In Friday’s Federal Register, the FCC published a summary of the Commission’s Notice of Proposed Rulemaking looking to revise its policies regarding the ownership of broadcast stations by non-US citizens setting the date for comments on its proposal of December 21, with Reply Comments being due by January 20.  The FCC two years ago issued a Declaratory Ruling confirming that it would allow broadcasters to have foreign ownership (in a licensee’s parent company) of greater than 25%, overturning what was widely viewed as the Commission’s prior reluctance to approve that degree of foreign ownership of broadcast stations (see our article here for a summary of the FCC’s 2013 action).  But that decision left many unanswered questions, as the Commission decided to proceed on a case-by-case basis in reviewing any requests for approval under the new rules.  When it took almost two years for Pandora to get approval for its acquisition of a broadcast station, almost a year in processing a request under the 2013 ruling (see our article here on the filing of the Pandora petition), when Pandora did not even think that it exceeded the 25% foreign-ownership threshold but it could not prove its compliance based on the FCC’s 40 year old rules setting out the procedures used to assess the foreign ownership of broadcast stations, it was clear that some changes had to be made.  So, in approving the Pandora deal in May, the FCC said that it would conduct a further review of its rules regarding foreign ownership, a commitment that it moves to fulfill by the issuance of this Notice of Proposed Rulemaking.

The NPRM suggests that the FCC will use for broadcasting, with some modifications, the procedures that it uses in assessing foreign ownership of non-broadcast FCC licensees.  While there are many details and nuances in its proposals, the FCC will still need a Petition for Declaratory Ruling to approve foreign ownership above 25% of a parent company of a broadcast licensee (foreign ownership of the licensee itself is flatly prohibited if it exceeds 20%). But it now proposes to adopt the non-broadcast presumptions that, when the FCC approves a foreign owner of more than 5% of a corporation, that approved owner can go up to 49% ownership without further FCC approval.  Similarly, if a foreign owner is approved in a control position, that owner would be able go to 100% without further approval.  But, on a practical level, perhaps more important was the FCC proposals about the mechanics of tracking foreign ownership.

First, and perhaps most significantly, the FCC proposes to require the disclosure and approval only of broadcast owners who are attributable under the broadcast attribution rules used for multiple ownership compliance purposes.  This would mean that potentially significant investors in a company, who invest in a passive way, would not be considered in the ownership analysis.  Insulated investors in a Limited Partnership or an LLC are not attributable if they meet certain insulation criteria insuring that they have no influence over the operations of the licensed broadcast station – criteria that must be spelled out in the organization’s governing documents (see our article about the insulation criteria for non-attributable owners of Limited Partnerships and LLCs, here).  Corporate shareholders of less than 5% of a company’s voting stock (and, for some institutional investors, less than 10%) are also not attributable.  The FCC’s reasons for considering these owners to be not attributable for ownership purposes is that their interests do not allow them to control or influence the types of programming and operations decisions that the multiple ownership rules are meant to protect.  The reasoning of the FCC in the foreign ownership proceeding seems to be the same – that these investors can’t control station operations, so their ownership will not have the threat of the kinds of activity that the foreign ownership rules are meant to bar (e.g. foreign propaganda on US airwaves).

The NPRM also asks to what extent broadcast licensees need to investigate and track their foreign ownership.  This was one of the issues that came up in the Pandora case, as it became clear that many US public companies do not know who many of their shareholders are, as SEC privacy regulations allow shareholders to invest in companies without providing their identities to the companies.  The FCC’s methodology for computing foreign ownership, contained in an internal FCC memo from the 1970s which significantly pre-dates the FCC privacy rules, and which were labeled as “suggestions” on how to track such ownership, has been read to require companies to do periodic surveys or reviews of their shareholder to assess their citizenship, and to assume that any shareholders who could not be identified (because they did not answer surveys or would not respond to citizenship questions) were not US citizens.  Such an assumption, when applied to shareholders whose identity a company does not even know, leads to problems for almost any public company – especially those that are not formed anticipating these rules simply to be an FCC licensee.

The FCC suggests several ways that it might change these computational rules.  First, there are programs like one known as the DTC-SEG 100 program, which funnels stock investments through a kind of trust account, where buyers are supposed to provide information to the trustee of foreign ownership, and such foreign owned shares are supposed to be segregated to avoid ownership issues.  The FCC asks if the use of such programs should be required for public companies.

The FCC also proposes that the rules used for common carriers and other non-broadcast licensees, which allow companies to rely on the residence address of shareholders who are otherwise unknown to the company (which supposedly can be tracked by some services available to public companies) can be used as a proxy for citizenship.  While it is possible that some shareholders with US addresses could be aliens, it is also possible that some owners of shares with foreign addresses could be US citizens.  To know for sure would require surveys that may be very expensive and may not have high participation rates, leaving certainty unattainable.  The FCC asks if there is any reason that it cannot be assumed that the addresses provide a reasonable basis for evaluating citizenship.

The FCC also suggests that, while ownership of public stock may be difficult to assess, the ownership of equity through other types of investment entities should be easier to track. The FCC asks for comments on this presumption.  We have heard about situations that leave this assumption in question, as many of today’s investment vehicles – through hedge funds, private equity companies and the many other sources of investment capital available in today’s financial world – are exceedingly complex and often have ownership as difficult to divine, if not more so, than that of stock in public companies.  This is especially true as these ownership vehicles are often layered – an LLC partially owned by an investment fund which is in turn partially owned by a private equity fund which is itself partially owned by a pension or retirement fund, and so on and so on.  We will be interested in the comments on this aspect of the FCC’s proposals.

These are but a few of the issues highlighted by the FCC’s NPRM on foreign ownership of broadcast stations.  As these rule changes could profoundly affect the investment capital available for broadcast acquisitions in the US in coming years, the proceeding could be exceedingly important.  So, remember the December 21 deadline for comments on these FCC proposals.