FCC Formalizes Foreign Investment Review Process

FCC Formalizes Foreign Investment Review Process

October 1, 2020, Covington Alert

On September 30, the Federal Communications Commission (“FCC”) unanimously adopted an order formalizing the referral and review process associated with “Team Telecom”—the group of national security and law enforcement agencies responsible for assessing foreign investment in U.S. telecommunications, submarine cable licensees, and broadcast licensees. The order adopts rules and procedures that will govern what has long been an informal process at the agency, both in connection with the issuance of such licenses and with respect to transfers of control.

The FCC’s action is consistent with the agency’s increased focus on, and involvement in, questions around national security and foreign investment in the telecommunications and media sectors. This attention to national security at the FCC is likely to continue regardless of the outcome of the election in November, given that both Republicans and Democrats at the agency have supported the agency’s heightened role in national security matters under its jurisdiction.

Overview of the New Rules.

The new rules were issued in the wake of—and align with—President Trump’s Executive Order (“EO”) of April 4, 2020, which rebranded the group of executive branch authorities long referred to as “Team Telecom” as the “Committee for the Assessment of Foreign Participation in the United States Telecommunications Services Sector.” Despite this name change in the EO, the Team Telecom process at the FCC is expected to follow the same general approach in use today, though the new rules do make a few key changes, which are described below.

Functionally, the Team Telecom process will remain largely the same: applications for FCC authorizations that disclose certain levels of foreign ownership will trigger Team Telecom review, which may result in a recommendation that the FCC deny an application or condition its grant on the applicant’s compliance with “mitigation” measures negotiated with the applicants. But the new rules now specify more clearly when and how this process will apply, set timeframes for review, and make certain changes to the application process to facilitate the submission of more information and certifications at the outset of the process.

What Filings Will Be Referred to Team Telecom?

Under the new rules, applications for submarine cable licenses or international 214 authorizations—the license needed to provide international telecommunications service—reporting any direct or indirect foreign owner of 10% or more of the licensee will automatically trigger Team Telecom review, as will applications to assign, transfer control, or modify such licenses. Petitions for Declaratory Ruling to exceed certain aggregate foreign ownership thresholds in Section 310(b)(4) of the Communications Act, including those pertaining to broadcast licensees, will automatically trigger Team Telecom review, too.

However, under the new rules the FCC no longer will automatically refer applications for transfer or assignment of domestic 214 licenses, even if they will result in a foreign entity directly or indirectly holding 10% or more of the licensee. The FCC does, however, retain discretion to refer these applications to Team Telecom, and the new rules do not prevent Team Telecom from seeking to review these types of applications on its own.

The new rules exclude from referral to Team Telecom certain applications deemed of low or minimal risk to national security, law enforcement, foreign policy, and trade policy concerns. Specifically, the following applications are excluded from automatic referral:

• Applications or notifications of pro forma changes (i.e., events that do not result in a change in the actual controlling party);
• Applications and petitions where the only reportable foreign ownership is held through intermediate holding companies and ultimate ownership and control is held by U.S. citizens and entities;
• International 214 applications where the applicant has an existing mitigation agreement, there are no new foreign owners, and the applicant agrees to continue to comply with existing mitigation agreement terms; and
• International 214 applications where the applicant was cleared by Team Telecom within the past 18 months without mitigation, and there are no new reportable foreign owners since that review.

How Will the Timing of the Team Telecom Review Process Change?

The new rules establish a 120-day initial review period for the Team Telecom process, with a possible additional 90-day period for secondary assessment. However, the 120-day review period begins when Team Telecom determines that an applicant’s responses are complete, so as a practical matter it is quite possible that the review period will exceed 120 or, in the case of secondary assessment, 210 days in total. In fact, Commissioner Mike O’Rielly, who first called for reform of the Team Telecom process in 2015, suggested that he would have preferred to see “a more definitive and objective standard for starting the [120-day initial] review clock” in the EO on which the new rules are based.

