News from July 6-10, 2002

House Committees Approve Bill to Create Department of Homeland Security
7/10. Five House Committees with jurisdiction over HR 5005, the Homeland Security Act of 2002, marked up the bill on Wednesday, July 10, making minor changes.
The House International Relations Committee amended and approved the bill by voice vote. The House Armed Services Committee amended and approved the bill by voice vote. The House Science Committee amended and approved the bill by voice vote. The House Judiciary Committee amended and approved the bill by voice vote. The House Ways and Means Committee amended and approved by a vote of 34 to 3.
The House Science Committee (HSC), which has jurisdiction over the National Institute of Standards and Technology (NIST), amended the bill to block the transfer of NIST's Computer Security Division (CSD) to the new Department of Homeland Security (DHS). The Computer & Communications Industry Association (CCIA) and Members of Congress who are active on technology issues had opposed the move. See, related stories, below.
In addition, the House Science Committee voted to create a separate Undersecretary for Science and Technology in the new DHS. See, HSC release.
More Committees are scheduled to mark up the bill on Thursday, July 11. Also, the Select Committee on Homeland Security, chaired by House Majority Leader Dick Armey (R-TX), is scheduled to hold a hearing on July 11 at 10:00 AM, with top administration officials testifying. The full House is scheduled to take up the bill during the week of July 22.
16 Representatives Oppose Transfer of NIST Computer Security Division to DHS
7/10. Rep. Bob Goodlatte (R-VA), Rep. Rick Boucher (D-VA), and other Members of Congress wrote a letter to Rep. Sherwood Boehlert (R-NY), the Chairman of the House Science Committee, opposing the provision in HR 5005 that would move the NIST's Computer Security Division (CSD) to the Department of Homeland Security.
The letter states that "While we support the Administration's efforts to make our country more secure in the face of terrorist threats, we are concerned that this provision, found in Section 202 of the President's proposal, would unravel years of collaboration between the CSD and the private sector to enhance the level of confidence in computer security practices. We are concerned that this reduced collaboration would be counterproductive to the Administration's goals by reducing confidence in American made IT systems thereby making our critical infrastructure more vulnerable to terrorist attack."
Fourteen other Representatives also signed the letter, including Rep. Zoe Lofgren (D-CA), Rep. Anna Eshoo (D-CA), Rep. Tom Davis (R-VA), Rep. Jim Moran (D-VA), Rep. Ileana Ros-Lehtiten (R-FL), Rep. Barney Frank (D-MA), Rep. Lamar Smith (R-TX), Rep. Steve Horn (R-CA), Rep. Gerry Weller (R-IL), and Rep. Pete Sessions (R-TX).
CCIA Opposes Transfer of CSD to DHS
7/10. Ed Black, P/CEO of the Computer & Communications Industry Association (CCIA), wrote a letter [2 pages in PDF] to Rep. Sherwood Boehlert (R-NY), the Chairman of the House Science Committee, and other Members of Congress, in which he stated that the Computer Security Division at the NIST should not be transferred to the Department of Homeland Security, pursuant to HR 5005, the Homeland Security Act of 2002.
He wrote that "fundamental liberties will be at risk if we are too zealous in our pursuit of wrongdoers. We must avoid departmental incentives that compromise core agency missions or, worse, traditional democratic values. We believe the proposed transfer of the Computer Security Division from the National Institute of Standards and Technology (NIST) to the proposed Department of Homeland Security is one such action, and one we strongly urge you to oppose. Such a transfer would transform NIST from a civilian agency known for assisting the private sector into one in which law enforcement and national security concerns are dominant."
He also wrote that the "NIST has distinguished itself through its expertise in cryptography: the creation of codes crucial to safeguarding business, government and personal assets from unauthorized access." However, he continued that the National Security Agency and the FBI have compromised the work of the NIST in the past through such initiatives as the Clipper Chip and key recovery.
Black concluded that "law enforcement and national security sectors have a checkered past with regard to NIST and computer security. Their interference in NIST's mission has repeatedly compromised the private sector's confidence in the Institute and seems certain to do so in the future if repeated. We believe the last thing our nation needs now is a reprise of debates that were long ago settled."
ACLU Says Cable Companies Will Control Access to Content on Internet
7/10. The American Civil Liberties Union (ACLU) released a report [12 pages in PDF] regarding cable modem service providers. The ACLU report argues that "the existence of the Internet as a free and neutral civic space could come to an end", unless the government mandates open access to cable Internet access facilities.
This ACLU report, in turn, references a much longer report [2.4 MB in PDF] titled "Technological Analysis of Open Access and Cable Television Systems", that was commissioned by the ACLU, and written by the Columbia Telecommunications Corporation (CTC).
The ACLU argues that while most people access the Internet today with phone modems, most people will soon use cable modems. The report dismisses DSL service as not being a viable competitive alternative to cable modem service. It does not address other prospective broadband technologies. Hence, the ACLU argues that cable companies will have dominance and monopoly power.
