7. Should Registration Applicants Be Subject to
Expanded Fiscal and Civil Responsibility Checks?
Should Fingerprints, Criminal Background Checks
and/or Other Showings Be Required For Registration
Applicants?
The Audit Report found that the Commission's collection difficulties, discussed above, are compounded by other processing shortcomings and control deficiencies.19 In particular, the Audit Report states that the Application Form requires an applicant to provide only minimal information and advises that the Commission does not adequately review the background and financial viability of applicants. The Audit Report identifies one instance where an unscrupulous company began billing consumers for millions of dollars in unauthorized charges shortly after being registered by the Commission.
We find that the Application Form currently does not require registration applicants to disclose certain information that might well be pertinent to an applicant's fitness for a grant of operating authority. We conclude that we should require registration license applicants to provide additional information, and undergo expanded fiscal and civil responsibility checks. However, we will not require fingerprinting as a part of applicant background checks.
The current registration process requires applicants to complete the Application Form, consisting of questions concerning the identity of the applicant, place of business, proposed service area, type of organizational structure, types of service to be offered, proof of requisite financing, eligibility for tariff exemptions, and declarations affirming that no principal owning more than 10% of the applicant has been the subject of a civil or criminal court order as to Business Code violations or has been sanctioned by a regulatory agency, and that no principal has been associated with a carrier that filed for bankruptcy.20
CPSD conducts background checks based on the responses to the questions in the Application Form. CPSD then files a protest if it believes that an applicant has untruthfully answered any question.
If a protest is filed, the application is automatically removed from the expedited process and is assigned to an Administrative Law Judge (ALJ) for further review, including possible hearings. This process allows applicants with no history of questionable behavior and that present noncontroversial applications to rely on an expedited and inexpensive means of securing operating authority.21
UCAN recommends that applicant background checks include fingerprinting of all corporate officers and directors (for corporations), members, managers, and officers (for limited liability corporations), general and managing partners (for partnerships), and of the proprietor of sole proprietorships. UCAN further recommends that the Commission conduct its own independent review of court and regulatory agency records to verify good standing (regulatory compliance and fiscal solvency), including a review of an applicant's officers and directors, partners, or members, and to impose fees to cover the costs for these investigations. UCAN recommends that a change of ownership or transfer of registration licenses be treated as new applications.
DRA supports the OIR's proposed revisions to the registration process, and recommends that the Commission also review the Commission's Consumer Affairs Branch database for complaints as evidence of lack of fitness, as is done for CPCN applications. However, DRA does not recommend that the Commission require fingerprinting as a part of applicant background checks because, according to DRA, the Commission currently does not have access to the United States Department of Justice fingerprint database, and, therefore, fingerprinting would be of little use.
CALTEL and ExteNet oppose the OIR's proposal to require fingerprinting and criminal background checks of NDIECs' officers or directors. CALTEL states that the Audit Report did not recommend criminal background checks or fingerprinting. CALTEL asserts that NDIECs do not present the kinds of risks to public safety and welfare that would justify fingerprinting NDIEC principals as the Commission does with charter party and household goods carriers.
ExteNet states that criminal background checks and fingerprinting overreach because such requirements are not targeted to offenses related to telecommunications operations. ExteNet recommends that the Commission limit its inquiry to the conduct of the carrier, including searching FCC and other state regulatory databases for evidence of regulatory sanctions.
Verizon states that it would be burdensome and resource intensive to require an applicant to disclose whether it has been previously or is currently being investigated by any governmental agency, has entered into any settlement agreements or made any voluntary payments in resolution of any action by any regulatory body, agency, or attorney general, or court. Verizon recommends that the Commission narrowly tailor any new rules to address specific, identified problems, avoid duplication of existing reporting requirements, and avoid imposing new requirements of questionable usefulness.
Sempra states that background checks should not be so onerous as to discourage potential officers and directors from serving, or to discourage potential registration license holders from seeking to offer services in California. Sempra states, however, that it is reasonable to inquiry into whether an applicant has entered into any settlements with any regulatory agency over its business conduct or practices.
DRA contends that the Commission should consider additional facts concerning any other type of monetary forfeitures, including settlements and other voluntary payments, that are not currently and explicitly required to be reported on the Application Form but which are pertinent to a registrant's fitness for a grant of operating authority.