What New Information Will Need to Be Included in FCC Applications?

The order enacts rules concerning the information and certifications necessary for FCC license and transfer of control applications, as well as additional rules concerning Team Telecom’s review authority.

Specifically, the order instructs the FCC’s International Bureau to develop new questions for applicants that will require them to provide certain specific information in their applications intended to facilitate the Team Telecom review process. These questions will pertain to the applicant’s (1) corporate structure and shareholder information; (2) relationships with foreign entities; (3) financial condition and circumstances; (4) compliance with applicable laws and regulations; and (5) business and operational information, including services to be provided by network infrastructure.

The International Bureau is expected to develop these new questions shortly and seek comment on them, with a goal of finalizing the questions within 90 days.

Applicants also will be required to certify up front in their applications that they will (1) comply with CALEA; (2) make communications to, from, or within the U.S., as well as records thereof, available to U.S. law enforcement officials; (3) designate a U.S. citizen or permanent U.S. resident as a point of contact for the execution of lawful requests and designate an agent for service of process; (4) affirm the accuracy of all information submitted and agree to keep it current; and (5) affirm their understanding that a failure to fulfil any conditions of the grant of their application can result in license revocation or termination and criminal and civil penalties. (Applications involving broadcast licensees are exempt from the first two of these certifications.) These certifications typically are required in mitigation agreements with Team Telecom, and the FCC’s position is that by requiring them at the outset the Team Telecom review and negotiation process can proceed more quickly.

The order also requires applicants to provide information about the voting interests of reportable 10% or greater shareholders, and subsea cable licensees affiliated with a carrier with market power in the cable’s destination market will be subject to certain reporting requirements regardless of whether the destination country is a WTO member. These requirements did not exist previously.

Note that the new rules do not in any way limit the nature or scope of the information that the Team Telecom agencies can seek from applicants. Thus, it is entirely possible, and in some cases likely, that the Team Telecom agencies will seek additional information from applicants. Similarly, the new rules do not alter or attempt to define the circumstances under which the Team Telecom agencies can seek mitigation measures from applicants as a condition to signing off on a transaction or initial licensing request.

When Do the New Rules Take Effect?

Because most of the new rules alter information to be provided by applicants, they will undergo a further approval process with the Office of Management and Budget (“OMB”), which reviews “information collections” by agencies. That process can be lengthy, so we do not expect all of the new rules to take effect until approximately Q1 2021. As a practical matter, however, both the FCC and applicants may begin to follow the process outlined in the new rules informally for transactions or initial license applications filed prior to the formal effective date.

Will the FCC Be Taking Additional Steps in the National Security Arena?

More FCC action in this area seems likely. Commissioners of both parties have made clear their desire to see the FCC take a more active role in protecting the security of U.S. telecommunications infrastructure. This was on display in statements made by Commissioners in connection with their votes on the new rules.

For example, Democratic Commissioner Jessica Rosenworcel called upon the FCC to go further and establish a formal process for ongoing monitoring of foreign carriers authorized to operate in the United States. Similarly, the Commission’s other Democratic member, Commissioner Geoffrey Starks, focused in his statement on security of submarine cables that transport data between the U.S. and points abroad—calling on the FCC to work with national security agencies to “take a closer look at cables with landing locations in adversary countries.”

Republican Commissioner Brendan Carr also has been vocal in efforts to encourage U.S. carriers to “remove and replace” equipment in their networks from countries deemed to pose a national security risk, as well as to review and potentially rescind previously-issued authorizations that allow carriers based in China to serve the U.S. market.

In short, the adoption of rules formalizing the Team Telecom process is just one step towards a more robust profile for the FCC in national security matters that affect telecommunications infrastructure. While there is much uncertainty around U.S. communications policy in general as we approach the November election, ongoing involvement by the FCC in national security matters is certain to continue.