The ACLU further argues that cable companies will use this power to control access to content. This, in turn, will restrict free speech. Citing the CTC report, the ACLU argues that cable "providers can ``slow or block access to certain sites on the Internet, such as those without financial arrangements with the cable company’s ISP, or those with content considered objectionable for political or competitive reasons,´´ even while they ``speed transmission to an affiliated site (or a site that has paid the operator for the privilege of special treatment).´´"
The ACLU adds that "At a time when many cable providers have assembled far flung business empires on the premise that cross promotion and other ``synergies´´ will yield big profits, they will come under strong pressure to do the equivalent. And what can be done in the commercial context could be done just as easily to political content."
The National Cable Telecommunications Association (NCTA) issued a release in which it stated that "The ACLU offers no evidence whatsoever to show that the provision by cable operators of high speed access to the Internet is somehow stifling development of, or access to, any content on the Internet. All of the Internet's content is a simple mouse click away for cable modem users. Moreover, cable modem service has enriched the Internet experience for millions of households and its high speed capability has stimulated the development of new, innovative Internet content that never before existed. The FCC is currently considering the regulatory status of cable modem service, and NCTA has filed comments -- and will file reply comments -- showing at length why regulation of the sort proposed by the ACLU is inappropriate."
FCC to Hold Spectrum Policy Workshops
7/10. The Federal Communications Commission's (FCC) Spectrum Policy Task Force announced that it will hold a series of four public workshop in August. See, FCC notice [PDF]. On August 1 it will hold a workshop titled "Experimental Licenses and Unlicensed Spectrum". On August 2 , it will hold a workshop titled "Interference Protection". On August 5, it will hold a workshop titled "Spectrum Efficiency". On August 9, it will hold a workshop titled "Spectrum Rights and Responsibilities". All workshops will be held from 9:00 AM to 3:00 PM in the FCC's Commission Meeting Room, 445 12th Street, SW.
Groups Comment on Broadcast Flag Standard
7/10. The Center for Democracy and Technology (CDT), Consumers Union, and Public Knowledge sent a memorandum [13 pages in PDF] to the House Commerce Committee regarding the Broadcast Protection Discussion Group's (BPDG) Final Report on the protection of digital television, and the "broadcast flag" standard.
These groups concluded that "we believe that serious questions remain as to whether the broadcast flag proposal will be sufficiently effective. Congress should seek assurance that it will not have adverse consequences on consumers, including their ability to use  their existing products, their ability to exercise legal and reasonably expected fair  uses of content, and their access to future innovative technologies that might allow them to manipulate content in creative ways that are legal under copyright law."
People and Appointments
7/10. David Sutphen was named VP and Legislative Counsel for Governmental Relations at the Recording Industry Association of America (RIAA). He was previously counsel to Sen. Ted Kennedy (D-MA), handling intellectual property, antitrust and privacy issues before the Senate Judiciary Committee. Before that, he was Chief of Staff for Rep. Harold Ford (D-TN).
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7/10. President Bush sent a brief memorandum to the heads of executive departments and agencies that urges "cross agency teamwork, using E-Government to create more cost effective and efficient ways to serve citizens."
7/10. The House Commerce Committee's Subcommittee on Telecommunications and the Internet held a hearing titled "Corporation for Public Broadcasting Oversight and a Look Into Public Broadcasting in the Digital Era". See, prepared testimony of witnesses: Robert Coonrod (Corporation for Public Broadcasting), Pat Mitchell (Public Broadcasting Service), Kevin Klose (National Public Radio), Andrea Lafferty (Traditional Values Coalition), John Lawson (Association for Public Television Stations), Michael Willner (Insight Communications), and Laura Walker (WYNC-FM).
7/10. Qwest Communications stated in a release that "it was informed by the U. S. Attorney's office in Denver yesterday afternoon that it had begun a criminal investigation of Qwest. The U.S. Attorney’s office did not disclose the subject matter of the investigation. Qwest plans to fully cooperate with the U.S. Attorney's office."
7/10. California Governor Gray Davis signed AB 2033, sponsored by Assemblyman Robert Pacheco (R - Walnut). This bill amends the Evidence Code to allow admission of certain "nonerasable optical image reproduction or any other reproduction of a public record by a trusted system, as defined in Section 12168.7 of the Government Code, if additions, deletions, or changes to the original document are not permitted by the technology". The bill further provides that "This act shall become operative on the date the Secretary of State adopts uniform standards for storing and recording permanent and nonpermanent documents in electronic media, as required by Section 12168.7 of the Government Code."
7/10. California Governor Gray Davis signed AB 2831, sponsored by Assemblyman Joseph Simitian (D - Palo Alto), which pertains to the communication of clinical laboratory test results via the Internet or e-mail.
