04-21413. North American Numbering Plan, NeuStar, Inc., Request To Allow Certain Transactions Without Prior Commission Approval and To Transfer Ownership

AGENCY:

Federal Communications Commission.

ACTION:

Notice.

SUMMARY:

In this document, the Commission makes minor modifications to the conditions placed on NeuStar, Inc. (NeuStar) in its role as the North American Numbering Plan Administrator (NANPA) in the Warburg Transfer Order. The Commission grants, in part, NeuStar's request to perform certain changes and transactions that do not affect its neutrality, without prior Commission approval.

FOR FURTHER INFORMATION CONTACT:

Pam Slipakoff, Attorney, Wireline Competition Bureau, Telecommunications Access Policy Division, [phone], TTY [phone].

SUPPLEMENTARY INFORMATION:

This is a summary of the Commission's Order in CC Docket No. 92-237 released on August 26, 2004. The full text of this document is available for public inspection during regular business hours in the FCC Reference Center, Room CY-A257, 445 12th Street, SW., Washington, DC 20554.

I. Introduction

1. We grant, in part, NeuStar's request to perform certain changes and transactions that do not affect its neutrality, without prior Commission approval.

2. Since the regulation of NeuStar as a privately held company would differ in some respects from the regulation of NeuStar as a publicly owned company, our review distinguishes the effects of and the limitations placed on NeuStar's requests under its current organizational structure and after an initial public offering (IPO). We find that prior approval is no longer required under NeuStar's current organizational structure or after an IPO, subject to the conditions listed herein, for changes to: (1) The structure or size of NeuStar's Board; (2) NeuStar's bylaws, charter or securities; and (3) NeuStar's corporate structure. Under its current organizational structure, however, NeuStar must continue to seek prior approval for: (1) The acquisition of equity interests in NeuStar by a telecommunications service provider (TSP) or TSP affiliate; and (2) any transaction that would increase Warburg, Pincus & Co.”s (Warburg's) percentage equity interest in NeuStar. We also conclude that prior approval will not be required once NeuStar becomes a public company for: (1) Transactions that dilute or do not increase any interests of a TSP or TSP affiliate in NeuStar; (2) NeuStar to issue indebtedness to any entity that is not a TSP or TSP affiliate; (3) NeuStar to acquire an equity interest in any entity that is not a TSP or TSP affiliate. NeuStar, however, will be required to notify the Commission of any changes or transactions for which prior approval has been eliminated, as specified below.

3. We also grant, in part, NeuStar's request for a transfer of ownership control from the current majority shareholder, a Voting Trust, to a broader shareholder base through an IPO. We further conclude that NeuStar's proposal to change its organizational structure does not require rebidding the NANPA contract.

II. Discussion

4. As we explain below, NeuStar may continue to serve as a neutral numbering administrator after it becomes a publicly-owned entity. In addition, we find generally that NeuStar may grow or change as a corporate entity, including becoming a publicly-owned company, so long as adequate safeguards are in place to ensure that it remains neutral.

5. The same general neutrality concerns that were present when ownership of Lockheed Martin IMS Corporation (Lockheed) was transferred to Warburg will continue as long as NeuStar remains a private entity that is primarily owned and controlled by a TSP affiliate, Warburg. Therefore, we keep in place most of the pre-approval requirements for the period before NeuStar shares are offered for sale to the general public. We, however, take this opportunity to clarify and narrow those requirements based on our experience. After an IPO, the corporate influence of any given TSP or TSP affiliate will likely be diluted. Accordingly, there will be less need to monitor all transactions affecting NeuStar's ownership and corporate structure. The disclosure requirements established in this Order and other regulatory requirements will subject NeuStar as a public company to greater scrutiny and oversight. In addition to our oversight, NeuStar would be subject to regulation by the Securities and Exchange Commission (SEC) which will bring greater transparency to NeuStar's business dealings. Furthermore, other existing neutrality oversight mechanisms will remain in place. These mechanisms include, but are not limited to: the Commission's rules; the North American Numbering Council's (NANC), authority to investigate NeuStar's neutrality; NeuStar's obligation to submit quarterly neutrality audits to the NANC and the FCC; and NeuStar's obligations to comply with its Code of Conduct. Therefore, we believe that we are justified in relaxing the post-IPO prior approval requirements subject to certain conditions. We emphasize that the Commission will have no tolerance for violations of the neutrality requirements and the conditions set forth in this Order. Any violation of these requirements will subject NeuStar to any and all remedies available to the Commission, up to and including contract termination.

