FCC Steps Up Review of Foreign Ownership in Telecom Carriers; Proposes Cybersecurity Mandates

FCC Steps Up Review of Foreign Ownership in Telecom Carriers; Proposes Cybersecurity Mandates

April 27, 2023, Covington Alert

Earlier this week, the Federal Communications Commission (“FCC”) released an Order and Notice of Proposed Rulemaking (“NPRM”) that could have significant compliance implications for all holders of international Section 214 authority (i.e., authorization to provide telecommunications services from points in the U.S. to points abroad), as well as all entities holding an ownership interest in these carriers. The item requires all holders of international Section 214 authority to respond to a one-time information request concerning their foreign ownership and proposes sweeping changes to the agency’s licensing rules for such licensees.

Although the FCC’s information request may be more relevant in the near term, it is a limited one-time requirement. By contrast, the rule changes on which the FCC seeks comment are far-reaching and, if adopted as written, could result in significant future compliance burdens, both for entities holding international Section 214 authority, as well as the parties holding ownership interests in these entities.

The FCC’s latest actions underscore the agency’s ongoing desire to closely scrutinize foreign ownership and involvement in telecommunications carriers serving the U.S. market, as well as to play a more active role in cybersecurity policy. These developments should be of interest to any carrier that serves the U.S. market and any financial or strategic investor focused on the telecommunications space, as well as other parties interested in national security developments affecting telecommunications infrastructure.

One-Time Information Collection

The FCC’s international Section 214 item is split into two parts: (1) an Order imposing a one-time information collection requirement on all holders of international Section 214 authority, and (2) an NPRM seeking public comment on proposed changes to the FCC’s rules governing international Section 214 authority and licensees.

The one-time information collection is relatively straightforward—all entities holding international Section 214 authority will have to submit a filing to the FCC identifying (by name, address, citizenship, and principal business) each foreign individual and foreign-organized entity with a 10% or greater economic or voting interest in the international Section 214 license holder. This requirement also will apply to any foreign individuals or foreign-organized entities controlling such a “reportable interest.” Each international Section 214 holder also will need to certify, via an affidavit or other signed verification from an authorized representative, to the accuracy of the ownership information provided.

The disclosure requirement will apply to all international Section 214 holders, but each response may fall into a different submission category based on the nature of a holder’s foreign ownership. There are three categories: (1) reportable foreign ownership, including “foreign adversary” ownership (i.e., China, including Hong Kong; Cuba; Iran; North Korea; Russia; and the Maduro Regime); (2) reportable foreign ownership, with no “foreign adversary” ownership; and (3) no reportable foreign ownership. These categories will be most relevant to determining which filing forms apply, but they also reflect what the FCC cites as a key motivation for the new information collection (and the proposed rule changes the collection is intended to support)—the advancement of national security and foreign policy interests.

The deadline for the foreign ownership disclosure will not be determined until a separate Public Notice appears in the Federal Register. Because the FCC must fulfill certain statutory obligations concerning the new information collection before it may issue the Public Notice, it likely will be several months before the new foreign ownership disclosures are due. However, because identifying all 10 percent or greater foreign ownership interests can be a complex exercise, it would be prudent for all international Section 214 holders—and any entities with significant ownership in, or control over, an international Section 214 holder—to plan ahead.

Proposed Rule Changes for International Section 214 Authority

Of potentially greater consequence are the FCC’s proposed changes to its regulation of international Section 214 authorizations, for which the FCC proposes additional compliance, disclosure, and reporting requirements. The FCC’s proposed rule changes are far-reaching, but the most notable of the proposals concern the following:

• 10-Year Renewal Requirement or Periodic Review. Currently, international Section 214 authority does not expire; once granted, there is no need for the holder to update the FCC regarding its operations or its ownership. The only exceptions are if the holder files for a modification, assignment, or transfer of control, or seeks to stop providing services to existing customers. In these scenarios—and during the initial application process—the FCC’s rules provide for a public interest review, as well as referral to the group of Executive Branch agencies commonly known as “Team Telecom” for an evaluation of potential national security and law enforcement risks. However, the FCC’s current procedures do not otherwise provide an opportunity for the agencies to review existing international Section 214 authorizations. To address this, the FCC proposes two alternatives for comment.
  • 10-Year Renewal Requirement. The first alternative proposes to adopt a renewal framework in which international Section 214 authorizations would need to be renewed every 10 years. The renewal process would subject the license holder to the FCC’s public interest review, through which renewal applicants with reportable foreign ownership would be referred to the Team Telecom agencies for a new assessment of national security and law enforcement concerns. However, the FCC would routinely refer certain renewal applications without reportable foreign ownership, as well. Specifically, the FCC proposes to refer to Team Telecom renewal applications in which an applicant discloses any of the following:
      