According to DRA, CPSD previously protested certain registration applications for failing to disclose pending civil litigation, settlements, or monetary forfeitures that CPSD believed were relevant to an applicant's fitness. However, because the Application Form does not specifically require registration applicants to report settlements and other monetary forfeitures or voluntary payments, prior Commission decisions have found that applicants' failure to disclose this information does not violate our rules.22 Thus, the extent of CPSD's background check is effectively limited to the questions contained in the Application Form.
We conclude that we should require registration applicants to provide additional information to enable more thorough fiscal and civil responsibility checks. Therefore, we require applicants to disclose any type of settlement of claims brought against applicants or applicants' principals by any regulatory body, agency, district attorney, states' attorney general, Department of Justice, or other enforcement body, whether that settlement is monetary or conduct-based. This information is in addition to currently required information concerning adjudications by those bodies, and judgments or settlements entered into in civil courts related to claims of fraud, non-disclosure or unfair, deceptive, and/or illegal business consumer practices.
Information concerning prior or current investigations of an applicant or its principals by governmental agencies that applicant is aware of and information concerning settlement agreements entered into or voluntary payments made by an applicant or its principals to resolve action by regulatory agencies, attorneys general, or courts is relevant to determining an applicant's eligibility to use the registration process. Requiring registration applicants to provide this additional information during the registration process is consistent with the Audit Report recommendation for the Commission to conduct more stringent background reviews of individuals and companies applying for registration.
In particular, information on other types of monetary forfeitures will alert the Commission to an applicant's settlements and forfeitures, as well as investigations underway but not completed, to help the Commission identify whether an applicant has a prior history of questionable behavior. Requiring applicants to provide information on other types of monetary forfeitures will also expand the scope of the background checks that CPSD conducts. Therefore, we revise Questions Nos. 7 and 8 of the Application Form as follows:
Question No. 7 (Question No. 8 on the revised Application Form):
"Neither applicant, any of its affiliates, officers, directors, partners, agents, or owners (directly or indirectly) of more than 10% of applicant, or anyone acting in a management capacity for applicant: (a) held one of these positions with a company that filed for bankruptcy; (b) been personally found liable, or held one of these positions with a company that has been found liable, for fraud, dishonesty, failure to disclose, or misrepresentations to consumers or others; (c) been convicted of a felony; (d) been (to his/her knowledge) the subject of a criminal referral by judge or public agency; (e) had a telecommunications license or operating authority denied, suspended, revoked, or limited in any jurisdiction; (f) personally entered into a settlement, or held one of these positions with a company that has entered into settlement of criminal or civil claims involving violations of sections 17000 et seq., 17200 et seq., or 17500 et seq. of the California Business & Professions Code, or of any other statute, regulation, or decisional law relating to fraud, dishonesty, failure to disclose, or misrepresentations to consumers or others; or (g) been found to have violated any statute, law, or rule pertaining to public utilities or other regulated industries; or (h) entered into any settlement agreements or made any voluntary payments or agreed to any other type of monetary forfeitures in resolution of any action by any regulatory body, agency, or attorney general.
If your answer to this question is anything other than an unqualified "True," please attach documentation and describe any such bankruptcies, findings, judgments, convictions, referrals, denials, suspensions, revocations, limitations, settlements, voluntary payments or any other type of monetary forfeitures."
Question No. 8 (Question No. 9 on the revised Application Form):
"To the best of applicant's knowledge, neither applicant, any affiliate, officer, director, partner, nor owner of more than 10% of applicant, or any person acting in such capacity whether or not formally appointed, is being or has been investigated by the Federal Communications Commission or any law enforcement or regulatory agency for failure to comply with any law, rule or order.
If your answer to this question is anything other than an unqualified "True," please attach documentation and describe all such investigations, whether pending, settled voluntarily or resolved in another manner."
In its comments on the PD, DRA recommends that the revised Application Form include a provision to "attach documentation" in response to Questions 8 and 9. We agree. Questions 8 and 9 on the revised Application Form have been revised accordingly.