7/10. The House Commerce Committee's Subcommittee on Commerce, Trade, and Consumer Protection amended and approved HR 5058, The Financial Accounting Standards Board Act. The Subcommittee approved an En Bloc Amendment offered by Rep. Clifford Stearns (R-FL), as amended by and amendment by Rep. John Dingell (D-MI).
House Passes Tech Talent Act
7/9. The House passed HR 3130, the Tech Talent Act, by a voice vote. The bill would authorize the appropriation of $25 Million for FY 2002 for the National Science Foundation (NSF) for a grant program intended to increase the number of college students pursuing degrees in science, mathematics, engineering, and technology.
Sherwood Boehlert (R-NY) said in his statement during the floor debate on the bill that "The problem is that fewer and fewer American college students are majoring in mathematics, engineering, technology, or science, particularly in the physical sciences. This is a source of growing concern for many reasons. First, and most obviously, the nation needs to constantly replenish its supply of scientists, mathematicians and engineers to have a workforce that can compete in this increasingly technological world."
He continued that the bill "takes aim at this problem directly by providing incentives for colleges and universities -- including community colleges -- to increase the number and quality of science, math, engineering and technology majors. Under the bill, the National Science Foundation (NSF) would provide grants to improve undergraduate science, math and engineering education that are contingent on the grantee increasing the number of graduating majors in those fields by a specific amount, without reducing quality."
Rep. Lamar Smith (R-TX), a cosponsor of the bill, stated that "This legislation will encourage more students to pursue science and mathematics studies. We need knowledgeable students today, for successful high tech companies tomorrow."
Federal Circuit Rules on Public Use and On Sales Bars to Patentability
7/9. The U.S. Court of Appeals (FedCir) issued its opinion [MS Word] in Netscape v. Konrad, a patent case involving what constitutes a "public use" and "on sale" for the purposes of the Section 102 conditions for patentability. In this case, the holder of patents for systems that allow a computer user to access and search a database residing on a remote computer had demonstrated his claimed invention more than one year before the key patent filing date.
Background. Allan Konrad is the holder of U.S. Patent Nos. 5,544,320, 5,696,901, and 5,974,444, each of which is titled "Remote information service access system based on a client server service model". The ’320 patent, Konrad’s first issued patent, is a continuation of an application filed on January 8, 1993. The ’901 patent is a continuation of the ’444 patent application, which is a continuation of the ’320 patent application. Hence, the earliest filing date that Konrad is entitled to is January 8, 1993. This, in turn, makes January 8, 1992, the critical date for Section 102 analysis.
Konrad's problem is that he engaged in several activities prior to this date. First, he demonstrated the claimed invention to two University of California computing personnel, without imposing any obligation of confidentiality. Second, he demonstrated the high energy physics remote database object to the Stanford Linear Accelerator Center, again, without a confidentiality condition. Third, he offered to create the high energy physics remote database object system for the University Research Association Superconducting Super Collider Laboratory in exchange for four months full time employment or no more than $48,000.
Statute. 35 U.S.C. § 102 provides, in part, that "A person shall be entitled to a patent unless ... (b) the invention was patented or described in a printed publication in this or a foreign country or in public use or on sale in this country, more than one year prior to the date of the application for patent in the United States".
District Court. Netscape filed a complaint in U.S. District Court (NDCal) against Konrad seeking judgment of invalidity, noninfringement, and unenforceability. The District Court held that the three patents are invalid under the public use and on-sale bars of 35 U.S.C. § 102(b).
Appeals Court. The Appeals Court affirmed. It first noted that "Public use includes ``any use of [the claimed] invention by a person other than the inventor who is under no limitation, restriction or obligation of secrecy to the inventor.´´". However, it also noted that "The law recognizes that an inventor may test his invention in public without incurring the public use bar. ``Experimental use negates public use; when proved, it may show that particular acts, even if apparently public in a colloquial sense, do not constitute a public use within the meaning of section 102.´´" (Citations omitted.)
The Court elaborated that the circumstances that the Court should consider in determining whether there was a public use include "the nature of the activity that occurred in public; the public access to and knowledge of the public use; whether there was any confidentiality obligation imposed on persons who observed the use; whether persons other than the inventor performed the testing; the number of tests; the length of the test period in relation to tests of similar devices; and whether the inventor received payment for the testing".
The Court held that since Konrad did not make the two university employees to whom he demonstrated the invention aware of any confidentiality requirement, this demonstration constituted a public use. Similarly, the Court held that his failure to make the demonstration attendees at the Stanford Linear Accelerator Center aware of any confidentiality requirement made this event a public use.
Finally, the Court held that his offer to make the high energy physics remote database object for four months full time employment or no more than $48,000 constituted a commercial offer for sale.
Rep. Barcia Introduces NIST Authorization Bill
7/9. By Rep. James Barcia (D-MI) and 13 other Democrats introduced HR 5074, a bill to authorize appropriations for the National Institute of Standards and Technology (NIST) for FY 2003, 2004, and 2005. The bill was referred to the House Science Committee.
