[Federal Register Volume 63, Number 81 (Tuesday, April 28, 1998)]
[Proposed Rules]
[Pages 23231-23239]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-10928]


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DEPARTMENT OF JUSTICE

28 CFR Part 100

RIN 1105-AA39


Implementation of Section 109 of the Communications Assistance 
for Law Enforcement Act: Proposed Definition of ``Significant Upgrade 
or Major Modification''

AGENCY: Federal Bureau of Investigation, DOJ.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The FBI proposes to amend the Communications Assistance for 
Law Enforcement Act (CALEA) Cost Recovery Regulations by adding a new 
section which defines the term ``Significant Upgrade or Major 
Modification.'' This NPRM sets forth both the FBI's proposed section 
and the rationale behind the proposed definition. The addition of this 
section will clarify the applicability of the CALEA, Cost Recovery 
Regulations and assist the telecommunications industry in assessing its 
responsibilities under CALEA.

DATES: Comments must be received on or before June 29, 1998.

ADDRESSES: Comments should be submitted to the Telecommunications 
Contracts and Audit Unit, Federal Bureau of Investigation, P.O. Box 
221286, Chantilly, VA 20153-0450, Attention: CALEA FR Representative. 
All comments will be available from the FBI Reading Room located at FBI 
Headquarters, 935 Pennsylvania Avenue, NW., Washington, DC 20535. To 
review the comments, interested parties should contact Ms. Mary 
Stuzman, FBI Reading Room, FBI Headquarters, telephone number (202) 
324-2664, to schedule an appointment (48 hours advance notice 
required). See Section G of the Supplementary Information for further 
information on electronic submission of comments.

FOR FURTHER INFORMATION CONTACT:
Walter V. Meslar, Unit Chief, Telecommunications Contracts and Audit 
Unit, Federal Bureau of Investigation, P.O. Box 221286, Chantilly, VA 
20153-0450, telephone number (703) 814-4900.

SUPPLEMENTARY INFORMATION:

A. General Background

    Recent and continuing advances in telecommunications technology and 
the introduction of new digitally-based services and features have 
impaired the ability of federal, state, and local law enforcement 
agencies to fully and properly conduct various types of court-
authorized electronic surveillance. Therefore, on October 25, 1994, the 
President signed into law the Communications Assistance for Law 
Enforcement Act (CALEA) (Public Law 103-414, 47 U.S.C. 1001 et seq.). 
This law requires telecommunications carriers, as defined in CALEA, to 
ensure that law enforcement agencies, acting pursuant to court order or 
other lawful authorization, are able to intercept communications 
regardless of advances in telecommunications technologies.
    Under CALEA, certain implementation responsibilities are conferred 
upon the Attorney General; the Attorney General has, in turn, delegated 
responsibilities set forth in CALEA to the Director, FBI, or his 
designee, pursuant to 28 CFR 0.85(o). The Director, FBI, has designated 
the Telecommunications Industry Liaison Unit of the Information 
Resources Division and the Telecommunications Contracts and Audit Unit 
of the Finance Division to carry out these responsibilities.
    One of the CALEA implementation responsibilities delegated to the 
FBI is the establishment, after notice and comment, of regulations 
necessary to effectuate timely and cost-efficient payment to 
telecommunications carriers for certain modifications made to 
equipment, facilities and services (hereafter referred to as 
``equipment'') to make that ``equipment'' compliant with CALEA.\1\ 
Section 109(b)(2) of CALEA authorizes the Attorney General, subject to 
the availability of appropriations, to agree to pay telecommunications 
carriers for additional reasonable costs directly associated with 
making the assistance capability requirements found in section 103 of 
CALEA reasonably achievable with respect to

[[Page 23232]]

``equipment'' installed or deployed after January 1, 1995, in 
accordance with the procedures established in section 109(b)(1) of 
CALEA.\2\ Section 104(e) of CALEA authorizes the Attorney General, 
subject to the availability of appropriations, to agree to pay 
telecommunications carriers for reasonable costs directly associated 
with modifications of any of a carrier's systems or services, as 
identified in the Carrier Statement required by CALEA section 104(d), 
which do not have the capacity to accommodate simultaneously the number 
of interceptions, pen registers, and trap and trace devices set forth 
in the Capacity Notice(s) published in accordance with CALEA section 
104. Finally, section 109(a) of CALEA authorizes the Attorney General, 
subject to the availability of appropriations, to agree to pay 
telecommunications carriers for all reasonable costs directly 
associated with the modifications performed by carriers in connection 
with ``equipment'' installed or deployed on or before January 1, 1995, 
to establish the capabilities necessary to comply with the assistance 
capability requirements found in section 103 of CALEA. However, 
reimbursement under section 109(a) of CALEA is modified by the 
requirements of section 109(d), which states:

    \1\ CALEA Sec. 109(e).
    \2\ CALEA Section 109(b)(1) sets forth the procedures and the 
criteria the Federal Communications Commission (FCC) will use to 
determine if the modifications are ``reasonably achievable''.
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    If a carrier has requested payment in accordance with procedures 
promulgated pursuant to subsection (e) [Cost Control Regulations], 
and the Attorney General has not agreed to pay the 
telecommunications carrier for all reasonable costs directly 
associated with modifications necessary to bring any equipment, 
facility, or service deployed on or before January 1, 1995, into 
compliance with the assistance capability requirements of section 
103, such equipment, facility, or service shall be considered to be 
in compliance with the assistance capability requirements of section 
103 until the equipment, facility, or service is replaced or 
significantly upgraded or otherwise undergoes major modification. 
(emphasis added).

