**Before the**

**Federal Communications Commission**

**Washington, D.C. 20554**

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| In the Matter of                 | *  | WT Docket No. 05-211         |
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| Enhancement Act and              | *) |                              |
| Modernization of the             | ** |                              |
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**SECOND REPORT AND ORDER**

**AND SECOND FURTHER NOTICE OF PROPOSED RULE MAKING**

**Adopted: April 25, 2006 Released: April 25, 2006**

**Comment Date:** 60 days after publication in the Federal Register

**Reply Comment Date:** 90 days after publication in the Federal
Register

By the Commission: Chairman Martin and Commissioner Copps issuing
separate statements; and Commissioner Adelstein approving in part,
dissenting in part, and issuing a separate statement.

Table of Contents

Heading Paragraph \#

I. introduction 1

A. *Second Report and Order* 3

B. *Second Further Notice of Proposed Rule Making* 6

II\. background 7

III\. Second Report and order 14

A. Background 14

B. Material Relationship 15

C. Unjust Enrichment 31

D. Implementation 42

IV\. second further notice of proposed rule making 53

A. Defining the Class 55

B. In-Region Limitation for Class of Entities 63

C. Material Relationships 74

V. conclusion 93

VI\. Procedural matters 94

A. Regulatory Flexibility Analyses 94

B. Comment Filing Procedures 96

C. Paperwork Reduction Act Analysis 99

D. Congressional Review Act 102

E. Ordering Clauses 103

APPENDICES:

Appendix A -- Commenters

Appendix B -- Final Rules

Appendix C -- Final Regulatory Flexibility Analysis

Appendix D -- Initial Regulatory Flexibility Analysis

# introduction

1.  In this *Second Report and Order* and *Second Further Notice of
    Proposed Rule Making* ("*Second Further Notice*"), we address our
    rules concerning the eligibility of applicants and licensees for
    designated entity benefits. In the *Second Report and Order*, we
    modify our rules in order to increase our ability to ensure that the
    recipients of designated entity benefits are limited to those
    entities and for those purposes Congress intended.[^1] In the
    *Second Further Notice*, we seek comment on a variety of additional
    measures that might further augment the effectiveness of our rules
    in this regard. We take all of these steps with the goal of
    enhancing our ability to carry out Congress's dual directives with
    regard to designated entities: (1) that we ensure that designated
    entities are given the opportunity to participate in the provision
    of spectrum-based services;[^2] and (2) that, in providing such
    opportunity, we prevent unjust enrichment.[^3] With regard to the
    second directive, our particular intention is to ensure that
    entities ineligible for designated entity incentives cannot
    circumvent our rules by obtaining those benefits indirectly, through
    their relationships with eligible entities.

2.  In the *Further Notice of Proposed Rule Making* in this docket
    ("*Further Notice*"), we tentatively concluded that we should
    restrict the award of designated entity benefits to an otherwise
    qualified applicant where it has a "material relationship" with a
    "large in-region incumbent wireless service provider."[^4] We sought
    comment on how we should define the elements of such a
    restriction.[^5] We further sought comment on whether we should
    restrict the award of designated entity benefits where an otherwise
    qualified applicant has a "material relationship" with a large
    entity that has a significant interest in communications services,
    and if so, how we should define the elements of such a
    restriction.[^6]

## *Second Report and Order*

3.  As discussed fully below, we revise our general competitive bidding
    rules ("Part 1" rules)[^7] governing benefits reserved for
    designated entities[^8] to include certain "material relationships"
    as factors in determining designated entity eligibility.
    Specifically, we adopt rules to limit the award of designated entity
    benefits, as explained in more detail below, to any applicant or
    licensee that has "impermissible material relationships" or an
    "attributable material relationship" created by certain agreements
    with one or more other entities for the lease or resale (including
    under a wholesale arrangement) of its spectrum capacity. These
    definitions of material relationships are necessary to strengthen
    our implementation of Congress's directives with regard to
    designated entities and to ensure that, in accordance with the
    intent of Congress, every recipient of our designated entity
    benefits is an entity that uses its licenses to directly provide
    facilities-based telecommunications services for the benefit of the
    public.[^9]

4.  We also adopt rule modifications to strengthen our unjust enrichment
    rules so as to better deter entities from attempting to circumvent
    our designated entity eligibility requirements and to recapture
    designated entity benefits when ineligible entities control
    designated entity licenses or exert impermissible influence over a
    designated entity.[^10] Similarly, to ensure our continued ability
    to safeguard the award of designated entity benefits, we provide
    clarification regarding how the Commission will implement its rules
    concerning audits, and we refine our rules with respect to the
    reporting obligations of designated entities.

5.  The rules we adopt today will apply to all determinations of
    eligibility for all designated entity benefits, including bidding
    credits and, as applicable, set-asides[^11] and installment
    payments, unless excepted by the grandfathering provisions described
    in detail below.[^12] These rules will be applied to any application
    filed to participate in auctions in which bidding begins after the
    effective date of the rules adopted herein and to all long-form
    applications filed by winning bidders after such auctions,[^13] as
    well as to all applications for an authorization, an assignment or
    transfer of control, a lease, or reports of events affecting a
    designated entity's ongoing eligibility,[^14] including
    "impermissible material relationships" or "attributable material
    relationships," filed on or after release of this *Second Report and
    Order*. These rules will become effective thirty days after their
    publication in the Federal Register.

## *Second Further Notice of Proposed Rule Making*

6.  In reviewing the record in this proceeding, including the requests
    of various parties to conduct a further inquiry,[^15] we issue this
    *Second Further Notice* to consider whether we should adopt
    additional restrictions, beyond those we adopt herein, to further
    safeguard the benefits reserved for designated entities.[^16]

# background

7.  Throughout the history of the auctions program, the Commission has
    endeavored to carry out its Congressional directive to promote the
    involvement of designated entities in the provision of
    spectrum-based services.[^17] Congress recommended that the
    Commission, in assisting designated entities, consider the use of
    various mechanisms such as tax credits and bidding preferences.[^18]
    Yet, in so doing, Congress also mandated that the Commission
    safeguard the award of the benefits it distributed to "prevent
    unjust enrichment as a result of the methods employed to issue
    licenses."[^19]

8.  The challenge for the Commission in carrying out Congress's plan has
    always been to find a reasonable balance between the competing goals
    of, first, providing designated entities with reasonable flexibility
    in being able to obtain needed financing from investors and, second,
    ensuring that the rules effectively prevent entities ineligible for
    designated entity benefits from circumventing the intent of the
    rules by obtaining those benefits indirectly, through their
    investments in qualified businesses.[^20] The changes in the
    Commission's designated entity rules over time have been the result
    of the Commission's continuing effort to maintain this balance
    effectively in the face of a rapidly evolving telecommunications
    industry, legislative changes, judicial decisions, and the demand of
    the public for greater access to wireless services.

9.  The Commission's primary method of promoting the participation of
    designated entities in competitive bidding has been to award bidding
    credits -- percentage discounts on winning bid amounts -- to small
    business applicants.[^21] The Commission also has utilized other
    incentives, such as installment payments and, in the broadband
    Personal Communications Services ("broadband PCS"), a license
    set-aside, to encourage designated entities to participate in
    spectrum auctions and in the provision of service.[^22] In order to
    qualify for these benefits, an applicant must demonstrate that its
    gross revenues (and, in some cases, its total assets), in
    combination with those of its "attributable" interest holders, fall
    below certain service-specific financial caps.[^23] Thus, in
    determining eligibility for size-based benefits, it is critical to
    decide which investors' gross revenues (and total assets) must be
    attributed.

10. During the early years of the designated entity program, the
    Commission adopted often complicated attribution rules on a
    service-specific basis. For broadband PCS attribution, the
    Commission had a "general rule" -- its financial caps[^24] -- and
    four exceptions to the rule.[^25] Two of these exceptions came to be
    known as the "control group exceptions" -- a 25 percent equity
    exception and a 49.9 percent equity exception.[^26] Both exceptions
    required the applicant to form a "control group"[^27] within which
    "qualifying investors"[^28] owned at least 50.1 percent of the
    applicant's voting interests.[^29] Under the 25 percent equity
    exception, the applicant\'s control group was required to own at
    least 25 percent of the applicant\'s total equity; and, within the
    control group, qualifying investors were required to hold at least
    15 percent of the applicant's total equity.[^30] Under the 49.9
    percent equity exception, the applicant's control group was required
    to own at least 50.1 percent of the applicant\'s total equity; and,
    within the control group, qualifying investors were required to hold
    at least 30 percent of the applicant's total equity.[^31] If these
    and certain other requirements were met, the gross revenues and
    total assets of non-controlling investors were not attributed to the
    applicant.[^32] These two exceptions to the general rule were widely
    used; however, the other two exceptions -- one for publicly-traded
    corporations with widely dispersed voting stock ownership and the
    other for small business consortia[^33] -- were seldom invoked.

11. The Commission used the control group approach in broadband PCS for
    determinations of small business eligibility and also for
    determinations of "entrepreneur" eligibility. In broadband PCS, the
    Commission originally "set aside" C and F block licenses for
    "entrepreneurs,"[^34] small entities whose gross revenues and total
    assets, when aggregated with those of their attributable interest
    holders, fell below certain financial caps.[^35] A variation of this
    control group approach was employed for narrowband PCS.[^36] In
    determining whether applicants for the 900 MHz specialized mobile
    radio ("SMR") service qualified as small businesses, the Commission
    attributed the revenues of parties holding partnership and other
    ownership interests and any stock interest amounting to 20 percent
    or more of the equity, or outstanding stock, or outstanding voting
    stock of the applicant.[^37] For virtually all other services, the
    Commission used a "controlling interest"[^38] or "controlling
    principal"[^39] standard much like the attribution standard used
    today. Under this earlier standard, the Commission attributed to the
    applicant the gross revenues of its controlling interests and their
    affiliates in assessing whether the applicant was qualified to take
    advantage of the Commission's small business provisions, such as
    bidding credits.[^40]

12. Since 2000, the Commission has applied the current "controlling
    interest" standard to all services when making attribution
    determinations.[^41] Under this standard, the Commission attributes
    to an applicant the gross revenues of it, its controlling interests,
    its affiliates, and the affiliates of the applicant's controlling
    interests.[^42] A "controlling interest" includes individuals or
    entities, or groups of individuals or entities, that have control of
    the applicant under the principles of either *de jure* or *de facto*
    control.[^43] *De jure* control is typically evidenced by the
    holding of greater than 50 percent of the voting stock of a
    corporation or, in the case of a partnership, general partnership
    interests.[^44] *De facto* control is determined on a case-by-case
    basis[^45] and includes the criteria set forth in *Ellis
    Thompson*.[^46] Under the controlling interest standard, the
    officers and directors of any applicant are considered to have a
    controlling interest in the applicant.[^47] The Commission has
    declined to impose minimum equity requirements on controlling
    interests, believing that such requirements would dictate that a
    person or entity identified as a controlling interest must retain
    some level of equity in the applicant, thereby reducing the amount
    of equity the applicant could offer to non-controlling interests in
    exchange for financing and making it more difficult for the
    applicant to attract sufficient investment to compete in the
    marketplace.[^48]

13. In applying the controlling interest standard, the Commission's
    intent has been to provide designated entities with increased
    flexibility and simplicity in structuring their businesses, while
    continuing to ensure that size-based benefits are reserved solely
    for qualified entities. In making the change, the Commission
    acknowledged the complexity of the broadband PCS control group
    approach, emphasizing that the controlling interest standard would
    be "simpler" and "more straightforward to implement."[^49] Also, the
    Commission explained, application of the controlling interest
    standard would allow "legitimate small businesses . . . to attract
    passive financing in a highly competitive and evolving
    telecommunications marketplace,"[^50] while ensuring "that only
    those entities truly meriting small business status qualif\[ied\]
    for \[the Commission's\] small business provisions."[^51]

# Second Report and order

## Background

14. In the *Further Notice*, we tentatively concluded that we should
    restrict the award of designated entity benefits to an otherwise
    qualified applicant where it has a "material relationship" with a
    "large in-region incumbent wireless service provider."[^52] We
    sought comment on how to define the specific elements of such a
    restriction.[^53] Further, we sought comment on whether such a
    restriction on the award of designated entity benefits should apply
    where a designated entity applicant has a "material relationship"
    with a large entity that has a "significant interest in
    communication services," and whether we should include in such a
    definition a broad category of communications-related businesses or
    instead exclude or include certain types of entities.[^54] In
    addition, we sought comment on whether we should adopt unjust
    enrichment provisions that would require reimbursement of designated
    entity benefits in the event that a designated entity makes a change
    in its material relationships or makes any other changes that would
    result in the loss of or change in its eligibility subsequent to
    acquiring a license with a designated entity benefit.[^55] Finally,
    in the *Further Notice*, we sought comment on changes to the
    Commission's auction application rules to facilitate the application
    of any rule modifications to upcoming auctions.[^56]

## Material Relationship

15. As discussed fully below, we revise our Part 1 rules to consider
    certain relationships as factors in determining designated entity
    eligibility. In so doing, we seek to improve our ability to achieve
    Congress's directives with regard to designated entities and to
    ensure that, in accordance with the intent of Congress, every
    recipient of our designated entity benefits is an entity that uses
    its licenses to directly provide facilities-based telecommunications
    services for the benefit of the public.[^57] Specifically, except as
    grandfathered below, an applicant or licensee has "impermissible
    material relationships" when it has agreements with one or more
    other entities for the lease (under either spectrum manager or *de
    facto* transfer leasing arrangements) or resale (including under a
    wholesale arrangement) of, on a cumulative basis, more than 50
    percent of its spectrum capacity of any individual license. Such
    "impermissible material relationships" render the applicant or
    licensee (i) ineligible for the award of designated entity benefits,
    and (ii) subject to unjust enrichment on a license-by-license basis.
    Furthermore, except as grandfathered below, an applicant or licensee
    has an "attributable material relationship" when it has one or more
    agreements with any individual entity, including entities and
    individuals attributable to that entity, for the lease (under either
    spectrum manager or *de facto* transfer leasing arrangements) or
    resale (including under a wholesale arrangement) of, on a cumulative
    basis, more than 25 percent of the spectrum capacity of any
    individual license that is held by the applicant or licensee. The
    "attributable material relationship" with that entity will be
    attributed to the applicant or licensee for the purposes of
    determining the applicant's or licensee's (i) eligibility for
    designated entity benefits, and (ii) liability for unjust enrichment
    on a license-by-license basis.

16. *Further Notice.* To define "material relationship," the *Further
    Notice* sought comment on the specific nature of the types of
    additional relationships that should trigger a restriction on the
    availability of designated entity benefits.[^58] For instance,
    Council Tree initially proposed that the Commission should restrict
    a designated entity applicant's "material relationships," including
    both financial and operational agreements, in order to more
    carefully ensure that designated entity benefits are awarded only to
    bona fide eligible entities.[^59] In this regard, we sought comment
    on what might constitute a "material financial" or "material
    operational" relationship. Moreover, insofar as our current rules
    already attribute the gross revenues of those that have
    relationships with designated entity applicants that confer either
    *de jure* and *de facto* control, we also sought comment on the type
    of attribution standard that we should apply to any rule
    modification.[^60]

17. The *Further Notice* also sought comment on whether restricting
    certain agreements as a "material relationship" would be too harsh
    or unnecessarily limit a designated entity applicant's ability to
    gain access to capital or industry expertise.[^61] Additionally, the
    *Further Notice* sought comment on whether there might be instances
    where the existence of either a "material financial agreement" or a
    "material operational agreement" might be appropriate and might not
    raise issues of undue influence.[^62] In this regard, the *Further
    Notice* asked whether the Commission should allow designated entity
    applicants to obtain a bidding credit or other benefits if they had
    only a "material financial agreement" or only a "material
    operational agreement" but not both, and what factors we should
    consider in determining the types of relationships that might not
    adversely affect an applicant's designated entity eligibility.[^63]
    Finally, we sought comment on whether a spectrum leasing arrangement
    should be defined as a "material relationship," and whether we
    should consider any other arrangements for the purposes of such a
    definition.[^64]

18. *Comments.* Commenters are generally split regarding the level of
    specificity with which the Commission should define "material
    relationship." Several commenters urge the Commission to narrowly
    tailor the definition so as not to "inadvertently hinder the flow of
    capital" to designated entity applicants.[^65] For example, Wirefree
    Partners argues that the Commission should "narrowly and
    specifically define what constitutes a material relationship"
    because "\[s\]mall businesses need the flexibility to enter into
    reasonable commercial agreements with other participants in the
    communications industry."[^66] Others maintain that the reach of the
    Commission's policies should be very broad and that we should define
    "material relationship" to include both financial and operational
    agreements.[^67] For example, Council Tree and other proponents of a
    broad definition maintain that the definition of material
    relationship should include, "without limitation, management
    agreements, trademark license agreements, joint marketing
    agreements, future interest agreements (such as puts, calls,
    options, and warrants), and long-term *de facto* and spectrum
    manager leasing arrangements."[^68]

19. Rural service providers oppose the proposal to define "material
    relationship" in a manner that would preclude small businesses from
    entering into operational agreements with large wireless
    carriers.[^69] As explained by one commenter, many small and rural
    wireless companies "have entered into management, marketing or other
    non-equity arrangements with large wireless carriers which enable
    them to provide quality wireless services to the rural areas they
    are licensed to serve."[^70] Another commenter notes that "the
    Commission should not consider roaming agreements evidence of a
    'material relationship' since to do so would eliminate almost every
    small rural carrier from enjoying DE status."[^71]

20. In seeking comment on spectrum leasing, we asked "what, if any
    standard should be used to determine whether spectrum leasing is a
    material relationship for the purpose of any additional restriction
    on the availability of designated entity benefits that we might
    adopt."[^72] A few commenters argued that the Commission should not
    reverse the guidance provided in the *Secondary Markets*
    proceeding.[^73] As noted above, a number of others generally agreed
    that the Commission should adopt Council Tree's proposal for
    material relationships, presumably including its suggestion that
    leasing should be included in the types of material relationships
    that should trigger a Commission restriction of the award of
    designated entity benefits.[^74]

21. *Discussion.* In defining "material relationship," we seek to
    balance a designated entity applicant's need for flexibility to
    structure its business relationships against our statutory
    obligation to award these small business benefits only to entities
    intended by statute to be eligible. In our experience in
    administering the designated entity program over the last several
    years, we have witnessed a growing number of complex agreements
    between designated entities and those with whom they choose to enter
    into financial and operational relationships. Although some of these
    agreements may have contributed to the wireless industry becoming a
    thriving sector of the nation's economy, the relationships
    underpinning such contracts underscore the need for stricter
    regulatory parameters to ensure, as Congress intended, that:
    (1) benefits are awarded to provide opportunities for designated
    entities to become robust independent facilities-based service
    providers with the ability to provide new and innovative services to
    the public; and (2) the Commission employs methods to prevent unjust
    enrichment.[^75]

22. We agree with commenters that certain agreements have the potential
    to significantly influence a designated entity licensee's decisions
    regarding its provision of service and, therefore, also have the
    potential to be abused, absent the appropriate safeguards. Yet, we
    also recognize the concerns of many, especially rural carriers, that
    argue that small businesses face practical difficulties in providing
    service and that stress that designated entity licensees must have
    the ability to enter into operational contracts, such as roaming,
    interconnection, and switch-sharing, with other, often large,
    providers in order to be in a position to provide valuable
    telecommunications service to the public.[^76]

23. In considering how to evaluate which specific relationships should
    trigger additional eligibility restrictions, we conclude that
    certain agreements, by their very nature, are generally inconsistent
    with an applicant's or licensee's ability to achieve or maintain
    designated entity eligibility because they are inconsistent with
    Congress's legislative intent. In this regard, where an agreement
    concerns the actual use of the designated entity's spectrum
    capacity, it is the agreement, as opposed to the party with whom it
    is entered into, that causes the relationship to be ripe for abuse
    and creates the potential for the relationship to impede a
    designated entity's ability to become a facilities-based provider,
    as intended by Congress.

24. As we indicated in the *Secondary Markets Second Report and Order*,
    "Congress specifically intended that, in order to prevent unjust
    enrichment, the licensee receiving designated entity benefits
    actually provide facilities-based services as authorized by its
    license."[^77] In that proceeding, the Commission stated that
    leasing by a designated entity licensee of "substantially all of the
    spectrum capacity of the licensee" would cause attribution that
    would likely lead to a loss of eligibility, and that the leasing of
    a "small portion" of such capacity where there was no other
    relationship between the parties likely would not result in a
    finding of attribution.[^78] Although at least one commenter argues
    that the Commission's existing leasing rules provide adequate
    protection to ensure that the relationship between the parties
    "remains one of contract and not control,"[^79] as articulated in
    the *Further Notice* and this decision, we are modifying our rules
    to include additional safeguards to our designated eligibility
    determinations that look beyond controlling relationships to those
    that have the potential to influence a designated entity in a manner
    contrary to that intended by Congress.

25. Building on our *Secondary Markets* policies and in consideration of
    the record we have before us, we modify our rules regarding
    eligibility for designated entity benefits for applicants or
    licensees that have agreements that create material relationships,
    as defined and explained herein. Specifically, except as
    grandfathered below,[^80] we conclude that an applicant or licensee
    has "impermissible material relationships" when it has agreements
    with one or more other entities for the lease (under either spectrum
    manager or *de facto* transfer leasing arrangements) or resale
    (including under a wholesale arrangement) of, on a cumulative basis,
    more than 50 percent of its spectrum capacity of any individual
    license. Such "impermissible material relationships" render the
    applicant or licensee (i) ineligible for the award of designated
    entity benefits, and (ii) subject to unjust enrichment on a
    license-by-license basis. Furthermore, except as grandfathered
    below,[^81] we find that an applicant or licensee has an
    "attributable material relationship" when it has one or more
    agreements with any individual entity, including entities and
    individuals attributable to that entity, for the lease (under either
    spectrum manager or *de facto* transfer leasing arrangements) or
    resale (including under a wholesale arrangement) of, on a cumulative
    basis, more than 25 percent of the spectrum capacity of any
    individual license that is held by the applicant or licensee.[^82]
    The "attributable material relationship" with that entity will be
    attributed to the applicant or licensee for the purposes of
    determining the applicant's or licensee's (i) eligibility for
    designated entity benefits, and (ii) liability for unjust enrichment
    on a license-by-license basis.[^83]

26. As stated above, our experience in administering the designated
    entity program and our review of the record developed in response to
    our *Further Notice* leads us to conclude that these definitions of
    material relationship are necessary to ensure that the recipient of
    our designated entity benefits is an entity that uses its licenses
    to directly provide facilities-based telecommunications services for
    the benefit of the public; that the Commission employs methods to
    prevent unjust enrichment; and that our statutory-based benefits are
    awarded only to those that Congress intended to receive them.

