NPRM proposes lower hurdles for alien ownership — and alien investment.

With the issuance of an extensive Notice of Proposed Rulemaking (NPRM), the FCC is looking to liberalize its approach to permitting alien ownership of common carrier and aeronautical radio station licenses. While it’s not exactly a re-opening of Ellis Island, the plan should significantly expand opportunities for aliens to acquire or increase license ownership. The FCC correctly recognizes that its current policies and processes are burdensome to prospective foreign investors, unnecessarily impeding, delaying and obstructing the ability of aliens to buy, or buy into, FCC licensees – and thus also creating barriers to investment capital that could benefit U.S companies and U.S. consumers.

The starting point for any discussion of alien ownership of domestic U.S. communications interests is Section 310(b) of the Communications Act, a provision that dates back to the original 1934 version of the law.  Drafted in an era when foreign Fascists and Communists had to be prevented from acquiring control of our communications media, Section 310(b) strictly prohibited – and continues to prohibit – aliens from directly owning a broadcast, common carrier, or aeronautical radio license or even from owning more than 20% of a company that holds such a license.

However, having erected a seemingly impenetrable fortress against evil foreign influences, Congress left the back door wide open.

Section 310(b)(4) permits an alien or alien-controlled company to own more than 25% of a company that owns some or all of a second company that in turn holds an FCC license – as long as the Commission does not find that the public interest would be served by denying the license. (Yes, the statute is drafted in that awkward double-negative way.)  In other words, direct ownership of a broadcast or common carrier license is unspeakably taboo, but indirect ownership is hunky-dory.   The statute makes little sense, but the FCC is stuck with administering it.

In 1997 the U.S. joined with 68 other countries to sign the World Trade Organization (WTO) Basic Telecommunications Agreement which committed all participants to “to open their markets to foreign competition for some or all basic telecommunications services.” (That Agreement has been incorporated in the General Agreement on Trade in Services (GATS).) To implement that commitment, the Commission adopted an “open entry standard” for WTO Member investment in the U.S. basic telecommunications services market, while continuing to apply an “effective competitive opportunities” (ECO) test to proposed investment from non-WTO Member countries. The Commission therefore routinely approves ownership of U.S. telecom interests by aliens from WTO countries. (The world being a happier place now than it was in the old days, WTO countries currently account for 94% of the world’s gross domestic product, which officially makes just about everyone our friend.)

The FCC also approves ownership by aliens from non-WTO countries as long as they can show that their country provides ECO to U.S. nationals.   This still leaves out a few large countries (notably Russia) and outlaw states like Iran, Libya and North Korea, but by and large aliens are nowadays welcome to indirectly own common carrier licenses, as long as they jump through the necessary hoops.

Notice that we said common carrier licenses. Even though the statute does not distinguish between (a) alien ownership of common carrier licenses and (b) alien ownership of broadcast licenses, the Commission has steadfastly refused to permit even indirect alien ownership of broadcast licenses to exceed 25%, no matter how friendly the foreign nation might be. The Commission appears to draw the line based on capacity for control of content: a broadcast licensee obviously controls the content of the information transmitted with its license(s); a common carrier, on the other hand, is prohibited from influencing the content of the transmissions on its system. Control of broadcast content is deemed so crucial to national security that aliens cannot be trusted with it.

(The NPRM does not propose to change this bifurcated approach to the statute, but one could certainly argue that the media landscape has become so diversified and fragmented that aliens might now safely own broadcast stations without peril.)

Even with the somewhat liberalized approach adopted pursuant to the WTO Agreement, the FCC still has to carefully review requests for approval of alien ownership. Such requests are usually presented as requests for declaratory ruling that the proposed ownership is not contrary to the public interest.   If the alien is from a WTO country, the approval is a no-brainer: the Commission will permit identified friendly (i.e., WTO) aliens to indirectly own 100% of a common carrier licensee. It will also permit unidentified and unapproved aliens to indirectly own large chunks of the parent of the licensee, as long as no more than 25% of such unapproved alien ownership is non-WTO or a single person or entity. The hardest part in this process tends to be determining who owns what and where.

Often in today’s transnational business environment, companies are owned by other companies owned by other companies, some of which are foreign-owned and some of which may be publicly traded.   Sometimes the companies themselves do not know who their smaller owners are, much less what nationality they are, because the stock is held in street names or is registered to addresses that do not necessarily correspond to the nationality of their owners. Yet to satisfy the Commission, the would-be alien licensee owner is expected to precisely lay out the national origin of its direct and indirect owners, sometimes to the second decimal point, to ensure that the 25% threshold is not transgressed. And that goes for each different affiliate of the licensee, and is required each time the company enters a new FCC service category or expands into a different geographic area.

Clearly, there is an enormous waste of time, money and energy here with virtually no concomitant pay-off in national security or anything else.

The FCC is proposing to simplify things and thus reduce the number of annual filings by an astounding 70%, according to the Commission’s own estimate.   While the basic regulatory framework will remain in place, the FCC plans to: (1) permit alien ownership approvals to apply to entire families of companies, as long as there is no substantive change to the original parent company; (2) permit approved aliens to increase their ownership up to 49.99% non-controlling interests without additional approval; and (3) not require approval of specific aliens unless they are to own more than 25% of the parent company. The company would still have to carefully monitor its alien ownership to determine when the 25% threshold is reached. A potential leg-up in that regard: a proposal that non-WTO alien interests of 5% or less be ignored.  That single reform would take much of the pain out of trying to identify and add up non-qualifying alien interests. The Commission also proposes to require disclosure of all persons holding 10% or greater interests in the entity for which approval is being sought.

The Commission hastens to remind everyone that none of these reforms would alter the normal requirement that all transfers of control of licenses be approved in advance. That requirement continues to apply regardless of whether the owners are alien or not.  And, of course, the Department of Homeland Security, the Department of Justice, and other federal agencies continue to have input into alien ownership issues from a national security perspective.

Comments on the NPRM will be due 45 days after Federal Register publication, with replies thirty days later. Check back here for updates on that front.