While this section deals specifically with a carrier's compliance with 
CALEA, the phrase ``significantly upgraded or otherwise undergoes major 
modification'' (hereafter referred to as ``significant upgrade or major 
modification''), depending on a carrier's actions after January, 1995, 
also has a direct bearing on the eligibility for reimbursement of some 
``equipment'' installed or deployed on or before January 1, 1995.\3\
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    \3\ ``Significant upgrade or major modification'' also appears 
in CALEA Sec. 108(c)(3)(B) with regard to the limitations placed 
upon the issuance of enforcement orders under 18 U.S.C. 2522.
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B. CALEA Cost Recovery Regulations

    As required by CALEA Sec. 109(e), the FBI, after notice and 
comment, promulgated the CALEA Cost Regulations (62 FR 13307, 28 CFR 
part 100), which establish the procedures which telecommunications 
carriers must follow in order to receive reimbursement under Sections 
109(a), 109(b) and 104(e) of CALEA, as discussed above. Specifically, 
the Cost Recovery Regulations set forth the means of determining 
allowable costs, reasonable costs, and disallowed costs. Furthermore, 
they establish the threshold requirements carriers must meet in their 
submission of cost estimates and requests for payment to the Federal 
Government for the disbursement of CALEA funds. Additionally, they 
ensure the confidentiality of trade secrets and protect proprietary 
information from unnecessary disclosure. Finally, they set forth the 
means for alternative dispute resolution.
    Of particular interest for the purposes of this proposed amendment 
to the Cost Recovery Regulations is Sec. 100.11(a)(1) of 28 CFR part 
100, which includes in the costs eligible for reimbursement under 
section 109(e) of CALEA:

    All reasonable plant costs directly associated with the 
modifications performed by carriers in connection with equipment, 
facilities, and services installed or deployed on or before January 
1, 1995, to establish the capabilities necessary to comply with 
section 103 of CALEA, until the equipment, facility, or service is 
replaced or significantly upgraded or otherwise undergoes major 
modifications; (emphasis added).

    At the proposed rule stage of the rulemaking process establishing 
the Cost Recovery Regulations, the FBI received comments from 16 
representatives of the telecommunications industry, including wireline 
and wireless carriers and associations. Of the 16 sets of comments 
received on the proposed rule, half requested that the FBI define 
``significant upgrade or major modification'' as used in 
Sec. 100.11(a)(1) of the proposed cost recovery rules.
    Given the dynamic nature of the telecommunications industry and the 
potential impact on eligibility for reimbursement, the FBI acknowledged 
that ``significant upgrade or major modification'' must be defined. 
Therefore, on November 19, 1996, the FBI published an Advanced Notice 
of Proposed Rulemaking (ANPRM) in the Federal Register (61 FR 58799), 
which solicited the submission of potential definitions of 
``significant upgrade or major modification'' from the 
telecommunications industry and the general public. This ANPRM was also 
sent to a large number of associations representing the interests of 
the various telecommunications carriers, both wireless and wireless.
    In response to the ANPRM, the FBI received comments from 13 
representatives of the telecommunications industry, including wireless 
and wireless carriers and associations. All comments received have been 
fully considered in preparing this proposed definition of ``significant 
upgrade or major modification.'' Significant comments received in 
response to the ANPRM are also summarized in Section D, below. 
Additionally, in developing this proposed definition, the FBI has 
relied on the input of other governmental agencies and 
telecommunications industry experts.

C. Definition Development

1. Introduction

    Committed to the consultative process and to maintaining an on-
going dialogue with the telecommunications industry, the FBI published 
its ANPRM in order to draw on the expertise of that industry so that 
the FBI could gain an understanding of the range of options available 
with regard to ``significant and upgrade or major modification.'' 
Therefore, the FBI requested that telecommunications carriers and other 
interested parties submit potential definitions of ``significant 
upgrade or major modification'' in response to the ANPRM. However, the 
FBI did not leave off working on a definition of ``significant upgrade 
or major modification'' in the interim. Rather, the FBI, in addition to 
considering the potential definitions submitted by the industry, also 
explored a number of means of defining this term. Specifically, the FBI 
has examined three definitional approaches: Accounting, Technical, and 
Public Safety. Each of these approaches, along with relevant public 
comments received and the results of the Bureau's research, is 
discussed in detail below.

2. Accounting Approaches

    In order to define ``significant upgrade or major modification'' in 
accounting terms, the FBI first sought to determine at what point 
expenditures would be considered significant in either dollar or

[[Page 23233]]

percentage terms. It became immediately apparent that a specific dollar 
figure could not be determined in light of the differences between 
wireline and wireless switching equipment and the dearth of available 
information on wireless carrier expenditures.
    In an effort to establish the threshold for significance in terms 
of a specific percentage, the FBI researched several accounting and 
procurement regulation sources. As a result of this research, the FBI 
identified two references which generally support 20% as being the 
threshold for significance. In the Accounting Principles Board Opinion-
18 (APB-18) pronouncement concerning the equity method of accounting 
for investments in common stock, the term ``significant'' is used when 
it refers to influence over the operating and financial policies of the 
investee. APB-18, paragraph 17, reads: ``Absent evidence to the 
contrary, an investment (directly or indirectly) of 20% or more in the 
voting stock of an investee is presumed to indicate the ability to 
exercise significant influence, and the equity method is required for 
fair presentation.'' There was also a presumption in APB-18 that 
``significant'' influence does not exist in an investment of less than 
20%.
    The use of the 20% threshold for significance is also supported in 
the Communications Act of 1934, Section 310, which indicates that a 
station license shall not be granted to ``any corporation of which more 
than one-fifth of the capital stock is owned of record or voted by 
aliens.'' \4\ This would seem to indicate that control of 20% of the 
capital stock imparts significant influence upon the stockholder.
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    \4\ 47 U.S.C. 310(b)(3).
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    In each of the above references it can be inferred that 20% was 
considered to be the threshold for significance. Translating this 
inference to the task of defining ``significant upgrade or major 
modification,'' it could be argued that any telecommunications carrier 
that incurred expenditures equal to or exceeding 20% of the 
telecommunications plant in-service value of a switch has made a 
``significant upgrade or major modification'' to that switch.
    Based on this premise the FBI could define ``significant upgrade or 
major modification'' in financial terms as follows: ``A significant 
upgrade or major modification is defined as any improvement to a 
carrier's existing equipment, facilities, or services for which the 
construction, installation, and acquisition costs of the project equal 
or exceed 20% of the telecommunications plant in-service value in 
switching equipment and switching assets used for stored program 
control.''
    However, this accounting definition ultimately proved untenable. 
First, it is possible for a carrier to make a modification or upgrade 
which could cross the 20% threshold, yet have no impact on law 
enforcement's ability to conduct lawfully authorized electronic 
surveillance. Such an occurrence would be inconsistent with the intent 
of CALEA. Additionally, given the wide variety of network-based systems 
in use today, it would be extremely difficult to determine precisely to 
what the 20% threshold should apply (e.g., the entire network, a 
specific switch, an available feature). In practice, applying such a 
percentage to a telecommunications network would ultimately create more 
confusion than it would resolve. Therefore, the FBI discarded this 
approach.