27. Spectrum manager and *de facto* transfer leasing agreements and
    resale agreements (including wholesale arrangements) with a single
    entity for 25 percent and less of the designated entity licensee's
    total spectrum capacity on a license-by-license basis, or cumulative
    agreements with multiple entities for 50 percent or less of a
    designated entity licensee's total spectrum capacity on a
    license-by-license basis will continue to be reviewed under our
    existing designated entity eligibility rules and, pursuant to
    existing rules and policies, may result in unjust enrichment
    obligations.[^84] Through the decisions we make today, we will
    ensure that a designated entity licensee will preserve at least half
    of its spectrum capacity of each of its licenses for which it has
    been awarded and retained designated entity benefits for the
    provision of service as a facilities-based provider for the benefit
    of the public, while still having flexibility to engage in
    agreements that are intended to provide it with access to valuable
    capital, thus better furthering the goals of the statutory
    designated entity program.

28. *Grandfathering and Applicability of Material Relationships.*
    Recognizing that there are numerous agreements in existence that
    might fall within our newly defined "impermissible material
    relationships" and "attributable material relationship," we will
    apply these eligibility restrictions on a prospective basis.
    Therefore, we will not employ our new restrictions to reconsider any
    designated entity benefits previously awarded to licensees prior to
    the release date of this *Second Report and Order* or to determine
    designated entity benefits in an application for a license, an
    authorization, or an assignment or transfer of control or a spectrum
    lease that was filed with the Commission before the release date of
    this *Second Report and Order* that is still pending approval.
    Accordingly, we will grandfather the existence of impermissible and
    attributable material relationships that were in existence before
    the release date of this *Second Report and Order* for the purposes
    of assessing unjust enrichment payments on benefits previously
    awarded or pending award, as discussed above. In assessing the
    imposition of unjust enrichment for future events, if any, we will
    consider unjust enrichment implications on a license-by-license
    basis.

29. Such relationships, are not, however, generally grandfathered for
    the purposes of determining an applicant's eligibility for the award
    of designated entity benefits in future auctions or for the purposes
    of determining eligibility for benefits in the context of an
    assignment, transfer of control, spectrum lease or reportable
    eligibility event after the release date of this *Second Report and
    Order*. Except as limited by our grandfathering provisions, the
    rules we adopt today will apply to all determinations of eligibility
    for all designated entity benefits with regard to any application
    filed to participate in auctions in which bidding begins after the
    effective date of the rules, as well as to all applications for an
    authorization, an assignment or transfer of control, a spectrum
    lease, or reports of events affecting a designated entity's ongoing
    eligibility filed on or after the release date of this *Second
    Report and Order*.[^85] Grandfathering the eligibility of all prior
    designated entity structures that involve impermissible and/or
    attributable material relationships would allow these designated
    entities to continue to acquire additional licenses and designated
    entity benefits using a structure that the Commission has determined
    would permit a third party to leverage improper influence over a
    designated entity in a manner that is inconsistent with the
    Congressional purposes for the designated entity program. Applying
    our rules in this manner is consistent with how the Commission
    currently determines an applicant's eligibility for designated
    entity benefits and how it applies its unjust enrichment
    obligations.

30. To address concerns of several commenters, we will, however,
    grandfather certain relationships that were in existence before the
    release date of this *Second Report and Order* in the context of
    eligibility for future benefits. Specifically, an applicant will not
    be considered to be ineligible for benefits based solely on an
    "attributable material relationship" or "impermissible material
    relationships" of certain of its affiliates (as specifically defined
    in section 1.2110(c)(5)(i)(C)), provided that the agreement that
    forms the basis of the affiliate's "attributable material
    relationship" or "impermissible material relationship" is otherwise
    in compliance with the Commission's designated entity eligibility
    rules, was entered into prior to the release date of this *Second
    Report and Order*, and is subject to a contractual prohibition that
    prevents the affiliate from contributing to the designated entity's
    total financing. The purpose of this grandfathering is to provide a
    means for controlling interests of existing designated entities to
    have an ability to seek the award of designated entity benefits in
    future auctions or to acquire designated entity licenses in the
    secondary market through new and independent affiliates, even if it
    is affiliated with an existing designated entity that has
    impermissible and/or attributable material relationships that were
    in existence prior to the release date of the decision.[^86] The
    attribution rules are not affected by this grandfathering.[^87] In
    taking this action, we seek to ensure that the additional
    eligibility requirements we adopt today do not unnecessarily
    restrict applicants seeking designated entity benefits for
    relationships that were previously permissible under our rules.

## Unjust Enrichment

31. We also make changes to our unjust enrichment rules to provide
    additional safeguards designed to better ensure that designated
    entity benefits go to their intended beneficiaries.[^88] As
    discussed below, one of our primary objectives in administering our
    designated entity program is to prevent unjust enrichment.[^89]
    Accordingly, in conjunction with the eligibility restrictions we
    adopt above, we also modify our rules and strengthen our unjust
    enrichment schedule for licenses acquired with bidding credits.

32. *Further Notice.* In the *Further Notice*, we sought comment on
    whether we should adopt revisions to our unjust enrichment rules, as
    proposed by Council Tree,[^90] or whether we should adopt other
    revisions to our unjust enrichment rules.[^91] The Commission also
    asked whether reimbursement obligations should apply if a licensee
    takes on new investment, or also where it enters into any new
    financial or operational relationship that would render the licensee
    ineligible for a bidding credit.[^92] Pursuant to any eligibility
    restriction that we might adopt, we asked over what portion of the
    license term such unjust enrichment provisions should apply.[^93]

33. Additionally, we sought comment in the *Further Notice* on Council
    Tree's proposal that an unjust enrichment payment should not be
    required in the case of "natural growth" of the revenues attributed
    to an incumbent carrier above the established benchmark.[^94]
    Instead, Council Tree suggests that the reimbursement obligation
    should apply only where the licensee takes on new investment, or
    enters into any operational agreement, that would have disqualified
    the licensee for the bidding credit at the time of the licensee's
    initial application.[^95]

34. *Comments.* Of the commenters discussing proposed changes in the
    unjust enrichment policies, some contend that the Commission should
    continue to apply the current unjust enrichment standard.[^96] These
    entities argue that the current unjust enrichment rules are
    sufficient and provide adequate protection. Thus, they conclude that
    no increased regulation is needed or appropriate.[^97]

35. Other commenters argue for the implementation of stricter unjust
    enrichment rules.[^98] STX supports "stricter unjust enrichment
    rules so that the U.S. Treasury may be made whole in the event that
    a designated entity turns out to have been merely a front organized
    to secure bidding credits for a large incumbent wireless service
    provider."[^99] MMTC suggests that the Commission should consider
    adjusting its reimbursement obligations to require 100 percent of
    the value of the bidding credit.[^100] MMTC further suggests that
    "the Commission should consider expanding the unjust enrichment
    standard to encompass the entire license term and not just the first
    five years."[^101]

36. *Discussion.* We agree with MMTC and STX that adoption of stricter
    unjust enrichment rules, applicable to all designated entities, will
    promote the objectives of the designated entity program. The
    designated entity and unjust enrichment rules were adopted to ensure
    the creation of new telecommunications businesses owned by small
    businesses that will continue to provide spectrum-based
    services.[^102] In addition, the unjust enrichment rules provide a
    deterrent to speculation and participation in the licensing process
    by those who do not intend to offer service to the public, or who
    intend to use bidding credits to obtain a license at a discount and
    later to sell it at the full market price for a windfall
    profit.[^103] By extending the unjust enrichment period to ten
    years, we increase the probability that the designated entity will
    develop to be a competitive facilities-based service provider.

37. We adopt the following ten-year unjust enrichment schedule for
    licenses acquired with bidding credits. For the first five years of
    the license term, if a designated entity loses its eligibility for a
    bidding credit for any reason,[^104] including but not limited to,
    entering into an "impermissible material relationship" or an
    "attributable material relationship," seeking to assign or transfer
    control of a license, or entering into a *de facto* transfer lease
    with an entity that does not qualify for bidding credits, 100
    percent of the bidding credit, plus interest, is owed. For years six
    and seven of the license term, 75 percent of the bidding credit,
    plus interest, is owed. For years eight and nine, 50 percent of the
    bidding credit, plus interest, is owed, and for year ten, 25 percent
    of the bidding credit, plus interest, is owed. If a designated
    entity loses its eligibility for the same level of bidding credit
    that it originally received for any reason,[^105] including but not
    limited to, entering into an "impermissible material relationship"
    or an "attributable material relationship," seeking to assign or
    transfer control of a license, or entering into a *de facto*
    transfer lease with an entity that does not qualify for the same
    level of bidding credits, this unjust enrichment schedule will be
    applied to the difference between the original bidding credit and
    the bidding credit for which the designated entity, assignee, or
    assignor is eligible.[^106]

38. In addition to revising the unjust enrichment payment schedule, we
    will impose a requirement that the Commission must be reimbursed for
    the entire bidding credit amount owed, plus interest, if a
    designated entity loses its eligibility for a bidding credit for any
    reason,[^107] including but not limited to, entering into an
    "impermissible material relationship" or an "attributable material
    relationship," seeking to assign or transfer control of a license,
    or entering into a *de facto* transfer lease with an entity that is
    not eligible for bidding credits prior to the filing of the
    notification informing the Commission that the construction
    requirements applicable at the end of the license term have been
    met.[^108] For example, if a designated entity seeks to assign a
    license with a bidding credit to an entity that is not eligible for
    bidding credits eight years after the grant of the license and prior
    to the filing of the construction notification, 100 percent of the
    bidding credit, plus interest, will be owed, rather than the 50
    percent unjust enrichment payment that would have been due had the
    construction notification been on file with the Commission, pursuant
    to the revised unjust enrichment schedule, above.

39. We impose the above-mentioned reimbursement obligations on any
    licensee that acquires licenses with bidding credits and
    subsequently loses its eligibility for a bidding credit for any
    reason because the implementation of such a policy is consistent
    with the policies underlying the Commission's designated entity and
    unjust enrichment requirements. By expanding the unjust enrichment
    period and requiring full payment of the bidding credit until a
    license has been constructed, we are fulfilling Congress's mandate
    that designated entities are given the opportunity to participate in
    the provision of spectrum-based services, while ensuring that
    entities that are not eligible for designated entity benefits cannot
    benefit from the designated entity program by acquiring the licenses
    or entering into impermissible or attributable material
    relationships with a designated entity after it acquires a license
    at auction or in the secondary market.[^109]

40. We agree with Council Tree's proposal that unjust enrichment
    payments should not be required for licenses held by the designated
    entity in the case of "natural" or "permissible" growth of the gross
    revenues of either a designated entity or an investor in a
    designated entity. Currently, there are no permissible growth
    provisions associated with bidding credits.[^110] However,
    Commission practice has been that a designated entity will not owe
    unjust enrichment for its licenses if the designated entity's
    increased gross revenues, or the increased gross revenues of any
    controlling interest or affiliate, are due to nonattributable equity
    investments, debt financing, revenue from operations or other
    investments, business development, or expanded service.[^111]
    Commission precedent states that the Commission evaluates an
    applicant's or licensee's eligibility for designated entity benefits
    and determines whether unjust enrichment is owed at the time the
    relevant application or notification (*e.g.,* transfer of control or
    assignment) is filed.[^112] Under the policies adopted in this
    *Second Report and Order*, the Commission similarly would evaluate
    an applicant's or licensee's eligibility for designated entity
    benefit at the time it files an application regarding a reportable
    eligibility event, as required in the new section 1.2114 that we
    adopt herein. Thus, if the designated entity seeks to acquire
    licenses on the secondary market or in future auctions, all of the
    designated entity's gross revenues, along with the gross revenues of
    its controlling interests and affiliates, will be attributed to the
    designated entity.[^113]

41. Finally, we agree with Cook Inlet's general concern that retroactive
    penalties not be imposed upon pre-existing designated entities.
    Thus, as discussed fully above, we grandfather the applicability of
    these rules under certain circumstances.[^114]

## Implementation

42. In this section, we explain how we intend to utilize the tools for
    preventing abuse of the designated entity program that are already
    at our disposal in our rules, and we describe certain minor rule
    modifications that we adopt in order to make these tools more
    effective. To achieve this purpose, we will use the following
    combination of existing and new measures to ensure that designated
    entity incentives benefit solely those parties intended to receive
    them under both our rules and section 309(j) of the Communications
    Act of 1934, as amended ("Communications Act"). First, we will
    review the agreements to which designated entity applicants and
    licensees are parties. Second, we will require that applicants and
    licensees seek advance Commission approval for all events that might
    affect their ongoing eligibility for designated entity benefits.
    Third, we will impose periodic reporting requirements on designated
    entities. Fourth, we will conduct audits, including random audits,
    of those claiming designated entity benefits. In this section we
    also provide guidance as to how our rules and procedures should be
    followed by applicants for the upcoming Advanced Wireless Services
    ("AWS") auction.

43. *Review of Agreements*. In applying our controlling interest
    standard, Commission staff has carefully reviewed agreements between
    applicants claiming designated entity status and other existing
    wireless carriers. In these cases, staff has usually undertaken
    discussions with such designated entity applicants in order to
    obtain revisions to agreements to ensure that entities with whom
    they have partnered are not an attributable controlling interest or
    affiliate obviating the applicant's eligibility for designated
    entity benefits. This review is necessarily specific to each
    relationship, since no two sets of agreements and no two sets of
    factual circumstances are exactly the same.

44. In light of the steps we are taking in this *Second Report and
    Order* to aid our ability to ensure that only eligible entities
    obtain designated entity benefits, we will undertake a thorough
    review of the long-form application (FCC Form 601) filed by every
    winning bidder claiming designated entity benefits and will
    carefully review all relevant contracts, agreements, letters of
    intent, and other such documents affecting that applicant. This
    review remains essential to our assessment of designated entity
    eligibility under the controlling interest standard and will be even
    more critical in ensuring that the rules and policies adopted in
    this *Second Report and Order* are fully effectuated. Thus, we will
    require that all designated entity applicants that are winning
    bidders at an auction file all relevant contracts, agreements,
    letters of intent, and other such documents affecting that applicant
    as part of the long-form application (FCC Form 601). In order to
    implement this rule, we delegate to the Bureau the authority to
    determine the method for designated entities to submit the
    appropriate and relevant documents. We note, however, that no
    licenses will be granted until all relevant contracts, agreements,
    letters of intent, and other such documents affecting that applicant
    are finalized.

45. Further, we will also thoroughly review all relevant contracts,
    agreements, letters of intent, and other such documents affecting an
    applicant, which claims designated entity eligibility, seeking to
    acquire licenses with designated entity benefits in the secondary
    market (*e.g.,* transfers of control, assignments, spectrum manager
    leases). Commission staff has requested such documents from entities
    acquiring designated entity licenses in the secondary market,
    especially when the applicant is a newly-created entity that has not
    been passed on as a designated entity in the past or where it
    appears that the corporate structure of a designated entity has
    changed. Thus, we will, as we have in the past, request designated
    entity applicants to forward copies of their agreements to
    Commission staff for review.

46. *Event-Based and Annual Reporting Requirements*. In light of the
    changes that we are making to the designated entity rules, the
    Commission will require additional information from applicants and
    licensees in order to ensure compliance with the policies and rules
    adopted herein. We also hereby adopt rules as shown in Appendix B,
    authorizing modifications to be made, as necessary, to and the
    creation, if necessary, of FCC forms to implement the rule changes
    adopted herein. Although many of these rule changes are minor, we
    highlight the following changes to our rules. Specifically, we adopt
    a new rule, section 1.2114, to require that designated entities seek
    approval[^115] for any event in which they are involved that might
    affect their ongoing eligibility,[^116] even if the event would not
    have triggered a reporting requirement under our rules.[^117] Such
    events -- known as "reportable eligibility events" -- will also
    include those that result in an "impermissible material
    relationship" or an "attributable material relationship." We note
    that applications seeking approval of these "reportable eligibility
    events" will be considered substantial (*i.e.,* not *pro forma*)
    pursuant to the Commission's rules or precedent and will not be
    approved until any applicable unjust enrichment is paid.

47. Additionally, we will revise section 1.2110 of the Commission's rule
    to require designated entity licensees to file an annual report with
    the Commission, which will, at a minimum, include a list and
    summaries of all agreements and arrangements (including proposed
    agreements and arrangements) that relate to eligibility for
    designated entity benefits. In addition to a summary of each
    agreement or arrangement, this list must include the parties
    (including affiliates, controlling interests, and affiliates of
    controlling interests) to each agreement or arrangement, as well as
    the dates on which the parties entered into each agreement or
    arrangement. Annual reports will be filed no later than, and up to
    five business days before, the anniversary of the designated
    entity's license grant.[^118]

48. We consider adoption of these reporting requirements to be a
    foreseeable component of the designated entity eligibility rules we
    adopt today, and we believe them to be necessary to the successful
    implementation of these rules. We also consider these requirements
    to be an extension of the existing responsibility of designated
    entities to retain and make available, on an ongoing basis, all
    agreements related to their eligibility.[^119] Furthermore, we
    delegate to the Bureau the authority to implement the necessary
    modifications to FCC forms and the Universal Licensing System (ULS)
    to implement these rule changes and to determine the content of, and
    filing procedures for, the new annual filing requirement.

49. *Audits*. Pursuant to our existing rules, the Commission has broad
    power to conduct audits at any time and for any reason, including at
    random, of applicants and licensees claiming designated entity
    benefits.[^120] In its comments, MMTC urges the Commission to employ
    its existing audit power and regularly conduct random audits to
    "uncover manipulation of the \[designated entity\] program
    irrespective of the type of business in which a \[designated
    entity\] applicant's partner is engaged."[^121] MMTC recommends that
    these audits "incorporate site visits to offices and physical
    plants, interviews with staff and meaningful inquiries into the
    management of the licenses," explaining that these efforts would be
    "more likely to yield discoveries of improper activity than cursory
    paper-base\[d\] audits which would allow the audited entity to craft
    creative responses to audit requests."[^122] Cook Inlet, in
    suggesting the imposition of periodic reporting requirements, noted
    above, explains that such requirements, along with "the possibility
    of a further audit\[,\] might dissuade some abuse of the
    Commission's rules. . . ."[^123]

50. We agree that our audit authority is an effective method by which to
    ascertain the initial and ongoing eligibility of the claimants of
    designated entity benefits. Applicants and licensees should
    therefore understand that the Commission can and will audit their
    continued designated entity eligibility as circumstances may
    necessitate or at will. Moreover, based on the significance of the
    upcoming AWS auction, we commit to audit the eligibility of every
    designated entity that wins a license in that auction at least once
    during the initial license term. In order to effectively conduct
    these audits, we delegate to the Bureau the authority to implement
    and create procedures to perform such audits.

51. *Pending Auction Provisions*. As noted in the *Further Notice*, we
    intend any changes adopted in this proceeding to apply to AWS
    licenses currently scheduled to be offered in an auction beginning
    June 29, 2006.[^124] We noted that in light of the current auction
    schedule, any changes that we adopt in this proceeding may become
    effective after the deadline for filing applications to participate
    in that auction. We sought comment on our proposal to require
    applicants to amend their applications on or after the effective
    date of the rule changes with a statement declaring, under penalty
    of perjury, that the applicant is qualified as a designated entity
    pursuant to section 1.2110 of the Commission's rules effective as of
    the date of the statement.[^125] We also noted that in the event
    applicants fail to file such a statement pursuant to procedures
    announced by public notice, they will be ineligible to qualify as a
    designated entity.[^126]

52. The vast majority of commenters did not address this issue.[^127]
    Under Commission rules, applicants asserting designated entity
    eligibility in a Commission auction are required to declare, under
    penalty of perjury, that they are qualified as a designated entity
    under section 1.2110 of the Commission's rules.[^128] After
    reviewing the record and considering the public interest benefits
    associated with our proposal, we will require entities applying as
    designated entities to amend their applications for the AWS auction
    on or after the effective date of the rule changes with a statement
    declaring, under penalty of perjury, that the applicant is qualified
    as a designated entity pursuant to section 1.2110 of the
    Commission's rules effective as of the date of the statement.

# second further notice of proposed rule making

53. As noted above, in reviewing the record in this proceeding,
    including the requests of various parties to conduct a further
    inquiry,[^129] we issue this *Second Further Notice* to consider
    whether we should modify further our general competitive bidding
    rules[^130] governing benefits reserved for designated
    entities.[^131]

54. Specifically, we seek further guidance on whether the Commission
    should implement additional safeguards beyond those we adopt today
    to ensure that our designated entity benefits are awarded to the
    entities and for the purposes intended by Congress. Additionally, we
    are seeking comment to obtain additional economic evidence regarding
    how and under what circumstances an entity's size might affect its
    relationships and agreements with designated entity applicants and
    licensees. As discussed fully below, we therefore seek further
    comment on whether we should adopt additional rule changes that
    would restrict the award of designated entity benefits under certain
    circumstances and in connection with relationships with certain
    entities.

## Defining the Class

55. *Further Notice.* In the *Further Notice*, we sought comment on
    Council Tree's suggestion for defining the elements of an
    eligibility restriction to apply to those that Council Tree referred
    to as "large in region incumbent wireless providers" that had
    "average gross wireless revenues"[^132] for the preceding three
    years exceeding \$5 billion. We sought comment on this proposed
    benchmark and whether it was a useful element for consideration if
    we adopt our tentative conclusion to modify our Part 1 rules to
    include additional restrictions on the availability of designated
    entity benefits. We asked whether \$5 billion was an appropriate
    level at which to set the benchmark to define those with whom a
    designated entity applicant's material relationships would trigger a
    restriction on the award of benefits. In contemplating this
    proposal, we sought comment on whether we should consider "gross
    wireless revenues" as suggested by Council Tree or instead whether
    we should generally consider "gross revenues" as defined in section
    1.2110(n) of the Commission's rules.[^133]

56. The *Further Notice* also sought comment on whether we should
    instead apply the restriction to the award of designated entity
    benefits where an applicant had a material relationship with
    "entities with significant interests in communications services" in
    order to extend the scope of such a restriction to a broader
    category of businesses such as voice or data providers, content
    providers, equipment manufacturers, other media interests, and/or
    facilities or non-facilities based communications services
    providers. We sought comment on whether all of these entities should
    be included as part of our definition of "entities with significant
    interests in communications services" or whether we should consider
    excluding some of these entities from our proposed definition. We
    also sought comment on whether we should consider including other
    entities as part of our proposed definition.