A. Standard of Review

6. Commission Rules. Section 52.12 of the Commission's rules addresses the NANPA neutrality requirements. Specifically, section 52.12(a)(1) states that the NANPA must be a non-governmental entity, not aligned with any particular industry segment. Thus, a TSP may not be the NANPA. Furthermore, the NANPA may not be an affiliate of a TSP. The Commission's rules state that the majority of the NANPA's debt must not be issued to, nor may a majority of the NANPA's revenues be received from, a TSP. In addition, the NANPA must not be subject to undue influence of any party with a vested interest in numbering administration. Section 52.13 of our rules sets forth the general responsibilities of the NANPA. More specific responsibilities are set forth in the NANPA contract.

7. The Warburg Transfer Order. On November 17, 1999, the Commission released the Warburg Transfer Order, approving the transfer of the NANPA functions to NeuStar, subject to the terms and conditions enumerated in that Order, for the remainder of Lockheed's term of appointment as the NANPA. As a threshold matter, the Commission found that, because of their direct participation as competitors in the telecommunications market, no telecommunications service providers may serve as the NANPA.

8. In the Warburg Transfer Order, the Commission concluded that Lockheed must obtain prior approval before transferring the NANPA functions to NeuStar. The Commission also found that Lockheed was in violation of the neutrality requirements, because Lockheed's acquisition of Comsat Government Services, Inc., a wholly owned subsidiary of Comsat Corporation Comsat, made it a TSP. Lockheed, however, was permitted to cure its neutrality violation by transferring the NANPA functions to an entity that met the neutrality requirements. The Commission found that NeuStar, as it was structured and with the additional safeguards imposed, was in compliance with the Commission's neutrality criteria; and, therefore, the NANPA functions could be transferred to it. The Commission also conditioned approval of the transfer of the NANPA functions on NeuStar's adherence to a Code of Conduct.

9. The NeuStar board was to consist of two Warburg representatives and two unaffiliated directors with no familial or business connection with Warburg, Warburg Pincus Equity Partners (WPEP), or NeuStar management. The Senior Vice President and Managing Director of CIS were appointed as the fifth director and the Chairman of the Board. Under the terms of the agreement, WPEP owns a 9.9% interest in NeuStar; NeuStar management owns a 28.1% interest in NeuStar; and Lockheed owns a 3% interest in NeuStar. The remaining 59% interest in NeuStar is owned by an irrevocable Voting Trust, which controls the voting rights of the shares in the trust. The Voting Trust is administered by two unaffiliated trustees, who have voting rights for the Voting Trust's 59% interest in NeuStar. The beneficiaries of the trust include at least 25 individuals comprised of the individual WPEP investors and NeuStar management.

10. Bureau Letter. On July 12, 2002, the Bureau sent a letter to NeuStar in response to the addition of two new investors in NeuStar. Although the addition of the two new investors did not violate the Commission's neutrality rules, it was a change to NeuStar's organizational structure that was implemented without prior Commission approval. The Bureau retroactively approved the admission of the new investors, but admonished NeuStar for taking such action without prior Commission approval. The Bureau directed NeuStar to refrain from issuing additional shares, registering for sale, permitting the private sale, or otherwise permitting the transfer of any of its shares, if such action could result in a change in NeuStar's organizational structure, without first obtaining the Commission's approval. In addition, the Bureau reiterated that NeuStar must seek and get prior approval for changes to its organizational structure, the Voting Trust, or the Board, even if NeuStar believes that such changes will not result in a violation of the Commission's neutrality rules or the Warburg Transfer Order. The Bureau also stated that any future changes of this nature, without first obtaining Commission approval, would subject NeuStar to any and all remedies available to the Commission, up to and including termination. Together, the Bureau Letter, the Warburg Transfer Order, and section 52.12 of our rules establish the foundation for evaluating NeuStar's ability to serve as a neutral numbering administrator.