3. Technical Approaches

    The FBI also considered a number of technical approaches to 
defining ``significant upgrade or major modification.'' The term 
``significant'' was used in relation to equipment upgrades by the 
Federal Communications Commission (FCC) in only one telecommunications 
proceeding during the past few years: FCC Docket Number 95-116, 
Telephone Number Portability (``Number Portability Proceeding''). The 
discussion of implementation costs in the Number Portability Proceeding 
states: ``long-term, or database, number portability methods require 
significant network upgrades, including installation of number 
portability-specific switch software, implementation of Signaling 
System No. 7 and Intelligent Network or Advance Intelligent Network 
capability, and the construction of multiple number portability 
databases.'' \5\ This specific reference to ``significant network 
upgrades'' does not, however, provide a generic definition; rather, it 
provides only examples of upgrades which could be considered 
significant.
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    \5\ Telephone Number Portability, First Report and Order and 
Further Notice of Proposed Rule Making, CC Docket No. 95-116 (1996), 
paragraph 122.
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    As the FBI worked through a number of technical definitions, some 
dealing with software generics, some dealing with switch architecture, 
it became apparent that every technical definition was open to question 
on some type of equipment. Furthermore, each technical definition 
proposed left ambiguities and called for constant definition of the 
terms used. Therefore, the FBI discarded this approach for the long 
term.

4. Public Safety Approaches

    The intent of CALEA is to ensure that law enforcement agencies, 
acting pursuant to court order or other lawful authorization, will 
continue to be able to interpret communications regardless of advances 
in telecommunications technologies. Therefore, the FBI began to look at 
defining ``significant upgrade or major modification'' from a public 
safety perspective. In doing so, the FBI determined that any new 
modification or upgrade which created an impediment to lawfully 
authorized electronic surveillance could be considered ``significant'' 
or ``major'' given the intent of CALEA in that it would endanger public 
safety and prevent law enforcement from carrying out its mission. 
Therefore, the FBI developed the following definition: ``the term 
`significant upgrade or major modification' means any change, whether 
through addition or other modification, to any equipment, facility or 
service that impedes law enforcement's ability to conduct lawfully 
authorized electronic surveillance.''
    However, the FBI recognizes that events have overtaken the CALEA 
implementation process, specifically the enactment of the 
Telecommunication Act of 1996, and that carriers could not cease all 
activity on their systems until a definition of ``significant upgrade 
or major modification'' was promulgated. Therefore, in the interests of 
reasonableness, the FBI developed the following bipartite definition:

Sec. 100.22  Definition of ``significant upgrade or major 
modification.''

    (a) For equipment, facilities or services for which an upgrade 
or modification has been completed on or before October 25, 1998, 
the term ``significant upgrade or major modification'' means any 
fundamental or substantial change in the network architecture or any 
change that fundamentally alters the nature or type of the existing 
telecommunications equipment, facility, or service that impedes law 
enforcement's ability to conduct lawfully authorized electronic 
surveillance, unless such change is mandated by a Federal or State 
statute;
    (b) For equipment, facilities or services for which an upgrade 
or modification is completed after October 25, 1998, the term 
``significant upgrade or major modification'' means any change, 
whether through addition or other modification, to any equipment, 
facility or service that impedes law enforcement's ability to 
conduct lawfully authorized electronic surveillance, unless such 
change is mandated by a Federal or State statute.


[[Page 23234]]


The technical terminology in proposed Sec. 100.22(a) is derived from 
the comments submitted by the telecommunications industry in response 
to the ANPRM. Given that October 25, 1998 is the compliance date for 
CALEA capability, the FBI believes that this initial definition will 
give carriers the time they need to make appropriate business decisions 
about their ``equipment'' in light of CALEA's ``significant upgrade or 
major modifications''' clause and will not penalize carries for most 
upgrades or modifications made to their ``equipment'' while both a 
definition of ``significant upgrade or major modification'' and a CALEA 
solution were unavailable. However, carriers who made upgrades or 
modifications about which no argument can be made regarding their 
``significance'' (e.g. changing from analogue to digital switching) 
will still be required to comply with CALEA at their own expense.
    Proposed Sec. 100.22(b) will then carry out the intent of CALEA by 
ensuring that law enforcement will continue to be able to carry out 
lawfully authorized electronic surveillance in cases where carriers 
made informed business decisions to modify or upgrade their equipment 
in such a way which impedes law enforcement. Carriers do not modify or 
upgrade equipment at random; such business decisions are made so that 
they will ultimately increase a carrier's revenue. With the 
promulgation of this definition, carriers will be able to factor the 
requirements and costs of CALEA compliance into their decisions, 
thereby being able to determine if upgrading or modification is the 
best decision at that time.

D. Industry Comments in Response to ANPRM

    In response to the ANPRM, commenters raised a number of issues, 
many of which had little direct bearing on the issue of defining the 
term ``significant upgrade or major modification'' and have since been 
addressed in the final CALEA cost recovery rule (62 FR 13307). 
Therefore, the FBI has opted to address in this document only those 
comments which have a direct bearing on ``significant upgrade or major 
modification'' and which have not been previously addressed in print.