57. *Comments.* Commenters were generally divided regarding how the
    Commission should define this particular element of its rule
    modification. Those commenters who supported the proposal in the
    *Further Notice* to define the class to include "large incumbent
    wireless service providers" were divided on the thresholds that we
    should consider. Some commenters advocated defining the term "large"
    in accordance with financial thresholds,[^134] while others
    supported a threshold based on subscription levels.[^135] Some
    commenters who supported using financial thresholds advocated a
    restriction based upon average gross revenues for the preceding
    three years exceeding \$5 billion.[^136] One commenter believed that
    the threshold should be \$1 billion.[^137] Commenters were split on
    whether we should consider "gross wireless revenues" or generally
    consider "gross revenues" as defined in section 1.2110(n) of the
    Commission's rules.[^138] Commenters that opposed the use of a \$5
    billion revenue threshold believed that this threshold was
    arbitrary, with no factual or public interest basis.[^139]

58. Several commenters argued that if the Commission adopted any
    additional eligibility restrictions, it should extend the scope of
    the prohibition beyond "large incumbent wireless service providers."
    For example, T-Mobile argued that no justification exists for
    excluding large, multinational conglomerates from the prohibition.
    It suggested that if the Commission's goal is to ensure small
    business bidders are actually small businesses, excluding large
    corporations defeats the proposed designated entity rule
    reform.[^140] Similarly, Verizon Wireless asserted that prohibiting
    partnerships with large, incumbent wireless service providers, but
    not other wireless carriers or companies, will not impact the
    legitimacy of a designated entity or fulfill the Commission's goals.
    If the Commission opts to impose restrictions on designated
    entities, Verizon Wireless stated the proposed changes should affect
    all designated entities and all of the designated entity's
    partners.[^141] In addition, USCC suggested that the same adverse
    effects that can occur in designated entity relationships with
    national incumbent wireless service providers can also occur with
    the nation's largest voice and data providers, content providers,
    media interests, equipment manufacturers and facilities based and
    non-facilities based communication services providers.[^142]

59. *Second Further Notice*. We acknowledge that voice, data, and video
    services are converging and are being offered as bundled service
    packages. These bundled service offerings may include wireline,
    wireless, cable and or DBS services along with the required
    equipment such as handsets and receivers. In light of the continuing
    dynamic technological developments and convergence occurring in the
    communications marketplace, we seek comment on the appropriate class
    of entity, if any, that should trigger to trigger any additional
    restriction we may adopt regarding relationships with designated
    entities. For instance, would the Commission be better positioned to
    achieve its statutory mandates if it defined such an entity to
    include one that is subject to the Commission's jurisdiction under
    Titles I, II, III, or VI of the Communications Act, including any of
    the entity's controlling interests or affiliates as those terms are
    defined in section 1.2110 of the Commission's rules (herein after
    "attributable communications entity"). Insofar as this definition
    captures a varied class of potential partners, including not only
    entities that have CMRS spectrum, but also wireline, broadcast,
    cable, satellite, and VoIP providers, would restricting certain
    relationships between designated entities and such a class better
    safeguard the award of designated entity benefits?

60. We seek comment on whether adopting a definition of a class of
    entities with whom a designated entity's agreements might trigger
    additional restrictions for designated entity benefits will better
    ensure that the Commission can continue to award such benefits to
    entities that Congress intended. Does one class of entities have a
    greater incentive and/or ability than another to attempt to acquire
    licenses at below market prices by using agreements with a
    designated entity?

61. We also seek comment on the financial threshold that we should
    consider in defining the appropriate class of entity that would
    trigger an eligibility restriction. As noted above, commenters were
    divided on the appropriate financial threshold. We seek further
    comment on the proposed financial benchmarks raised by the
    commenters. Should we consider a financial threshold of \$5 billion
    in annual gross revenues as advocated by various parties or lower
    thresholds such as \$1 billion or \$125 million as suggested by
    other commenters? Is the entity's size in terms of either its gross
    revenues or some other benchmark relevant to its incentive and/or
    ability to enter into agreements with a designated entity in a
    manner designed to gain access to benefits it is otherwise not
    eligible to obtain? We also seek comment on whether an entity's size
    is relevant to its incentive and/or ability to influence the
    designated entity with respect to the type and scope of the service
    it might provide as well as relevant economic analysis to support
    such arguments.

62. Similarly, we seek comment on whether we should define a class of
    entities based on its particular spectrum interests, for instance
    those that have licenses for "commercial mobile radio services
    spectrum" ("CMRS spectrum"). If we were to define a class in this
    manner, should we define CMRS spectrum to include "any spectrum for
    which the service specific rules permit the provision of commercial
    mobile radio services" as that term is defined in section 20.9 of
    the Commission\'s rules?[^143] We also seek comment on whether an
    entity's existing spectrum interests are relevant to the likelihood
    of it seeking to influence the designated entity with respect to the
    type and scope of the service it might provide as well as relevant
    economic analysis to support such arguments. If we determine to base
    any additional safeguards upon an entity's particular spectrum
    interests, should we consider including spectrum other than CMRS
    spectrum for the purposes of such restrictions? If so, what spectrum
    and why is it more or less relevant than other types of spectrum?

## In-Region Limitation for Class of Entities

63. *Further Notice*. In the *Further Notice*, we sought comment on
    whether geographic overlap should be an element in establishing any
    additional restriction on the availability of designated entity
    benefits for entities that have a "material relationship"[^144] with
    a large wireless service provider. We also sought comment on whether
    we should apply a different, or any, geographic standard if we
    extend the restriction on designated entity benefits to applicants
    that have material relationships with "entities with significant
    interests in communications services." In addition, we asked whether
    we should apply the standard set forth in the former spectrum
    aggregation rule to define the geographic overlap,[^145] as proposed
    by Council Tree, or if we should adopt a different definition of
    geographic overlap. Further, we sought comment on how the Commission
    should implement such a restriction if we determined that a
    significant geographic overlap did exist. We asked whether an
    incumbent should be allowed to divest its interest in the subject
    service area to allow a designated entity applicant to maintain
    eligibility for a bidding credit, and if so, within what time period
    should we require the divestiture. We also sought comment on whether
    the application of the standard set forth in Section 20.6(c) of the
    Commission's rules or any other geographic overlap restriction would
    place an undue administrative burden on the Commission, making it
    difficult to monitor an applicant's compliance with any adopted
    geographic overlap restriction.[^146]

64. *Comments.* In response to the *Further Notice*, the Commission
    received comments both in support of and against an in-region
    element to any further designated entity restrictions. Some
    commenters agree that geographic overlap should be an element in
    establishing any additional restriction on the availability of
    designated entity benefits.[^147] Generally, the proponents of a
    geographic overlap element state that any additional restriction
    should address the dominance of service providers in their existing
    service regions.[^148] They argue that Commission regulations
    designed to promote competition and diversity have generally
    included geographic components.[^149] They further argue that such
    an in-region component is necessary because designated entities will
    not compete against a large wireless provider investor
    in-region.[^150] A few commenters also argue that the in-region
    component should be extended to include wireline carriers, because
    the presence of the wireline provider in region translates into the
    loss of a direct competitor.[^151]

65. Many of these commenters suggest using the significant overlap,
    attributable interest, and divestiture standards from the sunset
    CMRS spectrum aggregation limit pursuant to section 20.6(c)(2) of
    the Commission's rules.[^152] They assert that a new rule could
    provide that "significant overlap of an AWS-1 licensed service area
    and CGSA(s) . . . or SMR or PCS service area(s) occurs when at least
    10 percent of the population of the AWS-1 licensed service area for
    the counties contained therein, as determined by the latest
    decennial census figures as compiled by the Bureau of Census, is
    within the CGSA(s) and /or SMR and/or PCS and /or AWS-1 service
    area(s)."[^153] Other commenters argue that the Commission cannot
    "simply readopt \[an\] old rule" without reviewing the
    appropriateness of the overlap definition in light of current market
    conditions.[^154] Similarly, USCC suggests that using the section
    20.6 standard is no longer an adequate metric for the emerging
    generation of mobile services that include voice, data, video and
    other broadband capabilities.[^155] USCC proposes that the
    Commission, in defining in-region, adopt a threshold based on the
    total MHz-Pops of attributable cellular, PCS, SMR and AWS spectrum
    held by an entity that has in-region CMRS spectrum in the relevant
    geographic market. Consequently, USCC asserts that an entity that
    has in-region CMRS spectrum would be deemed to have a "significant
    geographic overlap," if it has more than 30 MHz of combined
    cellular, PCS, SMR, and AWS holdings in the 10 percent overlap area,
    as defined by section 20.6(c) of the Commission's rules.[^156]

66. Other commenters state that significant overlap should not be a
    factor in determining eligibility for small business benefits.[^157]
    For example, DOJ argues that the restriction should apply equally to
    any affiliate of a designated entity whether "the affiliate is a
    large in-region wireless provider, an out-of-region wireless
    provider (which includes carriers seeking to expand their coverage
    footprint), or entities with significant interests in other
    communications services."[^158] CTIA alleges that an in-region
    component is discriminatory as it favors wireless, wireline and
    non-communications competitors over "in market" providers without
    any evidence of market concentration.[^159] CTIA further argues that
    the in-region element is unnecessary, because most large service
    providers would be barred from entering into relationships with
    designated entities due to the 10 percent population overlap
    threshold proposed in the *Further Notice*.[^160]

67. Many of the opponents of an in-region component argue that
    consideration of significant geographic overlap is not necessary to
    achieving the Commission's goals.[^161] For instance, Verizon
    Wireless states that "restricting a designated entity's ability to
    partner with an incumbent, but not with other wireless carriers or
    companies will have no impact on whether that designated entity is
    legitimate or whether the Commission's objectives for small
    businesses are fulfilled."[^162] MetroPCS alleges that national
    carriers should be excluded by the restriction even if a designated
    entity, associated with a large carrier, acquired spectrum in a
    market where it currently holds spectrum, because the designated
    entity is less likely to introduce innovative products and
    services.[^163] Another commenter argues that we should not allow
    large carriers to neutralize what may be the critical advantage to a
    new, independent entrant and that a large carrier that desires to
    establish an in-region presence can participate in the auction
    directly.[^164] One commenter also states that an in-region
    component would only create a source of abuse or confusion involving
    the proper calculation of overlap areas.[^165]

68. *Second Further Notice.* In this *Second Further Notice*, we seek
    further comment on whether we should adopt an in-region component to
    defining relationships with any particular class or type of entity
    that trigger additional eligibility restrictions. We request that
    commenters address whether adopting an in-region component to the
    restriction of relationships furthers the objectives of the
    designated entity program. We seek comment as to whether the
    in-region component will ensure that licensees receiving small
    business benefits will be independent, facilities-based service
    providers. We ask commenters to discuss how the in-region element
    will ensure that designated entities are free from undue influence
    from either larger or self interested entities with whom they enter
    into relationships. We request that commenters discuss whether the
    in-region component should apply to all definitions of additional
    eligibility restrictions and if not, commenters should explain why
    the in-region component should be defined or applied differently. We
    also seek comment on whether all entities with in-region spectrum
    interests have the same ability and incentive to leverage an
    inappropriate level of influence over a designated entity with which
    it has financial and/or operational arrangements. We seek comment on
    how the in-region component protects this program from being subject
    to potential abuse from those restricted entities that might seek to
    craft relationships with designated entity applicants in a manner
    intended to serve their self interests.[^166]

69. Assuming we do adopt an in-region component to any additional
    eligibility restrictions, we seek comment as to whether we should
    find that a "geographic overlap" that triggers the in-region
    restriction occurs when there is *any* overlap between the licensed
    service areas of the entity that has in-region spectrum, with whom
    the designated entity applicant has a "material relationship," or
    any affiliate of the entity that has in-region spectrum as defined
    in section 1.2110 of the Commission's rules,[^167] and the licensed
    service area to be acquired by the designated entity applicant.
    Should this restriction apply only to particular types of spectrum
    -- for example, only CMRS spectrum? We also seek further discussion
    of how the "significant overlap" standard set forth in the former
    spectrum aggregation limit would apply if it were adopted.[^168]
    Generally, under that provision, "significant overlap" occurred when
    there was an overlap of at least ten percent of the population
    within the affected service areas.[^169] That significant overlap
    standard, however, at times was problematic to apply in particular
    cases, for instance, because of difficulty in determining the
    relevant service area.[^170] The Commission has stated that as a
    general matter it is preferable to have rules for wireless spectrum
    that facilitate ease of compliance and administrative
    efficiency.[^171] Commenters addressing this issue should discuss
    whether reliance on the "significant overlap" test from the spectrum
    aggregation rule, or some variant of this test, could be crafted to
    facilitate ease of compliance and administrative efficiency. We also
    ask if the adoption of that standard would be appropriate in today's
    marketplace.[^172] The intent of the spectrum aggregation limit at
    its inception was to create a competitive marketplace for CMRS as
    PCS licenses were being introduced. We now have a competitive
    wireless marketplace and any revisions to the designated entity
    rules that we seek to implement are for the purpose of ensuring that
    designated entity benefits do not flow to ineligible entities.

70. Further, we seek comment as to whether the adoption of an in-region
    component to any of any additional eligibility restrictions will be
    burdensome to implement. Specifically, we recognize that defining
    the geographic areas of the variety of services provided by certain
    entities will be complicated. Thus, we ask that commenters discuss
    how the in-region definition would take into account the different,
    and sometimes difficult to determine, geographic area of services
    provided by varying entities and how these areas of service should
    be compared to the Commission's wireless licensing areas.

71. *Divestiture*. Most entities responding to the *Further Notice*
    declined to discuss whether a restricted entity should be allowed to
    divest its interest in the subject service area to allow a
    designated entity applicant to maintain eligibility for designated
    entity benefits. Thus, we seek comment as to whether any class of
    entities on which any additional eligibility restriction is based
    should be allowed to divest its interest in the subject service area
    to allow a designated entity applicant to maintain eligibility for
    benefits. We also seek comment as to whether the Commission should
    adopt divestiture provisions similar to those found in the
    eliminated spectrum aggregation limit rules.[^173] Moreover, we seek
    comment on the opinions of some commenters responding to the
    *Further Notice* that divestiture should not be permitted as it will
    "significantly complicate the auction process," lead to post-auction
    petitions and challenges that could delay the deployment of
    spectrum,[^174] and allow restricted entities "to game the system by
    divesting *after* the auction when it can compare the merits of what
    it has won with what it holds already."[^175]

72. If we were to allow divestitures, we seek comment as to how such
    divestitures should be implemented. We seek comment as to how long
    restricted entities that choose divestiture will be given to divest
    (*e.g.,* 60 days, 90 days, or 180 days), what commences the
    divestiture period (*e.g.,* the close of the auction, the public
    notice announcing the winning bidders, or the filing of the FCC Form
    601), and would the restricted entity be allowed to market the
    spectrum or should such marketing be done by a trustee. Further, we
    seek comment as to whether the award of designated entity licenses
    should be withheld until the restricted entity files the
    applications to divest or until the transaction to sell the
    divestiture spectrum has been consummated.[^176] We also seek
    comment as to whether the Commission should receive reports
    detailing the progress made in identifying a buyer for the
    divestiture spectrum and how often such reports should be filed.

73. Finally, we ask commenters to discuss what should occur if the
    restricted entity that has in-region spectrum fails to divest. We
    seek comment as to whether the designated entity must purchase the
    license without the benefit of the bidding credit and be subject to
    the Commission's default rules. We also seek comment as to whether
    the requirement for a designated entity to purchase the license
    without the bidding credit maintains auction integrity and ensures
    that entities with in-region CMRS spectrum are not able to game the
    auction process. What if the designated entity benefit at issue
    concerns eligibility for auction participation such as in the
    context of auctions for set-aside spectrum licenses?

## Material Relationships

74. *Further Notice*. In examining whether certain relationships should
    be relevant to an applicant or licensee's ability to be eligible for
    designated entity benefits, the *Further Notice* sought comment on
    the specific nature of the types of relationships that should
    trigger any restriction.[^177] Council Tree's initial proposal
    argued that the Commission should restrict a designated entity
    applicant's "material relationships," including both financial and
    operational agreements, in order to more carefully ensure that
    designated entity benefits are awarded only to bona fide eligible
    entities.[^178] In this regard, we sought comment on what might
    constitute a "material financial" or "material operational"
    relationship; whether restricting certain agreements as a "material
    relationship" would be too harsh or unnecessarily limit a designated
    entity applicant's ability to gain access to capital or industry
    expertise[^179]; and whether there might be instances where the
    existence of either a "material financial agreement" or a "material
    operational agreement" might be appropriate and might not raise
    issues of undue influence.[^180] We also sought comment on the type
    of attribution standard that we should apply to any rule
    modification.[^181]

75. *Comments*. In the record developed in connection with the *Further
    Notice*, many commenters supported the general premise of Council
    Tree's proposal to define "material relationships" to include even
    those agreements that would preserve a designated entity applicant's
    *de jure* and *de facto* control under our existing rules.[^182]
    Several commenters argued that the Commission's controlling interest
    standard does not, without more, sufficiently safeguard the award of
    designated entity benefits to their intended beneficiaries because
    it does not adequately insulate the designated entity from undue
    influence.[^183]

76. Commenters opposing rule modifications to consider such
    relationships; however, argued that there is insufficient evidence
    to support such rule changes, and maintain that there is no record
    of abuse of the Commission's designated entity eligibility
    requirements.[^184] Moreover, opposing commenters contended that if
    the Commission is compelled to amend its rules, adoption of its
    tentative conclusion will not be sufficient to accomplish its
    intended purpose.[^185]

77. Both sides offered general comments regarding whether the Commission
    should take non-controlling relationships into consideration as part
    of its determination of an applicant's or licensee's eligibility for
    designated entity purposes, but few offered specifics on how the
    Commission should precisely define material relationships. As
    discussed above, we have adopted two definitions of material
    relationships. The first are "impermissible material relationships"
    that, when entered into by an applicant or licensee, will render it
    wholly ineligible for designated entity benefits. The second are
    "attributable material relationships." These relationships become
    attributable for the purposes of calculating the applicant or
    licensee's eligibility for benefits in accordance with section
    1.2110 of the Commission's rules.

78. *Discussion.* We seek comment on whether there is a need, in
    addition to the rules we adopt today, to further modify our Part 1
    designated entity eligibility rules to include other types of
    agreements in our definitions of "impermissible material
    relationships" or "attributable material relationships." Will
    broadening these newly adopted definitions of material relationships
    to include other types of financial or operational agreements
    further enhance the Commission's ability to achieve the statutory
    goals intended by Congress -- namely ensuring that designated
    entities participate in the provision of spectrum-based services,
    and preventing unjust enrichment as a result of the methods employed
    to issue licenses?[^186] If commenters support broadening the
    definitions of material relationships to include additional
    agreements, they should provide specific examples of the types of
    agreements or combinations of agreements that should fall within
    each definition as well as explanation of how including such
    agreements will achieve the Commission's statutory mandates. To the
    extent we decide to broaden the definitions of material
    relationships to include other types of agreements, should there be
    any difference in our assessment of such agreements when entered
    into by the designated entity with different classes of entities?
    For example, should our rules treat a designated entity's agreements
    with an existing licensee of CMRS spectrum differently than similar
    agreements with an investor that does not currently hold any
    licenses for CMRS spectrum? To the extent that commenters support
    such differential treatment, we request that they provide evidence
    supporting such action, including its relation to the designated
    entity program.

79. Should our concern regarding relationships between designated entity
    applicants or licensees and other entities differ depending upon the
    type of entity at issue and the circumstances surrounding the
    relationship? Should we reconsider adopting a minimum equity
    requirement for designated entity applicants or define material
    relationship in a way that would prohibit a designated entity
    applicant from securing all of its capitalization from outside
    sources? Should we adopt commenters' suggestions to include
    additional operational agreements in our definitions of material
    relationship or does doing so create technological and practical
    restrictions that could hinder a designated entity licensee's
    ability to become a provider of spectrum based services, as intended
    by Congress?

80. Based on the limited record developed in response to the *Further
    Notice*, and our extensive experience in administering the
    designated entity program, we are concerned that additional types of
    relationships could have the potential to confer significant
    influence over the actions of a designated entity licensee thereby
    allowing an ineligible entity the ability to gain undue advantages
    in the communications marketplace through the benefits offered to a
    designated entity applicant. We therefore seek comment on the
    specific types of additional agreements that should fall within our
    definitions of "impermissible material relationships" and
    "attributable material relationships" so that we may be better able
    to prevent the potential for this type of abuse of the designated
    entity program, thereby ensuring the award of our designated entity
    benefits only to legitimate small businesses. Are the new rules we
    adopt today sufficient to safeguard against many of these concerns?

81. We generally do not have the same concerns regarding relationships
    between designated entity applicants and those who do not have
    interests in spectrum capacity or the provision of service, such as
    financial institutions or venture capital firms, provided that such
    entities do not have a controlling interest relationship with the
    applicant. Presumptively, for those entities, the overarching goal
    and primary incentive for partnering with a designated entity is to
    seek a return on investment rather than to provide service
    themselves using the designated entity's spectrum licenses. We seek
    comment on this presumption. Likewise, we presume that where an
    entity is not already providing communications services, there is no
    opportunity for it to bundle existing communications services with a
    strategic wireless partner, and there is less potential for those
    entities to exert undue influence over a designated entity
    licensee's decision making regarding its service provision or the
    use of its licensed spectrum. We seek comment on this presumption.
    Assuming that these presumptions are valid, we anticipate that such
    relationships do not require the additional safeguards we may apply
    to relationships with other entities that have differing incentives
    and motivations. For instance, if we included financial
    relationships in our definition of either "impermissible material
    relationships" or "attributable material relationship" we might
    specifically exclude relationships with financial institutions from
    such a definition. We seek comment on whether we should specifically
    do so.

82. With regard to financial relationships, should the Commission
    conclude that the greater the financial stake an entity has in a
    designated entity the more incentive it has to significantly
    influence the designated entity licensee's decisions regarding its
    provision of service? We also seek comment on whether we should
    expand our definitions of "impermissible material relationship" or
    "attributable material relationship" to include any financial
    relationship(s) (including any combination of equity, debt, loan or
    credit agreements, as well as future interests for such financial
    arrangements) between a designated entity applicant or licensee and
    another entity that represents more than a certain percentage of the
    designated entity's total financing. If so, what is the appropriate
    percentage? Council Tree suggested that a more than a 33 percent
    financial stake should be "material." Should such a financial
    interest be considered to be an "impermissible material
    relationship" or "attributable material relationship?" We note that
    the 33 percent benchmark offered by Council Tree is derived from the
    Commission's broadcast ownership attribution rules, but the
    relevance of that benchmark in this context is uncertain, given the
    different policy issues that were considered in adopting that
    percentage limitation in the broadcast context.[^187] Other
    commenters suggested that our definition of material relationship
    should include as little as a percent financial interest or as much
    as a 50 percent interest. We seek comment on how the percentage of
    an entity's financial interest in a designated entity applicant or
    licensee should be considered in our definitions of "impermissible
    material relationship" or "attributable material relationship." We
    are concerned that we do not want to create a situation in which
    additional safeguards regarding financial interests render a
    designated entity without any avenues for access to much needed
    capital.