Rep. Barcia wrote in extended remarks submitted for the Congressional Record that this bill, among other things, "provides funding for the Advanced Technology Program and addresses Administration concerns about the program. First this bill provides a stable funding base for the ATP by providing sufficient funds to allow for $60.7 million in new awards to be made in each fiscal year. In addition, the bill authorizes four policy changes to the ATP that were proposed by Secretary Evans. The bill makes Secretary's proposed changes to (1) allow universities to lead joint ventures, (2) allow universities and non-profit laboratories to be invested with intellectual property, (3) stress that ATP does not support product development, and (4) allows for private sector experts to participate in the ATP project review process." See, Cong. Rec., June 9, 2002, at Page E1222.
House Commerce Committee Holds Hearing on DHS Bill
7/9. The House Commerce Committee's Subcommittee on Oversight and Investigations held a lengthy hearing on HR 5005, President Bush' proposal to create a Department of Homeland Security. Witnesses disagreed sharply over the language in the bill that would create a new Freedom of Information Act (FOIA) exemption for information provided voluntarily to the federal government regarding infrastructure vulnerabilities, including cyber security matters.
The Commerce Committee is just one of many House committees with jurisdiction over the bill. They are operating under a fast track schedule that requires completion this week. Rep. Billy Tauzin (R-LA), the Chairman of the Commerce Committee, said at his Committee's hearing that "our deadline is July 12, and we are going to meet it."
The various House committees with jurisdiction are marking up the bill, mostly on Wednesday and Thursday. See, TLJ Calendar, at right. Then, a special committee, chaired by House Majority Leader Richard Armey (R-TX), will have final consideration of the House bill.
The Commerce Subcommittee's marathon hearing including testimony from six panels of witnesses. It covered chemical, biological, nuclear, cyber, and other threats to homeland security. Subcommittee members and witnesses were in widespread agreement with the underlying premise of the bill -- that numerous government entities related to homeland security which are now spread around various government agencies, should be merged into one department. However, there was discussion about some of the details of implementation.
There was also sharp disagreement among certain witnesses on one key issue -- information sharing regarding threats to critical infrastructures. In particular, witnesses differed on whether to create a FOIA exemption to incent companies to provide information to the federal government.
Section 204 of the bill, as introduced, provides, in full, that "Information provided voluntarily by non-Federal entities or individuals that relates to infrastructure vulnerabilities or other vulnerabilities to terrorism and is or has been in the possession of the Department shall not be subject to section 552 of title 5, United States Code."
Rep. Tauzin discussed how September 11 ringleader Mohamed Atta sought a loan for a crop dusting airplane, and an aerial map of Washington DC. "That map represented to him, obviously, a source of information upon which he might plan, or his friends, might plan an attack upon this city. It calls to our attention the importance in this legislation of amending the Freedom of Information Act to make sure that road maps, vulnerability assessments, of assets, both public and private, other road maps of sensitive installations, and sensitive places in this country, are not so easily available to people who might have improper motives, such as Mr. Mohamed Atta, and using those roads to hurt this country or its people. Balancing the needs of freedom of information in this country ... is going to be a difficult challenge for this Committee of Congress ..."
The fourth panel of witnesses to testify before the Committee included five representatives of industry, all of whom argued for the necessity of enacting the new FOIA exemption. See, prepared testimony of Guy Copeland (VP of Computer Sciences Corporation, testifying on behalf of the Information Technology Association of America), William Smith (EVP, Network Operations, BellSouth), Kenneth Watson (Cisco Systems), Lynn Costantini (North American Electric Reliability Council), and John Sullivan (Boston Water and Sewer Commission).
BellSouth's William Smith stated that "we have received numerous requests for sensitive information -- such as lists of critical facilities -- from federal, state and local authorities. From the perspective of a corporation such as BellSouth, these requests are troubling because if such a list were released publicly, whether through a FOIA request or through accidental disclosure, it could provide terrorists with a road map directing them to our most critical locations." He added that BellSouth was also concerned about third party liability, antitrust liability, and giving information to its competitors.
He continued that "With respect to FOIA, many companies are hesitant to voluntarily share sensitive information with the government because of the possible release of this information to the public. BellSouth currently shares cyber-related intrusion information with the Telecom Information Sharing and Analysis Center -- the Telecom ISAC -- located within the NCC.  However, because of the concerns just noted, the information sharing is done on a limited basis, within trusted circles, and strictly within a fashion that will eliminate any liability or harm from FOIA requests for BellSouth information. This is neither maximally efficient nor effective."
Smith concluded that "We also support Section 204 which provides an important FOIA exemption for information regarding infrastructure and other vulnerabilities that is provided voluntarily. Finally, we support the FOIA and antitrust protections embodied in H.R. 2435, the Cyber Security Information Act."