1. Definition of ``Installed or Deployed''

    The CALEA Cost Recovery Rules (28 CFR part 100) define ``installed 
or deployed'' as follows: ``Installed or deployed means that, on a 
specific switching system, equipment, facilities, or services are 
operable and available for use by the carrier's customers.'' (28 CFR 
100.10). Several commenters responding to the ANPRM argues that 
``deployed'' should mean ``commercially available prior to January 1, 
1995'' and should, therefore, be defined separately from ``installed.''
    The FBI believes that the commenters' proposed definition of 
``deployed'' as it is used in CALEA is incorrect. CALEA section 
109(e)(3), Submission of Claims, reads: ``Such [Cost Control] 
regulations shall require any telecommunications carrier that the 
Attorney General has agreed to pay for modifications pursuant to 
[section 109] and that has installed or deployed such modification to 
submit to the Attorney General a claim for payment * * *'' (Emphasis 
added). It is unlikely that the Congress intended that carriers be able 
to submit claims for payment simply because a piece of equipment was 
commercially available. It is also unlikely that the Congress intended 
that the Attorney General agree to reimburse carriers for commercially 
available equipment sitting in their warehouses. Rather, it seems clear 
that the Congress intended that claims be submitted only for such 
equipment for which the CALEA solution was ``operable and available for 
use,'' or ``deployed.'' Therefore, no change to the definition of 
``installed or deployed'' has been made.

2. Definition of ``Replaced''

    Some commenters requested that the FBI defined ``replaced'' as used 
in the phrase ``replaced or significantly upgraded or otherwise 
undergoes major modification.'' \6\ These commenters advocated defining 
``replaced'' as meaning the installation of equipment, facilities or 
services which became commercially available after January 1, 1995 and 
which are not upgrades or modifications to equipment, facilities or 
services commercially available prior to January 1, 1995. However, the 
plain language of CALEA never addresses the issue of commercial 
availability with regard to grandfathered equipment; rather, CALEA 
repeatedly refers to the date of installation or deployment as the 
relevant date for reimbursement eligibility. Additionally, unlike the 
potentially subjective or ambiguous nature of the term ``significant 
upgrade or major modification,'' the meaning of the term ``replaced'' 
is both clear and common. Therefore, the FBI does not intend to define 
this term.
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    \6\ CALEA Sec. 109(d).
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3. Just Compensation

    Some commenters asserted that an overly broad definition of 
``significant upgrade or major modification'' would constitute a taking 
for which the carriers would be entitled to full compensation pursuant 
to the Just Compensation Clause of the Fifth Amendment of the 
Constitution of the United States. One commenter asserted that this was 
so regardless of whether Congress provides funding for CALEA cost 
reimbursement.
    No set formula exists for identifying when Government regulatory 
action constitutes a ``taking'' under the Constitution; the Supreme 
Court has instead generally relied on an ad hoc, factual inquiry into 
the circumstances of each particular case. The Supreme court has, 
however, indicated that the following factors have particular 
significance: (1) The severity of the economic impact of the regulation 
on the claimant; (2) the extent to which the regulation has interfered 
with distinct investment-backed expectations; and (3) the character of 
the government action. See Concrete Pipe and Products of California, 
Inc. v. Construction Laborers Pension Trust for So. California, 508 
U.S. 602, 113 S.Ct. 2264, 124 L.Ed. 2d 539 (1993); Connolly v. Pension 
Benefit Guaranty Corp., 475 U.S. 211, 106 S.Ct. 1018, 89 L.Ed.2d 166 
(1986); see also Lucas v. South Carolina Coastal Commission, 505 U.S. 
1003, 112 St.Ct. 2886, 120 L.Ed.2d 798 (1992).
    In response to the comments received, the FBI has analyzed these 
factors and has concluded that the proposed definition of ``significant 
upgrade or major modification'' does not amount to a compensable 
taking. First, the FBI does not believe that the economic impact of 
this definition on carriers will rise to the level of a taking 
requiring compensation. The proposed definition will not significantly 
impair the economically beneficial use of the carriers' property, and 
the value of such property will not be substantially reduced. If any 
such reduction does occur, CALEA section 109(b) provides a mechanism 
whereby carriers may petition the FCC for relief through a 
determination that CALEA compliance is not reasonably achievable. 
Moreover, it has been held that ``mere diminution in the value of 
property, however serious, is insufficient to demonstrate a taking.'' 
Concrete Pipe, 508 U.S. at 645. Second, this definition, and the 
regulations of which it is a part, will not interfere with investment-
backed expectations of the carriers. Carriers have cooperated with the 
execution of court-ordered electronic surveillance for some time now. 
Carriers could,

[[Page 23235]]

consequently, readily anticipate that such wiretapping would continue 
and that the mechanisms of such wiretapping would evolve as 
telecommunications technology advanced. These regulations do not expand 
law enforcement authority but merely maintain the ability of law 
enforcement to conduct court-ordered surveillance. Carriers had no 
reasonable expectation that they would not be required to continue to 
provide assistance to law enforcement. Finally, the character of the 
government action involved suggests that regulations do not involve a 
compensable taking. In carrying out CALEA, no law enforcement agency 
will physically invade any carriers' property or appropriate any 
carriers' assets for its own use. The FBI feels that the regulations of 
which this definition is a part substantially advance the Nation's 
legitimate interests in preserving public safety and national security. 
These interests would unquestionably be jeopardized without the ability 
to conduct court-ordered electronic surveillance. Such wiretaps are 
critical to saving lives and preventing and solving crimes. In sum, the 
FBI does not believe that the carriers are being forced to bear a 
burden ``which, in all fairness and justice, should be borne by the 
public as a whole.'' Armstrong v. United States, 364 U.S. 40, 49, 80 
S.Ct. 1563, 4 L.Ed.2d 1554 (1960).