83. Additionally, are there circumstances in which we should agree with
    Council Tree and others that argue that the definition of material
    relationship should include, "without limitation, management
    agreements, trademark license agreements, joint marketing
    agreements, future interest agreements (such as puts, calls,
    options, and warrants), and long-term *de facto* and spectrum
    manager leasing arrangements?"[^188] If so, should such
    relationships be considered to be "impermissible material
    relationships" or "attributable material relationships?" Under what
    circumstances, does the existence of any agreement between a
    designated entity applicant or licensee and another entity have the
    strong potential to convey influence over the operations of the
    designated entity and the deployment of its spectrum in a manner
    contrary to that intended by Congress?

84. We also seek comment upon whether we should adopt even tighter
    safeguards to prevent the development of relationships that might
    deter designated entities from evolving into independent
    facilities-based competitors. For example, are there circumstances
    in which we should define "material relationship" to include "any
    relationship, financial and/or operational" between a designated
    entity applicant or licensee and another entity? For instance, does
    the likelihood that certain relationships will influence a
    designated entity's provision of service increase when agreements
    are entered into with an entity that has existing self interests in
    the same spectrum?

85. If we include all agreements, both financial and operational, as
    either "impermissible material relationships" or "attributable
    material relationships" between designated entities and entities
    that have existing spectrum interests in the same geographic areas
    can we reduce the reliance of designated entities on those that
    might provide funding or operational support in a manner designed to
    complement their own services rather than for facilitating the
    emergence of new technologies and new facilities-based competitors?
    In so doing, can we reduce the potential for abuse of the designated
    entity program and can we lessen the possibility of entities with
    existing self interests to use relationships with designated
    entities as a means to gain access to spectrum at a discounted
    value?

86. We seek comment on any and all of the agreements the Commission
    should consider including in its definitions of "impermissible
    material relationships" or "attributable material relationships" and
    whether the Commission should take into consideration whether such
    agreements are made with certain types of entities with certain
    geographic interests.

87. *Personal Net Worth*. We seek comment on whether we should include
    personal net worth in determining designated entity eligibility and
    if so, whether we should adopt the proposal put forth by Council
    Tree in its *ex parte* to prohibit individuals with a net worth of
    \$3 million or more (excluding the value of a primary residence)
    from having a controlling interest in a designated entity[^189] or
    whether we should place other net-worth-based restrictions on
    designated entity eligibility.

88. In its *ex parte*, Council Tree specifically urges the Commission to
    prohibit individuals with a net worth of \$3 million or more
    (excluding the value of a primary residence) from having a
    controlling interest in a designated entity.[^190] It argues that in
    the absence of a personal net worth limitation, there is very little
    to prevent wealthy individuals from seeking status as small
    businesses. According to Council Tree, designated entities "have
    come to be dominated by high net worth individuals, particularly
    well-connected former wireless industry executives who have no need
    for government assistance." Council Tree asserts that high net worth
    individuals have exploited the designated entity program since they
    recognize that the Commission does not count personal wealth in
    assessing the size of a business that applies for auction-related
    bidding credits or set asides. In its comments filed in this
    proceeding, Council Tree continues to urge the Commission to close
    the "loophole" that, it alleges, allows "high net worth individuals
    to take advantage of designated entity preferences."[^191]

89. Few commenters in this proceeding addressed Council Tree's proposal
    to impose a net worth prohibition. Cook Inlet acknowledges Council
    Tree's concern that wealthy individuals may have the ability to
    obtain designated entity benefits.[^192] Carroll Wireless, Aloha
    Partners and Poplar argue that the proposal is "both unnecessary and
    impractical," in view of the investment needed for wireless and the
    difficulty in measuring individual net worth.[^193] Those commenters
    also all allege that a net worth cap on individuals is impractical
    because "it would seem to eliminate many entrepreneurs who have been
    successful in wireless to date -- and are the ones who can make a DE
    program work."[^194] RTG and Rural Carriers oppose Council Tree's
    net worth proposal on the ground that such a rule possibly would
    exclude family-owned, independent rural telephone companies and
    small businesses and most cooperative rural telephone
    companies.[^195]

90. In previous circumstances, where the Commission was focused
    primarily on creating flexibility for designated entities to have
    access to capital, the Commission generally has not adopted personal
    net worth restrictions, including personal income and assets, for
    purposes of eligibility for designated entity provisions.[^196] In
    that context, the Commission has observed, for example, that
    personal net worth limits are difficult to apply and enforce and may
    be easily manipulated.[^197] The Commission also has explained that
    it did not believe that eliminating the personal net worth limits
    would facilitate significant encroachment by \"deep pockets\" that
    can be accessed by wealthy individuals through affiliated entities
    because, in those instances in which access to such resources would
    create an unfair advantage, the affiliation rules will continue to
    apply and require that such an entity\'s assets and revenues be
    included in determining an applicant\'s size. The Commission
    previously has explained that it believed that the affiliation rules
    make the personal net worth rules largely unnecessary because most
    wealthy individuals are likely to have their wealth closely tied to
    ownership of another business.[^198]

91. In the *Further Notice*, we did not address Council Tree's personal
    net worth proposal substantively, noting that it had been rejected
    in a prior proceeding.[^199] After further considering, however, our
    rule modifications that we are adopting in this *Second Report and
    Order*, the additional matters that we are addressing herein, as
    well as Council Tree's continued urging to include a net worth
    prohibition, we are persuaded that we should seek further comment on
    this issue. Accordingly, we seek comment on whether the Commission
    should reconsider its treatment of personal net worth in determining
    eligibility for designated entity benefits and if so, what changes
    the Commission should adopt and why. We specifically seek comment on
    Council Tree's proposal to prohibit individuals with a net worth of
    \$3 million or more (excluding the value of a primary residence)
    from having a controlling interest. We ask commenters to address the
    validity of Council Tree's arguments in support of its
    proposal[^200] and, if possible, to cite specific instances that may
    be relevant to evaluating the proposal of Council Tree or other
    proposals offered by commenters. We particularly seek comments on
    Council Tree's assertion that "an individual who has made a fortune
    in the wireless industry, but who is no longer affiliated with his
    or her former company, may form a new limited liability company . .
    .\[,\] use his or her contacts to partner with an existing wireless
    service provider" and then pledge his or her personal assets to
    secure financing for any desired capital contribution to the new
    entity.[^201]

92. In addition to requesting comments on Council tree's proposal, we
    also ask commenters to propose any other individual net worth
    restrictions that they may deem necessary or appropriate to
    strengthen our rules. We also ask commenters supporting additional
    restrictions to discuss how such restrictions should be implemented?
    For example, should the attribution rules be amended with respect to
    the exclusion of personal income, or would any adopted restriction
    be more effectively implemented through some other rule? If
    commenters believe that no changes are needed in the Commission's
    current exclusion of individual net worth in determining designated
    entity eligibility, we ask that they explain their position in
    detail and include a discussion of whether they believe that the
    Commission should be concerned about the types of individuals
    described by Council Tree receiving benefiting from the designated
    entity program and, if not, why not. We ask that all commenters
    explain how the position that they advocate is consistent with the
    Commission's statutory responsibilities toward designated entities.
    In that regard, we seek comment on whether the potential threat, if
    any that an individual with sufficient wealth poses to the
    designated entity program is similar in nature to, or different
    from, the other threats that we address or raise as possibilities
    elsewhere in this *Second Report and Order*. We ask that commenters
    explain what they believe the similarities or differences are and
    how those factors should affect any actions by the Commission.

# conclusion 

93. For all of the reasons set forth above, we modify our rules for
    determining the eligibility of applicants for size-based benefits in
    the context of competitive bidding and issue a *Second Notice of
    Proposed Rule Making* to consider whether we should adopt additional
    restrictions to further safeguard the benefits reserved for
    designated entities.

# Procedural matters 

## Regulatory Flexibility Analyses

94. As required by the Regulatory Flexibility Act, *see* 5 U.S.C. § 604,
    the Commission has prepared a Final Regulatory Flexibility Analysis,
    set forth below at Appendix C.

95. An Initial Regulatory Flexibility Analysis ("IRFA") for the *Second
    Further Notice* is attached at Appendix D.[^202] Comments on the
    IRFA should be labeled as IRFA Comments, and should be submitted
    pursuant to the filing dates and procedures set forth below.

## Comment Filing Procedures

96. Pursuant to sections 1.415 and 1.419 of the Commission's rules, 47
    C.F.R §§ 1.415, 1.419, interested parties may file comments on or
    before 60 days after publication in the Federal Register and may
    file reply comments on or before 90 days after publication in the
    Federal Register. All filings related to this Second Further Notice
    of Proposed Rule Making should refer to WT Docket No. 05-211.
    Comments may be filed using: (1) the Commission's Electronic Comment
    Filing System (ECFS), (2) the Federal Government's eRulemaking
    Portal, or (3) by filing paper copies. *See* Electronic Filing of
    Documents in Rule Making Proceedings, 63 FR 24121 (1998).

97. Electronic Filers: Comments may be filed electronically using the
    Internet by accessing the ECFS: http://www.fcc.gov/cgb/ecfs/ or the
    Federal eRulemaking Portal: http://www.regulations.gov. Filers
    should follow the instructions provided on the website for
    submitting comments. For ECFS filers, if multiple docket or rule
    making numbers appear in the caption of this proceeding, filers must
    transmit one electronic copy of the comments for each docket or rule
    making number referenced in the caption. In completing the
    transmittal screen, filers should include their full name, U.S.
    Postal Service mailing address, and the applicable docket or rule
    making number. Parties may also submit an electronic comment by
    Internet e-mail. To get filing instructions, filers should send an
    e-mail to ecfs@fcc.gov, and include the following words in the body
    of the message, "get form." A sample form and directions will be
    sent in response.

98. Paper Filers: Parties who choose to file by paper must file an
    original and four copies of each filing. Filings can be sent by hand
    or messenger delivery, by commercial overnight courier, or by
    first-class or overnight U.S. Postal Service mail (although we
    continue to experience delays in receiving U.S. Postal Service
    mail). All filings must be addressed to the Commission's Secretary,
    Office of the Secretary, Federal Communications Commission.

-   The Commission's contractor will receive hand-delivered or
    messenger-delivered paper filings for the Commission's Secretary at
    236 Massachusetts Avenue, N.E., Suite 110, Washington, DC 20002. The
    filing hours at this location are 8:00 a.m. to 7:00 p.m. All hand
    deliveries must be held together with rubber bands or fasteners. Any
    envelopes must be disposed of *before* entering the building.

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-   Commercial overnight mail (other than U.S. Postal Service Express
    Mail and Priority Mail) must be sent to 9300 East Hampton Drive,
    Capitol Heights, MD 20743.

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-   U.S. Postal Service first-class, Express, and Priority mail should
    be addressed to 445 12^th^ Street, SW, Washington DC 20554.

## Paperwork Reduction Act Analysis 

99. This *Second Report and Order* contains new or modified information
    collection requirements subject to the Paperwork Reduction Act of
    1995 (PRA), Public Law 104-13. It has been submitted to the Office
    of Management and Budget (OMB) for review under Section 3507(d) of
    the PRA. OMB, the general public, and other Federal agencies are
    invited to comment on the new or modified information collection
    requirements contained in this proceeding. In addition, we note that
    pursuant to the Small Business Paperwork Relief Act of 2002, Public
    Law 107-198, *see* 44 U.S.C. 3506(c)(4), we previously sought
    specific comment on how the Commission might "further reduce the
    information collection burden for small business concerns with fewer
    than 25 employees."

100. In this *Second Report and Order*, we have assessed the effects of
     our new restriction on the award of designated entity benefits
     where an applicant or licensee has agreements, which create a
     material relationship, with one or more other entities for the
     lease (under either spectrum manager or *de facto* transfer leasing
     arrangements) or resale (including under a wholesale arrangement)
     of a portion of its spectrum capacity. We find that the rule we
     adopt will best ensure that the Commission can continue to award
     designated entity benefits to entities that Congress intended.
     While the new rule may impose a new information collection on small
     businesses, including those with fewer than 25 employees, we
     conclude that this information collection is necessary to ensure
     that the benefits of the Commission's designated entity program are
     reserved only for legitimate small businesses.

101. This *Second Further Notice* contains proposed new or modified
     information collection requirements. The Commission, as part of its
     continuing effort to reduce paperwork burdens, invites the general
     public and the Office of Management and Budget ("OMB") to comment
     on the information collection requirements contained in this
     document, as required by the Paperwork Reduction Act of 1995,
     Public Law 104-13. Public and agency comments are due 60 days after
     the date of publication in the Federal Register. Comments should
     address: (a) whether the proposed collection of information is
     necessary for the proper performance of the functions of the
     Commission, including whether the information shall have practical
     utility; (b) the accuracy of the Commission\'s burden
     estimates; (c) ways to enhance the quality, utility, and clarity of
     the information collected; and (d) ways to minimize the burden of
     the collection of information on the respondents, including the use
     of automated collection techniques or other forms of information
     technology. In addition, pursuant to the Small Business Paperwork
     Relief Act of 2002, Public Law 107-198, see 44 U.S.C. 3506(c)(4),
     we seek specific comment on how we might "further reduce the
     information collection burden for small business concerns with
     fewer than 25 employees."

## Congressional Review Act

102. The Commission will include a copy of this *Second Report and
     Order* and *Second Further Notice* in a report it will send to
     Congress and the Government Accountability Office pursuant to the
     Congressional Review Act, *see* 5 U.S.C. 801(a)(1)(A).

## Ordering Clauses

103. Accordingly, IT IS ORDERED that, pursuant to sections 4(i), 303(r),
     and 309(j) of the Communications Act of 1934, as amended, 47 U.S.C.
     sections 154(i), 303(r), and 309(j), this *Second Report and Order*
     is hereby ADOPTED and Part 1 of the Commission's rules, 47 C.F.R.
     Part 1, is amended as set forth below in Appendix B, effective 30
     days after publication in the Federal Register, except for the
     grandfathering provisions which are effective upon release.

104. IT IS FURTHER ORDERED that pursuant to sections 4(i), 303(r), and
     309(j) of the Communications Act of 1934, as amended, 47 U.S.C.
     sections 154(i), 303(r), and 309(j), this *Second Further Notice of
     Proposed Rule Making* is HEREBY ADOPTED.

105. IT IS FURTHER ORDERED that, pursuant to 47 U.S.C. § 155(c) and 47
     C.F.R. §§ 0.131(c) and 0.331, the Chief of the Wireless
     Telecommunications Bureau IS GRANTED DELEGATED AUTHORITY to
     prescribe and set forth procedures for the implementation of the
     provisions adopted herein.

106. IT IS FURTHER ORDERED that the Commission's Consumer and
     Governmental Affairs Bureau, Reference Information Center, SHALL
     SEND a copy of this *Second Report and Order* and *Second Further
     Notice*, including the Final Regulatory Flexibility Analysis and
     the Initial Regulatory Flexibility Analysis, to the Chief Counsel
     for Advocacy of the Small Business Administration.

> FEDERAL COMMUNICATIONS COMMISSION
>
> Marlene H. Dortch
>
> Secretary

**Appendix A**

**Commenters**

**Comments**

1\. Aloha Partners, L.P. ("Aloha")

2\. Antares, Inc. ("Antares")

3\. Carroll Wireless, L.P. ("Carroll Wireless")

4\. Centennial Communications Corp. ("Centennial")

5\. Columbia Capital LLC ("Columbia Capital")

6\. Communications Advisory Counsel ("CAC")

7\. Comscape Telecommunications, Inc. ("Comscape")

8\. Cook Inlet Region, Inc. ("Cook Inlet")

9\. Council Tree Communications, Inc. ("Council Tree")

10\. CTIA -- The Wireless Association ("CTIA")

11\. Dobson Communications Corporation ("Dobson")

12\. Doyon Communications, Inc. ("Doyon")

13\. Dull, Arvin D.

14\. John Staurulakis, Inc.

15\. Leap Wireless International, Inc. ("Leap")

16\. Madison Dearborn Partners, LLC ("Madison Dearborn")

17\. MetroPCS Communications, Inc. ("MetroPCS")

18\. Minority Media and Telecommunications Council ("MMTC")

19\. MobiPCS

20\. National Association of Broadcasters ("NAB")

21\. National Hispanic Media Coalition ("NHMC")

22\. National Telecommunications Cooperative Association ("NTCA")

23\. NTCH, Inc.

24\. NTCH, Inc, dba Clear Talk ("Clear Talk")

25\. Paging Systems, Inc. ("Paging Systems")

26\. Patrick, Levi

27\. Poplar Associates, LLC ("Poplar")

28\. Rural Telecommunications Group, Inc. ("RTG")

29\. STX Wireless, LLC ("STX")

30\. Suncom Wireless, Inc. ("Suncom")

31\. T-Mobile USA, Inc. ("T-Mobile")

32\. United States Cellular Corporation ("USCC")

33\. U.S. Wirefree

34\. Verizon Wireless ("Verizon Wireless")

35\. Wirefree Partners III, LLC ("Wirefree Partners")

36\. Wireless Broadband Service Providers Association ("WBSPA")

37\. Wireless Communications Association International, Inc. ("WCAI")

**Reply Comments**

1\. Antares, Inc. ("Antares")

2\. Blooston Rural De Colalition ("Blooston")

3\. Cablevision Systems Corporation ("CSC")

4\. Cingular Wireless, LLC ("Cingular")

5\. Consumers Union

6\. Cook Inlet Region, Inc. ("Cook Inlet")

7\. Council Tree Communications, Inc. ("Council Tree")

8\. Ericsson, Inc. ("Ericsson")

9\. Leap Wireless International, Inc. ("Leap")

10\. Minority Media and Telecommunications Council ("MMTC")

11\. Royal Street Communications, LLC ("Royal Street")

12\. Rural Carriers

13\. T-Mobile USA, Inc. ("T-Mobile")

14\. United States Cellular Corporation ("USCC")

15\. U.S. Wirefree

16\. Verizon Wireless ("Verizon Wireless")

17\. Wirefree Partners III, LLC ("Wirefree Partners")

18\. Wireless Broadband Service Providers Association ("WBSPA")

**Notice of *Ex Parte* Presentations**

1\. Carroll Wireless et al ("Carroll")

2\. Cook Inlet Region, Inc. ("Cook Inlet") \*

3\. Council Tree Communications, Inc. ("Council Tree") \*

4\. CTIA -- The Wireless Association ("CTIA")

5\. Doyon Communications, Inc. ("Doyon")

6\. Madison Dearborn Partners, LLC ("Madison Dearborn")

7\. Media Access Project ("MAP")\*

8\. MetroPCS Communications, Inc. ("MetroPCS")\*

9\. Minority Media and Telecommunications Council ("MMTC")

10\. National Hispanic Media Coalition ("NHMC")\*

11\. National Telecommunications Cooperative Association ("NTCA")\*

12\. Royal Street Communications, LLC ("Royal Street")

13\. T-Mobile USA, Inc. ("T-Mobile")\*

14\. Transactional Transparency and Related Outreach Subcommittee

15\. U.S. Department of Justice

16\. Verizon Wireless ("Verizon Wireless")\*

17\. Wirefree Partners III, LLC ("Wirefree Partners")

\* Indicates that more than one *ex parte* submission was filed

**APPENDIX B**

**Final Rules**

**PART 1 -- PRACTICE AND PROCEDURE**

For the reasons discussed in the preamble, the FCC amends parts 1 of the
Code of Federal Regulations to read as follows:

1\. The authority citation for part 1 is revised to read as follows:

Authority: 15 U.S.C. 79 [et seq.]{.underline}; 47 U.S.C. 151, 154(i),
154(j), 155, 157, 225, 303(r), and 309.

2\. In § 1.913, paragraph (a) introductory text and the first sentence
of paragraph (b) are revised and paragraph (a)(6) is added to read as
follows:

**[§ 1.913 Application and notification forms; electronic and manual
filing.]{.underline}**

\(a\) [Application and notification forms.]{.underline} Applicants,
licensees, and spectrum lessees (see § 1.9003) shall use the following
forms and associated schedules for all applications and notifications:

\* \* \* \* \*

\(6\) FCC Form 609, Application to Report Eligibility Event. FCC Form
609 is used by licensees to apply for Commission approval of reportable
eligibility events, as defined in § 1.2114.

\(b\) [Electronic filing.]{.underline} Except as specified in paragraph
(d) of this section or elsewhere in this chapter, all applications and
other filings using the application and notification forms listed in
this section or associated schedules must be filed electronically in
accordance with the electronic filing instructions provided by ULS. \*
\* \*

\* \* \* \* \*

3\. Revise paragraph (b) introductory text and add paragraph (b)(5) to §
1.919 to read as follows:

**[§ 1.919 Ownership information.]{.underline}**

\* \* \* \* \*

\(b\) Any applicant or licensee that is subject to the reporting
requirements of §1.2112 or § 1.2114 shall file an FCC Form 602, or file
an updated form if the ownership information on a previously filed FCC
Form 602 is not current, at the time it submits:

\* \* \* \* \*

\(5\) An application reporting any reportable eligibility event, as
defined in § 1.2114.

\* \* \* \* \*

4\. Revise paragraph (a)(2)(ii)(B) of § 1.2105 to read as follows:

**[§ 1.2105 Bidding application and certification procedures;
prohibition of collusion.]{.underline}**

\(a\) \* \* \*

\(2\) \* \* \*

(ii)(B) Applicant ownership and other information, as set forth in
1.2112.

\* \* \* \* \*

5\. In paragraph § 1.2110, paragraphs (b)(1)(i)-(ii) and (j) are revised
, paragraphs (n) and (o) are redesignated as paragraphs (o) and (p), and
paragraphs (b)(3)(iv) and (n) are added to read as follows:

**[§ 1.2110 Designated entities.]{.underline}**

\* \* \* \* \*

\(b\) \* \* \*

\(1\) [Size attribution.]{.underline}

\(i\) The gross revenues of the applicant (or licensee), its affiliates,
its controlling interests, the affiliates of its controlling interests,
and the entities with which it has an attributable material relationship
shall be attributed to the applicant (or licensee) and considered on a
cumulative basis and aggregated for purposes of determining whether the
applicant (or licensee) is eligible for status as a small business, very
small business, or entrepreneur, as those terms are defined in the
service-specific rules. An applicant seeking status as a small business,
very small business, or entrepreneur, as those terms are defined in the
service-specific rules, must disclose on its short- and long-form
applications, separately and in the aggregate, the gross revenues for
each of the previous three years of the applicant (or licensee), its
affiliates, its controlling interests, the affiliates of its controlling
interests, and the entities with which it has an attributable material
relationship.

