarding how DoD, GSA, and NASA
                should incorporate the requirements regarding certification,
                disclosure, notification safe harbors, and allowable costs in paragraph
                (h) of section 5949?
                 (r) What else should DoD, GSA, and NASA consider in drafting a
                proposed rule to implement the prohibitions outlined in section 5949?
                III. Executive Orders 12866 and 13563
                 Executive Orders (E.O.s) 12866 and 13563 direct agencies to assess
                costs and benefits of available regulatory alternatives and, if
                regulation is necessary, to select regulatory approaches that maximize
                net benefits (including potential economic, environmental, public
                health and safety effects, distributive impacts, and equity). E.O.
                13563 emphasizes the importance of quantifying both costs and benefits,
                of reducing costs, of harmonizing rules, and of promoting flexibility.
                This is a significant regulatory action and, therefore, was subject to
                review under Section 6(b) of E.O. 12866, Regulatory Planning and
                Review, dated September 30, 1993.
                 Government procurement.
                William F. Clark,
                Director, Office of Government-wide Acquisition Policy, Office of
                Acquisition Policy, Office of Government-wide Policy.
                [FR Doc. 2024-08735 Filed 5-2-24; 8:45 am]
                BILLING CODE 6820-EP-P
                

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