Federal Acquisition Regulation: Prohibition on Certain Semiconductor Products and Services, 36738-36742 [2024-08735]

Agencies

• DEPARTMENT OF DEFENSE
• General Services Administration
• National Aeronautics and Space Administration

[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.

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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