\(ii\) If applicable, pursuant to § 24.709, the total assets of the
applicant (or licensee), its affiliates, its controlling interests, the
affiliates of its controlling interests, and the entities with which it
has an attributable material relationship shall be attributed to the
applicant (or licensee) and considered on a cumulative basis and
aggregated for purposes of determining whether the applicant (or
licensee) is eligible for status as an entrepreneur. An applicant
seeking status as an entrepreneur must disclose on its short- and
long-form applications, separately and in the aggregate, the gross
revenues for each of the previous two years of the applicant (or
licensee), its affiliates, its controlling interests, the affiliates of
its controlling interests, and the entities with which it has an
attributable material relationship.

\* \* \* \* \*

\(3\) \* \* \*

\(iv\) [Applicants or licensees with material
relationships.]{.underline}

\(A\) [Impermissible material relationships.]{.underline} An applicant
or licensee that would otherwise be eligible for designated entity
benefits under this section and applicable service-specific rules shall
be ineligible for such benefits if the applicant or licensee has an
impermissible material relationship. An applicant or licensee has an
impermissible material relationship when it has arrangements with one or
more entities for the lease or resale (including under a wholesale
agreement) of, on a cumulative basis, more than 50 percent of the
spectrum capacity of any one of the applicant's or licensee's licenses.

\(B\) [Attributable material relationships.]{.underline} An applicant or
licensee must attribute the gross revenues (and, if applicable, the
total assets) of any entity, (including the controlling interests,
affiliates, and affiliates of the controlling interests of that entity)
with which the applicant or licensee has an attributable material
relationship. An applicant or licensee has an attributable material
relationship when it has one or more arrangements with any individual
entity for the lease or resale (including under a wholesale agreement)
of, on a cumulative basis, more than 25 percent of the spectrum capacity
of any one of the applicant's or licensee's licenses.

\(C\) [Grandfathering.]{.underline}

([1]{.underline}) [Licensees.]{.underline} An impermissible or
attributable material relationship shall not disqualify a licensee for
previously awarded benefits with respect to a license awarded before
April 25, 2006, based on spectrum lease or resale (including wholesale)
arrangements entered into before April 25, 2006.

([2]{.underline}) [Applicants.]{.underline} An impermissible or
attributable material relationship shall not disqualify an applicant
seeking eligibility in an application for a license, authorization,
assignment, or transfer of control or for partitioning or disaggregation
filed before April 25, 2006, based on spectrum lease or resale
(including wholesale) arrangements entered into before April 25, 2006.
Any applicant seeking eligibility in an application for a license,
authorization, assignment, or transfer of control or for partitioning or
disaggregation filed after April 25, 2006, or in an application to
participate in an auction in which bidding begins on or after \[30 days
after Federal Register publication\], need not attribute the material
relationship(s) of those entities that are its affiliates based solely
on section 1.2110(c)(5)(i)(C) if those affiliates entered into such
material relationship(s) before April 25, 2006, and are subject to a
contractual prohibition preventing them from contributing to the
applicant\'s total financing.

Example to paragraph (C)([2]{.underline}): Newco is an applicant seeking
designated entity status in an auction in which bidding begins after the
effective date of the rules. Investor is a controlling interest of
Newco. Investor also is a controlling interest of Existing DE. Existing
DE previously was awarded designated entity benefits and has
impermissible material relationships based on leasing agreements entered
into before April 25, 2006, with a third party, Lessee, that were in
compliance with the Commission's designated eligibility standards prior
to April 25, 2006,. In this example, Newco would not be prohibited from
acquiring designated entity benefits solely because of the existing
impermissible material relationships of its affiliate, Existing DE.
Newco, Investor, and Existing DE, however, would need to enter into a
contractual prohibition that prevents Existing DE from contributing to
the total financing of Newco.

\* \* \* \* \*

\(j\) Designated entities must describe on their long-form applications
how they satisfy the requirements for eligibility for designated entity
status, and must list and summarize on their long-form applications all
agreements that affect designated entity status such as partnership
agreements, shareholder agreements, management agreements, spectrum
leasing arrangements, spectrum resale (including wholesale)
arrangements, and all other agreements, including oral agreements,
establishing, as applicable, de facto or de jure control of the entity
or the presence or absence of impermissible and attributable material
relationships. Designated entities also must provide the date(s) on
which they entered into each of the agreements listed. In addition,
designated entities must file with their long-form applications a copy
of each such agreement. In order to enable the Commission to audit
designated entity eligibility on an ongoing basis, designated entities
that are awarded eligibility must, for the term of the license, maintain
at their facilities or with their designated agents the lists,
summaries, dates, and copies of agreements required to be identified and
provided to the Commission pursuant to this paragraph and to § 1.2114.

\* \* \* \* \*

\(n\) Annual reports. Each designated entity licensee must file with the
Commission an annual report within five business days before the
anniversary date of the designated entity's license grant. The annual
report shall include, at a minimum, a list and summaries of all
agreements and arrangements (including proposed agreements and
arrangements) that relate to eligibility for designated entity benefits.
In addition to a summary of each agreement or arrangement, this list
must include the parties (including affiliates, controlling interests,
and affiliates of controlling interests) to each agreement or
arrangement, as well as the dates on which the parties entered into each
agreement or arrangement. Annual reports will be filed no later than,
and up to five business days before, the anniversary of the designated
entity's license grant.

\(o\) [Gross revenues.]{.underline} \* \* \*

\(p\) [Total assets.]{.underline} \* \* \*

6\. Revise paragraphs (a), (b) introductory text, the first sentence of
paragraph (c)(2), the first sentence of paragraph (c)(3), (d)(1), and
(d)(2) of § 1.2111 to read as follows:

**[§ 1.2111 Assignment or transfer of control: unjust
enrichment.]{.underline}**

\(a\) Reporting requirement. An applicant seeking approval for a
transfer of control or assignment (otherwise permitted under the
Commission\'s Rules) of a license within three years of receiving a new
license through a competitive bidding procedure must, together with its
application for transfer of control or assignment, file with the
Commission\'s statement indicating that its license was obtained through
competitive bidding. Such applicant must also file with the Commission
the associated contracts for sale, option agreements, management
agreements, or other documents disclosing the local consideration that
the applicant would receive in return for the transfer or assignment of
its license (see § 1.948). This information should include not only a
monetary purchase price, but also any future, contingent, in-kind, or
other consideration (e.g., management or consulting contracts either
with or without an option to purchase; below market financing).\
(b) Unjust enrichment payment: set-aside. As specified in this paragraph
an applicant seeking approval for a transfer of control or assignment
(otherwise permitted under the Commission\'s Rules) of, or for entry
into a material relationship (see §§ 1.2110, 1.2114) (otherwise
permitted under the Commission's rules) involving, a license acquired by
the applicant pursuant to a set-aside for eligible designated entities
under § 1.2110(c), or which proposes to take any other action relating
to ownership or control that will result in loss of eligibility as a
designated entity, must seek Commission approval and may be required to
make an unjust enrichment payment (Payment) to the Commission by
cashier\'s check or wire transfer before consent will be granted. The
Payment will be based upon a schedule that will take account of the term
of the license, any applicable construction benchmarks, and the
estimated value of the set-aside benefit, which will be calculated as
the difference between the amount paid by the designated entity for the
license and the value of comparable non-set-aside license in the free
market at the time of the auction. The Commission will establish the
amount of the Payment and the burden will be on the applicants to
disprove this amount. No payment will be required if:

\* \* \*

\(c\) \* \* \*

\(2\) If a licensee that utilizes installment financing under this
section seeks to make any change in ownership structure or to enter into
a material relationship (see § 1.2110) that would result in the licensee
losing eligibility for installment payments, the licensee shall first
seek Commission approval and must make full payment of the remaining
unpaid principal and any unpaid interest accrued through the date of
such change as a condition of approval. \* \* \*

\(3\) If a licensee seeks to make any change in ownership or to enter
into a material relationship (see § 1.2110) that would result in the
licensee qualifying for a less favorable installment plan under this
section, the licensee shall seek Commission approval and must adjust its
payment plan to reflect its new eligibility status. \* \* \*

\(d\) \* \* \*

\(1\) A licensee that utilizes a bidding credit, and that during the
initial term seeks to assign or transfer control of a license to an
entity that does not meet the eligibility criteria for a bidding credit,
will be required to reimburse the U.S. Government for the amount of the
bidding credit, plus interest based on the rate for ten year U.S.
Treasury obligations applicable on the date the license was granted, as
a condition of Commission approval of the assignment or transfer. If,
within the initial term of the license, a licensee that utilizes a
bidding credit seeks to assign or transfer control of a license to an
entity that is eligible for a lower bidding credit, the difference
between the bidding credit obtained by the assigning party and the
bidding credit for which the acquiring party would qualify, plus
interest based on the rate for ten year U.S. treasury obligations
applicable on the date the license is granted, must be paid to the U.S.
Government as a condition of Commission approval of the assignment or
transfer. If, within the initial term of the license, a licensee that
utilizes a bidding credit seeks to make any ownership change or to enter
into a material relationship (see § 1.2110) that would result in the
licensee losing eligibility for a bidding credit (or qualifying for a
lower bidding credit), the amount of the bidding credit (or the
difference between the bidding credit originally obtained and the
bidding credit for which the licensee would qualify after restructuring
or entry into a material relationship), plus interest based on the rate
for ten year U.S. treasury obligations applicable on the date the
license is granted, must be paid to the U.S. Government as a condition
of Commission approval of the assignment or transfer or of a reportable
eligibility event (see § 1.2114).

\(2\) [Payment schedule.]{.underline}

\(i\) The amount of payments made pursuant to paragraph (d)(1) of this
section will be 100 percent of the value of the bidding credit prior to
the filing of the notification informing the Commission that the
construction requirements applicable at the end of the initial license
term have been met. If the notification informing the Commission that
the construction requirements applicable at the end of the initial
license term have been met, the amount of the payments will be reduced
over time as follows:

\(A\) A loss of eligibility in the first five years of the license term
will result in a forfeiture of 100 percent of the value of the bidding
credit (or in the case of eligibility changing to qualify for a lower
bidding credit, 100 percent of the difference between the bidding credit
received and the bidding credit for which it is eligible);

\(B\) A loss of eligibility in years 6 and 7 of the license term will
result in a forfeiture of 75 percent of the value of the bidding credit
(or in the case of eligibility changing to qualify for a lower bidding
credit, 75 percent of the difference between the bidding credit received
and the bidding credit for which it is eligible);

\(C\) A loss of eligibility in years 8 and 9 of the license term will
result in a forfeiture of 50 percent of the value of the bidding credit
(or in the case of eligibility changing to qualify for a lower bidding
credit, 50 percent of the difference between the bidding credit received
and the bidding credit for which it is eligible); and

\(D\) A loss of eligibility in year 10 of the license term will result
in a forfeiture of 25 percent of the value of the bidding credit (or in
the case of eligibility changing to qualify for a lower bidding credit,
25 percent of the difference between the bidding credit received and the
bidding credit for which it is eligible).

\(ii\) These payments will have to be paid to the United States Treasury
as a condition of approval of the assignment, transfer, ownership
change, or reportable eligibility event (see §1.2114).

\* \* \* \* \*

7\. In § 1.2112, add new paragraphs (b)(1)(iii) and (b)(2)(vii),
redesignate paragraph (b)(1)(iii) as (b)(1)(iv), and revise redesignated
paragraph (b)(1)(iv) and paragraphs (b)(2)(iii) and (v) of to read as
follows:

**[§ 1.2112 Ownership disclosure requirements for
applications.]{.underline}**

\* \* \* \* \*

\(b\) \* \* \*

\(1\) \* \* \*

\(iii\) List all parties with which the applicant has entered into
arrangements for the spectrum lease or resale (including wholesale
agreements) of any of the capacity of any of the applicant's spectrum.

\(iv\) List separately and in the aggregate the gross revenues, computed
in accordance with § 1.2110, for each of the following: The applicant,
its affiliates, its controlling interests, the affiliates of its
controlling interests, and the entities with which it has an
attributable material relationship; and if a consortium of small
businesses, the members comprising the consortium.

\* \* \* \* \*

\(2\) \* \* \*

\(iii\) List and summarize all agreements or instruments (with
appropriate references to specific provisions in the text of such
agreements and instruments) that support the applicant\'s eligibility as
a small business under the applicable designated entity provisions,
including the establishment of de facto or de jure control or the
presence or absence of impermissible and attributable material
relationships. Such agreements and instruments include articles of
incorporation and bylaws, partnership agreements, shareholder
agreements, voting or other trust agreements, management agreements,
franchise agreements, spectrum leasing arrangements, spectrum resale
(including wholesale) arrangements, and any other relevant agreements
(including letters of intent), oral or written;

\(iv\) \* \* \*

\(v\) List separately and in the aggregate the gross revenues, computed
in accordance with § 1.2110, for each of the following: the applicant,
its affiliates, its controlling interests, affiliates of its controlling
interests, and parties with which it has attributable material
relationships; and if a consortium of small businesses, the members
comprising the consortium; and

\(vi\) \* \* \*

\(vii\) List and summarize any agreements in which the applicant has
entered into arrangements for the lease or resale (including wholesale
agreements) of any of the spectrum capacity of the license that is the
subject of the application.

8\. Add new section 1.2114 to read as follows:

**[§ 1.2114 Reporting of Eligibility Event.]{.underline}**

\(a\) A designated entity must seek Commission approval for all
reportable eligibility events. A reportable eligibility event is:

\(1\) Any spectrum lease (as defined in § 1.9003) or resale arrangement
(including wholesale agreements) with one entity or on a cumulative
basis that would cause a licensee to lose eligibility for installment
payments, a set-aside license, or a bidding credit (or for a particular
level of bidding credit) under § 1.2110 and applicable service-specific
rules.

\(2\) Any other event that would lead to a change in the eligibility of
a licensee for designated entity benefits.

\(b\) [Documents listed on and filed with application.]{.underline} A
designated entity filing an application pursuant to this section must --

\(1\) List and summarize on the application all agreements and
arrangements (including proposed agreements and arrangements) that give
rise to or otherwise relate to a reportable eligibility event. In
addition to a summary of each agreement or arrangement, this list must
include the parties (including each party's affiliates, its controlling
interests, the affiliates of its controlling interests, its spectrum
lessees, and its spectrum resellers and wholesalers) to each agreement
or arrangement, as well as the dates on which the parties entered into
each agreement or arrangement.

\(2\) File with the application a copy of each agreement and arrangement
listed pursuant to this paragraph.

\(3\) Maintain at its facilities or with its designated agents, for the
term of the license, the lists, summaries, dates, and copies of
agreements and arrangements required to be provided to the Commission
pursuant to this section.

\(c\) [Application fees.]{.underline} The application reporting the
eligibility event will be treated as a transfer of control for purposes
of determining the applicable application fees as set forth in § 1.1102.

\(d\) [Streamlined approval procedures.]{.underline}

\(1\) The eligibility event application will be placed on public notice
once the application is sufficiently complete and accepted for filing
(see § 1.933).

\(2\) Petitions to deny filed in accordance with § 309(d) of the
Communications Act must comply with the provisions of § 1.939, except
that such petitions must be filed no later than 14 days following the
date of the Public Notice listing the application as accepted for
filing.

\(3\) No later than 21 days following the date of the Public Notice
listing an application as accepted for filing, the Wireless
Telecommunications Bureau (Bureau) will grant the application, deny the
application, or remove the application from streamlined processing for
further review.

\(4\) Grant of the application will be reflected in a Public Notice (see
§ 1.933(a)(2)) promptly issued after the grant.

\(5\) If the Bureau determines to remove an application from streamlined
processing, it will issue a Public Notice indicating that the
application has been removed from streamlined processing. Within 90 days
of that Public Notice, the Bureau will either take action upon the
application or provide public notice that an additional 90-day period
for review is needed.

\(e\) [Public notice of application.]{.underline} Applications under
this subpart will be placed on an informational public notice on a
weekly basis (see § 1.933(a)).

\(f\) [Contents of the application.]{.underline} The application must
contain all information requested on the applicable form, any additional
information and certifications required by the rules in this chapter,
and any rules pertaining to the specific service for which the
application is filed.

\(g\) The designated entity is required to update any change in a
relationship that gave rise to a reportable eligibility event.

**APPENDIX C**

**Final Regulatory Flexibility Analysis**

As required by the Regulatory Flexibility Act (RFA),[^203] an Initial
Regulatory Flexibility Analysis (IRFA) was incorporated into the Further
Notice of Proposed Rule Making ("*Further* *Notice*") in WT Docket No.
05-211. The Commission sought written public comment in the Further
Notice on possible changes to its competitive bidding rules, as well as
on the IRFA.[^204] One commenter addressed the IRFA. This Final
Regulatory Flexibility Analysis conforms to the IRFA.[^205]

**A. Need for, and Objectives of, the Second Report and Order**

This *Second Report and Order* adopts modifications to the Commission's
rules for determining the eligibility of applicants for size-based
benefits in the context of competitive bidding. Over the last decade,
the Commission has engaged in numerous rulemakings and adjudicatory
investigations to prevent companies from circumventing the objectives of
the designated entity eligibility rules.[^206] To that end, in
determining whether to award designated entity benefits, the Commission
adopted a strict eligibility standard that focused on whether the
applicant maintained control of the corporate entity.[^207] The
Commission's objective in employing such a standard was "to deter the
establishment of sham companies in a manner that permits easy resolution
of eligibility issues without the delay of administrative
hearings."[^208] The Commission intends its small business provisions to
be available only to bona fide small businesses.

Consequently, the rules as modified by the *Second Report and Order*
provide that certain material relationships of an applicant for
designated entity benefits will be a factor in determining the
applicant's eligibility. The *Second Report and Order* provides that if
an applicant or licensee has agreements that together enable it to lease
or resell more than 50 percent of the spectrum capacity of any
individual licenses, the applicant or licensee will be ineligible for
designated entity benefits. Further, the *Second Report and Order* also
provides that if an applicant or licensee has agreements with any other
entity, including entities or individuals attributable to that other
entity that enable the applicant or licensee to lease or resell more
than 25 percent of the spectrum capacity of any individual licenses, the
other entity will be attributed to the applicant or licensee when
determining the applicant's or licensee's eligibility for designated
entity benefits. Finally, the modifications of the *Second Report and
Order* strengthen the Commission's unjust enrichment rules to better
deter attempts at circumvention and to recapture designated entity
benefits when there has been a change in eligibility on a
license-by-license basis. Similarly, to ensure our continued ability to
safeguard the award of designated entity benefits, we provide
clarification regarding how the Commission will implement its rules
concerning audits and we refine our rules with respect to the reporting
obligations of designated entities.

These rule modifications will enhance the Commission's ability to carry
out Congress's statutory plan in accordance with the intent of Congress
that every recipient of designated entity benefits uses its licenses
directly to provide facilities-based telecommunications services for the
benefit of the public. In making these changes to the rules, the
Commission takes another important step in fulfilling its statutory
mandate to facilitate the participation of small businesses in the
provision of spectrum based services.[^209]

**B. Summary of Significant Issues Raised By Public Comment in Response
to the IRFA**

The National Telecommunications Cooperative Association filed comments
in response to the IRFA stating, among other things, that the Commission
must take steps to minimize the economic impact of its proposed rules on
small entities. NTCA asserts that the Commission must tailor its rules
narrowly enough to target only real abuse, rather than capturing all
rural telephone companies with any ties to a large in-region wireless
provider, or it should exempt rural telephone companies from the rules'
provision.[^210]

**C. Description and Estimate of the Number of Small Entities to Which
the Proposed Rules Will Apply**

The RFA directs agencies to provide a description of and, where
feasible, an estimate of the number of small entities that may be
affected by the proposed rules, if adopted.[^211] The RFA generally
defines the term "small entity" as having the same meaning as the terms
"small organization," "small business," and "small governmental
jurisdiction."[^212] The term "small business" has the same meaning as
the term "small business concern" under the Small Business Act.[^213] A
small business concern is one which: (1) is independently owned and
operated; (2) is not dominant in its field of operation; and (3)
satisfies any additional criteria established by the SBA.

A small organization is generally "any not-for-profit enterprise which
is independently owned and operated and is not dominant in its
field."[^214] Nationwide, as of 2002, there were approximately 1.6
million small organizations.[^215] The term "small governmental
jurisdiction" is defined generally as "governments of cities, towns,
townships, villages, school districts, or special districts, with a
population of less than fifty thousand."[^216] Census Bureau data for
2002 indicate that there were 87,525 local governmental jurisdictions in
the United States.[^217] We estimate that, of this total, 84,377
entities were "small governmental jurisdictions."[^218] Thus, we
estimate that most governmental jurisdictions are small. Nationwide,
there are a total of approximately 22.4 million small businesses,
according to SBA data.[^219]

The changes and additions to the Commission's rules adopted in the
*Second Report and Order* are of general applicability to all services,
applying to all entities of any size that seek eligibility to
participate in Commission auctions as a designated entity and/or that
hold licenses won through competitive bidding that are subject to
designated entity benefits. Accordingly, this FRFA provides a general
analysis of the impact of the proposals on small businesses rather than
a service by service analysis. The number of entities that may apply to
participate in future Commission auctions is unknown. The number of
small businesses that have participated in prior auctions has varied. In
all of our auctions held to date, 1,975 out of a total of 3,545
qualified bidders either have claimed eligibility for small business
bidding credits or have self-reported their status as small businesses
as that term has been defined under rules adopted by the Commission for
specific services.[^220] In addition, we note that, as a general matter,
the number of winning bidders that qualify as small businesses at the
close of an auction does not necessarily represent the number of small
businesses currently in service. Also, the Commission does not generally
track subsequent business size unless, in the context of changes in
control, changes in material relationships or assignments or transfers,
unjust enrichment issues are implicated.

**D. Description of Projected Reporting, Recordkeeping, and Other
Compliance Requirements**

The Commission will require additional information from applicants in
order to ensure compliance with the policies and rules adopted by the
*Second Report and Order*. For example, designated entity applicants
that have filed applications to participate in an auction for which
bidding will begin on or after the effective date of the rules, will be
required to amend their applications on or after the effective date of
the rule changes with a statement declaring, under penalty of perjury,
that the applicant is qualified as a designated entity pursuant to the
Commission's rules effective as of the date of the statement. In
addition, the Commission adopts rules to make modifications, as
necessary, to FCC forms related to auction, licensing, and leasing
applications. Specifically, the modifications will require that
designated entities report any relevant material relationship(s), as
defined in newly adopted sections of 1.2110, reached after the date the
rules are published in the Federal Register, even if the material
relationship between the designated entity and the other entity would
not have triggered a reporting requirement under the rules prior to this
*Second Report and Order*.[^221]

**E. Steps Taken to Minimize Significant Economic Impact on Small
Entities, and Significant Alternatives Considered**

The RFA requires an agency to describe any significant alternatives that
it has considered in reaching its proposed approach, which may include
the following four alternatives (among others): "(1) the establishment
of differing compliance or reporting requirements or timetables that
take into account the resources available to small entities; (2) the
clarification, consolidation, or simplification of compliance or
reporting requirements under the rule for small entities; (3) the use of
performance rather than design standards; and (4) an exemption from
coverage of the rule or any part thereof for small entities."[^222]

The *Further Notice* sought comment on several options for modifying its
designated entity eligibility rules and specifically sought comment from
small entities. The options included various ways to consider whether
the Commission should award designated entity benefits where an
applicant for such benefits also had financial or operational agreements
with a larger entity. In considering these options, for the purposes of
determining designated entity eligibility, the Commission defined the
effect of entering certain agreements. By adopting the rules in the
*Second Report and Order,* the Commission will enhance its ability to
carry out Congress's statutory plan that every recipient of designated
entity benefits uses their licenses directly to provide facilities-based
telecommunications services, for the benefit of the public.