4. FBI Authority To Define ``Significant Upgrade or Major 
Modification''

    Some commenters challenged the FBI's authority to define the term 
``significant upgrade or major modification,'' asserting that final 
authority rests with either the FCC or the courts. The FBI began this 
rulemaking proceeding regarding ``significant upgrade or major 
modification'' at the request of commenters on the proposed cost 
recovery rule. In fact, some of the same entities which requested in 
their comments on the proposed CALEA cost recovery rule that the FBI 
define ``significant upgrade or major modification,'' are those who are 
now challenging the FBI's authority to do so.
    There is no explicit language in CALEA placing the definition of 
``significant upgrade or major modification'' under the FCC's 
authority.\7\ In fact, in light of the FCC's greater technical 
expertise, the FBI has consulted on several occasions with the FCC 
regarding the definition of ``significant upgrade or major 
modification.'' The FBI offered to defer to the FCC in this area; 
however, the FCC determined that the definition of ``significant 
upgrade or major modification'' falls within the FBI's CALEA 
implementation responsibilities, specifically with regard to 
reimbursement.
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    \7\ See, however, the amendments to the Communications Act of 
1934 contained in Title III of CALEA, specifically 47 U.S.C. 229(a): 
``In general--the Commission shall prescribe such rules as are 
necessary to implement the requirements of the Communications 
Assistance for Law Enforcement Act.''
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    With regard to the courts, CALEA section 108 does place the final 
authority regarding this issue with the courts in any enforcement order 
proceeding. However, that should not preclude the FBI from defining 
this term so that carriers will know whether their equipment, 
facilities and services are grandfathered under CALEA section 109(d), 
whether they may be eligible for compensation under CALEA section 
109(a), and whether they may need to petition the FCC under the 
provisions of CALEA section 109(b). Therefore, the FBI is proceeding 
with this rulemaking.

5. Potential Burden on Small Carriers

    Two associations representing the interests of carriers qualifying 
as ``small entities'' for regulatory purposes sought assurances that 
the proposed definition of ``significant upgrade or major 
modification'' would take into consideration the potential burdens 
imposed upon small carriers. The FBI is cognizant of the needs of small 
carriers and has taken these needs into consideration during the 
development of the proposed definition. This issue is addressed at 
length in Section F, Initial Regulatory Flexibility Analysis, below.

6. The Telecommunications Act of 1996

    Several commenters were concerned that upgrades and modifications 
required by the Telecommunications Act of 1996, as well as other 
federal and state mandates, be exempt from consideration as 
``significant upgrades or major modifications'' under CALEA. The FBI is 
persuaded by these comments and has worked such an exemption into the 
proposed definition.

7. Availability of a CALEA Standard

    Several commenters asserted that a pre-condition for the occurrence 
of a ``significant upgrade or major modification'' was the availability 
of an industry-developed CALEA standard. However, the plain language of 
CALEA states that the absence of a standard shall not ``relieve a 
carrier, manufacturer, or telecommunications support services provider 
of the obligations imposed by sections 103 [Assistance Capability 
Requirements] or 106 [Cooperation of Equipment Manufacturers and 
Providers of Telecommunications Support Services], as applicable.'' \8\ 
Therefore, the FBI does not accept this comment.
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    \8\ CALEA Sec. 107(a)(3)(B).
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8. Availability of CALEA Compliant Technology

    Several commenters asserted that a pre-condition for the occurrence 
of a ``significant upgrade or major modification'' was the availability 
of CALEA compliant technology. Carriers could not be expected to 
include the CALEA solution along with any ``significant upgrade or 
major modification'' if such a solution did not exist.
    The FBI is cognizant of this issue and has taken steps to minimize 
the impact of the ``significant upgrade or major modification'' clause 
in these circumstances. To this end, the FBI has proposed the bipartite 
definition proposed above, which limits ``significant upgrades or major 
modifications'' prior to October 25, 1998 to ``any fundamental or 
substantial change in the network architecture or any change that 
fundamentally alters the nature or type of the existing 
telecommunications equipment, facility, or service, that impedes law 
enforcement's ability to conduct lawfully authorized electronic 
surveillance, unless such change is mandated by a Federal or State 
statute.'' Given that October 25, 1998 is the compliance date for CALEA 
capability, the FBI believes that this initial definition will give 
carriers the time they need to make appropriate business decisions 
about their ``equipment'' in light of CALEA's ``significant upgrade or 
major modification'' clause and will not penalize carriers for most 
upgrades or modifications made to their ``equipment'' while the CALEA 
solution is unavailable. However, carriers who made upgrades or 
modifications about which no argument can be made regarding their 
``significance'' (e.g. changing from analogue to digital switching) 
will still be required to comply with CALEA at their own expense.

9. Definition of ``Significant Upgrade''

    Most commenters proposed a definition of ``significant upgrade or 
major modification'' similar to the one proposed by the United States 
Telephone Association (USTA):

    Significant upgrade or major modification includes only those 
upgrades or modifications which are generally available to the 
industry and installed/implemented in

[[Page 23236]]

order to be consistent with industry-developed standards and/or FCC 
technical requirements associated with implementation of CALEA. Such 
upgrades or modifications pertain only to facilities, services, 
functions, etc. that affect compliance with the capabilities [sic] 
requirements of CALEA and represent changes in the network 
architecture or changes that fundamentally alter the nature or type 
of the existing telecommunications equipment, facility, or service. 
Such term does not include upgrades and/or modifications to networks 
mandated by state or Federal law where CALEA compliant technology is 
not available.
    As discussed above, the FBI has taken this proposed definition 
under consideration and has incorporated parts of it into the FBI's own 
proposed definition regarding upgrades and modifications made between 
January 1, 1995 and the CALEA capability compliance date of October 25, 
1998. The FBI has also included in toto the proposed exemption for 
upgrades or modifications required by state and federal mandates. 
However, the FBI believes that this definition will not satisfy the 
intent of CALEA in the long term. Therefore, the FBI has broadened the 
definition for modifications occurring after October 25, 1998 to 
include any upgrade or modification which impedes law enforcement's 
ability to carry out lawfully authorized electronic surveillance. Such 
impediments are clearly ``significant'' and ``major'' in that they 
endanger public safety and prevent law enforcement from carrying out 
its mission. Therefore, the FBI can accept the commenters proposed 
definition only in part.

E. Applicable Administrative Procedures and Executive Orders

1. Unfunded Mandates

    The FBI has examined this proposed rule in light of the Unfunded 
Mandates Reform Act of 1995 and has tentatively concluded that this 
proposed rule will not result in the expenditure by State, local, and 
tribal governments, in the aggregate, or by the private sector, of 
$100,000,000 or more (adjusted annually for inflation) in any one year.

2. Executive Order 12866

    The FBI examined this proposed rule in light of Executive Order 
12866 and has found that it constitutes a significant regulatory action 
only under section 3(f)(4). In accordance with section 6 of Executive 
Order 12866, the FBI has submitted this proposed rule to the Office of 
Information and Regulatory Affairs, OMB, for review, and has met all of 
the requirements of this section.