Guy Copeland of CSC stated that "sharing information about corporate information security practices is inherently difficult. Companies are understandably reluctant to share sensitive proprietary information about prevention practices, intrusions, and actual crimes with either government agencies or competitors. Information sharing is a risky proposition with less than clear benefits. No company wants information to surface that they have given in confidence, and that may jeopardize -- through misunderstanding or misperception -- their market position, strategies, customer base, investor confidence or capital investments, and certainly no company wants information to surface that could aide terrorists or criminals."
Copeland added that "Government agencies seek detailed data about computer attacks for the purposes of better law enforcement, earlier detection, and the promotion of best practices in government and industry. Today, however, corporate counsels advise their clients not to share voluntarily the details of computer attacks with government agencies because the risk that such data could ultimately be divulged through the Freedom of Information Act (FOIA) -- even over the agency’s objections -- is unacceptably high."
The fourth panel also included two witnesses who testified in opposition to the FOIA exemption. David Sobel, General Counsel of the Electronic Privacy Information Center (EPIC), testified that "Section 204 would cast a shroud of secrecy over one of the Department of Homeland Security's critical functions, removing any semblance of meaningful public accountability. If Section 204, or a similar secrecy provision, is enacted, the public will be unable to hold the new Department accountable should it fail to make effective use of information it obtains. ``What did DHS know and when did it know it?´´ is a question that will go unanswered."
Sobel is an experienced, aggressive and successful FOIA litigator who has obtained records pertaining to carnivore, CALEA, and other technology related topics.
He also stated that "It should not go unnoticed that we are discussing the desire of private companies to keep secret potentially embarrassing information at a time when the disclosure practices of many in the business world are being scrutinized. If a company is willing to fudge its financial numbers to maintain its stock price, what assurance would we have that it was not hiding behind a ``critical infrastructure´´ FOIA exemption in order to conceal gross negligence in its maintenance and operation of a chemical plant or a transportation system?"
During the question and answer session Sobel stated that he knows of no cases where information useful to terrorists has been divulged as a result of a FOIA response. He added that the asserted problem is "purely hypothetical". BellSouth's Smith responded that the reason that there have been no such cases is that companies like BellSouth are withholding such information from the government.
Few members of the Subcommittee were present to hear any part of the testimony of the contentious fourth panel. Only Rep. Ed Whitfield (R-KY), Rep. Richard Burr (R-NC), and Rep. Peter Deutsch (D-FL) participated.
The third panel of witnesses was a group of government witnesses. They generally agreed that information sharing between government entities, and between government and industry, needs to be improved. However, they did not endorse creating a new FOIA exemption for this purpose, or an antitrust exemption.
See, prepared testimony of Samuel Varnado (Director, Infrastructure and Information Systems Center, Sandia National Laboratories), Donald Cobb (Associate Director for Threat Reduction, Los Alamos National Laboratory), Robert Dacey (Director, Information Security Issues, General Accounting Office), John Tritak (Director, Critical Infrastructure Assurance Office, Department of Commerce), and James McDonnell (Director, Energy Security and Assurance Program, Department of Energy).
On other issues, Rep. Heather Wilson (R-NM) stated that the research and development provisions in the bill are weak. She elaborated that the U.S. needs to "leverage our technological superiority" to successfully fight terrorism. Rep. Bart Stupak (D-MI), a former police officer, commented on the chain of command of the proposed Department of Homeland Security. He stated that there needs to be "vertical authority", rather than the "horizontal chain of command" as the bill is currently written. He added that "I don't want merely a shuffling of chairs at the table."
Senate Subcommittee Holds Hearing on Identity Theft
7/9. The Senate Judiciary Committee's Subcommittee on Technology, Terrorism, and Government Information held a hearing on S 2541, the Identity Theft Penalty Enhancement Act of 2002. Sen. Dianne Feinstein (D-CA), who is the Chairman of the Subcommittee, and the sponsor of the bill, has held repeated hearings on identity theft.
See, prepared testimony of Howard Beales, Director of the Federal Trade Commission's (FTC) Bureau of Consumer Protection, prepared testimony of Dan Collins, Deputy Associate Attorney General, and prepared testimony of Dennis Lormel, Section Chief of the FBI's Terrorism Financial Review Group.
FCC Files Petition for Rehearing in USTA v. FCC
7/9. The Federal Communications Commission (FCC) filed a petition for rehearing en banc [PDF] with the U.S. Court of Appeals (DCCir) in USTA v. FCC, in which a three judge panel overturned the FCC's unbundling order and line sharing order.
The DC Circuit issued its opinion on May 24, 2002 granting the petitions for review of the U.S. Telecom Association (USTA) and incumbent local exchange carriers (ILECs). See, 290 F.3d 415.
The USTA and ILECs challenged the FCC's order requiring ILECs to lease a variety of unbundled network elements to competitive local exchange carriers (CLECs). They also challenged an FCC line sharing order that requires ILECs to lease to CLECs only a portion of local copper loops, rather than the whole line, for the purpose of offering DSL service. The Appeals Court granted both petitions. It remanded both rules to the FCC for further proceedings. While the ILECs prevailed, the FCC already has underway a proceeding in which it is examining its unbundling rules.
