FCC Takes First Steps Towards Telecom Foreign Ownership Reform
Posted September 20, 2012
By Tony Lin
The FCC recently released an Order giving companies greater flexibility in how they can structure foreign investment in common carrier licensees, such as wireless companies that provide phone service. This action, taken in a proceeding initiated last year, is a first step towards simplifying and streamlining the FCC's cumbersome foreign ownership review and approval process, with the goal of facilitating increased foreign investment in telecommunications companies.
The FCC's foreign ownership policy is governed by Section 310 of the Communications Act. Section (b)(3) of the statute requires the FCC to prohibit certain foreign entities from being FCC licenses themselves and from directly holding ownership interests that exceed specified levels in certain types of FCC licensees, such as common carrier licensees. The FCC's International Bureau previously interpreted this provision to strictly prohibit foreign entities from having more than a 20% non-controlling interest (direct or indirect) in an FCC common carrier licensee.
The Order replaces this absolute prohibition with a discretionary policy already in use under a different section of the statute, Section 310(b)(4). That section restricts foreign entities from having more than a 25% controlling interest (direct or indirect) in any parent company of an FCC common carrier licensee (among other entities), unless the FCC specifically approves a greater foreign ownership interest.
The FCC makes the determination of whether it should allow greater foreign investment under Section 310(b)(4) and now under Section 310(b)(3), by examining whether the foreign investment is from a World Trade Organization (WTO) Member country, using a "principal place of business" test. If under the principal place of business test the investment is from a WTO Member country, the proposed foreign investment is presumed to be competitive and in the public interest. Where the investment is from a non-WTO Member country, the FCC applies what is known as an "effective competitive opportunities" or "ECO" test. The purpose of the ECO test is to determine whether competitive opportunities exist for American companies in those non-WTO Member countries and whether the foreign investment in the U.S. will serve the public interest.
The FCC's foreign ownership review and approval process under Section 310(b)(4) has historically proven to be complex and time-consuming, both for licensees and the FCC. Licensees are required to engage in costly and extensive efforts in order to compile detailed information regarding citizenship and principal places of business of investors. There is no exception for individuals and entities that hold even de minimis interests through multiple intervening investment vehicles and holding companies. Moreover, licensees often have to conduct this exercise repeatedly given the fluid nature of investments. For its part, the FCC must expend considerable resources of its own processing (and often reprocessing) the voluminous and detailed information submitted by licensees.
The FCC's decision liberalizes only its ownership policies under Section 310(b)(3). It leaves for another day the extensive reforms proposed by the FCC in a Notice of Proposed Rulemaking regarding foreign ownership under Section 310(b)(4).
The FCC's Order has been published in the Federal Register and is now in effect. Parties interested in learning more about the FCC's Order or the foreign ownership reform proceeding should contact Pillsbury for advice.