3. Executive Order 12612

    This final rule does not have a substantial direct effect on the 
States, on the relationship between the national Government and the 
States, or on distribution of power and responsibilities among the 
various levels of government. Therefore, in accordance with Executive 
Order 12612, it is determined that this rule does not have sufficient 
federalism implications to warrant the preparation of a Federalism 
Assessment.

4. Executive Order 12988

    This proposed rule meets the applicable standards set forth in 
sections 3(a) and 3(b)(2) of Executive Order 12988.

5. Paperwork Reduction Act of 1995

    This proposed rule contains no information collection requirements 
and is not, therefore, subject to the Paperwork Reduction Act of 1995.

F. Initial Regulatory Flexibility Analysis

    As required by the Regulatory Flexibility Act (``RFA''),\9\ the FBI 
has prepared an Initial Regulatory Flexibility Analysis (``IRFA'') of 
the expected significant economic impact on small entities of this 
proposed rule. Written public comments are requested on the IRFA. 
Comments must be identified as responses to the IRFA and must be filed 
by the deadlines for comments on the NPRM provided above on the first 
page, in the heading. The FBI shall send a copy of this NPRM, including 
the IRFA, to the Chief Counsel for Advocacy of the Small Business 
Administration (SBA) in accordance with section 603(a).\10\
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    \9\ U.S.C. 603.
    \10\ The Regulatory Flexibility Act, 5 U.S.C. Sec. 601 et seq. 
has been amended by the Contract with America Advancement Act of 
1996, Pub. L. No. 104-121, 110 Stat. 847 (1996) (CWAAA). Title II of 
the CWAAA is the ``Small Business Regulatory Enforcement Fairness 
Act of 1996'' (SBREFA).
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1. Need for and Objectives of the Proposed Rules

    This NPRM responds both to the legislative mandate contained in 
Section 109 of the Communications Assistance for Law Enforcement Act, 
Pub. L. No. 103-414, 108 Stat. 4279 (1994) (codified as amended in 
scattered sections of 18 U.S.C. and 47 U.S.C.) and to public comments 
received in response to the proposed CALEA Cost Recovery Rules 
published in the Federal Register on May 10, 1996 (61 FR 21396 .

2. Legal Basis

    The proposed action is authorized under the Communications 
Assistance for Law Enforcement Act, Pub. L. No. 103-414, 108 Stat. 4279 
(1994) (codified as amended in scattered sections of 18 U.S.C. and 47 
U.S.C.).

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

    This proposed rule may have a significant economic impact on a 
substantial number of small telephone companies identified by the SBA. 
The FBI seeks comment on how small entities may be affected by the 
proposed definition of ``significant upgrade or major modification.''
    The RFA generally defines ``small entity'' as having the same 
meaning as the term ``small business,'' ``small organization,'' and 
``small governmental jurisdiction'' and the same meaning as the term 
``small business concern'' under the Small Business Act, unless an 
agency has developed one or more definitions that are appropriate to 
its activities.\11\ Under the Small Business Act, a ``small business 
concern'' is one that: (1) Is independently owned and operated; (2) is 
not dominant in its field of operation; and (3) meets any additional 
criteria established by the Small Business Administration (SBA).\12\ 
The SBA has defined small business for Standard Industrial 
Classification (SIC) categories 4812 (Radiotelephone Communications and 
4813 (Telephone Communications, Except Radiotelephone) to be small 
entities when they have fewer than 1,500 employees.\13\ This IRFA first 
discusses generally the total number of small telephone companies 
falling within both of those SIC categories. Then, the IRFA addresses 
the number of small businesses within the two subcategories, and 
attempts to refine further those estimates to correspond with the 
categories of telephone companies that are commonly used under the 
FCC's rules. It must be noted, however, that only small entities in 
operation on or

[[Page 23237]]

before January 1 1995 are affected by this proposed rule.
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    \11\ 5 U.S.C. 601(3) (incorporating by reference the definition 
of ``small business concern'' in 15 U.S.C. 632).Pursuant to 5 U.S.C. 
601(3), 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 in the Federal Register.''
    \12\ 15 U.S.C. 632. See, e.g., Brown Transport Truckload, Inc. 
v. Southern Wipers,. Inc., 176 B.R 82(Bankr. N.D.Ga. 1994).
    \13\ 2 CFR 121.201.
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Total Number of Telephone Companies (SIC 4813) Affected
    This proposed rule may have a significant effect on a substantial 
number of the small telephone companies identified by SBA. The United 
States Bureau of the Census (``the Census Bureau'') reports that, at 
the end of 1992, there were 3,497 firms engaged in providing telephone 
services, as defined therein, for at least one year.\14\ This number 
contains a variety of different categories of carriers, including local 
exchange carriers, interexchange carriers, competitive access 
providers, cellular carriers, mobile service carriers, operator service 
providers, pay telephone operators, PCS providers, covered SMR 
providers, and resellers. It seems certain that some of those 3,497 
telephone service firms may not qualify as small entities because they 
are not ``independently owned and operated.''\15\ For example, a PCS 
provider that is affiliated with an interexchange carrier having more 
than 1,500 employees would not meet the definition of a small business. 
It seems reasonable to conclude, therefore, that fewer than 3,497 
telephone service firms are small entity telephone companies that may 
be affected by this proposed rule.
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    \14\ United States Department of Commerce, Bureau of the Census, 
1992 Census of Transportation, Communications, and Utilities: 
Establishment and Firm Size, at Firm Size 1-123 (1995) (``1992 
Census'').
    \15\ 15 U.S.C. Sec. 632(a)(1).
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Wireline Carriers and Service Providers
    SBA has developed a definition of small entities for telephone 
communications companies other than radiotelephone (wireless) 
companies. The Census bureau reports that there were 2,321 such 
telephone companies in operation for at least one year at the end of 
1992.\16\ According to SBA's definition, a small business telephone 
company other than a radiotelephone company is one employing fewer than 
1,500 persons.\17\ All but 26 of the 2,321 non-radiotelephone companies 
listed by the Census Bureau were reported to have fewer than 1,000 
employees. Thus, even if all 26 of those companies had more than 1,500 
employees, there would still be 2,295 non-radiotelephone companies that 
might qualify as small entities. Although it seems certain that some of 
these carriers are not independently owned and operated, the FBI is 
unable at this time to estimate with greater precision the number of 
wireline carriers and service providers that would qualify as small 
business concerns under SBA's definition. Consequently, the FBI 
estimates that there are fewer than 2,295 small entity telephone 
communications companies other than radiotelephone companies that may 
be affected by this proposed rule.
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    \16\ Census, supra, at Firm Size 1-123.
    \17\ 13 CFR 121.201, Standard Industrial Classification (SIC) 
Code 4812.
---------------------------------------------------------------------------