The FCC wrote in its request for rehearing that this case is of "national importance to the FCC's ongoing implementation of the 1996 Act's local competition provisions". It asserted two errors. First, "the panel's decision is, at a minimum, fundamentally in tension with recent and pertinent Supreme Court authority dealing with closely related substantive requirements of the 1996 Act. Less than two weeks before the panel issued its decision in this case, the Supreme Court, in Verizon Telephone Cos. v. FCC, 122 S.Ct. 1646 (2002) ("Verizon"), had affirmed the FCC's "TELRIC" methodology for determining the cost-based prices that incumbent LECs may charge new competitive LECs for access to the unbundled network elements ("UNEs") that are the subject of this case." See, Verizon v. FCC [104 pages in PDF], May 13, 2002.
Secondly, the FCC wrote that "the panel's decision also requires rehearing because it can be read to establish, on the basis of a misreading of the Supreme Court's decision in AT&T Corp. v. Iowa Utilities Board, 252 U.S. 366 (1999), an unwarranted restriction on the FCC's implementation of the Act's network element provisions that is, at a minimum, in tension with other provisions of the 1996 Act."
Walter McCormick, P/CEO of the USTA stated in a release that "We are disappointed that the FCC has filed for a rehearing since it will further delay the Commission from moving forward with its Triennial Review, in which it is already looking at the questions that the court has directed it to consider. Unfortunately, any delay in achieving final rules for the issues raised in the Triennial Review will further postpone the telecom industry’s economic recovery."
Bush Gives Speech on Corporate Responsibility
7/9. President Bush gave a speech in New York City regarding financial crimes and corporate responsibility. He also signed an executive order creating a new Corporate Fraud Task Force. The President proposed longer prison terms for corporate fraud and more funding and authority for the Securities and Exchange Commission (SEC).
Bush stated that "by executive order, I create a new Corporate Fraud Task Force, headed by the Deputy Attorney General, which will target major accounting fraud and other criminal activity in corporate finance. The task force will function as a financial crimes SWAT team, overseeing the investigation of corporate abusers and bringing them to account." The task force would include several top Department of Justice officials, the U.S. Attorneys whose districts include major financial markets, and the heads of the SEC, Federal Communications Commission (FCC), Commodities Futures Trading Commission (CFTC), Federal Energy Regulatory Commission (FERC), and Treasury Department.
The task force would "provide direction for the investigation and prosecution of cases of securities fraud, accounting fraud, mail and wire fraud, money laundering, tax fraud based on such predicate offenses, and other related financial crimes committed by commercial entities and directors, officers, professional advisers, and employees thereof".
Bush stated that "I'm also proposing tough new criminal penalties for corporate fraud. This legislation would double the maximum prison terms for those convicted of financial fraud from five to 10 years."
Bush stated that "I ask Congress to strengthen the ability of SEC investigators to temporarily freeze improper payments to corporate executives, and to strengthen laws that prevent the destruction of corporate documents in order to hide crimes."
He also stated that "The SEC should be able to punish corporate leaders who are convicted of abusing their powers by banning them from ever serving again as officers or directors of a publicly held corporation."
He also said that "Corporate officers who benefit from false accounting statements should forfeit all money gained by their fraud." In addition, he said that "My accountability plan also requires CEOs to personally vouch for their firms' annual financial statements."
Bush stated that "I asked Congress four months ago for funding to place 100 new enforcement personnel in the SEC. And I call on Congress to act quickly on this request. Today I announce my administration is asking Congress for an additional $100 million in the coming year to give the SEC the officers and the technology it needs to enforce the law."
FCC Chairman Michael Powell, who will serve on the newly created task force, stated in a release [MS Word] that "There is a severe capital crisis putting a tremendous strain on the telecommunications industry. It is imperative to do everything possible to restore investor confidence in this critical sector of the American economy. I applaud the President's initiative, and the Commission stands ready to offer its expertise to assist in the effort to investigate and prosecute significant financial crimes and restore credibility to the market."
SEC Chairman Harvey Pitt stated in a release that "We are grateful for the President's unqualified support of our request for an additional $100 million in our FY03 budget, in addition to $20 million in supplemental funding he approved three months ago, that now awaits Congress's approval. These resources will enable us to hire additional needed accountants, lawyers and other professionals for our enforcement and corporation finance efforts, fully fund our merit based pay parity program and begin implementing critical information technology projects directly related to investor protection."
Rep. Billy Tauzin (R-LA), Chairman of the House Commerce Committee, stated in a release that "What President Bush has laid out today is a tough minded, no nonsense approach to meaningful corporate reforms that will go a long way in bolstering public confidence in America's capital markets."