B. Changes and Transactions No Longer Subject to Prior Approval Requirements

1. Corporate Changes That Dilute or Do Not Increase the Rights of Any TSP or TSP Affiliate

11. Changes to the Board's Structure or Size. We eliminate the prior approval requirement for changes to the Board's structure or size, under NeuStar's current organizational structure or after an under an IPO, subject to the following conditions. First, Warburg's Board membership should not exceed the 40 percent level established in the Code of Conduct. This measure, as advocated by Cox, will help minimize the risk of Warburg incrementally increasing its influence on the Board. Second, no single entity, other than the existing Voting Trust, may control more than 40 percent of the Board. Such measures will help minimize the risk of any TSP or TSP affiliate exerting undue influence over NeuStar's responsibilities as a neutral numbering administrator. Third, no additional directors shall be affiliated with a TSP. Fourth, in order to further safeguard NeuStar's neutrality, no director may be nominated or chosen by a TSP or TSP affiliate. Fifth, the majority of NeuStar's Board members must be independent. These conditions will ensure that neither Warburg, nor any other TSP or TSP affiliate, will exert undue influence over NeuStar.

12. Changes to Bylaws, Charter or Securities. We eliminate the prior approval requirement for changes to NeuStar's bylaws, charter or securities, provided that such changes do not provide a TSP or TSP affiliate any rights that are not enjoyed by other holders of the class of securities held by such entity under NeuStar's current organizational structure or after an IPO. We agree with Cox, however, that 4 additional restrictions are necessary to ensure compliance with our neutrality rules. Thus, the changes to NeuStar's bylaws, charter, or securities are subject to the conditions set forth below.

13. We find that, as proposed by the NANC, NeuStar must maintain provisions in its bylaws and other corporate documents that require it to comply with all neutrality rules regardless of whether NeuStar is a private or public company. Specifically, NeuStar's bylaws and charter must be revised to include any changes authorized, and limitations placed in this Order. In addition, with respect to securities, no special rights or classes of stock may be issued to TSPs or TSP affiliates without prior Commission approval. Finally, we find that no changes shall be made to NeuStar's bylaws, charter, or securities that may affect NeuStar's compliance with our neutrality requirements. These provisions will help ensure that NeuStar remains neutral by minimizing the risk that TSPs or TSP affiliates will exert undue influence in violation of the Warburg Transfer Order and the neutrality rules.

14. Changes to Corporate Structure. We eliminate the prior approval requirement for changes to NeuStar's corporate structure, including reorganization into one or more subsidiaries or dispositions of subsidiaries under NeuStar's current organizational structure or after an IPO. NeuStar, however, must keep its numbering administration functions severable. Such a separation will allow for a smooth transfer of numbering administration functions in the event another entity is selected to perform the numbering administration functions currently performed by NeuStar. NeuStar must also ensure that the boards of any subsidiaries adhere to the Code of Conduct and the requirements set forth in this Order. In addition, NeuStar must file its revised Voting Trust and Shareholders' Agreement within 30 days of the release of this Order.

2. Transactions That Dilute or Do Not Increase the Rights of Any TSP or TSP Affiliate in NeuStar

15. Pre-IPO Transactions. We eliminate the prior approval requirement for transactions that dilute or do not increase the rights of any particular TSP or TSP affiliate, subject to the conditions set forth below. We adopt NeuStar's proposed conditions that no entity that is a TSP or TSP affiliate may acquire any equity in NeuStar without prior Commission approval, and that any entity's equity interest in excess of 9.9% shall be placed in the Voting Trust.

16. Finally, we find that Warburg's percentage of equity interest in NeuStar may be maintained or diluted, but may not be increased. We find, however, that even a de minimis increase could increase Warburg's influence over NeuStar. Thus, we find that prior Commission approval remains necessary, prior to an IPO, for any transaction that increases Warburg's percentage equity interest in NeuStar, whether held directly or through the Voting Trust. The conditions we establish for pre-IPO transactions will help ensure that neither Warburg, nor any other TSP or TSP affiliate, exerts undue influence over NeuStar.

17. Post-IPO Transactions. We find that after an IPO there will be less of a need to monitor all transactions affecting NeuStar's ownership, and it will be less likely that a particular TSP or TSP affiliate could exert control or influence over NeuStar without the Commission's knowledge. As noted above, disclosure requirements will subject NeuStar to more transparency and oversight. Therefore, we relax the post-IPO pre-approval requirements as discussed herein.

