Recent FCC Activities Could Affect Direct and Upstream Investors in Telecommunications

FCC Enforcement Advisory on Transfers of Control and Foreign Ownership

On April 20, 2023, the FCC’s Enforcement Bureau issued an Enforcement Advisory reminding FCC licensees and authorization holders about the need to obtain approval even for upstream changes of control (transfers of control) and in certain cases the need to update the FCC as to even small changes in foreign ownership.

Transfers of Control: As the Enforcement Advisory states:

Broadcast, common carrier, wireless, and other license and authorization holders must request and receive permission from the Commission before assigning or transferring control of a license or authorization.

Even if the licensee or authorization holder remains the same, a change in the upstream (indirect) controlling ownership of that entity requires preapproval by the FCC, and failure to do so could lead to enforcement penalties.

Foreign Ownership Reporting: Several — but not all — FCC licenses have a limit of 25% direct or indirect foreign ownership. That amount cannot be exceeded without advance FCC permission through a time-consuming Petition for Declaratory Ruling process. Even if such a ruling is obtained, the Enforcement Advisory reminds licensees that

further Commission approval is required before any foreign individual or entity not previously approved by the Commission acquires, directly or indirectly, a five percent or greater direct or indirect equity or voting interest in the controlling U.S. organized entity.

The Enforcement Advisory demonstrates that the FCC is on the watch for unauthorized transfers of control and violations of its foreign ownership limits. These obligations are generally on the licensees themselves and not upstream investors, but investors will want to be sure the licensees they own or in which they invest are not risking regulatory penalties. Often licensees will seek redress against upstream investors they believe to be the cause of FCC rule violations through actions under contract or their charters or other governing documents.

FCC Order on International Section 214 Data Collection

On April 20, 2023, the FCC adopted an Order requiring a one-time collection regarding the foreign ownership of International Section 214 authorization holders. An International Section 214 authorization allows telecommunications carriers to provide international telecommunications, such as calls that originate in the United States and terminate in a foreign country. Currently, after a carrier obtains an International Section 214 authorization, there is no renewal requirement and no need to update any information with the FCC unless control of the authorization is transferred or assigned.

In the new Order, the FCC requires a one-time collection whereby each authorization holder must identify its 10% or greater direct or indirect foreign interest holders as of 30 days prior to the filing deadline. Carriers that fail to respond will have their authorizations cancelled. Furthermore, the Commission requires International Section 214 authorization holders to categorize the information in three ways:

• reportable foreign ownership from a foreign adversary (China (including Hong Kong), Cuba, Iran, North Korea, Russia, and the Maduro Regime in Venzeuela),
• reportable foreign ownership from elsewhere, or
• no reportable foreign ownership.

The one-time collection will require authorization holders to ask their equity and voting rights holders questions about upstream ownership because the FCC looks “up the chain,” as described above. Moreover, this disclosure applies even to investors who are “insulated” under the FCC’s rules, a specific form of passive investment that has some regulatory and procedural benefits to upstream investors.

Because of the Paperwork Reduction Act, the FCC needs Office of Management and Budget (OMB) approval prior to initiating the collection. The FCC will issue a public notice with further information and deadlines after OMB approval.

Notice of Proposed Rulemaking on Ongoing International Section 214 Obligations

Alongside the Order, the FCC also issue an NPRM to request comments on ongoing changes to the International Section 214 regime. Most significantly for investors are three proposed changes:

• Reducing the Reportable Interest Threshold: The FCC proposes to reduce the threshold for reportable interests from 10% of direct and indirect equity and/or voting to 5%. This proposed change will require the public disclosure of more owners and potentially increase the volume of referrals to the Committee on Foreign Participation and the United States Telecommunications Services Sector (sometimes referred to as Team Telecom) because disclosable foreign owners lead to automatic referrals unless one of the narrow exceptions applies. Team Telecom review is a lengthy process that can significantly slow down requests for new authorizations or transfer/assignment applications as the parties respond to Team Telecom’s questions and negotiate a mitigation agreement. For a prior update on the Team Telecom process, click here.
• Renewal Schedule: The FCC proposes to require renewal of International Section 214 authorizations every 10 years or, in the alternative, require a periodic update of authorization holder information. This will increase the reporting obligations of authorization holders and will likely lead to more questions being asked of investors by those authorization holders.
• Ongoing Reporting Requirement: The FCC proposes to require updated ownership and other information every three years. As with the renewal requirement, this will increase the reporting obligations of authorization holders and will likely lead to more questions being asked of investors by those authorization holders.

The FCC proposes a number of other changes related to International Section 214 authorizations that will affect those authorization holders but should not directly impact investors. These include

• disclosure to the FCC of services, geographic markets, foreign-owned managed network providers, cross-border facilities, and International Signaling Point Codes
• certifications related to cybersecurity and the FCC’s “Covered List,” which is a list of equipment and services the FCC has found pose an unacceptable risk to national security
• a limit to the number of International Section 214 authorizations an authorization holder can have — with no change to limits for upstream owners — and a requirement that service commence within one year
• changes to the discontinuance rules requiring discontinuance approval even when there are no customers

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Taken together, the FCC’s actions demonstrate its increased concern about foreign ownership, including upstream foreign ownership. Investors in the telecommunications sector should be prepared to provide information to authorization holders as a result of these developments. If the NPRM is ultimately adopted, investors should be prepared for increased disclosure and scrutiny depending on the specific nature of their investments.