The additional disclosures that we require do not change the objective of providing an expedited and inexpensive means for applicants with no history of questionable behavior to secure operating authority pursuant to § 1013. The additional disclosures will provide the Commission with relevant information to assure the Commission that registration applicants have no history of questionable behavior and present noncontroversial applications. Applicants which do not meet these standards (or whose applications are protested) but which nevertheless may be suitable for being granted operating authority, will not be excluded from applying but will have to use the more extensive CPCN application process conducted pursuant to § 1001.
Notwithstanding CALTEL's and ExteNet's general objections to the Commission imposing any new requirements on NDIECs, no party opposes the proposal, in particular, to require resumes, listing all employment, from officers and directors of registration applicants. Requiring resumes from officers and directors of applicants will provide important information about an applicant's principals but should not discourage potential officers and directors from serving, and should not discourage registrants from seeking to offer services in California. Therefore, the proposal to require resumes, listing all employment, from officers and directors of registration applicants is adopted and the Application Form is revised accordingly.23
In its comments on the PD, DRA recommends that registration applicants be required to also provide the social security numbers of its principals and officers, because, according to DRA, this information will allow the enforcement staff to perform background checks more quickly.
Requiring registration applicants to provide the social security numbers of its principals and officers could be of value while performing background checks. However, DRA makes this recommendation for the first time in its comments on the PD, and the Commission has not had the opportunity to carefully consider the recommendation. We do not adopt it.
Question No. 1 of the Application Form currently requires applicants to attach a list of fictitious names used, if any. To provide more clear instructions to applicants, and to enable the Commission to conduct more thorough fiscal and civil responsibility checks, the Application Form is revised to require applicants to list the fictitious business names under which a registration applicant has done business in the last five years.24
As discussed below, the Commission will not require fingerprinting of registration NDIECs' principals as a part of the simplified registration process. The Commission currently requires electric service providers registering with the Commission and applicants for a permit to operate as a household goods carrier to submit fingerprints for each owner, partner, officer, and director, pursuant to § 394(b)(8) and § 5135(d), respectively.
In 1996, the legislature adopted AB 1890 addressing the transition to a more competitive electric industry, and in 1997, the legislature adopted Senate Bill (SB) 477 to facilitate restructuring of the electric industry. Pursuant to AB 1890 and SB 477, D.98-03-072 established interim standards for determining financial viability, and technical and operational ability for applicants seeking to become electric service providers in California. Among other things, D.98-03-072 required the officers and directors of electric service providers to submit fingerprints to enable the Commission to conduct the background checks contemplated by § 394(b)(8).
In 1999, AB 1658 added a specific fingerprinting requirement to § 394 as part of the electric service provider registration process. AB 1658 also established § 5135(d), requiring fingerprints from the owners, partners, officers, and directors of household goods carriers in order to mirror the fingerprinting requirement applicable to electric service providers.
D.99-05-034 subsequently eliminated the requirement to submit fingerprints of the directors of electric service providers but continued to require submission of fingerprints of electric service provider officers. D.99-05-034 found that fingerprinting electric service provider officers would be useful in screening out persons intending to defraud consumers. D.99-05-034 stated that, when balancing the need to maximize competition by reducing barriers to entry with the need to protect small consumers against deceptive, unfair, or abusive business practices, fingerprinting was not an undue barrier to entry given the legislature's expressed intent to protect small consumers, embodied in § 391.25
The fingerprinting of electric service provider officers is justified given the legislature's declaration that electricity is essential to the health, safety, and economic well-being of all California consumers, and that consumers be provided with mechanisms to protect themselves from marketing practices that are unfair or abusive. Fingerprinting the owners, partners, officers, and directors of household goods carriers is also appropriate because these carriers are entrusted with the moving publics' most cherished and valuable possessions.
However, the risks to the public presented by registrants do not justify fingerprinting of registration applicants' principals. The Commission does not require fingerprinting of CPCN applicants' principals. To require the principals of registration applicants to undergo fingerprinting would be more onerous than what we currently require for CPCN applicants.
Moreover, while telecommunications carriers may be viewed as providing essential services, the additional information we require from applicants is sufficient to allow the Commission to conduct more thorough background and financial viability reviews of individuals or companies registering with the Commission, consistent with the Audit Report recommendations.