18. We eliminate the prior approval requirement for transactions that dilute or do not increase any interests of a TSP or TSP affiliate in NeuStar, subject to the conditions set forth below. Individual TSPs and TSP affiliates shall be limited to less than a 5% equity ownership interest in NeuStar. In the event any TSP or TSP affiliate acquires any ownership interest in NeuStar in violation of this limit, NeuStar may not register these shares and no voting rights may be granted to such shares. TSPs and TSP affiliates may not cure any excess interests by placing them in the Voting Trust. This requirement will help minimize the risk that entities with a vested interest in the outcome of numbering administration activities will be able to exert undue influence over NeuStar. Furthermore, limiting the level of TSP or TSP affiliate equity interests will help minimize the risk of any industry segment exerting undue influence over NeuStar.

19. We also decline to impose an aggregate ownership cap at this time. Ownership by a broad group of shareholders that might include disparate TSP interests may well promote, and not undermine, neutrality. We nevertheless recognize the possibility that a concentration of ownership in the hands of TSPs providing similar services might in some circumstances lead to the problem claimed by Cox. Accordingly, we require NeuStar to report to the Commission, no later than 30 days after its IPO registration statement is declared effective, the names of all TSPs or TSP affiliates that own a 5% or greater equity interest in NeuStar. We also require NeuStar, in the context of the periodic neutrality audits, to make available to the auditor upon the auditor's request any information in NeuStar's possession relating to the identity of the record or beneficial owners of its equity shares, and, in addition, to certify to the auditor upon request that the executive officers and directors of NeuStar have no actual knowledge of any record or beneficial ownership of equity shares by a TSP or TSP affiliate, other than as disclosed to the auditor. This, in conjunction with the other aspects of the required neutrality audits and other ongoing oversight by NANC and this Commission, will allow us to ascertain, before renewing the NANPA contract, whether NeuStar's neutrality has been adversely affected by aggregate TSP ownership.

20. Any entity acquiring 5% or more of NeuStar equity must certify to NeuStar that it is not a TSP or TSP affiliate. Any entity that is required to certify that it is not a TSP or TSP affiliate shall report any changes that affect the validity of its certification to NeuStar within five business days of the change. Five business days will provide ample time for NeuStar to inform the Commission of such changes. If an entity with 5% or more of NeuStar equity becomes a TSP or TSP affiliate, NeuStar may not register these shares and no voting rights may be granted to such shares. TSPs and TSP affiliates, other than as previously required for Warburg, may not cure any excess interests by placing them in the Voting Trust. This reporting requirement will help NeuStar monitor its investors and comply with the requirements of this Order. NeuStar shall provide copies of these certifications and the supporting documentation to the Commission and the NANC within five business days of receiving them.

21. We also find that NeuStar may issue indebtedness to any entity that is not a TSP or TSP affiliate without prior approval. The Commission, however, retains its prior approval requirement for any indebtedness that is issued to a TSP or TSP affiliate. Any indebtedness issued to a TSP must also be consistent with section 52.12(a)(1)(ii) of our rules. Similarly, we find that NeuStar may acquire, without prior approval, an entity, or equity interest in an entity, which is not a TSP or a TSP affiliate. The Commission, however, retains its prior approval requirement for any equity interest acquired by NeuStar in a TSP or TSP affiliate. These limitations will help minimize the risk that the entity selected to perform numbering administration functions will become aligned with a particular telecommunications industry segment.

22. Finally, as proposed by NeuStar, the majority of NeuStar's Board shall consist of independent directors, as defined by the NASDAQ or the New York Stock Exchange. This condition, combined with the conditions listed above, will ensure that the NeuStar board remains neutral and not subject to undue influence by any TSP, TSP affiliate or particular industry segment with a vested interest in numbering administration activities.

C. Transfer of Control From the Voting Trust to a Broad Shareholder Base Through an IPO

23. We find that the transfer of control from the current majority shareholder, the Voting Trust, to a broad shareholder base through an IPO will serve the public interest. This transfer will allow NeuStar to become a public company, permitting it to access a larger capital market while maintaining its neutrality. We agree with the NANC that allowing NeuStar to become a public company through an IPO will provide several enhancements to the Commission's and the NANC's ability to monitor NeuStar's adherence to the neutrality requirements. First, becoming a public company provides more transparency through SEC filings. Second, becoming a public company adds a new level of incentive to comply with neutrality requirements through legal exposure to claims by public shareholders if fiduciary responsibilities are breached. Third, becoming a public company creates additional incentives to comply with neutrality requirements through additional pressure on the value of the company via its publicly held shares if allegations of non-compliance with government regulations are made. Thus, NeuStar will now be accountable to the SEC and its shareholders in addition to the Commission.

