Winnik Forum participants predict sustained scrutiny of foreign ownership in the U.S. tech and telecom sectors

FCC Efforts

In a fireside chat, Commissioner Geoffrey Starks, of the Federal Communications Commission (FCC), discussed efforts to address national security threats to U.S. telecommunications networks, including hjs strong advocacy in favor of the FCC’s Rip and Replace Program, which requires telecom carriers to remove from their networks equipment manufactured by entities on the FCC’s Covered List (designating equipment found to pose a threat to national security by federal national security agencies), such as Huawei and ZTE. Commissioner Starks called funding the Rip and Replace program’s approximate $3.8 billion shortfall a national security imperative. He also noted that only 12 percent of carriers have fully replaced their insecure Chinese equipment, as most of the implicated carriers are small providers that cannot remediate such equipment without federal support. Furthermore many of these carriers serve rural or underserved communities, where no other operators provide service, and many are located near military installations, increasing the national security risk.

Separately, Commissioner Starks discussed how the FCC’s reclassification of broadband Internet access service (BIAS) as a “telecommunications service” under Title II of the Communications Act provided additional authority to address national security risks. Over the past several years, the FCC has revoked the Section 214 (interstate and foreign telecom service) licenses of several Chinese-owned carriers to prevent them from operating networks in the United States. However, several of these carriers still provide services in the United States through data centers, points of interconnection, and points of presence. Commissioner Starks stated that the new authority would provide an avenue for the FCC to terminate these types of operations, as well.

Digitalization and Data Multiply Risk

Consumers, companies, and governments increasingly rely on digital technologies for daily activities and operations. Hogan Lovells partner and former CFIUS official Anne Salladin identified digitalization and the related proliferation of data, including various types of sensitive information, as a significant risk factor driving the U.S. government’s heightened scrutiny of foreign investment in the tech and telecom sectors. Additionally, the progression of technologies such as artificial intelligence and quantum computing introduces unique vulnerabilities, and foreign investment in new technologies with enhanced capability for surveillance and data analysis also may provide adversaries with insights into sensitive U.S. operations. Finally, the rise of state-directed investments from countries of concern, particularly China, also raises significant national security risks necessitating greater regulatory vigilance.

Chris Clements, a Team Telecom official in the U.S. Department of Justice’s (DOJ) National Security Division, noted that the U.S. government’s response to this evolving, interconnected digital environment goes beyond the foreign investment reviews conducted by CFIUS and Team Telecom. Rather, a “whole of government” approach is being pursued that includes, among other initiatives, the FCC’s Rip and Replace program and Section 214 license revocations; the Department of Commerce’s supply chain rules and connected vehicles notice of proposed rulemaking; implementation of Executive Order 13873, which addresses supply chain security for information and communications technology and services; and the DOJ’s implementation of Executive Order 14117 on data security.

Team Telecom Versus CFIUS

Panelists with extensive experience in CFIUS and Team Telecom reviews offered key distinctions between the two processes. Linda Lourie, a former CFIUS official at the U.S. Department of Defense and the White House Office of Science and Technology Policy, emphasized that CFIUS review has a targeted focus and analysis, examining the national security risk posed by a specific transaction. By contrast, Clements explained that Team Telecom has a broader aperture. Specifically, Team Telecom takes a holistic approach, looking at everything including preexisting risk. As a result, while a transaction may clear CFIUS review, Team Telecom may still require mitigation measures, such as a Letter of Agreement (LoA). Tyler Wood, another DOJ official, added that Team Telecom also has authority to revisit prior decisions when circumstances present new or additional risk due to changes in the geopolitical landscape, the nature of the business, or other factors.

Multiple panelists emphasized the importance of applicant candor during the review process. Clements cautioned companies not to treat Team Telecom requests like interrogatories but instead to provide fulsome answers, potentially offering more information than requested. Salladin agreed with this sentiment, warning that “hiding the ball” during the CFIUS review process will only delay resolution. The panelists also noted that the analysis is less focused on traditional considerations such as ownership percentage or “passive” versus “controlling” interest. Instead, the committees look beyond labels to focus on the foreign investor’s actual access to information and options for leveraging control.

Global Analogues

Other countries also are increasingly scrutinizing foreign investment, introducing or updating their foreign direct investment regimes to address potential national security risks. Angus Coulter, a Hogan Lovells partner based in London and head of the firm’s global Telecoms industry sector, noted that while regimes vary in terms of the industries covered and regulatory approaches taken, interest in the technology and telecoms sectors is consistent across jurisdictions. Coulter urged companies to think beyond the United States and cautioned that the foreign direct investment regimes in many other jurisdictions are relatively new. Accordingly, they may lack the expertise that CFIUS and Team Telecom have accumulated, which can increase risk for companies, including the possibility of delay.

Key Takeaways

• Failure to proactively and forthrightly engage with national security-related regulatory processes can delay deal closings and upend business plans.
• If geopolitical tensions remain as they are, companies can expect national security-related regulatory processes to persist and mature.
• As more jurisdictions implement and develop their foreign investment review processes, companies should ensure consistency in their filings across jurisdictions to mitigate risks.

Authored by Ari Fitzgerald, Katy Milner, John Castle, and Ambia Harper.