Insights On American Legislation Effecting Supply Chain Management

The ways companies conduct business is changing. Legislation is tightening regulations all over the world, and legislation effecting supply chain management in the United States is extensive and complex. Supply chain disruptions  are unfortunately all too frequent these days, and the Biden Administration has been undertaking a range of initiatives intended to build resilient supply chains that reflect the administration’s policies around national security, foreign policy, human rights and the US economy.

The rational for legislation is in part answered by the Economist Impact Survey data that shows ESG regulation to be both positive and negative for companies. While keeping up with an evolving landscape and uncertainty it is named the top challenge, where also compliance with ESG is also one of the key focus areas. This is closely followed by an increased diversification of funding sources with new investors and customer acquisition and retention.

Accordingly, legal and compliance developments in this space, with more on the horizon, procurement and supply chain professionals need to know what to focus on, and what they should be doing. Focus has turned to some specific areas such as the Semiconductor and Advanced Packaging Supply Chain where legal and compliance considerations for companies operating in this sector will need a clear understanding of the implications in terms of tax, trade, and foreign investment. The same being true for large capacity batteries, Critical Minerals and Strategic Materials, pharmaceuticals, and active ingredients to produce pharmaceuticals.

SEC Amendments

On 9 March 2022, the US Securities and Exchange Commission (SEC) proposed amendments to its rules on disclosures regarding cybersecurity risk management, strategy, governance, and incident reporting by public companies. These rules are intended to enhance and standardise the key issue of cybersecurity disclosures, and, if adopted in their current form, would require public companies to disclose cybersecurity-related policies, procedures and all material cybersecurity incidents.

The proposed rules (item 1.05 of form 8-K) would create a new reporting obligation on material cybersecurity incidents, both in content and substance. This would mean that the obligation would be along the same lines as the US state data breach notification laws. Further, a cybersecurity incident can be considered material even if it does not impact personal data.

Slave-Free Business Certification Act

Senators Josh Hawley and Kirsten Gillibrand have reintroduced the Slave-Free Business Certification Act of 2022. The Act would impose significant new compliance and disclosure requirements for many companies, requiring businesses with annual, worldwide gross receipts exceeding $500 million to conduct annual audits of their supply chains to detect any use of forced labour, report findings to the US Government, and face potentially significant fines and penalties for any violations that occurred in contravention of the new proposed Act.

Biden-Harris Plan to Revitalize American Manufacturing and Secure Critical Supply Chains

On February 24, 2022, various U.S. government agencies published their respective reports on supply chain policies for six key industrial bases pursuant to Executive Order 14017, “America’s Supply Chains” (the “Reports”).  These Reports identify key weaknesses in some of the nation’s most crucial supply chains and offer multi-year strategies to help address those weaknesses.  The White House issued the Biden-Harris plan statement (The Biden-Harris Plan to Revitalize American Manufacturing and Secure Critical Supply Chains in 2022 | The White House) and Capstone Report (Capstone-Report-Biden.pdf (whitehouse.gov) following the publication of the Reports.

In the first initial work phase established by EO 14017, the Departments of Commerce, Energy, Defense (see illustration below), and Health and Human Services were instructed to assess supply chain vulnerabilities across four key products: semiconductors, large-capacity batteries, critical minerals and materials, and pharmaceutical and active pharmaceutical ingredients.  These assessments culminated in a report of “100-day reviews”, see below (Resources section).  The report containing reviews from all four agencies identified insufficient U.S. manufacturing capacity, misaligned markets, foreign nations' industrial polices, geographic (global) concentration of key supply chains, and limited international coordination as drivers of the challenges faced in those four sectors.

In essence the key takeaways form the former statement of 24^th February 2022, were as follows:

• Seven cabinet agencies published reports identifying key weaknesses in some of the nation’s most crucial supply chains and devising multi-year strategies to address those weaknesses.

• Put the U.S. Economy on a Path Towards Long-Term Resilience Across Critical Supply Chains.

• Propose a new domestic manufacturing initiative through the Export-Import Bank to strengthen U.S. manufacturing exports.

• Expand access to capital for small manufacturers. 

• Advance the technological leadership of both small and large manufacturers.

• Leverage the Bipartisan Infrastructure Law to move critical goods from ships to shelves faster and more affordably.

• Invest in sustainable domestic production and processing of critical minerals.

• Leverage the American Rescue Plan to jumpstart a more competitive, innovative, and resilient meat and poultry supply chain.