In its comments on the PD, DRA states that the PD does not discuss the possible sanctions faced by registrants who either withhold information or willfully mislead the Commission. DRA recommends that the Commission provide guidelines to NDIECs and Commission Staff as to what the consequences are for failing to disclose the required information.
We need not set forth guidelines on the consequences of withholding information or willfully misleading the Commission, except to note that the Application Form requires a signed verification by the applicant. Consequently, any misrepresentation in the application would be a violation of Rule 1.1 of the Commission's Rules of Practice and Procedure and subject to sanctions under the Public Utilities Code.
No party commented on the OIR's proposal to have an applicant state when the applicant will begin providing service in California. This proposal is adopted. A new question (Question No. 6 on the revised Application Form) is added to the Application Form requiring the applicant to provide the date on which applicant expects to begin offering service in California, and the remaining questions on the Application Form are renumbered, accordingly.
In its comments on the PD, DRA recommends that an additional question be added to the Application Form to require applicants to identify the other states where they conducted, applied to conduct, or currently conducts business. DRA states that this information will assist staff performing background checks. DRA makes this recommendation for the first time in its comments on the PD. The Commission has not had the opportunity to carefully consider the recommendation, and does not adopt it.
It is not necessary for the Commission to take further comment on how the additional information obtained through the revised registration process will be used, as UCAN asserts the Commission must do. As described above, if a registration application is protested, the registration application is automatically removed from the expedited process and is assigned to an ALJ for further review, including possible hearings.26 Thus, the additional information we require from registration applicants will be used to verify a registration applicant's eligibility to use the simplified registration process.
In its comments on the PD, DRA recommends that the Commission require that an application for an NDIEC registration license filed pursuant to § 1013 be dismissed without prejudice and be required to be re-filed pursuant to § 1001, if Commission staff determines that an applicant has not fully disclosed its negative corporate history. DRA recommends that the re-filed applications be closely scrutinized and the applicant be required to explain why the negative information was previously withheld. DRA does not explain how its recommendation is substantively different from the existing process.
As discussed earlier, CPSD currently conducts background checks based on the responses to the questions in the Application Form, and files a protest if it believes that an applicant has untruthfully answered any question. If a protest is filed, the application is automatically removed from the expedited process and is assigned to an ALJ for further review, including possible hearings.
DRA appears to be proposing that staff be authorized to reject an application as the result of an informal staff review. DRA's recommendation would inappropriately delegate to staff discretionary authority, and, therefore, the recommendation is not adopted.
The revisions made to the Application Form and instructions, pursuant to this Decision, are shown in the markup contained in Attachment B. The revised Application Form and instructions are included as Attachment C.27
In its comments on the PD, DRA recommends that the title of the revised Application Form (currently titled "Form of Application for Registration") be renamed the "Registration License Form." The Commission prefers that the revised Application Form be called the "Application for Registration License" to more clearly identify its purpose, and makes this non-substantive change.
19 Audit Report, Finding 1, at 7-10.
20 The current Application Form is attached to this Decision as Attachment A.
21 D.97-06-107, Finding Of Fact No. 8.
22 See, for example, D.08-12-027, D.09-07-034, and D.09-10-034. Other Commission decisions, however, have treated failure to disclose an applicant's regulatory history as sanctionable conduct. (See, for example, D.09-06-013.)
23 Question No. 2 of the Application Form has been revised to require resumes, listing all employment, from officers and directors of registration applicants.
24 Question No. 1.A on the revised Application Form.
25 Section 391(a) states, among other things, that electricity is essential to the health, safety, and economic well-being of all California consumers, and § 391(g)(2) states that it is the intent of the legislature that consumers be provided with mechanisms to protect themselves from marketing practices that are unfair or abusive.
26 Registration applications that are filed with the Commission are noticed in the Commission's Daily Calendar. The Daily Calendar is available on the Commission's website ( http://www.cpuc.ca.gov). Any person concerned about the accuracy, completeness or content of an application may file a protest within 30 days after publication of the notice in the Daily Calendar.
27 The instructions for the revised Application Form also include a non-substantive change in order to be consistent with the revised Commission's Rules of Practice and Procedure adopted in D.06-07-006.