**F. Report to Congress**

The Commission will send a copy of the *Second Report and Order*,
including this FRFA, in a report to be sent to Congress pursuant to the
SBREFA.[^223] In addition, the Commission will send a copy of the
*Second Report and Order*, including the FRFA, to the Chief Counsel for
Advocacy of the SBA. A copy of the *Second Report and Order* and the
FRFA (or summaries thereof) will also be published in the Federal
Register.

**Appendix D**

**Initial Regulatory Flexibility Analysis**

As required by the Regulatory Flexibility Act (RFA),[^224] the
Commission has prepared this Initial Regulatory Flexibility Analysis
(IRFA) of the possible significant economic impact on small entities by
the policies and rules proposed in the *Second Further Notice of
Proposed Rule Making* ("*Second* *Further* *Notice*"). Written public
comments are requested on this IRFA. Comments must be identified as
responses to the IRFA and must be filed by the deadlines for comments
provided in this *Second* *Further* *Notice*. The Commission will send a
copy of the *Second* *Further Notice*, including this IRFA, to the Chief
Counsel for Advocacy of the Small Business Administration (SBA).[^225]
In addition, the *Second* *Further Notice* and the IRFA (or summaries
thereof) will be published in the Federal Register.[^226]

**A. Need for, and Objectives of, the Proposed Rules**

The initial *Further Notice* in this proceeding tentatively concluded
that it should restrict the award of designated entity benefits to an
otherwise qualified applicant where it has a "material relationship"
with a "large in-region incumbent wireless service provider." The
Commission sought comment on how it should define the elements of such a
restriction. Based on the Commission's experience in administering the
designated entity program and the record developed in response to the
*Further Notice*, this *Second Further Notice* seeks further comment on
those issues, including comment to obtain additional economic evidence
regarding how and under what circumstances an entity's size might affect
its relationships and agreements with designated entity applicants and
licensees. The *Second Further Notice* also seeks comment on whether the
Commission should adopt additional rule changes that would restrict the
award of designated entity benefits under certain circumstances and in
connection with relationships with certain types of entities and
individuals with high personal net worth, including whether and how
in-region relationships and personal net worth should be considered in
determining eligibility for designated entity benefits.

Over the last decade, the Commission has engaged in numerous rulemakings
and adjudicatory investigations to prevent companies from circumventing
the objectives of the designated entity eligibility rules.[^227] To that
end, in determining whether to award designated entity benefits, the
Commission adopted a strict eligibility standard that focused on whether
the applicant maintained control of the corporate entity.[^228] The
Commission's objective in employing such a standard was "to deter the
establishment of sham companies in a manner that permits easy resolution
of eligibility issues without the delay of administrative
hearings."[^229] The Commission intends its small business provisions to
be available only to bona fide small businesses.

**B. Legal Basis**

The proposed actions are authorized under Sections 4(i), 303(r), and
309(j) of the Communications Act of 1934, as amended, 47 U.S.C. Sections
154(i), 303(r), and 309(j).

**C. Description and Estimate of the Number of Small Entities to Which
the Proposed Rules Will Apply**

The RFA directs agencies to provide a description of and, where
feasible, an estimate of the number of small entities that may be
affected by the proposed rules, if adopted.[^230] The RFA generally
defines the term "small entity" as having the same meaning as the terms
"small organization," "small business," and "small governmental
jurisdiction."[^231] The term "small business" has the same meaning as
the term "small business concern" under the Small Business Act.[^232] A
small business concern is one which: (1) is independently owned and
operated; (2) is not dominant in its field of operation; and (3)
satisfies any additional criteria established by the SBA.

A small organization is generally "any not-for-profit enterprise which
is independently owned and operated and is not dominant in its
field."[^233] Nationwide, as of 2002, there were approximately 1.6
million small organizations.[^234] The term \"small governmental
jurisdiction\" is defined as "governments of cities, towns, townships,
villages, school districts, or special districts, with a population of
less than fifty thousand."[^235] Census Bureau data for 2002 indicate
that there were 87,525 local governmental jurisdictions in the United
States.[^236] We estimate that, of this total, 84,377 entities were
"small governmental jurisdictions."[^237] Thus, we estimate that most
governmental jurisdictions are small. Nationwide, there are a total of
approximately 22.4 million small businesses, according to SBA
data.[^238]

Any proposed changes or additions to the Commission's Part 1 rules that
may be made as a result of the *Second Further Notice* would be of
general applicability to all services, applying to all entities of any
size that apply to participate in Commission auctions. Accordingly, this
IRFA provides a general analysis of the impact of the proposals on small
businesses rather than a service by service analysis. The number of
entities that may apply to participate in future Commission auctions is
unknown. The number of small businesses that have participated in prior
auctions has varied. In all of our auctions held to date, 1,975 out of a
total of 3,545 qualified bidders either have claimed eligibility for
small business bidding credits or have self-reported their status as
small businesses as that term has been defined under rules adopted by
the Commission for specific services.[^239] In addition, we note that,
as a general matter, the number of winning bidders that qualify as small
businesses at the close of an auction does not necessarily represent the
number of small businesses currently in service. Also, the Commission
does not generally track subsequent business size unless, in the context
of assignments or transfers, unjust enrichment issues are implicated.

**D. Description of Projected Reporting, Recordkeeping, and Other
Compliance Requirements**

The Commission will not require additional reporting, recordkeeping or
other compliance requirements pursuant to this *Second Further Notice*.

**E. Steps Taken to Minimize Significant Economic Impact on Small
Entities, and Significant Alternatives Considered**

The RFA requires an agency to describe any significant alternatives that
it has considered in reaching its proposed approach, which may include
the following four alternatives (among others): (1) the establishment of
differing compliance or reporting requirements or timetables that take
into account the resources available to small entities; (2) the
clarification, consolidation, or simplification of compliance or
reporting requirements under the rule for small entities; (3) the use of
performance, rather than design, standards; and (4) an exemption from
coverage of the rule or any part thereof for small entities.[^240]

The initial *Further Notice* in this proceeding tentatively concluded
that it should restrict the award of designated entity benefits to an
otherwise qualified applicant where it has a "material relationship"
with a "large in-region incumbent wireless service provider." The
Commission sought comment on how it should define the elements of such a
restriction. Based on the Commission's experience in administering the
designated entity program and the record developed in response to the
*Further Notice*, this *Second Further Notice* seeks further comment on
those issues, including comment to obtain additional economic evidence
regarding how and under what circumstances an entity's size might affect
its relationships and agreements with designated entity applicants and
licensees. The *Second Further Notice* also seeks comment on whether the
Commission should adopt additional rule changes that would restrict the
award of designated entity benefits under certain circumstances and in
connection with relationships with certain types of entities and
individuals with high personal net worth, including whether and how
in-region relationships and personal net worth should be considered in
determining eligibility for designated entity benefits. The *Second*
*Further Notice* seeks guidance from the industry on how it should
define the elements of any restrictions it might adopt regarding the
award of designated entity benefits. Small entity comments are
specifically requested.

**F. Federal Rules that May Duplicate, Overlap, or Conflict with the
Proposed Rule**

None.

**STATEMENT OF CHAIRMAN KEVIN J. MARTIN**

*Re: Implementation of the Commercial Spectrum Enhancement Act and
Modernization of the Commission's Competitive Bidding Rules and
Procedures, WT Docket No. 05-211, Second Report and Order and Second
Further Notice of Proposed Rule Making.*

We initiated this proceeding to examine our rules governing designated
entities to better achieve the purpose of ensuring that small businesses
have an opportunity to participate in the provision of spectrum-based
services. Today's order adopts several measures to help accomplish that
goal. Specifically, we strengthen our unjust enrichment and spectrum
leasing rules for designated entities in order to provide additional
incentives for small businesses receiving bidding credits to offer
facilities-based service. We also further the integrity of the
designated entity program by implementing random audits, additional
document and transaction reviews, and periodic reporting. Together,
these measures significantly strengthen the designated entity program.

In the further notice portion of this item, we ask whether additional
safeguards are necessary to reduce the opportunity for manipulation of
our rules governing the provision of bidding credits to small
businesses. I look forward to working with my colleagues as we continue
to develop the record in this proceeding.

**STATEMENT OF**

**COMMISSIONER MICHAEL J. COPPS**

*Re: Implementation of the Commercial Spectrum Enhancement Act and
Modernization of the Commission's Competitive Bidding Rules and
Procedures, WT Docket No. 05-211, Second Report and Order and Second
Further Notice of Proposed Rule Making.*

 

In this age when telecommunications companies seem only to grow larger
and larger, it is important to have programs that encourage competition
from smaller entrepreneurs.  This is exactly what the Designated Entity
(DE) program is all about and it is why we must do everything we can to
make this program perform as intended.  Small companies must have a
fighting chance to compete with industry giants to obtain valuable
spectrum.  In an era of consolidation, the program is especially
important to rural areas that might otherwise remain underserved.  Quite
frankly, rural America seems too often to have been pushed off the big
companies' radar scopes.  This is a central reason why I remain strongly
committed to small carriers' participation in spectrum auctions.  It is
good policy; it also happens to be the law. 

 

But let's be candid.  Whenever government attempts to provide incentive
programs for small business, there are those who try to twist the rules
in order to gain unwarranted entry into these programs.  We have seen
this in many business sectors and we have unfortunately experienced such
chicanery and cheating in telecom too.  We must not allow the bad apple
to spoil the bushel, however.  Instead we need good rules to curb the
chicanery.  Recent experience teaches us that we must move quickly to
curb abuses of the DE program.  News reports indicate that, in prior
auctions, entities with deep pockets helped themselves to discounts they
were never meant to enjoy.  This unacceptable behavior threatens the
integrity of our auctions and, worse, it cheats consumers.  It costs
taxpayers millions of dollars in foregone revenue.  It also means that
spectrum goes to those most willing and able to manipulate the rules of
the game, rather than to the entities Congress actually intended to
benefit.  And it denies consumers the benefits of new and all-too-rare
competition.  So, our job is to deny wealthy companies or individuals
any opportunity to misuse the DE discount to outbid small carriers --
the very carriers the DE program is meant to protect. 

 

Today we take meaningful steps in the right direction.  We do so in time
to apply new rules to the large and important Advanced Wireless Services
(AWS) auction scheduled for this summer.  I am grateful to the Chairman
for his role in moving this item along in time to have these rules apply
to the AWS auction.  And I am grateful to him and to my other colleagues
for their support of strong measures to prevent fraud and unjust
enrichment by those who would seek to abuse this valuable program.  In
particular, I am pleased that by strengthening our unjust enrichment
rules we take away the incentive for speculators to try to masquerade as
legitimate DEs.  Under our new rules, bidders who benefit from the 25
percent discount must forfeit that discount if they then turn around and
sell some or all of their license rights to someone else.  By
eliminating the payoff for this "flipping" of licenses, we discourage
sham buyers from participating in the first place.  And most
importantly, we reserve the DE program for companies that actually
intend to use their spectrum to serve customers.

 

I am also pleased that we commit to thoroughly review the application
and all relevant documents for each and every winning bidder claiming DE
status. Additionally, we pledge to audit every DE at least once during
the initial license term.  These are two important safeguards against
sham bidders, and I am glad the Commission agreed to implement them as
well. 

 

There is more to do to ensure the ongoing integrity and credibility of
the DE program.  For instance, I have real questions about whether a
company should be able to qualify for the DE discount if it is owned in
large part by a multi-billion-dollar wireless company -- or any
multi-billion-dollar communications company, for that matter. I believe
the unjust enrichment reforms we announce today will go a long way
towards eliminating the worst abuses of this kind. But we still need to
consider whether additional partnership restrictions are warranted.

At the same time, we must also be cautious about overshooting the mark
and harming the very small carriers and entrepreneurs that Congress
meant to protect. Legitimate DEs must have access to capital to compete
meaningfully against the large carriers. I would not support any
measures that improperly compromised their ability to do so.

The limited time available to us for consideration of this item did not
allow us to resolve these questions. I would have preferred launching
this proceeding last summer so as to facilitate a more thorough review
in time for comprehensive action today. But given the importance of both
the upcoming AWS auction and the DE program, I think that the item we
announce today is the most prudent course to protect the core values of
the DE program. Certainly, we must be careful not to rush into further
changes without full consideration of all their consequences, unintended
as well as intended.  I hope we will keep working on this program
because another huge auction in the 700 MHz spectrum is not far off and
we should have the program working as flawlessly as possible by then. 
In the meantime, I applaud the changes we make today to curb fraud and
unjust enrichment and I thank my colleagues for their cooperative work
to achieve these results.

**STATEMENT OF**

**COMMISSIONER JONATHAN S. ADELSTEIN**

**APPROVING IN PART, DISSENTING IN PART**

*Re: Implementation of the Commercial Spectrum Enhancement Act and
Modernization of the Commission's Competitive Bidding Rules and
Procedures, WT Docket No. 05-211, Second Report and Order and Second
Further Notice of Proposed Rule Making.*

I must dissent from a large portion of this decision because it fails to
accomplish the very specific goals the Commission outlined in the
Further Notice and Proposed Rule Making (FNPRM) in this proceeding.
While I endorse the narrow adjustments to the Designated Entity (DE)
program that we adopt today, the majority falls far short of making the
meaningful modifications to the DE program that were almost universally
supported by commenters in this proceeding. I am disappointed that we
were unable to follow through on our tentative conclusion from earlier
this year, and believe that the Second FNPRM we adopt today is
unnecessarily broad and complicated, and significantly ignores the full
and complete record before us.

On January 27, 2006, my colleagues and I adopted an FNPRM in which we
tentatively concluded that we should modify our Part 1 rules to restrict
the award of designated entity benefits to an otherwise qualified
designated entity where it has a "material relationship" with a "large
in-region incumbent wireless service provider." This position was
supported by a large and diverse group of commenters ranging from
DEs[^241] to Tier II carriers,[^242] the minority community[^243] to
rural telephone companies,[^244] and even members of Congress[^245] and
the Department of Justice.[^246]

Yet, in a troubling and curious reversal, less than three months later,
I stand alone in dissenting from our decision today to not to close this
obvious loophole. It is stunning that we have failed to take any
meaningful action to specifically address the single biggest issue
facing the DE program given the overwhelming support in the record to do
so. We missed a real opportunity to shut down what almost everyone
recognizes has the potential for the largest abuse of our DE program:
giant wireless companies using false fronts to get spectrum on the
cheap.

During the past month, there has been considerable discussion about an
alternative proposal to our original tentative conclusion -- a
limitation on investment in DEs by all providers of communications
services over a given revenue threshold. While we do not vote on that
proposal here, many commenters argued that this approach would not have
tightened the DE program, but rather that the approach would have killed
it. I certainly had concerns that the proposal, as structured, would
have cast a wide net over the DE program -- limiting funding to the DE
community from almost all FCC-regulated companies, manufacturers, and
service providers, whether circuit or IP-based. Not surprisingly, the
proposal to adopt a low revenue threshold was loudly opposed by a number
of significant voices including members of Congress,[^247] two
subcommittees of the FCC's own Advisory Committee on Diversity for
Communications in the Digital Age,[^248] current and former DEs,[^249]
and a quintet of Native Alaskan Corporation CEOs.[^250] Some argue that
so-called DE reform was really a disguise to eliminate an avenue of
competition to incumbent wireless companies.[^251]

Notwithstanding the flaws in this proposal, I have been willing to
consider a variety of alternatives to our tentative conclusion that
would have responded to complaints by large wireless carriers that they
were being unfairly singled out or that we were ignoring our precedent
of conducting market by market analyses in looking at spectrum issues.
Moreover, if the wireless loophole was adequately addressed in a final
decision, I was willing to consider a revenue-based restriction that
affected all FCC regulatees provided that a revenue threshold was based
on the record, not one that could indiscriminately shut down the DE
program. But inexplicably, no deal could be struck. Ultimately, it was
easier for the majority to make a few minor changes to the DE program
than close the loophole that is recognized by almost everyone but this
Commission.

Of course, I support the changes made in this item as DE reform has been
an important issue to me for some period of time. In my separate
statement to the FNPRM, I talked about a tighter review of DE
applications involving large wireless carriers and am pleased that we
have extended a thorough Wireless Telecommunications Bureau review to
all DE applications. And I applaud the efforts of MMTC in highlighting
the need for a more rigorous audit program and advancing proposals that
form the basis for those we adopt today. MMTC, like many others in this
proceeding, provided thoughtful comments and discussion on the DE
program, and has helped create the record that allows us to make at
least some changes to the DE program prior to the upcoming AWS auction.

Finally, I must add that I am troubled by the tone and approach of the
Second FNPRM. I believe it disproportionally relies on the perceived
status of the communications marketplace in assessing changes to the DE
program. While I recognize the dual statutory goals highlighted in the
item of ensuring opportunities for DEs and preventing unjust enrichment,
we also have an obligation to promote competition and innovation in the
wireless industry pursuant to Section 309(j)(3)(B), and the DE program
is an appropriate vehicle to further that objective. I worry that the
Second FNPRM, instead of suggesting proposals that could promote the
effectiveness and integrity of DEs, could ultimately lead to
determinations that do more harm to potential competition in the
communications marketplace than truly protect the program. The item
seems to ignore the well-developed record in proposing an unnecessarily
complicated and expansive review of perceived problems of the DE program
when the solutions already are right in front of us.

[^1]: "Designated entities" are small businesses, businesses owned by
    members of minority groups and/or women, and rural telephone
    companies. 47 C.F.R. § 1.2110(a). In an effort to eliminate some
    past inconsistency in nomenclature, we clarify that, unless
    otherwise noted, when referring to "designated entities," we include
    as a subgroup "entrepreneurs" eligible to bid for "set-aside"
    broadband Personal Communications Service ("broadband PCS") licenses
    offered in closed bidding. *See id.* §§ 1.2110(a), 24.709.

[^2]: 47 U.S.C. § 309(j)(4)(D); *see also id.* § 309(j)(3)(B).

[^3]: *Id*. § 309(j)(4)(E); *see also id.* § 309(j)(3)(C).

[^4]: Implementation of the Commercial Spectrum Enhancement Act and
    Modernization of the Commission\'s Competitive Bidding Rules and
    Procedures, WT Docket No. 05-211, *Further* *Notice of Proposed Rule
    Making*, 21 FCC Rcd 1753 (2006) ("*Further Notice*").

[^5]: *Id*. at 1754-55 ¶ 1.

[^6]: *Id.* In response, we received 37 comments and 18 reply comments.
    Two parties who filed initial comments in response to the
    Commission's Public Notice relating to AWS auction procedures
    (AU-06-30) also raised issues with respect to the Commission's
    designated entity program. We also received *ex parte* filings in
    response to the *Further Notice* from various parties including the
    Congressional Black Caucus, the U.S. Department of Justice and
    Council Tree. Appendix A contains a list of full and abbreviated
    names of commenting parties.

[^7]: *See* 47 C.F.R. § 1.2101 *et. seq.*

[^8]: *See* *id.* § 1.2110. The Commission establishes special small
    business size standards on a service-specific basis, taking into
    consideration the characteristics and capital requirements of the
    particular service. 47 C.F.R. §1.2110(c)(1). In the *Part 1 Fifth
    Report and Order,* the Commission, in light of the *Adarand*
    decision, declined to adopt special provisions for minority- and
    women-owned businesses but noted that minority- and women-owned
    businesses that qualify as small businesses may take advantage of
    the provisions the Commission has adopted for small businesses.
    Amendment of Part 1 of the Commission's Rules -- Competitive Bidding
    Procedures, WT Docket No. 97-82, *Order on Reconsideration of the
    Third Report and Order, Fifth Report and Order, and Fourth Further
    Notice of Proposed Rule Making*, 15 FCC Rcd 15293, 15319 ¶ 48 (2000)
    ("*Part 1 Fifth Report and Order*") (citing *Adarand Constructors,
    Inc. v. Pena*, 515 U.S. 200, 227 (1995)). On several occasions, the
    Commission has declined to adopt bidding credits for large telephone
    companies that serve rural areas. *See, e.g.*, Implementation of
    Section 309(j) of the Communications Act -- Competitive Bidding, PP
    Docket No. 93-253, *Fifth Memorandum Opinion and Order*, 10 FCC Rcd
    403, 457-58, 462-63 ¶¶ 100, 111 (1994) ("*Competitive Bidding Fifth
    MO&O*"); Amendment of Part 1 of the Commission's Rules --
    Competitive Bidding Procedures, *Order on Reconsideration of the
    Third Report and Order, Fifth Report and Order, and Fourth Notice of
    Proposed Rule Making,* 15 FCC Rcd 15293, 15320-21 ¶¶ 51-52 (2000);
    Reallocation and Service Rules for the 698-746 MHz Spectrum Band
    (Television Channels 52-59), GN Docket No. 01-74, *Report and
    Order*, 17 FCC Rcd 1022, 1090-91 ¶ 176 (2002). The Commission
    determines eligibility for its small business provisions based on an
    entity's size determined pursuant to attribution rules. 47 C.F.R. §
    1.2110(b)(1)-(3). *But see* Amendment of Part 1 of the Commission's
    Rules -- Competitive Bidding Procedures, *Second Order on
    Reconsideration of the Third Report and Order and Order on
    Reconsideration of the Fifth Report and Order*, 18 FCC Rcd 10180,
    10191-94 ¶¶ 16-18 (2003) (establishing exemption for rural telephone
    cooperatives from the requirement that gross revenues of entities
    controlled by an applicant's officers and directors be attributed to
    the applicant), *modified on reconsideration,* *Second Order on
    Reconsideration of the Fifth Report and Order*, 20 FCC Rcd 1942
    (2005); 47 C.F.R. § 1.2110(b)(3)(iii) (exempting rural telephone
    cooperatives from attributing the gross revenues of its officers and
    directors).