    

    1. Use of (or plans to use) a foreign-owned Managed Network Service Provider (“MNSP”);

    2. Critical infrastructure (e.g., terrestrial fiber cables and related facilities) used to provide services crossing the U.S.-Mexico and/or U.S.-Canada borders (“Cross Border Facilities”); and

    3. Use of equipment or services included in the FCC’s “Covered List” (e.g., Huawei, ZTE, etc.), created pursuant to the Secure and Trusted Communications Networks Act.

    We discuss these reporting criteria and the related concepts in further detail below.

  • 3-Year Periodic Review. In the alternative, the FCC proposes a system of periodic review in which it would review all international Section 214 holders in three-year intervals. Although the periodic review process would be similar to the renewal framework, the FCC would not cancel authorizations found contrary to the public interest or raising national security, law enforcement, or other concerns (as it would in a denial of a renewal application). Instead, if during its periodic review the FCC identified concerns warranting revocation of the international Section 214 authorization, the FCC would institute revocation proceedings. This would result in the authorization remaining effective by default until resolution of the revocation action.
    
    The FCC seeks comment on these alternative frameworks, as well as on many other issues associated with the potential implementation of each. In addition, the FCC asks whether it should consider a hybrid approach in which the 10-year renewal framework would apply to international Section 214 applicants granted authority after the effective date of the new rules and the 3-year periodic review process would apply to entities granted international Section 214 authority before the effective date.

• Ongoing Reporting Requirements. The FCC proposes that upon the grant of any application for international Section 214 authorization—including a modification or an assignment or transfer of control application—the holder of the authorization would have to provide the FCC with updated ownership information, Cross Border Facilities information (discussed below), and other information every three years. This obligation would run every three years until the FCC granted a subsequent application (e.g., a new modification or transfer of control application), at which point the three-year reporting cycle would restart. These reports—which would be required throughout the FCC’s proposed 10-year renewal period, as well—would need to contain information current as of 30 days prior to submission.
• Five Percent Threshold for Reportable Ownership Interests. As discussed above, the FCC’s current rules require that applicants for international Section 214 authority identify all individuals and entities with a 10 percent or greater economic or voting interest in the applicant. The FCC proposes to lower this reporting threshold to 5 percent, which would require the disclosure of all 5 percent or greater economic or voting interests in new applicants for international Section 214 authority, as well as in assignment and transfer of control applications involving international Section 214 license holders. This would align the FCC’s reportable interest standard with the reporting threshold that the Committee on Foreign Investment in the United States (“CFIUS”) requires in the filing of voluntary notice for “covered transactions.”
• Disclosure of Current/Expected Services and Associated Geographic Markets. Currently, the FCC only requires an applicant for international Section 214 authority to indicate whether it seeks to provide (1) facilities-based services, (2) resold (i.e., non-facilities-based) services, or (3) unique services not covered by these two general categories. The FCC’s proposed rule changes would require that applicants for international Section 214 authority—as well as international Section 214 holders seeking approval for a modification, assignment, or transfer of control—provide additional information about their current and/or expected future services and the geographic markets in which they offer (or plan to offer) these services. Specifically, applicants would need to provide the following information:

1. A description of the specific services the authorization holder or applicant provides and/or will provide using the international Section 214 authority;

2. A description of the types of customers to which the authorization holder or applicant provides or will provide service;

3. A description of whether the services will be provided through facilities the authorization holder or applicant owns or in which it has an indefeasible-right-of-use or leasehold interest, or through the resale of other companies’ services; and

4. A description of where the authorization holder or applicant currently provides—or in the future intends to market, offer, or provide—services using the international Section 214 authority (e.g., U.S. state or territory, U.S.-international route, and/or globally).

• Disclosure of Use of Foreign-Owned MNSPs. The FCC proposes that applicants for international Section 214 authority identify in their applications (again, including for modification, assignment, and transfer of control applications) whether they use—or in the future will use—foreign-owned MNSPs. Under the proposed rules, the FCC would consider as an MNSP any “third part[y] with access to [a] telecommunications network, systems, or records [for the purpose of providing] Managed Services [supporting] core domestic and international telecommunications services, functions, or operations.”