• Institutionalize Supply Chain Resilience Throughout the Federal Government

• Bolster the American manufacturing of critical goods through new reforms under the Buy American Act.

• Restore U.S. global leadership on supply chains

• Bolster clean energy manufacturing through implementation of the Bipartisan Infrastructure Law.
• Fully establish a Defense Production Act Investment Program to build and expand the health resources industrial base.

The statement concluded by saying, “To build on these investments and spur more private-sector investment in the United States, the President is committed to passing comprehensive competitiveness legislation like the COMPETES/USICA bills put forward in the House and the Senate to strengthen our supply chains, grow domestic manufacturing, and help us outcompete China and the rest of the world. This legislation, combined with the critical investments included in the Build Back Better Act, will help to deliver on the President’s mission to expand the productive capacity of our economy and lower costs for families”.

The reports issued in February 2022 represent the second phase of work under EO 14017, instructing the agencies to provide specific policy recommendations and proposals for strengthening and ensuring resilient supply chains. A brief summary and links to those specific reports is appended below:

• Department of Defense: Securing Defense-Critical Supply Chains focuses on the following five areas: (1) Kinetic capabilities; (2) Energy Storage and Batteries; (3) Castings and Forgings ("C&F"); (4) Microelectronics; and (5) an update of the 100-day critical minerals and materials report.
• Department of Energy: America's Strategy to Secure the Supply Chain for a Robust Clean Energy Transition focuses on the following technologies: (1) carbon capture materials; (2) electric grid; (3) energy storage; (4) fuel cells and electrolyzes; (5) hydropower including pumped storage hydropower; (6) neodymium magnets; (7) nuclear energy; (8) platinum group metals and other catalysts; (9) semiconductors; (10) solar photovoltaics; and (10) wind.

• Department of Commerce / Department of Homeland Security: Assessment of the Critical Supply Chains Supporting the U.S. Information and Communications Technology Industry focuses on (1) software, including risks associated with open-source; as well as manufacture of (2) printed circuit boards; (3) fiber optic cable; (4) printed circuit board assemblies and subassemblies; (5) routers, switches, and servers; and (6) LCDs/Displays.

• Health and Human Services: Public Health Supply Chain and Industrial Base focuses on (1) personal protective equipment; (2) durable medical equipment; (3) testing and diagnostics; and (4) pharmaceuticals.

• Department of Transportation: Transportation Industrial Base Freight and Logistics focuses on (1) physical infrastructure (including needed developments); (2) congestion and bottlenecks; (3) data availability and research gaps; (4) supply chain security; (5) freight and warehousing; and (6) rules and regulation.

• Department of Agriculture: Program and Policy Options for Strengthening Resilience focuses (1) consolidation within the industry; (2) labor; (3) ecological and climate risks; (4) transportation bottlenecks; and (5) international trade.

In considering the breadth and depth of the reports the principal summaries are as follows:

• The need to work with "allies and partners" in securing supply chains, in particular where domestic sources may not exist.  Further, the augmentation of "near-shoring" or "ally-shoring" as reasonable alternatives to on-shoring or building up domestic production capacity is an acknowledgment by the Administration that not every link in every supply chain can be reasonably located in the United States.  But the identification of global trusted partners as opposed to adversarial or unaligned nations is a critical element of the Administration's approach to supply chain security.

• Objective and laser focus on the total supply chain and it’s ultimate points of origin in all respects given the Russian-Ukraine conflict and potentially loosen the ties with China too with the need for industry preparation for longer-term business impacts.

• Sectoral assessments are the result of what the report's describe as a "whole-of-government" effort that is supported, in turn, by U.S. industry.  This also involved sub-agencies gathering data from industry over the past year to provide supply chain analysis, to form these initial outcomes.

• The EO also requires quadrennial reviews involving ongoing data gathering and supply chain monitoring, with the next set of reports to be released in 2025.  In addition, many of the sectoral reports note the creation of new interdisciplinary task forces that will continue to grapple with supply chain policy issues. 

• The reports collectively identify several recent investments the government has undertaken to support increased domestic production.  For example, the Department of Energy will invest $7 billion from Bipartisan Infrastructure Bill in large-capacity battery supply chain, including material refining and production, battery cell and pack manufacturing, and recycling.  Additionally, the Department of Defense has invested to re-shore production of rare earth metals.  Investments in U.S. production of semiconductors by leading foreign corporations in allied nations are also touted.

• Revised focus on U.S. government's directing federal dollars to developing markets and capacity in support of critical supply chains is the need to partner with and/or promote industry and foreign allies in strengthening industrial bases through private, public-private, or cross-government collaborative mechanisms. 