[^9]: In the legislative history of Section 309(j), Congress explains
    that the reason for imposing anti-trafficking restrictions and
    unjust enrichment payment obligations on entities that receive small
    business benefits is to deter "participation in the licensing
    process by those who have no intention of offering service to the
    public." [H.R. Rep. No. 103-111]{.smallcaps}, at 257-58 (1993)
    (Conference Agreement adopted House provisions, in relevant part,
    with amendments. [H.R. Conf. Rep. No]{.smallcaps}. 103-213, at 483
    (1993)).

[^10]: *See* 47 C.F.R. § 1.2111.

[^11]: Broadband Personal Communications Services entrepreneurs will be
    subject to these new rules as described below.

[^12]: *See* discussion *infra* ¶¶ 28-30.

[^13]: The rules adopted herein, therefore, will not apply to the
    upcoming auction of 800 MHz Air-Ground Radiotelephone Service
    licenses, scheduled to begin on May 10, 2006, nor to the Form 601
    applications to be filed subsequent to the close of that auction by
    the winning bidders. *See* Auction of 800 MHz Air-Ground
    Radiotelephone Service Licenses Scheduled for May 10, 2006; Notice
    and Filing Requirements, Minimum Opening Bids, Upfront Payments and
    Other Procedures for Auction No. 65, *Public Notice*, 21 FCC Rcd
    1278 (2006).

[^14]: *See* discussion *infra* note 116 and accompanying text.

[^15]: *See, e.g*., Comments of NHMC at 17-18; Reply Comments of
    Consumers Union at 1-2.

[^16]: *See supra* note 8 (discussing the Commission's designated entity
    benefits).

[^17]: *See* 47 U.S.C. § 309(j)(4)(D); *see also* 47 C.F.R. § 1.2110(a).

[^18]: 47 U.S.C. § 309(j)(4)(D).

[^19]: *Id*. § 309(j)(4)(E).

[^20]: *See* Implementation of Section 309(j) of the Communications
    Act - Competitive Bidding, PP Docket No. 93-253, *Fifth Report and
    Order*, 9 FCC Rcd 5532, 5582 ¶ 159 (1994) ("*Competitive Bidding
    Fifth Report and Order*").

[^21]: *See, e.g.,* Implementation of Section 309(j) of the
    Communications Act -- Competitive Bidding, PP Docket No. 93-253,
    *Second Report and Order*, 9 FCC Rcd 2348, 2391-92 ¶¶ 241-44 (1994)
    ("*Competitive Bidding Second Report and Order*").

[^22]: *See id.* at 2389-91, 2392 ¶¶ 231-40, 245-48.

[^23]: *See* 47 C.F.R. § 1.2110(b).

[^24]: *See id.* § 24.709(a)(1)-(2).

[^25]: *See id.* § 24.709(b)(1)(i)-(iv).

[^26]: *See id.* § 24.709(b)(1)(iii), (iv).

[^27]: A control group is an entity, or a group of individuals or
    entities, that possesses *de jure* and *de facto* control of an
    applicant or licensee. *See id*. § 24.720(k).

[^28]: A qualifying investor is a person who is (or holds an interest
    in) a member of the applicant\'s control group and whose gross
    revenues and total assets, when aggregated with those of all other
    attributable investors and affiliates, do not exceed the
    entrepreneurs\' block gross revenues and total assets limits. *Id.*
    § 24.720(n).

[^29]: *Id.* § 24.709(b)(1)(v)(A)(2), (b)(1)(vi)(A)(2). If the applicant
    was a partnership, the control group was required to hold all of its
    general partnership interests. *Id.*

[^30]: *Id.* § 24.709(b)(1)(v)(A), (b)(1)(v)(A)(1).

[^31]: *Id.* § 24.709(b)(1)(vi)(A), (b)(1)(vi)(A)(1).

[^32]: *Id.* § 24.709(b)(1)(iii)-(vi). The equity ownership requirements
    under both exceptions were somewhat relaxed for entities that had
    been operating and earning revenues for at least two years prior to
    December 31, 1994. *Id.* §§ 24.709 (b)(1)(v)(B),
    24.709(b)(1)(vi)(B), 24.709(b)(6)(ii), 24.720(h).

[^33]: *See id.* § 24.709(b)(i), (ii).

[^34]: In some non-PCS services, the Commission uses the term
    "entrepreneur" to refer to a level of small business eligibility for
    bidding credits. *See*, *e.g.*, *id.* §§ 22.229, 27.702, 101.538,
    101.1107, 101.1112, 101.1429.

[^35]: In the context of Broadband PCS, an applicant or licensee
    generally qualifies as an entrepreneur if it, together with its
    affiliates, persons or entities that hold interests in the applicant
    or licensee, and their affiliates, has combined total assets of less
    than \$500 million and has had combined gross revenues of less than
    \$125 million in each of the last two years. *Id.* § 24.709(a)(1).

[^36]: Under this standard, the gross revenues and affiliations of an
    investor in the applicant were not considered so long as the
    investor held 25 percent or less of the applicant\'s passive equity
    and was not a member of the applicant\'s control group. Amendment of
    Part 1 of the Commission's Rules --- Competitive Bidding Proceeding,
    WT Docket 97-60, *Order,* *Memorandum Opinion and Order, and Notice
    of Proposed Rule Making*, 12 FCC Rcd 5686, 5702 ¶ 26 (1997) ("*Part
    1 Order*").

[^37]: 47 C.F.R. § 90.814(g) (2001); *see* *Part 1 Order*, 12 FCC Rcd at
    5703 ¶ 27.

[^38]: *See*, *e.g.*, 47 C.F.R. §§ 1.948, 1.2105, 1.2110, 1.2112, 20.6,
    21.38, 22.223, 22.225.

[^39]: *See*, *e.g.*, *id.* §§ 1.2110, 22.223, 27.210, 90.814, 90.912,
    90.1021, 101.1109.

[^40]: *See Part 1 Order*, 12 FCC Rcd at 5703 ¶ 27.

[^41]: *See generally Part 1 Fifth Report and Order*, 15 FCC Rcd at
    15293.

[^42]: *Id.* at 15323 ¶ 59.

[^43]: 47 C.F.R. § 1.2110(c)(2).

[^44]: *Id*.

[^45]: *Id.*

[^46]: In *Ellis Thompson*, the Commission identified the following
    factors used to determine control of a business: (1) use of
    facilities and equipment; (2) control of day-to-day operations; (3)
    control of policy decisions; (4) personnel responsibilities;
    (5) control of financial obligations; and (6) receipt of monies and
    profits. Application of Ellis Thompson Corporation, *Memorandum
    Opinion and Order and Hearing Designation Order*, 9 FCC Rcd 7138,
    7138-7139 ¶ 9 (1994) (citing the Commission's decision in
    *Intermountain Microwave*, Applications for Microwave Transfers to
    Teleprompter Approved with Warning, *Public Notice*, 12 FCC 2d 559
    (1963) ("*Intermountain Microwave*") (1963)). *See also* Application
    of Baker Creek Communications, L.P. for Authority to Construct and
    Operate Local Multipoint Distribution Services in Multiple Basic
    Trading Areas, *Memorandum Opinion and Order*, 13 FCC Rcd 18709
    (Wireless Tel. Bur. 1998) (discussing in detail the factors
    constituting *de facto* control); Stephen F. Sewell, *Assignments
    and Transfers of Control of FCC Authorizations Under Section 310(d)
    of the Communications Act of 1934*, 43 [Fed. Comm. L.J.]{.smallcaps}
    277, 316-17 (1991).

[^47]: 47 C.F.R. 1.2110(c)(2)(ii)(F); *Part 1 Fifth Report and Order*,
    15 FCC Rcd at 15325-26 ¶¶ 65-66.

[^48]: *See Part 1 Fifth Report and Order*, 15 FCC Rcd at 15325-26 ¶ 65.

[^49]: *Id.*

[^50]: Amendment of Part 1 of the Commission's Rules - Competitive
    Bidding Procedures, WT Docket No. 97-82, *Third Report and Order and
    Second Further Notice of Proposed Rule Making*, 13 FCC Rcd 374, 478
    ¶ 186 (1997) ("*Part 1 Third Report and Order*").

[^51]: *Part 1 Fifth Report and Order*, 15 FCC Rcd at 15293, 15323-24 ¶
    58.

[^52]: *Further Notice*, 21 FCC Rcd at 1754-57 ¶¶ 1, 3-5.

[^53]: *Id*. at 1754-55, 1759-62 ¶¶ 1, 12-18.

[^54]: *Id*. at 1754-55, 1762-63 ¶¶ 1, 19.

[^55]: *Id*. at 1763 ¶ 20.

[^56]: *Id*. at 1763-64 ¶ 21.

[^57]: In the legislative history of Section 309(j), Congress explains
    that the reason for imposing anti-trafficking restrictions and
    unjust enrichment payment obligations on entities that receive small
    business benefits is to deter "participation in the licensing
    process by those who have no intention of offering service to the
    public." [H.R. Rep. No.]{.smallcaps} 103-111, at 257-58 (1993)
    (Conference Agreement adopted House provisions, in relevant part,
    with amendments. [H.R. Conf. Rep. No]{.smallcaps}. 103-213, at 483
    (1993)).

[^58]: *Further Notice*, 21 FCC Rcd at 1760 ¶ 13.

[^59]: *Id.*

[^60]: *Id.*

[^61]: *Id.* at 1761 ¶ 15.

[^62]: *Id.*

[^63]: *Id.*

[^64]: *Id.* at 1761 ¶ 16.

[^65]: *See*, *e.g.*, Comments of STX at 2; *see also* Comments of
    Antares at 4 ("the Commission needs to balance the public policy
    goal of continuing to encourage small business participation within
    the wireless industry against the very real need for qualified small
    businesses to raise capital in order to participate in wireless
    service auctions."); Comments of Cook Inlet at 3 ("it is
    particularly challenging for small companies to obtain access to
    financial resources necessary to support bidding and paying for even
    one license in a given auction, much less to construct and operate a
    system within the time frame mandated by the Commission's rules.");
    Comments of NAB at 2 ("If the Commission were to adopt unnecessarily
    restrictive DE rules, small businesses would be more limited in
    their ability to raise capital and attract investors."); Reply
    Comments of Ericsson at 2-3 (arguing that the Commission should not
    constrain access to manufacturer financing).

[^66]: Comments of Wirefree Partners at 7.

[^67]: *See, e.g.,* Comments of Council Tree at 52; Comments of Leap at
    15; Comments of MMTC at 2, 9.

[^68]: Comments of Council Tree at 52. *See also Further Notice*, 21 FCC
    Rcd at 1761 ¶ 9. A number of commenters also generally appeared to
    support the premise of Council Tree's proposals without specifically
    commenting on how the Commission might define "material
    relationship." *See, e.g.*, Comments of MobiPCS at 1; Comments of
    Suncom at 1; Comments of USCC at 2-3, 5.

[^69]: *See, e.g.*, Comments of NTCA at 7-8; Comments of RTG at 4-5.

[^70]: Comments of John Staurulakis, Inc. at 3.

[^71]: Comments of RTG at 5.

[^72]: *Further Notice*, 21 FCC Rcd at 1761 ¶ 16.

[^73]: *See, e.g.,* Comments of Wirefree Partners at 8-9; Comments of
    CTIA at 4.

[^74]: *See, e.g.,* Comments of Council Tree at 52; *see generally*
    Comments of MobiPCS at 1; Comments of Suncom at 1; Comments of USCC
    at 2-3, 5.

[^75]: *See, e.g*., Comments of MMTC at 6 ("some of the largest national
    incumbent wireless carriers have received from their DE partners
    exclusive access to valuable spectrum and network capacity that
    otherwise could have been used to offer new services and induce the
    national wireless incumbents to better respond to the needs of the
    marketplace.").

[^76]: *See, e.g.,* Comments of RTG at 5.

[^77]: Promoting Efficient Use of Spectrum through Elimination of
    Barriers to the Development of Secondary Markets, WT Docket No.
    00-230, *Second Report and Order, Order on Reconsideration, and
    Second Further Notice of Proposed Rulemaking*, 19 FCC Rcd 17503,
    17538, 17541, 17544 ¶¶ 71, 76, 82 (2004) ("*Secondary Markets Second
    Report and Order*").

[^78]: *Id.* at 17541-42 ¶ 77.

[^79]: Comments of Wirefree Partners at 8.

[^80]: *See* discussion *infra* ¶¶ 28-30.

[^81]: *See id.*

[^82]: If a designated entity licensee disaggregates its license,
    determinations of impermissible and attributable material
    relationships will be made based upon its remaining spectrum
    license. For example, if a designated entity licensee disaggregates
    5 MHz of a 10 MHz license, it cannot have spectrum leasing or resale
    arrangements for more than 2.5 MHz of spectrum, pursuant to the
    "impermissible material relationships" restriction, and any spectrum
    leasing or resale arrangements with one individual entity for more
    than 1.25 MHz of spectrum will result in the attribution of revenues
    and assets, pursuant to the "attributable material relationships"
    restriction.

[^83]: During the first five years of the license term, broadband PCS
    entrepreneurs that have not yet met their five-year construction
    requirements will be prohibited from entering into any impermissible
    material relationships with entities of any size. They will also be
    prohibited from entering into attributable material relationships if
    those relationships bring their attributable gross revenues or total
    assets above the financial caps established in section 24.709. After
    build-out or the first five years of the license term, broadband PCS
    entrepreneurs that are participating in the installment payment plan
    and enter into impermissible or attributable material relationships
    will be subject to installment payment unjust enrichment pursuant to
    section 1.2111(c). *See* 47 C.F.R. §§ 1.2110, 1.2111, 24.709,
    24.839.

[^84]: *See* *Secondary Markets Second Report and Order*, 19 FCC Rcd at
    17538, 17541, 17544 ¶¶ 71, 76, 82.

[^85]: For example, if an applicant seeking to participate in an
    upcoming auction has an existing impermissible material relationship
    on a single license, it will be ineligible for the award of
    designated entity benefits in that auction, regardless of the
    significance of that one license in terms of the applicant's revenue
    or the scope of its operations.  This is true even if the
    impermissible material relationship was entered into prior to the
    release of this order and thus grandfathered for purposes of unjust
    enrichment. Similarly, if it is an attributable material
    relationship at issue, then the gross revenues of the entity with
    which the applicant has such a relationship are counted against the
    applicant and may affect its eligibility.

[^86]: For example, Newco is an applicant seeking designated entity
    status in an auction in which bidding begins after the effective
    date of the rules. Investor is a controlling interest of Newco.
    Investor also is a controlling interest of Existing DE. Existing
    DE previously was awarded designated entity benefits and has
    impermissible material relationships based on leasing agreements
    entered into before the release date of this order with a third
    party, Lessee, that were in compliance with the Commission's
    eligibility standards prior to the effective date of the rules
    adopted herein. In this example, Newco would not be prohibited from
    acquiring designated entity benefits solely because of the existing
    impermissible material relationships of its affiliate, Existing DE.
    Newco, Investor, and Existing DE, however, would need to enter into
    a contractual prohibition that prevents Existing DE from
    contributing to the total financing of Newco.

[^87]: *See* 47 C.F.R. § 1.2110(b). Under the example in the preceding
    note, Newco would have to attribute the gross revenues of its
    affiliate, Existing DE, in establishing eligibility for designated
    entity benefits, but would not have to attribute the gross revenue
    of Lessee.

[^88]: *See id*. § 1.2111(b)-(e).

[^89]: *See* 47 U.S.C. § 309(j)(4)(E); *see also id*. § 309(j)(3)(C).

[^90]: Council Tree suggested a reimbursement obligation on a licensee
    that acquires a license with a bidding credit and subsequently, in
    the first five years of its license term, makes a change in its
    "material relationships" that would result in its loss of
    eligibility for the bidding credit, or seeks to assign or transfer
    control of the license to an entity that would not qualify for the
    same level of bidding credits, pursuant to any eligibility
    restriction that we adopt. *Further Notice*, 21 FCC Rcd at 1763 ¶
    20; Council Tree Proposal at 15.

[^91]: *Further Notice*, 21 FCC Rcd at 1763 ¶ 20.

[^92]: *Id.*

[^93]: *Id.*

[^94]: *Id.*

[^95]: *Id.*; Council Tree Proposal at 16.

[^96]: *See, e.g.,* Comments of Aloha Partners at 5; Comments of Carroll
    Wireless at 8; Comments of Wirefree Partners at 14-15; Comments of
    Council Tree at 59.

[^97]: *See, e.g.,* Comments of Aloha at 5; Comments of Carroll Wireless
    at 8.

[^98]: *See, e.g.,* Comments of STX at 2; Comments of U.S. Wirefree at
    4; Comments of MMTC at 15; Comments of Council Tree at 15-16.

[^99]: Comments of STX at 2.

[^100]: Comments of MMTC at 15.

[^101]: *Id.*

[^102]: *Competitive Bidding* *Second Report and Order*, 9 FCC Rcd at
    2394 ¶ 258.

[^103]: *Id.* at 2385, 2394 ¶¶ 211, 259. *See also* [H.R. Rep.
    No.]{.smallcaps} 103-111, at 257-58 (1993) (Conference Agreement
    adopted House provisions, in relevant part, with amendments. H.R.
    [Conf. Rep. No.]{.smallcaps} 103-213, at 483 (1993)); *Secondary
    Markets Second Report and Order*, 19 FCC Rcd at 17538 ¶ 71.

[^104]: *See* discussion *infra* note 116 and accompanying text.

[^105]: *See* discussion *infra* note 116 and accompanying text.

[^106]: We also note that the provisions of section 1.2112(e) of the
    Commission's rules may also apply. 47 C.F.R. § 1.2112(e) (discussing
    the assessment of unjust enrichment in the context of the partition
    and/or disaggregation of licenses).

[^107]: *See id.*

[^108]: Licensees may, under section 1.946(e) of our rules, request an
    extension of time to meet the applicable construction requirements.
    47 C.F.R. § 1.946(e). Additionally, licensees may also request a
    waiver of the construction requirement, and this request must meet
    the requirements of section 1.925 of our rules. 47 C.F.R § 1.925. We
    note that we will undertake careful scrutiny of requests for
    extension of the construction requirements filed by designated
    entities consistent with our rules, obligations under the
    Communications Act, and legal precedent, and that we will consider ,
    as part of our review, whether the extension request is an effort to
    defeat the objectives of our designated entity program. If a
    designated entity is successful in obtaining an extension of the
    construction requirements beyond the initial license term, the
    requirement that the Commission must be reimbursed for the entire
    bidding credit amount, plus interest, prior to the filing of the
    notification informing the Commission that the applicable
    construction requirements will continue to apply until such
    notifications are filed.

[^109]: *See* 47 U.S.C § 309(j)(4)(E); *see also* id. § 309(j)(3)(C).

[^110]: We note that, although the Commission did not adopt a
    permissible growth exception for bidding credit unjust enrichment,
    it did adopt a permissible growth exception for set-aside, or closed
    bidding, licenses and installment payments. *Compare* 47 C.F.R. §
    1.2111(d) *with id.* §§ 1.2111(c)(2), *and* *id.* § 24.709(a)(2).

[^111]: *Cf*. 47 C.F.R. § 1.2111(c)(2) (establishing that "permissible
    growth" does not result in unjust enrichment in the context of
    installment payments); *id*. § 24.709(a)(2) (establishing that
    permissible growth does not result in the loss of eligibility to
    hold set-aside, or closed bidding, licenses).

[^112]: *See* Applications of TeleCorp PCS, Inc., Tritel, Inc, and
    Indus, Inc., WT Docket No. 00-1589, *Memorandum Opinion and Order*,
    16 FCC Rcd 3716, 3737 ¶ 49 (Wireless Tele. Bur. 2000)
    ("*TeleCorp-Tritel Order*"); D&E Communications, Inc., *Order*, 15
    FCC Rcd 61, 67 ¶ 12 (Auctions & Ind. Analysis Div., Wireless Tele.
    Bur. 1999) ("*D&E Communications*").

[^113]: *See* Amendment of Commission\'s Rules Regarding Installment
    Payment Financing for Personal Communications Services (PCS)
    Licenses, WT Docket No. 97-8200-1589, *Memorandum Opinion and
    Order*, 14 FCC Rcd 20543, 20545-46 ¶¶ 6-8 (1999); *see also*
    *TeleCorp-Tritel Order*, 16 FCC Rcd at 3734 ¶ 46; *D&E
    Communications*, 15 FCC Rcd at 67 ¶ 12.

[^114]: *See* discussion *supra* ¶¶ 28-30 (discussing the grandfathering
    of impermissible and attributable material relationships that were
    in existence before the release date of this *Second Report and
    Order* for the purposes of assessing unjust enrichment penalties on
    benefits previously awarded).

[^115]: Obtaining prior approval for events that could possible effect
    an entity's designated entity eligibility is consistent with our
    practices for reviewing applications for the assignment or transfer
    of control of designated entity licenses. *See* 47 C.F.R. §
    1.948(c)(1)(i).

[^116]: Such events include changes in the ownership structure of the
    designated entity and agreements (*e.g.,* management, credit,
    trademark, marketing, and facilities agreements) entered into
    between designated entity licensees and third parties that the
    Commission has not previously reviewed. New section 1.2114(c)
    provides that such filings will be treated as if they are transfer
    of control applications under section 1.1102 for purposes of
    determining the appropriate application fees.

[^117]: 47 C.F.R. § 1.948(j).

[^118]: The record supports such an approach. *See, e.g*. Comments of
    Cook Inlet at 21 (suggesting that the Commission require each
    designated entity to submit an annual report detailing the actions
    it took during the past period with respect to the licenses it holds
    as well as any actions taken by its limited financial partners. It
    believes that the Commission would have some empirical evidence of
    the degree of day-to-day control actually exercised by the parties
    who purport to be in *de facto* control of these designated entity
    licensees).

[^119]: *See* 47 C.F.R. § 1.2110(j).

[^120]: *See id.* § 1.2110(j), (n).

[^121]: Comments of MMTC at 13-14.

[^122]: *Id.* at 14.

[^123]: Comments of Cook Inlet at 21.

[^124]: Auction of Advanced Wireless Services Licenses Scheduled for
    June 29, 2006, Comment Sought on Reserve Prices or Minimum Opening
    Bids and Other Procedures, AU Docket No. 06-30, *Public Notice*, 21
    FCC Rcd 794 (2006).

[^125]: *Cf.* 47 C.F.R. 1.2105(a)(2)(iv) (parallel statement currently
    required as of the date of filing the short-form application).
    Pursuant to its delegated authority to conduct auctions, the
    Wireless Telecommunications Bureau will establish any detailed
    procedures necessary for making required amendments and announce
    such procedures by public notice. *See id.* §§ 0.131, 0.331.

