The fallout from the financial crisis and the failure of regulators to detect the Madoff Ponzi scheme appear to be driving unprecedented enforcement initiatives by the Federal Communications Commission (“FCC”) as well as other federal regulators.  Prepaid service and interconnected VoIP providers stand to be directly affected by this.

On February 25, 2009, the FCC’s Enforcement Bureau released an Omnibus Notice of Apparent Liability for Forfeiture citing approximately 650 telecommunications providers for failing to file Customer Proprietary Network Information (“CPNI”) Compliance Certifications on or before March 1, 2008, and assessing proposed fines in the amount of $20,000 against each cited company.  All prepaid calling and interconnected VoIP providers are required to submit annual CPNI Certifications with the FCC.  Since most of the cited companies were small companies, the agency adjusted the forfeiture amount downwards from its standard CPNI forfeiture of $100,000 to the $20,000 amount.  Nonetheless, the aggregate proposed forfeiture amount is approximately $13,000,000.  The FCC proceeding is currently ongoing, as many of these companies are attempting to challenge the fine amount.

An FCC order levying proposed fines against such a large number of companies, in such relatively large amounts, is uncommon in FCC history.  In recent years, the FCC has levied fines against dozens of companies for violations of its Universal Service Fund rules and payment obligations, often in larger amounts, but the breadth of that sweep has paled in comparison to the large number of companies cited for CPNI violations.  The recent FCC CPNI action also may augur a new enforcement tactic of identifying all, or substantially all, violators and then levying fines widely across the industry, as opposed to selectively fining limited numbers of violators in the hope that the limited actions will serve as a deterrent to the overall industry. 

That this unique action comes on the heels of the financial crisis and the missed Madoff Ponzi scheme is likely no coincidence.  Federal regulators in Washington, D.C. are undergoing a regulatory paradigm shift of fundamental proportion.  Rampant and longstanding national deregulatory policies are being replaced by aggressive regulatory intervention and enforcement.

On the surface, the arrest of Bernard Madoff in December 2008 likely marked a turning point in this paradigm shift away from the laissez-faire philosophy that has prevailed in Washington, D.C. for the last several decades.  The subprime housing crisis and the related financial crisis also seriously called into question the hands off approach of the federal regulatory agencies under recent Presidential administrations.  Now, regulatory agencies which have implemented deregulatory policies appear to be scrambling to avoid the stigma of being viewed as ‘asleep at the switch’ or being stung by the next “Madoff” regulatory failure.

On the theoretical level, the Chicago School of economic theory would appear to be breathing its last breaths as a driver of national public policy.  For several decades, this school of economic thought has infiltrated national policymaking, as well as U.S. legal and administrative rulings at the most fundamental levels, with the notion that the public interest will be best served by ensuring competitive, free markets.  In fact, repeated references to “faith in the market” still populate the Federal Trade Commission’s (“FTC’s”) website.  Of course, this stands in contrast to the thinking of John Maynard Keynes who believed that markets do not always maximize public benefit and that, in certain instances, government intervention is necessary to stimulate economic growth and improve stability.  With the shift towards regulatory intervention and enforcement, Keynesian economic thought is enjoying renewed popularity.

Alan Greenspan and former Secretary of the Treasury Henry Paulson both subscribed to Chicago School economics before the crisis but have acknowledged the need for a fundamental shift.  In his testimony before Congress last October, Alan Greenspan withdrew his faith in the marketplace when he testified that more government regulation of the financial sector was necessary.  Former Secretary Paulson did not explicitly articulate such a clear reversal, but his actions reflected a more balanced approach (i.e., reliance on the market in the case of Lehman Brothers, but not in the case of those “too big to fail” such as Bear Sterns, Fannie Mae, Freddie Mac and Citicorp).

The results of this regulatory paradigm shift are predictable and apparent.  The Securities and Exchange Commission (“SEC”) is undertaking major regulatory reform efforts, including its Enforcement Division having initiated more than fifty pending SEC investigations in the subprime area, among other initiatives.  The Division also announced the largest settlements in the history of the SEC on behalf of investors in auction rate securities that became illiquid during the credit crisis.  Similarly, the FTC is undertaking a comprehensive law enforcement and regulatory effort to protect consumers from scams or deceptive practices involving debt settlement offers, credit repair counseling, debt collection efforts, and the extension of credit, including subprime lending.  While much of this activity focuses on financial crisis-related issues, it is fair to say that virtually every federal agency or Department with an enforcement role in protecting consumers or individual citizens is throttling up its enforcement activity levels. 

Clearly, the FCC’s CPNI rules represent a highly sensitive zone of consumer protection, as failure to comply can place individually identifying customer information in the public domain and raise serious privacy concerns.  The Madoff scandal and financial crisis have brought a renewed focus to consumer protection initiatives, and CPNI protection falls squarely within this.

The FCC’s recent unprecedented CPNI enforcement actions serve as notice to prepaid service and interconnected VoIP providers that the days of lax and forgiving regulatory oversight are now a vestige of the past.  Not only can the FCC be expected to press enforcement actions against CPNI violators but also companies that fail to comply with many other FCC regulatory requirements.



Thomas Crowe is a Washington, D.C.-based attorney specializing in communications legal/regulatory matters.  He can be reached at firm@tkcrowe.com or visit the firm online at www.tkcrowe.com. This article is provided for informational purposes only, and is intended neither to provide nor to substitute for legal advice.