O'Rielly Proposal To Make Foreign Ownership Review More Transparent Could Find Favor at FCC
A proposal to loosen FCC foreign ownership rules and change the way transactions with foreign buyers are handled by other federal agencies is likely to find favor with industry and could get traction at the commission, said attorneys familiar with the FCC's foreign ownership process. Outlined by Commissioner Mike O'Rielly in a blog post last week, the proposal would increase the transparency of the review process for deals involving foreign-owned companies. Since part of that process involves review by the numerous federal agencies outside the FCC that make up "Team Telecom" (a working group of representatives from the departments of Justice, State, Defense and Homeland Security, among others), the commission and the parties to a transaction don't always know the status of deals involving foreign companies, O'Rielly said. Easing the process for foreign companies to do business here would lead to similar overtures for U.S. companies doing international business, he said.
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Reforming the process could also ease things for many ostensibly U.S. companies that get caught up in foreign ownership rules because hedge funds and financing companies often include many stockholders whose nationalities can't be verified, said Andrew Lipman of Morgan Lewis, who handles international telecom deals. Because the foreign ownership rules don't account for this, “many transactions involving financial entities today trip Team Telecom review,” Lipman said. O'Rielly didn't comment on the impetus for proposing the rule change now or any expected timeline. The FCC also didn't comment, but reforms to the foreign ownership rules are part of the commission's recommendations for process reform.
O'Rielly wants the rules changed to create a specific process for the FCC and Team Telecom to follow. “The opaque and sometimes unending review process” of Team Telecom is an “obstacle” to making it easier for foreign companies to invest in the U.S. communications sphere, he said. The FCC should establish a “notification process” if foreign investment is involved over 80 percent in a deal, and rule that foreign investment is automatically approved after 30 days without a formal request from Team Telecom seeking more time, his blog post said. Even the Team Telecom-requested delay should last only 90 days, with a possible 90-day extension, O'Rielly said. The current process, which doesn't include a specific timeline for the Team Telecom review, is a “black box,” Lipman said. The process is often “frustrating” to both industry and FCC staff, he said.
O'Rielly also wants the FCC to remove the cap on foreign ownership, even though the current process allows the FCC to approve deals over the cap. The FCC needs specific rules to provide clarity to industry, O'Rielly said. A “haphazard process” doesn't “provide any precedential value for future applicants to know what may be acceptable or unacceptable practices, structure or partnerships,” O'Rielly said.
The many different options for video available now mean rules designed to protect broadcasters from foreign control are out of date, O'Rielly said. The video market is too vast for any one party to corner it or prevent emergency information from going out, and the Internet is a powerful information transmission tool that didn't exist when the foreign ownership rules were written in the '70s, he said. “Given this reality, artificially limiting foreign ownership for broadcasters without a legitimate, identifiable concern regarding the specific transaction proposed makes as much sense as imposing technological speed limits on bicycles while cars, trucks and buses continue to fly by.”
Since many financial entities are owned by stockholders who may be all over the world and trading using identities that can't be traced to a country of origin, foreign ownership rules are often triggered by transactions in which all participants are ostensibly domestic, Lipman said. In Pandora's recent buy of KXMZ(FM) Box Elder, South Dakota, the cost of doing a survey to determine the nationality of all of Pandora's shareholders was prohibitively expensive, said Multicultural Media, Telecom and Internet Council General Counsel David Honig, who has long supported looser foreign ownership rules. Loosening the rules would likely solve this problem and make the rules more relevant to the modern market, Honig and Lipman said.
Relaxing foreign ownership rules for broadcasting and video companies is a different matter than relaxing such rules for companies that handle internet infrastructure or other industries more important to national security, said Davis Wright cable attorney Burt Braverman. Increasing concerns about cyberterrorism and other threats are likely to lead to push-back against rule changes that would make it easier for foreign companies to own important communications infrastructure, such as undersea cables carrying secure transmissions, he said. O'Rielly's proposal to set the cap on foreign broadcast ownership to 100 percent is problematic, said Andrew Schwartzman, senior counselor at the Georgetown University Law Center Institute for Public Representation. "I might even support raising the cap somewhat and applying a liberal waiver standard, but I don't think the FCC can or should abandon its oversight," he said. "Over-the-air broadcasting is the most powerful force shaping public opinion in the United States, and the concern about who controls broadcast licensees is legitimate."
Companies that are owned primarily by U.S. investors but happen to be incorporated in Bermuda or that happen to have some foreign employees shouldn't be triggering Team Telecom Review, said an industry lawyer who handles transactions involving Team Telecom. Reforms that would allow the rules to distinguish between actual foreign entities and domestic companies that are financed by large hedge funds with diverse stockholders don't have to be so broad that they would lead to security concerns, the attorney said. Most of the issues raised by O'Rielly "are beyond the FCC's control, and would take a concerted effort from the administration to make it happen," said Public Knowledge Senior Vice President Harold Feld.
O'Rielly's proposal is consistent with statements in favor of allowing foreign investment he has made his entire time as a commissioner, Honig pointed out. O'Rielly's first vote on the FCC was for a relaxation of the commission’s foreign broadcast ownership rules. The unanimous vote in favor of that relaxation and recent approval of the Pandora deal indicate broad commission support for reforming the rules, several attorneys told us. The broadcast industry would welcome the greater access to capital that an ease on foreign ownership rules would provide, while wireless and wireline industry companies would also appreciate the greater flexibility, they said. Netherlands-based Altice is already involved in the review process for its Suddenlink deal, but the rule changes would likely affect future transactions it was involved with, Lipman said. Altice didn't comment.
There are concerns that commission actions to relax foreign ownership restrictions could open the FCC to criticism, attorneys pointed out. “There is a strain of xenophobia that has infected our discourse,” Honig said. This attitude is seen as most likely to prevail on the political right, and the proposal originating from a Republican commissioner would likely provide cover against those arguments, lawyers said.