[^126]: As noted in the *Further Notice*, while prior certifications may
    be a prerequisite to eligibility, applicants still must demonstrate
    compliance with all applicable Commission rules, including
    eligibility for any bidding credits, at the time the Commission is
    ready to grant a license, regardless of previously applicable rules.
    *See* Implementation of the Commercial Spectrum Enhancement Act and
    Modernization of the Commission's Competitive Bidding Rules and
    Procedures, *Report and Order*, 21 FCC Rcd 891, 909 n.84 (2006);
    *see also* *Celtronix Telemetry, Inc. v. FCC*, 272 F.3d 585, 587
    (D.C. Cir. 2001), *cert. denied*, 536 U.S. 923 (2002) (affirming
    Commission application of installment payment rules that were
    revised after initial grant of license).

[^127]: While CTIA expresses some concern regarding the amendment of
    short form applications, the public interest benefits associated
    with requiring entities to amend their applications and certify that
    they are qualified as a designated entity pursuant to our modified
    rules, outweigh any concerns raised in the record.

[^128]: *See* 47 C.F.R. § 1.2105(a)(2)(iv).

[^129]: *See, e.g*., Comments of NHMC at 17-18; Reply Comments of
    Consumers Union at 1-2.

[^130]: *See* 47 C.F.R. § 1.2101 *et seq.*

[^131]: *See supra* note 8 (discussing the Commission's designated
    entity benefits).

[^132]: Council Tree's proposal does not include a definition of
    "average gross wireless revenues."

[^133]: 47 C.F.R. § 1.2110(n).

[^134]: *See, e.g.,* Comments of Council Tree at 33; Comments of Leap at
    15; Comments of MetroPCS at 9.

[^135]: *See, e.g.,* Comments of MMTC at 9.

[^136]: *See, e.g.,* Comments of Council Tree at 33; Comments of Leap at
    15; Comments of MetroPCS at 9. These commenters believe that this
    threshold is an objective measure to address carriers with
    operations that can be characterized as national in scope and scale,
    and that designated entities who partner with companies meeting this
    threshold are the least likely to provide services that compete with
    the service provided by these large companies.

[^137]: *See, e.g.,* Comments of Centennial at 6.

[^138]: *See, e.g.,* Comments of Council Tree at 33-34; Comments of USCC
    at 10 (advocating the use of gross wireless revenues).

[^139]: *See, e.g.,* Comments of CTIA at 3, 5, 11; Comments of T-Mobile
    at 9; Comments of Verizon Wireless at 19-20 ("If the Commission
    wished to set a threshold for strategic investment in designated
    entities, it should set the standard at the level it adopted for the
    Entrepreneurs Block, which is \$125 million in revenues measured
    over two preceding years.").

[^140]: Comments of T-Mobile at 8.

[^141]: Comments of Verizon Wireless at 4-6.

[^142]: Comments of USCC at 11-13.

[^143]: 47 C.F.R. § 20.9.

[^144]: Letter from Messrs. Steve C. Hillard and George T. Laub, Council
    Tree Communications, Inc. to Marlene H. Dortch, Secretary, Federal
    Communications Commission, WT Docket Nos. 02-353, 04-356, RM-10956
    (June 13, 2005) (Council Tree *ex parte*).

[^145]: 47 C.F.R. ¶ 20.6(c) (sunset January 1, 2003).

[^146]: *Further Notice*, 21 FCC Rcd at 1762 ¶ 18.

[^147]: *See, e.g.,* Comments of Council Tree at 43; Comments of Leap at
    6, 15-16; Comments of MMTC at 9-10; Comments of USCC at 9; Comments
    of Wirefree Partners at 11; Comments of Centennial at 8-9; Comments
    of STX at 3; Comments of Antares at 5-6.

[^148]: *See, e.g.,* Comments of Council Tree at 42.

[^149]: *See, e.g.,* *id*.; Comments of NAB at 3.

[^150]: *See, e.g.,* Comments of Council Tree at 42.

[^151]: *See, e.g.,* Reply Comments of Blooston at 5; Comments of NHMC
    at 12.

[^152]: *See, e.g.,* Comments of Council Tree at 43; Comments of MMTC at
    9-10; Comments of USCC at 9; Comments of Wirefree Partners at 11;
    Comments of Centennial at 8-9; Comments of STX at 3.

[^153]: Comments of Council Tree at 44.

[^154]: Comments of Verizon Wireless at 17 (noting that this standard
    was created in a different spectrum environment, one in which there
    were two cellular providers and 50 MHz available in each market.).
    *See also* Comments of USCC at 9.

[^155]: Comments of USCC at 9.

[^156]: *Id*.

[^157]: *See, e.g.,* Comments of MetroPCS at 10; Comments of NHMC at 3,
    4; Comments of CTIA at 11-14 ; Comments of U.S. Wirefree at 3; Reply
    Comments of Consumers Union at 2-3; Comments of Verizon Wireless at
    6; U.S. Department of Justice *ex parte* at 6.

[^158]: U.S. Department of Justice *ex parte* at 6.

[^159]: Comments of CTIA at 1-2.

[^160]: *Id.* at 13-14.

[^161]: *See, e.g.,* Comments of U.S. Wirefree at 3; Comments of
    MetroPCS at 10; Comments of Verizon Wireless at 6.

[^162]: Comments of Verizon Wireless at 6.

[^163]: Comments of MetroPCS at 10.

[^164]: Comments of NMHC at 8.

[^165]: Comments of U.S. Wirefree at 3-4.

[^166]: *Secondary Markets Second Report and Order*, 19 FCC Rcd at 17538
    ¶¶ 71, 72 (citing H.R. Rep. No. 103-111, at 257-58 (1993)
    (Conference Agreement adopted House provisions, in relevant part,
    with amendments. H.R. Conf. Rep. No. 103-213, at 483 (1993).)).

[^167]: 47 C.F.R. § 1.2110(c)(5).

[^168]: *Id*. § 20.6(c).

[^169]: *Further Notice*, 21 FCC Rcd at 1762 ¶ 18 (citing 47 C.F.R §
    20.6(c)).

[^170]: For example, the rule used the term "PCS licensed service area"
    for determining the presence of "significant overlap" with other
    PCS, cellular or SMR service areas. 47 C.F.R. § 20.6(c)(1). PCS
    spectrum, however, is licensed on both an MTA and BTA basis, and
    licensees have further partitioned these areas into smaller
    geographic areas, which may be defined by pre-existing geographic
    boundaries (*e.g.*, county lines) or may be defined by the parties
    to a partitioning application. Licensees and applicants often faced
    confusion in assessing significant overlap as to which "service
    area" -- which of the originally defined geographic areas (if there
    was more than one) and/or the partitioned area -- should be used as
    the denominator.

[^171]: *See* 1998 Biennial Regulatory Review Spectrum Aggregation
    Limits for Wireless Telecommunications Carriers, WT Docket No.
    98-205, *Report and Order*, 15 FCC Rcd 9219, 9226 ¶ 11 (1999).

[^172]: That standard was developed in conjunction with the
    implementation of a 45 MHz spectrum cap, as a simplified version of
    the Herfindahl-Hirschman Index using spectrum capacity as the
    measurement of market share, to limit the amount of license spectrum
    capacity that any one entity could have. *See* Amendment of Parts 20
    and 24 of the Commission's Rules -- Broadband PCS Competitive
    Bidding and the Commercial Mobile Radio Service Spectrum Cap, WT
    Docket No. 96-59, *Report and Order*, 11 FCC Rcd 7824, 7869-70 ¶ 96
    (1996).

[^173]: *See* Comments of Council Tree at 45 (citing 47 C.F.R. §
    20.6(e)).

[^174]: *See* Comments of MetroPCS at 11.

[^175]: Comments of Centennial at 8-9 (emphasis in original).

[^176]: We would consider adopting such a divestiture procedure because
    we want to ensure that there is an identified buyer for the
    divestiture spectrum prior to the grant of the designated entity
    license.

[^177]: *Further Notice*, 21 FCC Rcd at 1760 ¶ 13.

[^178]: *Id.*

[^179]: *Id.*

[^180]: *Id.* at 1761 *¶* 15.

[^181]: *Id.*

[^182]: Comments of Council Tree at 52; *see also generally*, Comments
    of Anatres; Comments of Carroll Wireless; Comments of Doyon
    Communications, Bristol Bay Native Corp., Bethel Native Corp.;
    Comments of John Staurulakis, Inc.; Comments of Leap; Comments of
    MMTC; Comments of STX; Comments of Suncom; Comments of USCC;
    Comments of U.S. Wirefree.

[^183]: *See, e.g.*, Comments of Council Tree at 55-56 ("the
    Commission's existing "controlling interest" standard and
    affiliation rules do not prevent the type of influence that should
    be addressed here."); Comments of MobiPCS at 1 ("allowing the
    nation's largest national wireless carriers to serve in those roles
    only serves to increase their already overwhelming influence.");
    Comments of WBSPA at 4-5( "WBPSA strongly supports the proposals put
    forth by CT to eliminate and prohibit any ability for any
    communications services provider whose services are regulated by the
    FCC or any state regulatory body to enter into any financial
    relationship with an otherwise eligible DE in which it has the
    ability to either directly or indirectly control or influence the
    management, operations or ownership of that entity. . . ."). *But
    see* Reply Comments of WBSPA at 2 (WBSPA refined and clarified its
    position to apply to "any communications service providers whose
    telecommunications activities are subject to state or federal
    telecommunications regulations and whose revenues exceed \$1 billion
    in the last calendar year. . . .").

[^184]: *See, e.g.,* Comments of CTIA at 2 ("there is no evidence cited
    in the Notice that those policies have been abused, that they have
    not been effective, or that their reformation would achieve any
    stated goal."); Comments of T-Mobile at 6 ("The Commission cites no
    evidence to demonstrate -- indeed, it makes no allegations -- that
    such wireless carriers have attempted to circumvent the letter or
    spirit of the Commission's DE rules or have otherwise been
    responsible for 'undermining' the program."); Comments of Verizon
    Wireless at 4 (the FNPRM "fails to cite evidence that any harm has
    resulted from strategic relationships between small businesses and
    large wireless carriers."); Comments of Cook Inlet at i, 5 ("Cook
    Inlet is concerned by the absence of a factual record that justifies
    a rule change of the magnitude proposed in the *Further Notice*.").

[^185]: *See, e.g.,* Comments of CTIA at 2 ("the Notice proposes to
    embark on a path that does not address the problems it purports to
    fix."); Comments of Dobson at 3 ("there is nothing in the FNPRM that
    suggests that the concerns that Council Tree has expressed would be
    ameliorated by applying the proposed restriction only to one group
    of strategic investors and not another."); Comments of Verizon
    Wireless at 1-2 ("If the Commission feels compelled to make changes
    it should do so more broadly and effectively restrict investment
    from all companies that with revenues greater than \$125 million.");
    Comments of U.S. Wirefree at 11 ("There is no rational basis for
    discriminating against carrier investment in a DE based solely on
    the size of the carrier. . . . If the Commission wants to restrain
    ownership in DEs by other wireless carriers it should apply this
    restraint uniformly."); Comments of Cook Inlet at 13 ("It is not
    clear how the incentives or practices of these carriers are any more
    detrimental to the program than the incentives of any investor in a
    designated entity, whether a large financial institution, venture
    capital fund, small wireless carrier or otherwise.").

[^186]: 47 U.S.C. §§ 309(j)(3)(B), 309(j)(4)(D)-(E).

[^187]: 47 C.F.R. § 73.3555.

[^188]: A number of commenters also generally appeared to support the
    premise of Council Tree's proposals without specifically commenting
    on how the Commission might define "material relationship." *See
    e.g.*, Comments of MobiPCS at 1; Comments of Suncom at 1; Comments
    of USCC at 2-3, 5; Reply Comments of Royal Street at 1.

[^189]: Council Tree *ex parte* at 2, 6-7, 13.

[^190]: *Id*. Council Tree suggests that the Commission measure personal
    net worth as of the time of filing the applicant's short form
    application. Council Tree notes that this limitation should be
    applied only to an individual with *de jure* or *de facto* control
    of the applicant as determined under the Commission's controlling
    interest standard. It believes that such a condition is important
    because the Commission's attribution rules provide that the officers
    and directors of an applicant, and the officers and directors of an
    entity that control the applicant, shall be "considered" to have a
    controlling interest in the applicant. As such, Council Tree asserts
    that unless application of the personal net worth test is limited to
    individuals with actual *de jure* or *de facto* control of the
    applicant, legitimate designated entities would risk losing
    preference eligibility due to the net worth of an officer or
    director who has only constructive control under the Commission's
    rules, which could discourage designated entities from hiring
    experienced managers and industry veterans to serve as officers or
    directors.

[^191]: Council Tree Comments at 6.

[^192]: Comments of Cook Inlet at 14-15. *See* Cook Inlet *ex parte*
    filing, dated February 16, 2006.

[^193]: Comments of Aloha Partners at 5; Comments of Carroll Wireless at
    7; Comments of Poplar at 4.

[^194]: *Id.*

[^195]: Comments of RTG at 5; Reply Comments of Rural Carriers at 5-6.

[^196]: *Competitive Bidding Fifth* *MO &O*, 10 FCC Rcd at 403.

[^197]: *Id.* at 421 ¶ 30.

[^198]: *Id.*

[^199]: *See* *Further Notice*, 21 FCC Rcd at 1756-57 ¶ 5, n.17.

[^200]: Council Tree argues, for example, that if a high net worth
    individual does *not* have his or her wealth tied to ownership of
    other businesses or if such other businesses have few or no gross
    revenues, individuals who are not the intended beneficiaries of the
    designated entity program could receive designated entity benefits

[^201]: Council Tree *ex parte* at 11.

[^202]: *See* 5 U.S.C. § 603.

[^203]: *See generally* 5 U.S.C. § 603. The RFA, *see* 5 U.S.C. §§ 601
    -- 612, has been amended by the Small Business Regulatory
    Enforcement Fairness Act of 1996 (SBREFA), Pub. L. No. 104-121,
    Title II, 110 Stat. 857 (1996).

[^204]: Implementation of the Commercial Spectrum Enhancement Act and
    Modernization of the Commission\'s Competitive Bidding Rules and
    Procedures, WT Docket No. 05-211, *Further* *Notice of Proposed Rule
    Making*, 21 FCC Rcd 1753 (2006), 71 FR 6992 (February 10, 2006).

[^205]: *See* *generally* 5 U.S.C. § 604.

[^206]: *See, e.g.,* *Competitive Bidding Second Report and Order,* 9
    FCC Rcd 2348 (1994); *Part 1 Fifth Report and Order*, 15 FCC Rcd
    15293 (2000); Application of ClearComm, L.P., *Memorandum Opinion
    and Order*, 16 FCC Rcd 18627 (2001).

[^207]: *Competitive Bidding Second Report and Order*, 9 FCC Rcd at
    2396, ¶ 277.

[^208]: *Id.* at 2397 ¶ 278.

[^209]: 47 U.S.C. §309(j)(4)(D).

[^210]: Comments of NTCA at 9.

[^211]: 5 U.S.C. § 603(b)(3).

[^212]: *Id.* § 601(6).

[^213]: *Id.* § 601(3) (incorporating by reference the definition of
    "small business concern" in the Small Business Act, 15 U.S.C. §
    632). Pursuant to the RFA, the statutory definition of a small
    business applies "unless an agency, after consultation with the
    Office of Advocacy of the Small Business Administration and after
    opportunity for public comment, establishes one or more definitions
    of such term which are appropriate to the activities of the agency
    and publishes such definition(s) in the Federal Register." *Id.* §
    601(3).

[^214]: *Id.* § 601(4).

[^215]: Independent Sector, The New Nonprofit Almanac & Desk Reference
    (2002).

[^216]: 5 U.S.C. § 601(5).

[^217]: U.S. Census Bureau, Statistical Abstract of the United States:
    2006, Section 8, page 272, Table 415.

[^218]: We assume that the villages, school districts, and special
    districts are small, and total 48,558. *See* U.S. Census Bureau,
    Statistical Abstract of the United States: 2006, section 8, page
    273, Table 417. For 2002, Census Bureau data indicate that the total
    number of county, municipal, and township governments nationwide was
    38,967, of which 35,819 were small. *Id.*

[^219]: *See* SBA, Programs and Services, SBA Pamphlet No. CO-0028, at
    page 40 (July 2002).

[^220]: This figure is as of March 29, 2006.

[^221]: *See generally* 47 C.F.R. §§ 1.948, 1.9020(i), 1.9030(h), (i).

[^222]: *See* 5 U.S.C. § 603.

[^223]: *See id.* § 801(a)(1)(A).

[^224]: *See generally* 5 U.S.C. § 603. The RFA, *see* 5 U.S.C. §§ 601
    -- 612, has been amended by the Small Business Regulatory
    Enforcement Fairness Act of 1996 (SBREFA), Pub. L. No. 104-121,
    Title II, 110 Stat. 857 (1996).

[^225]: *See* 5 U.S.C. § 603(a).

[^226]: *See id.*

[^227]: *See, e.g.,* *Competitive Bidding Second Report and Order,* 9
    FCC Rcd 2348 (1994); *Part 1 Fifth Report and Order*, 15 FCC Rcd
    15293 (2000); Application of ClearComm, L.P., *Memorandum Opinion
    and Order*, 16 FCC Rcd 18627 (2001).

[^228]: *Competitive Bidding Second Report and Order*, 9 FCC Rcd at 2396
    ¶ 277.

[^229]: *Id.* at 2397 ¶ 278.

[^230]: 5 U.S.C. § 603(b)(3).

[^231]: *Id.* § 601(6).

[^232]: *Id.* § 601(3) (incorporating by reference the definition of
    "small business concern" in the Small Business Act, 15 U.S.C. §
    632). Pursuant to the RFA, the statutory definition of a small
    business applies "unless an agency, after consultation with the
    Office of Advocacy of the Small Business Administration and after
    opportunity for public comment, establishes one or more definitions
    of such term which are appropriate to the activities of the agency
    and publishes such definition(s) in the Federal Register." *Id.* §
    601(3).

[^233]: *Id.* § 601(4).

[^234]: Independent Sector, The New Nonprofit Almanac & Desk Reference
    (2002).

[^235]: 5 U.S.C. § 601(5).

[^236]: U.S. Census Bureau, Statistical Abstract of the United States:
    2006, Section 8, page 272, Table 415.

[^237]: We assume that the villages, school districts, and special
    districts are small, and total 48,558. *See* U.S. Census Bureau,
    Statistical Abstract of the United States: 2006, section 8, page
    273, Table 417. For 2002, Census Bureau data indicate that the total
    number of county, municipal, and township governments nationwide was
    38,967, of which 35,819 were small. *Id.*

[^238]: *See* SBA, Programs and Services, SBA Pamphlet No. CO-0028, at
    40 (July 2002).

[^239]: This figure is as of March 29, 2006.

[^240]: *See* 5 U.S.C. § 603.

[^241]: "It is extremely positive and encouraging that the Commission
    has decided to take this opportunity to change its Designated Entity
    program rules so as to make available more fair and reasonable
    opportunities for bona fide designated entities to secure the
    critical spectrum necessary to compete in the face of
    ever-increasing industry consolidation dominated by large incumbent
    wireless service providers." Comments of STX Wireless, LLC.

[^242]: "It is not unreasonable or unfair for the Commission to update
    its designated entity program to take into account the greatly
    increased concentration of spectrum resources in the hands of the
    national wireless carriers. By limiting access of the national
    carriers to bid credit benefits, the Commission can effectively
    refocus its designated entity policies to expand opportunities for
    successful small business participation in the wireless industry."
    Reply Comments of United States Cellular Corporation at 2-3.

[^243]: "As carriers whose collective share of the wireless market is
    89-90 percent, the five largest incumbents have the most to lose
    from the entry of facilities-based competitors into the wireless
    market, and therefore have the strongest incentives to manipulate
    the DE program in a manner that forestalls the competition that the
    DE program was meant to engender." Reply Comments of the Minority
    Media and Telecommunications Council (MMTC) at 3.

[^244]: "The Commission's tentative conclusion that it should modify its
    Part 1 rules to restrict the award of DE benefits such as bidding
    credits to an otherwise qualified DE where it has a 'material
    relationship' with a large, in-region incumbent wireless service
    provider is consistent with Section 309(j) of the Communications Act
    of 1934, as amended." Comments of The Rural Telecommunications
    Group, Inc. and The Organization for the Promotion and Advancement
    of Small Telecommunications Companies.

[^245]: "It is important that DEs have sources of capital and industry
    experience on which to rely, but allowing national wireless carriers
    to perform these functions is no longer good policy in light of
    their overwhelming dominance in the industry." Letter from 10
    Members of the Congressional Black Caucus to Chairman Kevin Martin
    (March 3, 2006).

[^246]: "The Department supports the Federal Communications Commission's
    proposal to deny designated entity benefits to entities that have a
    material relationship with a large in-region incumbent wireless
    service provider or a large entity that has a significant interest
    in communications services." *Ex Parte* Letter of the Department of
    Justice (March 17, 2006).

[^247]: "It would be wholly inconsistent with the promotion of these
    objectives for the Commission to limit the sources of capital and
    expertise available to new entrants in the complex wireless industry
    beyond the largest national carriers identified in the rulemaking
    who dominate the industry." Letter from Congressman Edolphus Towns
    and Congresswoman Diane Watson to Commissioners Michael Copps and
    Jonathan Adelstein (April 7, 2006).

[^248]: "The \[Subcommittees\] believe the Commission should receive the
    input of the full Committee before taking steps in response to the
    FNPRM released February 3, 2006 in WT Docket No. 05-211, recent
    reports regarding which suggest that the Commission may
    substantially undermine opportunities for diversity of ownership and
    other goals mandated by Section 309(j) of the Communications Act.
    Accordingly, the Subcommittee asks the Commission to convene the
    full Committee as soon as possible with respect to this matter."
    Statement of The Transactional Transparency and Related Outreach
    Subcommittee and the Career Advancement Subcommittee of the Advisory
    Committee on Diversity for Communications in the Digital Age (April
    6, 2006).

[^249]: "Imposing severe new limitations on DEs sourcing investments
    from a broad category of companies defined as having revenues of
    \$125 million or more will have the effect of killing the DE
    program." Ex Parte of Carroll Wireless, LP, CSM Wireless, LLC, Leap
    Wireless Int'l, Inc. United States Cellular Corp., TA Associates, 3G
    PCS, LLC, Royal Street Commc'ns, LLC, MetroPCS Commc'ns, Inc.,
    Catalyst Investors and Council Tree Commc'ns, Inc. (April 5, 2006)
    ("Carroll Wireless et al").

[^250]: "Such ruling would effectively dismantle the DE Program as
    mandated by Congress. We urge the Commission to maintain the most
    important diversity tool at its disposal, stay with the clear record
    in this case and proceed with finalizing its Tentative Conclusion in
    this proceeding." Ex Parte of Doyon, Ltd., Koniag Development Corp.,
    St. George Tanaq Corp. Chugach Alaska Corp., and Bethel Native Corp.
    (April 7, 2006).

[^251]: Ex Parte of Carroll Wireless et al.