Local Exchange Carriers.
    Neither the FCC nor SBA has developed a definition of small 
providers of local exchange services (LECs). The closest applicable 
definition under SBA rules is for telephone communications companies 
other than radiotelephone (wireless) companies. The most reliable 
source of information regarding the number of LECs nationwide of which 
the FBI is aware appears to be the data that the FCC collects annually 
in connection with the Telecommunications Relay Service (TRS). 
According to the most recent data, 1,347 companies reported that they 
were engaged in the provision of local exchange services.\18\ Although 
it seems certain that some of these carriers are not independently 
owned and operated, have more than 1,500 employees, or were not in 
operation prior to January 1, 1995, the FBI is unable at this time to 
estimate with greater precision the number of LECs that would qualify 
as small business concerns under SBA's definition. Consequently, the 
FBI estimates that there are fewer than 1,347 small LECs that may be 
affected by this proposed rule.
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    \18\ Federal Communications Commission, CCB, Industry Analysis 
Division. Telecommunications Industry Revenue: TRS Fund Worksheet 
Data, Tbl. 21 (Average Total Telecommunications Revenue Reported by 
Class of Carrier) (December, 1996) (``TRS Worksheet'').
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Interexchange Carrier
    Neither the FCC nor SBA has developed a definition of small 
entities specifically applicable to providers of interexchange services 
(IXCs). The closest applicable definition under SBA rules is for 
telephone communications companies other than radiotelephone (wireless) 
companies. The most reliable source of information regarding the number 
of IXCs nationwide of which the FBI is aware appears to be the data 
that the FCC collects annually in connection with TRS. According to the 
most recent data, 130 companies reported that they were engaged in the 
provision of interexchange services.\19\ Although it seems certain that 
some of these carriers are not independently owned and operated, have 
more than 1,500 employees, or were not in operation prior to January 1, 
1995, the FBI is unable at this time to estimate, with greater 
precision the number of IXCs that would qualify as small business 
concerns under SBA's definition. Consequently, the FBI estimates that 
there are fewer than 130 small entity IXCs that may be affected by this 
proposed rule.
---------------------------------------------------------------------------

    \19\ TRS Worksheet.
---------------------------------------------------------------------------

Competitive Access Providers
    Neither the FCC nor SBA has developed a definition of small 
entities specifically applicable to providers of competitive access 
services (CAPs). The closest applicable definition under SBA rules is 
for telephone communications companies other than radiotelephone 
(wireless) companies. The most reliable source of information regarding 
the number of CAPs nationwide of which the FBI is aware appears to be 
the data that the FCC collects annually in connection with the TRS. 
According to the most recent data, 57 companies reported that they were 
engaged in the provision of competitive access services.\20\ Although 
it seems certain that some of these carriers are not independently 
owned and operated, have more than 1,500 employees, or were not in 
operation prior to January 1, 1995, the FBI is unable at this time to 
estimate with greater precision the number of CAPs that would qualify 
as small business concerns under SBA's definition. Consequently, the 
FBI estimates that there are fewer than 57 small entity CAPs that may 
be affected by this proposed rule.
---------------------------------------------------------------------------

    \20\ 13 CFR 121.201, SIC 4813.
---------------------------------------------------------------------------

Wireless (Radiotelephone) Carriers
    SBA has developed a definition of small entities for radiotelephone 
(wireless) companies. The Census Bureau reports that there were 1,176 
such companies in operation for at least one year at the end of 
1992.\21\
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    \21\ United States Department of Commerce, Bureau of the Census 
1992 Census of Transportation, Communications, and Utilities: 
Establishment and Firm Size, at Firm Size 1-123 (1995) (``1992 
Census'').
---------------------------------------------------------------------------

According to SBA's definition, a small business radiotelephone company 
is one employing fewer than 1,500 persons.\22\ The Census Bureau also 
reported that 1,164 of those radiotelephone companies had fewer than 
1,000 employees. Thus, even if all of the remaining 12 companies had 
more than 1,500 employees, there would still be 1,164 radiotelephone 
companies that

[[Page 23238]]

might qualify as small entities if they are independently owned and 
operated. Although it seems certain that some of these carriers are not 
independently owned and operated, the FBI is unable at this time to 
estimate with greater precision the number of radiotelephone carriers 
and service providers that would qualify as small business concerns 
under SBA's definition. Consequently, the FBI estimates that there are 
fewer than 1,164 small entity radiotelephone companies that may be 
affected by this proposed rule.
---------------------------------------------------------------------------

    \22\ 13 CFR 121.201, Standard Industrial Classification (SIC) 
Code 4812.
---------------------------------------------------------------------------