Sen. Paul Sarbanes (D-MD), Chairman of the Senate Banking Committee, was less impressed. He stated that "we intend obviously to continue to move forward this week and we're hopeful we can complete this legislation (Sarbanes bill) by the end of the week. We think we clearly need a statute; unfortunately the President has not yet reached that point. But we think this legislation does what has to be done. It creates an independent oversight board with respect to the accounting profession. It separates auditing from certain consulting services which create obvious conflicts of interest. It provides the resources to the SEC. I am very disappointed that the President was not more forthcoming on resources for the SEC in order to carry out its responsibilities. That’s a relatively easy thing for the Administration to do, and I don't know why they've been holding back from it over these many months. I mean -- they've made a small request, but the SEC needs a real shot in terms of additional resources."
Sen. Patrick Leahy (D-VT), the Chairman of the Senate Judiciary Committee, used the occasion to tout his bill, S 2010, the Corporate and Criminal Fraud Accountability Act of 2002, which his Committee reported on April 25.
"I welcome the President to the urgent need to restore trust in our markets, and I welcome his ideas. A few of them are very familiar. We invited the President to join in this effort. For months, the White House declined that invitation. Now that the President is part of this effort, we have the opportunity to work together to achieve real reform," said Sen. Leahy in a release. "Getting tough means criminal penalties, and getting tough is the aim of the Corporate and Criminal Fraud Accountability Act, which Senator Daschle and I offered today on the Senate floor."
FCC Announces Agenda for June 16 Meeting
7/9. The Federal Communications Commission (FCC) announced the agenda for its open meeting at 9:30 AM on Tuesday, July 16, 2002.
CPNI. The FCC will consider a Third Report and Order and Third Further NPRM to implement 47 U.S.C. § 222(c)(1), which requires customer approval before a telecommunications carrier may use, disclose, or permit access to a customer's confidential proprietary network information (CPNI). This is CC Docket Nos. 96-115 and 96-149.
Number Portability. The FCC will consider a MOO regarding the Verizon Wireless petition for forbearance from the wireless local number portability requirements. This is WT Docket No. 01-184 and CC Docket No. 95-116.
Public Safety Agency Communications. The FCC will consider a Fifth Report and Order concerning the migration to 6.25 kHz spectral efficiency in the 700 MHz public safety band. WT Docket No. 96-86.
People and Appointments
7/9. Brian Gunderson was named Chief of Staff of the Office of the U.S. Trade Representative (USTR). He was previously Chief of Staff to House Majority Leader Dick Armey (R-TX). He succeeds M.B. Oglesby. See, USTR release.
7/9. Robin Pence joined the Federal Communications Commission (FCC) as Associate Director of the Office of Media Relations (OMR). She previously worked for Sprint. Before that she worked as press secretary for former Rep. Thomas Coleman (R-MO), and as a press assistant to former Sen. Alfonse D'Amato (R-NY).
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7/9. The Office of the U.S. Trade Representative (USTR) published a notice in the Federal Register announcing that it is requesting comments on China's compliance with the commitments it made in connection with its accession to the World Trade Organization (WTO), and that the Trade Policy Staff Committee (TPSC) will hold a hearing on China's compliance on September 18, 2002. The deadline to submit written comments is 12:00 NOON on September 10. The deadline to request to testify is September 5. See, Federal Register, July 9, 2002, Vol. 67, No. 131, at Pages 45580 - 45581.
7/9. The New Mexico Public Regulation Commission (PRC) recommended to the Federal Communications Commission (FCC) that Qwest has satisfied the last of Section 271's 14 point checklist. Qwest announced that it will file with the FCC its Section 271 application to provide in region interLATA service in the state of New Mexico "within the next few weeks". See, Qwest release.
Ebbers and Sullivan Refuse to Testify to House Committee
7/8. The House Financial Services Committee held a hearing on financial accounting practices by WorldCom. Bernard Ebbers, former CEO of WorldCom, and Scott Sullivan, former Chief Financial Officer, both appeared, but refused to testify.
See also, prepared testimony in PDF of other witnesses: John Sidgmore (new President and CEO of WorldCom), Bert Roberts (Chairman of WorldCom), Melvin Dick (former Senior Global Managing Partner, Technology, Media, and Communications Practice, Arthur Andersen, former external auditor), and Jack Grubman (telecommunications analyst at Salomon Smith Barney).
Sidgmore, who replaced Ebbers as CEO two months ago, discussed efforts by WorldCom's new management. He also argued that "WorldCom is a key component of our nation's economy and communications infrastructure. Both commercial and national security interests rely upon WorldCom's operations continuing without disruption." Moreover, he argued that "WorldCom's presence ensures competition in the rapidly consolidating telecom industry. ... WorldCom is one of the last hopes for America to realize the intended benefits of the 1996 Telecom Act."