  The FCC seeks comment on many issues related to the potential disclosure of foreign-owned MNSPs, including on the criteria that would determine whether a given MNSP is “foreign-owned.”

• Information on Cross Border Facilities. Consistent with the FCC’s proposal to require similar information under its renewal framework and periodic reporting requirement, the FCC proposes collecting from current international Section 214 authorization holders information related to their use of critical infrastructure to provide services across U.S. borders. Specifically, the FCC would require the following information on Cross Border Facilities (i.e., physical telecommunications facilities, such as terrestrial fiber, used to provide service crossing the U.S.-Mexico and/or U.S.-Canada borders):

1. Location of each Cross Border Facility (street address and coordinates);

2. Name, street address, e-mail address, and telephone number of the owner of each Cross Border Facility, including the government, state, or territory under the laws of which the facility owner is organized;

3. Description of the equipment to be used in the Cross Border Facilities, including equipment used for transmission and servers and other equipment used for the storage of information and signaling in support of telecommunications;

4. Identification of all IP prefixes and autonomous system domain numbers acquired from the American Registry for Internet Numbers (“ARIN”) used by the Cross Border Facilities; and

5. Identification of any services that the international Section 214 holder or applicants provides—or plans to provide—using the international Section 214 authority.

This requirement would apply to applicants seeking facilities-based international Section 214 authority, as well as applicants for resale-based authority (in which case the application would need to identify the facilities leased—or planned for lease—to provide services from the U.S. into Canada and/or Mexico). The FCC also would require that all current international Section 214 holders provide the above information to the agency within 60 days of the effective date of the new rule (if adopted). The FCC also proposes that all international Section 214 holders notify the FCC within 30 days after commencing service in any new Cross Border Facility (or commencing service with a new underlying Cross Border Facility provider).

• Additional Certifications. In addition to proposing that applicants for international Section 214 authority provide a general certification that they are in compliance with the Communications Act, the FCC’s rules, and other laws, the FCC proposes the following additional certification requirements, which would apply to new applications, as well as modifications and applications for assignments and transfers of control:
  • Facilities Cybersecurity Certification. Under the proposed rules, applicants would have to certify that they will work to implement and adhere to “baseline cybersecurity standards” based on “universally recognized” standards such as those provided by the Department of Homeland Security’s Cybersecurity & Infrastructure Security Agency (“CISA”) or the Department of Commerce’s National Institute of Standards and Technology (“NIST”).
  • “Covered List” Certification. The FCC proposes that applicants certify whether they use equipment or services identified on the FCC’s “Covered List” (see above). This certification would apply to any covered equipment or services purchased, rented, leased, or otherwise obtained on or after August 14, 2018 (for Huawei, ZTE, Hikvision, Dahua, and Hytera), or on or after 60 days following the date the specific equipment or service was placed on the FCC’s Covered List.
• Other Changes to the FCC’s International Section 214 Rules. As noted above, the FCC’s proposed rule changes are far-reaching and involve a large number of issues, many of which are complex. The following are some of the other notable issues raised in the NPRM:
  • Limit of One International Section 214 Authorization per Entity. Currently, an entity may hold multiple international Section 214 authorizations. The FCC proposes a rule that would limit an authorization holder to a single international Section 214 authorization (i.e., a specific International Bureau Filing System number), except in certain limited circumstances. This would require that any authorization holder with multiple international Section 214 authorizations file to surrender the excess authorization(s). Because of the way the FCC’s rules are structured (they permit an authorized carrier to provide service through any wholly owned direct or indirect subsidiaries, but not through a mere affiliate), it also could end up requiring certain providers to undertake internal restructurings to facilitate the ability of multiple commonly-owned service provider entities to rely on a single Section 214 authorization.
  • International Signaling Point Codes. An International Signaling Point Code (“ISPC”) is a code used to route domestic voice traffic to an international provider. For applicants seeking to assign or transfer control of their international Section 214 authorization, the FCC proposes that these entities be required to identify in their application whether they hold any ISPCs, as well as whether these ISPCs would be included in the transaction.

Please note that these summaries are not comprehensive—the NPRM asks many questions associated with the rule changes identified above and proposes many additional changes that could affect the compliance obligations of international Section 214 holders and their owners. Given the forthcoming disclosure requirements and the significance of the changes the FCC proposes, we recommend that international Section 214 holders and any entities with financial interests in these licensees contact legal counsel to discuss the implications of the FCC’s Order and NPRM.

If you have any questions concerning the material discussed in this client alert, please contact the members of our Technology & Communications Regulation practice.