• Additionally, the collectively acknowledgement of the need to mitigate risk of "adversarial" foreign ownership, control, or influence (FOCI) in supply chains.  Thematically, these dual goals - fostering market and capacity growth while seeking to avoid harmful foreign influence in supply chains - depend heavily on identifying and developing a trusted global supply chain network.

• A Larger Framework to Promote Domestic Manufacturing, where in June 2021, the Administration launched a rapid-response, interagency Supply Chain Disruptions Task Force (SCDTF) to address the immediate supply chain challenges arising from the COVID-19 pandemic in the areas of transportation logistics and labor shortages, semiconductor availability, food, and agriculture.

In July 2021, President Biden issued  EO 14036 on Promoting Competition in the American Economy, recognising the importance of a robust and diverse sectors, being: agriculture, information technology, telecommunications, and healthcare. Where the long-term resilience of competition, supply chains, U.S. workers, and consumers is needed for the US economy.

President Biden has advocated for comprehensive competitiveness legislation, including the America Creating Opportunities for Manufacturing, Pre-Eminence in Technology, and Economic Strength (COMPETES) Act (which passed in the House of Representatives) and the United States Innovation and Competition Act (USICA) (which passed in the Senate).  These legislative vehicles include numerous, wide-ranging provisions aimed at promoting investment in the domestic industrial base and domestic manufacturing (including to expand supply of semiconductors through the Creating Helpful Incentives for Production of Semiconductors (CHIPS) for America Act), shoring up supply chains, and combatting unfair trade practices.

And most recently, consistent with the policy of leveraging the government's purchasing power to strengthen the resilience of supply chains, the Federal Acquisition Regulatory (FAR) Council published the Federal Acquisition Regulation (FAR), see resources below. This was in order to strengthen Buy American Act (BAA) requirements in accordance with President Biden's January 25, 2021  Executive Order (E.O.) 14005, Ensuring the Future is Made in All of America by All of America's Workers.  This new rule increases the BAA's domestic content threshold for certain end products and construction materials.

Turning to the area of IT, Technology, digital and cybersecurity the U.S. government is determined to reset this area/sector too from a procurement and supply chain perspective. With the advent of five areas of focus:

FISMA Reform. The Federal Information Security Management Act (FISMA) provides guidance on how federal agencies track and report on their cybersecurity posture. Consultation and hearings have already taken place to advance reform and modernisation of FISMA. Watch this space!

Incident Reporting Requirements for Federal Agencies and Contractors. Incident reporting will remain a priority throughout 2022. As part of its FISMA and FedRAMP legislation in Strengthening American Cybersecurity Act of 2022.

CMMC. The Department of Defense (DoD) continues to move forward with the implementation of its Cybersecurity Maturity Model Certification program (CMMC). In November 2021, the DoD announced modifications to the underlying model, addressing many of the issues previously raised in regard to the DoD. 

Zero Trust. The National Institutes of Standards and Technology (NIST), OMB, and CISA have put out guidance regarding federal agencies’ migration to a zero trust environment. In January, the Biden Administration released OMB Memorandum M-22-09, Moving the U.S. Government Toward Zero Trust Cybersecurity Principles as required by Section 3 of the Cyber EO. CISA has yet to publish the final versions of the Zero Trust Maturity Model and Cloud Security Technical Reference Architecture. 

Made in America. In 2022, the Made in America Office within OMB will continue to evaluate and implement policy changes related to the 2021 Executive Order on Ensuring the Future is Made in America by All of America’s Workers. However, the realities of the global ICT supply chain, as well as the United States’ international trade obligations require an extra ordinary response in terms of domestic sourcing requirements in the Infrastructure Investment and Jobs Act (IIJA) already in existence.

Turning to Executive Order (EO) 14057, Catalyzing Clean Energy Industries and Jobs Through Federal Sustainability, which includes a number of requirements directed at introducing sustainability to federal acquisitions the EO sets its policy to achieve net-zero emissions from federal procurement by 2050 and closely precedes the public comment period extension to 13^th January 2022 in response to EO 14030, Climate-Related Financial Risk.  This will help shape and effectively establish an Environmental, Social, and Governance or “ESG” reporting requirement, that has been seen in other western countries. In this respect the Federal Acquisition Regulatory Council is currently seeking public comment to consider amending the Federal Acquisition Regulation (“FAR”) to:

• require major federal suppliers to both publicly disclose greenhouse gas emissions and climate-related financial risk and set science-based reduction targets; and

• ensure that major federal agency procurements minimize the risk of climate change, including requiring the social cost of greenhouse gas emissions to be considered in procurement decisions and, where appropriate and feasible, give preference to bids and proposals from suppliers with a lower social cost of greenhouse gas emissions.