WorldCom also submitted a revised statement [7 pages in PDF] to the Securities and Exchange Commission (SEC) on July 8. See also, Exhibit 1 [2.4MB in PDF], Exhibit 2 [202KB in PDF], Exhibit 3 [130KB in PDF], and Exhibit 4 [340KB in PDF].
FCC Receives Comments on Spectrum Policy
7/8. July 8 was the deadline to file comments with the Federal Communications Commission's (FCC) Spectrum Policy Task Force in response to its request for comments on spectrum policy, including taking steps toward market oriented allocation and assignment policies, interference, efficient use of spectrum, public safety communications, and international issues.  The FCC has published nearly 50 comments in its web site.
See, FCC's Public Notice [PDF] requesting comments. Reply comments are due by July 23. This is FCC Docket No. 02-135. The FCC is operating on a short filing schedule in this matter; it has denied several requests for extensions of time.
Jon Peha, Associate Director of Carnegie Mellon University's Center for Wireless and Broadband Networks, wrote in his comment [PDF] that spectrum scarcity "is severely exacerbated by our spectrum management policies".
Peha argued that "To alleviate the scarcity, we must find new methods to allow and encourage efficient spectrum sharing; exclusivity can lead to inefficiency. Today’s technology offers many ways to gain the efficiencies of sharing without unacceptable interference." He continued that the FCC "should expand use of market based mechanisms, and the Commission should insure the availability of an unlicensed spectrum ``commons.´´ Taking either one of these approaches to a simplistic extreme would be counterproductive, so the Commission should make judicious use of both. There is no substitute for an effective regulator."
He also stated that "Thanks to auctions, new licenses are assigned to those who value them the most. It should similarly be easy for a license holder to ``sell´´ a license, where the post sale license holder has rights and obligations that are identical to those of the previous license holder. Similarly, a license holder might ``rent´´ the license for a limited time, which obviously cannot extend beyond the expiration date of the license."
In contrast, the Consumer Federation of America (CFA) submitted a comment [40 pages in PDF] in which it argued that "Creating quasi property rights in spectrum through auctions is exactly the wrong thing to do." This comment railed against "media moguls and communications conglomerates".
The CFA argued that "The auctioning of spectrum is likely to reinforce existing market power. Dominant incumbents have the resources and the incentive to win the bids to protect their existing market power or to capture economies of scale and scope. In pursuing their interests, proprietary facility owners restrict the use of communications networks suppressing innovation. It would be the height of foolishness to create private ownership or control over the spectrum where it does not exist, which would then invoke the newly minted quasi-property rights to strangle the Internet." Rather, "the FCC should rationalize current uses and expand the space for unrestricted use."
Meanwhile, the SETI (Search for Extraterrestrial Intelligence), which uses radio telescopes to listen for extraterrestrial broadcasting, also submitted a comment [PDF]. SETI wants the FCC to "continue to preserve allocated portions of the radio spectrum for exclusive use of passive scientific research" so that it may continue to pursue "the question of whether other intelligent species occupy our universe".
People and Appointments
7/8. Federal Communications Commission (FCC) Commissioner Michael Copps announced that Alexis Johns has been "detailed to his office" to assist in handling media and consumer protection issues. She joined the FCC in 1996, most recently working in the Competition Policy Division of the Wireline Competition Bureau. Previously, she was an associate with the law firm of Cooley Godward. Susanna Zwerling, who is currently Commissioner Copps' Legal Advisor for media and consumer protection issues, plans to leave the FCC upon completion of several pending projects.
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7/8. The Agriculture Department's Rural Utilities Service published a notice in the Federal Register announcing its $20 Million pilot grant program for the provision of broadband transmission service in rural America for fiscal year 2002. Applications for grants are due by November 5, 2002. See, Federal Register, July 8, 2002, Vol. 67, No. 130, at Pages 45079 - 45083.
7/8. Federal Reserve Board Governor Mark Olson gave a speech in Madrid, Spain, titled "Financial Markets Regulation in the United States". He stated that "Several common forces are influencing financial services industries around the world. Perhaps most dominant is the extraordinary leap forward in technology that has changed every facet of these industries. The first major technological changes, almost forty years ago, dramatically changed back office processing. In recent years, technological improvements have changed the delivery of retail financial products to such an extent that our traditional definitions of deposit gathering and lending are in continual need of updating."
7/8. eBay and PayPal announced that eBay will acquire PayPal. eBay operates an auction web site. PayPal facilitates online payments. eBay stated in a release that "eBay will acquire all of the outstanding shares of PayPal in a tax free, stock for stock transaction using a fixed exchange ratio of 0.39 eBay shares for each PayPal share. Based on eBay's stock price on July 5, 2002, the acquisition is valued at $1.5 billion." It stated that the acquisition "is subject to various stockholder, government and regulatory approvals". PayPal "will continue to operate as an independent brand". eBay also stated that "In view of the uncertain regulatory environment surrounding online gaming, eBay plans to phase out PayPal's gaming business after the transaction closes."

Go to News from July 1-5, 2002.