24. We, therefore, grant, in part, subject to the conditions imposed herein, NeuStar's request for a transfer of ownership control from the current majority shareholder, a Voting Trust, to a broader shareholder base through an IPO.

25. Requirements of an IPO. We find that NeuStar's IPO must meet the following requirements. No entity may acquire 5% or more of the outstanding equity in NeuStar as a result of the IPO. After the IPO, TSPs and TSP affiliates, other than Warburg, will be limited to less than a 5% ownership interest and will be required to divest any excess interest. As discussed above, TSPs and TSP affiliates, other than as previously specified for Warburg, cannot cure any excess interests by placing them in the Voting Trust. Such measures will help ensure that TSPs or TSP affiliates do not exert undue influence over NeuStar.

26. In addition, Warburg's equity interest in NeuStar shall not increase as a result of the IPO. This condition will help ensure that NeuStar remains neutral in order to maintain the trust and confidence of the entities that must submit sensitive data to it in its numbering administration activities. Finally, NeuStar shall file with the Commission and the NANC any and all amendments up to and including its SEC registration statement and exhibits within two days of filing with the SEC. This requirement will allow the Commission and the NANC to continually monitor NeuStar's adherence to the neutrality requirements and the conditions established in this Order.

27. We find that NeuStar, through its petition and supplemental filings has provided sufficient information to address its potential IPO. In these filings, NeuStar states that following the IPO the Voting Trust will remain in place. NeuStar also states that the IPO will not change the Voting Trust, the rights of the trustee, or the rights of the entities whose shares are held by the Voting Trust. NeuStar anticipates that 8 to 17 millions shares (approximately 15 to 30 percent of NeuStar's current total outstanding equity) will be offered in the IPO. According to NeuStar, the new shares to be issued in the IPO, and any shares sold out of the Voting Trust, will be common stock that carry the right to one vote per share and that have no other, special voting rights. These newly issued shares may include shares of NeuStar common stock owned by existing investors in NeuStar. NeuStar also explains that although it currently has multiple classes of stock, upon the closing of the IPO, all outstanding shares of preferred stock would be converted to common stock, leaving NeuStar with one class of stock.

28. Reporting and Disclosure Requirements. Because we eliminate the prior approval requirement for certain changes and transactions, we shall establish reporting and disclosure requirements to help us monitor NeuStar's compliance with the neutrality requirements and the provisions of this Order. NeuStar will be required to provide a copy of its IPO registration statement, together with any and all amendments, up to and including its SEC registration statement and exhibits and certify that the IPO meets the requirements of this Order within two days of filing the registration statement with the SEC. Additionally, NeuStar will be required to provide copies of equity ownership information, certifications, and shareholder filings within two business days of our request. Changes to NeuStar's organizational structure, including Board changes, must be provided to the Commission and the NANC with a detailed organizational chart within five days of the change. Furthermore, we find that NeuStar is required to provide the Commission and the NANC with the disclosure forms of the shareholders who own 5% or more of the company's equity within five days of registration or receipt of the disclosure forms. These requirements will provide the Commission and the NANC with the ability to continually monitor NeuStar's neutrality.

D. NANPA Solicitation

29. Some commenters suggest that eliminating the prior approval requirements for certain transactions requires rebidding the NANPA contract. We disagree. The requested changes do not constitute a material change to the scope of the original contract. NeuStar has not requested a change to its responsibilities as the NANPA or to the costs of its services. Nor does the relief granted to NeuStar in this Order change its ability to serve as a neutral numbering administrator. Rather, as discussed above, the basic statutory and regulatory neutrality requirements that apply to the NANPA remain intact. For these reasons, therefore, we do not believe that the scope of the current NANPA contract requirements have been exceeded so as to require rebidding.