This recognizes investors and the U.S. Securities and Exchange Commission response to them in requiring a minimum level of ESG-related information.  Further, Covington’s multidisciplinary ESG and Sustainability team created an ESG and Sustainability Toolkit as an entry point for analysis, understanding, and tailored advice on this wide ranging topic.

With new reporting, tracking, and emission reduction targets potentially on the horizon, federal contractors should consider taking the opportunity to shape aspects of new requirements, such as the preferred method of tracking and reporting emission data, including how to evaluate the social cost of such greenhouse gases. As re-established under EO 13990, the Interagency Working Group on the Social Cost of Greenhouse Gases published interim estimates of the social cost of carbon, methane, and nitrous oxide in February 2021 that reflects one method for evaluating emissions data that could ultimately inform requirements imposed on contractors. 

There are also two ongoing FCA consultations which, if implemented, would come into force over the next 12 months. The first consultation closed at the end of 2021 and considers whether to change the Listing Rules to require certain companies to disclose whether they meet specific board diversity targets relating to gender and ethnicity on a “comply or explain” basis. The consultation and similar initiatives across the globe are set out in more detail in the Harvard Law School forum on corporate Governance ( ESG: 2021 Trends and Expectations for 2022 (harvard.edu) on 19th January 2022 article “UK, US and Some Asian Jurisdictions Join in Pressing Companies To Diversify Their Boards.” The second consultation closed at the start of 2022 and considers new sustainability disclosure requirements for asset managers and FCA-regulated asset owners, as well as a new classification and labelling system for sustainable investment products. 

Accordingly, recent commentary from private legal advisors have summarized the three key takeaways as being;

• Regulators, including the SEC and OCC, are poised to enact new reporting requirements focused on climate risk, among other ESG themes, in the coming months. An increase in enforcement actions is also likely to follow.

• Financial institutions' ESG-alignment and mitigation of related risks will likely continue to be a major focal point for NGOs and other private stakeholders with increased vigor, given the broader focus on world energy markets in light of the current geopolitical crisis.

• As more companies tout their ESG commitments in public disclosures—and as more investors claim to consider such factors when making investment decisions—legal arguments around materiality of these statements should be closely monitored.

What is very clear is that the critical focus on supply chains and their strategic role in the vitality of an economy has been fully recognized and placed front and centre of the Administrative plan to an extent that has perhaps not been seen for a very long time. This signals the need for procurement and supply chain professionals to work closer and more collaboratively with their legal counsels to a new and higher level going forward to ensure not just compliance but to develop the opportunities and competitive advantage that can flow from such strategic intervention.

Additional Read: Insights on EU Legislation Effecting Supply Chain Management

 

Resources:

ESG:
https://www.whitehouse.gov/wp-content/uploads/2021/06/100-day-supply-chain-review-report.pdf
https://www.insidegovernmentcontracts.com/2021/12/contractors-have-an-opportunity-to-help-shape-esg-requirements/

https://www.activesustainability.com/sustainable-development/esg-criteria-in-public-tenders/?_adin=02021864894

https://www.epa.gov/sites/default/files/2018-06/documents/emerging_trends_in_supply_chain_emissions_engagement.pdf

Transparency:

https://www.whitehouse.gov/briefing-room/statements-releases/2021/10/31/chairs-statement-on-principles-for-supply-chain-resilience/

https://hbr.org/2019/08/what-supply-chain-transparency-really-means

https://oag.ca.gov/SB657

https://www.congress.gov/bill/116th-congress/house-bill/6279?s=1&r=2

Slavery:

https://www.state.gov/u-s-government-efforts-to-advance-business-and-human-rights-in-2020/

https://www.state.gov/wp-content/uploads/2019/03/286369.pdf

https://supplierregistration.cabinetoffice.gov.uk/msat

https://news.stanford.edu/2021/12/20/reimagining-just-equitable-global-supply-chains/

https://www.ropesgray.com/en/newsroom/alerts/2019/04/Modern-Slavery-Compliance-For-US-based-and-Other-Multinationals-A-Review-of-Recent-Compliance

 

Acknowledgments:

I would lime to make a special acknowledgement for the amazing help and support of Professor Christopher L. Atkinson, Ph.D. from the University of West Florida where he specializes in Administration and Law.