Cellular and Mobile Service Carriers
    In an effort to further refine the FBI's calculation of the number 
of radiotelephone carriers, Cellular Service Carriers and Mobile 
Service Carriers. Neither the FCC nor the SBA has developed a 
definition of small entities specifically applicable to Cellular 
Service Carriers and to Mobile Service Carriers. The closest applicable 
definition under SBA rules for both services is for telephone companies 
other than radiotelephone (wireless) companies. The most reliable 
source of information regarding the number of Cellular Service Carriers 
and Mobile Service Carriers nationwide of which the FBI is aware 
appears to be the data that the FCC collects annually in connection 
with the TRS. According to the most recent data, 792 companies reported 
that they are engaged in the provision of cellular services and 138 
companies reported that they are engaged in the provision of mobile 
services.\23\ Although it seems certain that some of these carriers are 
not independently owned and operated, have more than 1,500 employees, 
or were not in operation prior to January 1, 1995, the FBI is unable at 
this time to estimate with greater precision the number of Cellular 
Service Carriers and Mobile Service Carriers that would qualify as 
small business concerns under SBA's definition. Consequently, the FBI 
estimates that there are fewer than 792 small entity Cellular Service 
Carriers and fewer than 138 small entity Mobile Service Carriers that 
might be affected by the actions and rules adopted in this NPRM.
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    \23\ TRS Worksheet, at Tbl. 1 (Number of Carriers Reporting by 
Type of Carrier and Type of Revenue).
---------------------------------------------------------------------------

Resellers
    Neither the FCC nor SBA has developed a definition of small 
entities specifically applicable to resellers. The closest applicable 
definition under SBA rules is for all telephone communications 
companies. The most reliable source of information regarding the number 
of resellers nationwide of which the FBI is aware appears to be the 
data that the FCC collects annually in connection with the TRS. 
According to the most recent data, 260 companies reported that they 
were engaged in the resale of telephone services.\24\ Although it seems 
certain that some of these carriers are not independently owned and 
operated, have more than 1,500 employees, or were not in operation 
prior to January 1, 1995, the FBI is unable at this time to estimate 
with greater precision the number of resellers that would qualify as 
small business concerns under SBA's definition. Consequently, the FBI 
estimates that there are fewer than 260 small entity resellers that may 
be affected by this proposed rule.
---------------------------------------------------------------------------

    \24\ Id.
---------------------------------------------------------------------------

4. Description of Projected Reporting, Recordkeeping and Other 
Compliance Requirements

    This proposed rule imposes no reporting or recordkeeping 
requirements on small entities. Additionally, this proposed rule does 
not impose any other direct compliance requirements on small entities. 
However, this proposed rule does, by defining ``significant upgrade or 
major modification,'' clarify the threshold at which telecommunications 
equipment, facilities and services installed or deployed on or before 
January 1, 1995 cease to be grandfathered under CALEA section 109. 
Should a carrier make a ``significant upgrade or major modification'' 
to such grandfathered equipment, facility, or service, the carrier must 
then bring the equipment, facility or service in question into 
compliance with the assistance capability requirements of CALEA section 
103 at the carrier's expense.

5. Significant Alternatives to Proposed Rules Which Minimize 
Significant Economic Impact on Small Entities and Accomplish Stated 
Objectives

    The development of the proposed definition of ``significant upgrade 
or major modification'' is discussed at length in Section C, Definition 
Development, of this NPRM, supra. The FBI considered and rejected as 
impractical both technical and accounting definitions. Having 
determined that CALEA's intent was best served by a definition focusing 
on public safety, the FBI then modified its definition to incorporate 
industry's suggestions submitted in response to the ANPRM.
    Because this document proposes a definition which must be as clear 
and as finite as possible, the FBI has tentatively concluded that it is 
not feasible to make special accommodations for small entities in this 
proceeding. The FBI arrived at this tentative conclusion knowing that 
CALEA itself makes ample provisions for the protection of small 
entities which make ``significant upgrade[s] or major modification[s]'' 
by allowing these carriers to petition the FCC for relief under CALEA 
section 109(b).
    The FBI welcomes and encourages comments from concerned small 
entities on this issue.

6. Federal Rules That May Overlap, Duplicate, or Conflict With the 
Proposed Rules

    The FBI is not aware of any overlapping, duplicating, or 
conflicting Federal Rules to the Federal Rule proposed in this 
document.

G. Electronic Submission of Comments

    While printed comments are welcome, commenters are encouraged to 
submit their responses on electronic media. Electronic documents must 
be in WordPerfect 6.1 (or earlier version) or Microsoft Word 6.0 (or 
earlier) format. Comments must be the only file on the disk. In 
addition, all electronic submissions must be accompanied by a printed 
sheet listing the name, company or organization name, address, and 
telephone number of an individual who can replace the disk should it be 
damaged in transit. Comments under 10 pages in length can be faxed to 
the Telecommunications Contracts and Audit Unit, Attention: CALEA FR 
Representative, fax number (703) 814-4730.

[47 U.S.C. 1001-1010; 28 CFR 0.85(o)]

List of Subjects in 28 CFR Part 100

    Accounting, Law enforcement, Reporting and recordkeeping 
requirements, Telecommunications, Wiretapping and electronic 
surveillance.

    For the reasons set out in the preamble, 28 CFR part 100 is 
proposed to be amended as set forth below:

PART 100--COST RECOVERY REGULATIONS, COMMUNICATIONS ASSISTANCE FOR 
LAW ENFORCEMENT ACT OF 1994

    1. The authority citation for 28 CFR part 100 continues to read as 
follows:

    Authority: 47 U.S.C. 1001-1010; 28 CFR 0.85(o).

    2. Section 100.22 is added to read as follows:

[[Page 23239]]

Sec. 100.22  Definition of ``significant upgrade or major 
modification.''

    (a) For equipment, facilities or services for which an upgrade or 
modification has been completed after January 1, 1995 and on or before 
October 25, 1998, the term ``significant upgrade or major 
modification'' means any fundamental or substantial change in the 
network architecture or any change that fundamentally alters the nature 
or type of the existing telecommunications equipment, facility or 
service, that impedes law enforcement's ability to conduct lawfully 
authorized electronic surveillance, unless such change is mandated by a 
Federal or State statute;
    (b) For equipment, facilities or services for which an upgrade or 
modification is completed after October 25, 1998, the term 
``significant upgrade or major modification'' means any change, whether 
through addition or other modification, to any equipment, facility or 
service that impedes law enforcement's ability to conduct lawfully 
authorized electronic surveillance, unless such change is mandated by a 
Federal statute.

    Dated: April 13, 1998.
Louis Freeh,
Director, Federal Bureau of Investigation, Department of Justice.
[FR Doc. 98-10928 Filed 4-27-98; 8:45 am]
BILLING CODE 4410-02-M