30. CTIA and Syniverse also claim that potential bidders were deterred from participating in the original procurement due to the prior approval restrictions on ownership changes imposed by the Warburg Transfer Order. Again, we disagree. The requirements established in the Warburg Transfer Order and the Bureau Letter was designed to cure the specific neutrality conflicts that Lockheed and NeuStar faced. Any uncertainty regarding the applicability of those requirements to others could and should have been raised during the NANPA solicitation process when potential bidders were given an opportunity to obtain clarification of the RFP requirements. In fact, such questions were raised. In response to questions addressing the reach of the Warburg Transfer Order, the Commission stated, “Generally, the neutrality rules, requirements and policies will continue to apply to any entity selected as the NANPA” and that the “terms and conditions placed on NeuStar in the Lockheed Martin [Warburg] Transfer Order would continue with respect to NeuStar if it were selected as the NANPA for the next term.” The Commission further explained that “Bidders cannot assume, however, that the FCC would find the same terms and conditions would cure a potential or actual violation of the neutrality provisions with respect to a different situation or entity.” Thus, while the Commission clarified that the same types of prior approval restrictions contained in the Warburg Transfer Order could be imposed on other bidders found in violation of a neutrality requirement, the Commission's own statements belie any basis for the presumption that all such restrictions applied to all bidders in all situations.

31. In this same vein, we reject claims made that because the actions taken in this Order remove alleged restrictions on public companies serving as the NANPA, rebidding the NANPA functions is required. Consistent with the analysis set forth above, any questions concerning the applicability of the requirements of the Warburg Transfer Order to this issue could and should have been raised during the solicitation process. In fact, such issues were raised and the Commission's response did not foreclose a public company from serving as the NANPA, a result made obvious by the fact that a public company did bid for the NANPA contract. We also find that the public interest is not served by rebidding the NANPA functions because an entity may have mistakenly believed a public company could not serve as the NANPA. Rebidding the contract is neither necessitated nor warranted, especially since NeuStar is meeting the requirements of its contract and any interested party had an opportunity to participate during the last solicitation.

32. We also reject Syniverse's claim that eliminating the prior approval requirement for certain transactions increased the value of the NANPA contract. Syniverse suggests that the value of the contract is increased as a result of the elimination of certain prior approval restrictions. According to Syniverse, this “windfall” value should not benefit NeuStar. In order for Syniverse's argument to have any validity, we would have to conclude that the eliminated restrictions hold some definitive dollar value and that this value would be translated into a reduced contract price. Syniverse does not provide evidence of NeuStar's purported increased value or a mechanism for establishing that value. Nor does Syniverse adequately demonstrate that changing the prior approval requirements would necessarily result in a lower contract price. Because Syniverse's contention is highly speculative, we find it to be without merit.

33. We strongly reject Syniverse's claim that “the Commission would utterly undermine the integrity of its procurements” if NeuStar is granted the relief it requested without any evidence that it needs such relief “in order to perform its contractual obligations” or that granting the relief requested violated the procurement process. Whether or not NeuStar needs the relief requested to perform its contractual obligations is irrelevant to our analysis here. Rather, we focus on whether the relief requested would adversely impact NeuStar's ability to serve as a neutral numbering administrator. Our actions in this order in no way compromise the integrity of that process. In addition, Syniverse fails to provide specific evidence of a violation of the procurement process we used to select the NANPA. Because, as discussed above, NeuStar's request as modified herein, does not affect its ability to serve as a neutral numbering administrator we see no reason why the NANPA cannot make changes to its business plan that do not impact its neutrality.

34. Finally, Syniverse contends that the Commission should rebid the NANPA contract at the end of the current period if NeuStar chooses to make the requested changes to its ownership structure. We disagree. The decision whether or not to renew the option is not currently before the Commission. The factors that might impact a decision to exercise the option are specifically set forth in section 17.207 of the FAR and will be evaluated by the contracting officer at the time the option is to be exercised.

III. Ordering Clauses

35. It is ordered, pursuant to sections 1, 4, and 251 of the Communications Act of 1934, as amended, 47 U.S.C. 151, 154 and 251 this order is adopted.

36. It is further ordered that the request of NeuStar, Inc., perform certain changes and transactions that do not affect its neutrality, without prior Federal Communications Commission approval, is granted, in part, to the extent set forth herein.

Federal Communications Commission.

Marlene H. Dortch,

Secretary.