Earlier this week, the Federal Communications Commission (“FCC”) adopted a Notice of Proposed Rulemaking (“NPRM”) that proposes to clarify existing definitions in the FCC’s foreign ownership rules and codify certain practices regarding the filing requirements for, and the agency’s processing of, foreign ownership petitions (Petitions for Declaratory Ruling, or “PDRs”).  These changes generally seek to provide filers with additional guidance when seeking FCC approval for complex foreign ownership structures and include several updates that, if adopted, would modify the standard filing practices for foreign ownership-related PDRs.

The FCC’s filing requirements for approval of foreign ownership in certain FCC licensees are nuanced and typically result in a challenging filing process, particularly when the proposed ownership structure of a licensee is complex.  The following is a high-level summary of the FCC’s current foreign ownership rules and filing requirements and what the NPRM proposes to change.

FCC Foreign Ownership Restrictions and Filing Requirements

The Communications Act limits the level of foreign ownership in certain FCC licensees (e.g., broadcast and common carrier wireless licensees) and requires prior FCC approval before this foreign ownership exceeds certain thresholds.  Specifically, the FCC rules implementing these statutory restrictions require FCC approval before aggregate foreign ownership in the controlling U.S. parent company of broadcast, common carrier wireless, and certain other FCC licensees exceeds 25 percent of the U.S. parent’s equity and/or voting interests.  When aggregate foreign ownership would exceed this 25 percent threshold, the licensee must seek prior approval by filing a PDR with the FCC’s Office of International Affairs. 

Foreign ownership PDRs must clearly outline the proposed foreign ownership structure and identify all foreign individuals and entities that would directly hold 10 percent or more of the equity and/or voting interests, or a controlling interest, in the FCC licensee’s controlling U.S. parent.  In addition, the FCC’s rules have a “specific approval” requirement for any individual foreign interests (whether held by an individual or foreign-organized entity) that would hold, directly or indirectly, more than five percent of the equity and/or voting interests in the controlling U.S. parent, unless such an interest qualifies as “insulated” under the FCC’s rules (in which case the specific approval threshold is 10 percent).

The NPRM adopted earlier this week would make certain changes to the FCC’s rules concerning both the calculation of foreign interests for PDRs, as well as the processing of the PDRs themselves.

Proposed Changes to FCC Rules and PDR Filing Requirements

The NPRM proposes several updates to the FCC’s foreign ownership rules and filing requirements for PDRs.  Here are the most-notable changes:

1. Definition of “Controlling U.S. Parent.”  The FCC’s current rules do not specify which entity in a licensee’s upstream ownership and control structure qualifies as the “controlling U.S. parent” for the purposes of foreign ownership calculations (and the filing of a PDR).  The NPRM would formalize the definition of “controlling U.S. parent” as “the first controlling entity organized in the United States that is above the licensee(s) in the vertical chain of control and does not itself hold a license subject to [foreign ownership approval].”  This change, which would standardize the first U.S. entity directly above the FCC licensee as the relevant “controlling U.S. parent,” would, according to the NPRM, ease filing burdens by allowing for some restructuring above this parent entity without the need for a new PDR.
   
2. Calculation of Deemed Voting Interests and Advance Approval.  As noted above, when certain FCC licensees file a PDR for approval of aggregate foreign ownership exceeding 25%, the FCC’s rules also require the disclosure of, and specific approval for, any individual foreign interests that would hold more than five percent of the equity and/or voting interests of the licensee’s controlling U.S. parent.  (This threshold increases to 10% if the foreign investor qualifies as “insulated,” which generally requires that the investor be limited to a set list of “usual and customary” investor protections.)  As part of a request for specific approval in a PDR, individual foreign interests also may seek advance approval from the FCC for future increases in their equity and/or voting interests, which foreign investors often use to avoid the need for further PDR filings. 
   
   The advance approval process grows complicated when dealing with foreign ownership interests held through limited partnerships and limited liability companies.  If a foreign investor’s interest in an LP or LLC qualifies as “uninsulated,” that investor is deemed to hold the same voting interest that the LP or LLC itself holds in the next level below in the vertical ownership chain.  This applies regardless of the level of ownership the foreign investor actually holds in the LP or LLC.  For example, if an uninsulated member holds a 1% interest in an LLC that in turns holds a 55% voting interest in an FCC licensee, the uninsulated member holds a “deemed voting interest” of 55% for specific approval purposes.  This applies despite the uninsulated member holding a very small equity interest in the LLC.
   
   This “deemed voting interest” scheme adds complexity for foreign interests seeking advance approval through a PDR.  For any investor holding less than a controlling interest in an FCC licensee’s controlling U.S. parent, foreign investors may only seek advance approval for up to a non-controlling 49.99% equity and/or voting interest in that entity.  By comparison, when the FCC determines that a foreign investor has actual control of an entity (either by holding 50% or more of the equity and/or voting interests or having de facto control – i.e., the ability to control the board or otherwise control day-to-day affairs), the investor may seek advance approval for up to a 100% voting interest.  Traditionally, there has been some uncertainty as to whether “deemed voting interests” – which may exceed 50% for specific approval purposes – provide a basis for a foreign investor to seek advance approval for up to a 100% voting interest.
   
   The NPRM proposes to clarify that “deemed voting interests” of 50% or greater do not qualify as actual control and thus are not eligible to seek advance approval for their equity and/or voting interests to exceed 49.99% without the filing of a new PDR.  The NPRM notes that this would be consistent with the FCC’s current practice, pursuant to which advance approval for up to a 100% voting interest is available only to foreign investors that the FCC already has determined hold actual control of an FCC’s controlling U.S. parent.  As a practical matter, this means that minority foreign investors, even those that are “deemed” to hold a 50%-or-greater voting interest under the FCC’s specific approval methodology, may only seek advance approval for up to a 49.99% equity and/or voting interest. 

3. Disclosure of Trustees.  Previously, there has been some uncertainty as to whether (and to what extent) individual trustees, not just trusts themselves, must be disclosed in PDRs.  The NPRM proposes to codify the FCC’s current practice, which requires that a PDR identify trustees specifically, not just the trust itself, when identifying individual interests that exceed the reportable thresholds (e.g., five percent or greater foreign equity and/or voting interests requiring specific approval).  The NPRM also proposes that when a PDR fails to identify individual trustees, not just the trust, FCC staff will require that the petitioners file a clarifying supplement.

4. Publicly Traded Company Exceptions for Private Companies.  Under the FCC’s current foreign ownership rules, a safe harbor exists when an FCC licensee whose controlling U.S. parent is a publicly traded company inadvertently violates the FCC’s foreign ownership restrictions.  These licensees, upon becoming aware of any violations, may avoid FCC enforcement by notifying the FCC within 10 days of becoming aware of the issue and explaining (i) either the intent to file a new PDR or the plan to take remedial action to return to compliance within 30 days and (ii) demonstrating that the violation “was due solely to circumstances beyond the licensee’s control that were not reasonably foreseeable to or known by the licensee with the exercise of the required due diligence.”
   
   The proposed rules would extend the remedial procedures and methodology currently available to publicly held companies to privately held companies, as well.  The FCC previously has granted, on a case-by-case basis, requests to treat certain privately held companies the same as publicly held companies for ownership calculation and reporting purposes, but the NPRM seeks comment on extending this flexibility to all privately held companies.

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The NPRM seeks comment on additional rule changes, including those that impact broadcast licensees specifically, so stakeholders interested in filing comments should review the NPRM closely or contact regulatory counsel.

Comments on the NPRM will be due 30 days after publication in the Federal Register, which has not yet occurred.