Transcript

Forum: Corporate Political Spending and Foreign Influence

Hosted by Commissioner Ellen L. Weintraub

Federal Election Commission, 999 E St. NW, Washington, DC 20463

June 23, 2016

Statement of Mace Rosenstein, Covington & Burling

COMMISSIONER WEINTRAUB: Thank you. Mace? 

MACE ROSENSTEIN, COVINGTON & BURLING: Well, I'm the piker on this panel, obviously, because, you 

know, I'm just a lowly communications attorney. This isn't my space and I'm also not as smart as any of 

these guys, but I'll fake it, okay? So just humor me.

COMMISSIONER WEINTRAUB: Don't believe any of them when they say that.

MACE ROSENSTEIN: I practice in one of the areas that, as Professor Coates mentioned, does have an 

existing regime to regulate foreign investment and ownership and that's in the telecom space. So I guess 

that's a good thing, you know, you guys can sort of write on a blank slate here, I have a century-old 

statutory regime that I have to struggle with and try to adapt to modern exigencies. And I thought it 

might make sense, because the FCC does have a very complex statutory and regulatory and policy 

regime, to walk you through some of the highlights of it that they might inform some of the thinking 

that you guys are doing and some of the discussion that is going on today So this is where it becomes 

sort of the dry, lecture portion of the program, but I think it'll be interesting. 
As I mentioned, the fundamental challenge that I think the FCC faces and that practitioners in 

this area face and that the regulated parties face is that our law governing foreign investment, which is 

embodied in the Communication Act, was enacted in 1934 and it hasn't changed since. And what's even 

more interesting is that its underpinnings, really, its progeny, its providence can be traced back to the 

Radio Act of 1912, over 100 years ago, when the whole world looked different, much less our 

communications infrastructure and our communications policy infrastructure. Congress, in fact, first 

became concerned about foreign ownership of radio communications in 1912, you ready for this? There 

was no commercial communications infrastructure industry. They were concerned that Germany or its 

proxies might gain control of privately held ship-to-shore radio stations along the East Coast in the 

run-up to the first World War and that they might use those facilities in order to send merchant ships off 

course and into the shoals. That's where our problem began, if you will, because, ever since that time, 

the Congress and the Commission have struggled with how, to what extent, to regulate foreign 

investment in this sector. 

So let me walk through, with you, a little bit about that statutory underpinning. And I think what 

you'll see is, and this may not be what this room wants to hear, because the progression, the evolution 

of the FCC in this area has been from strict prohibition to a much more permissive environment to the 

extent that now, and I’m fast forwarding, we'll get there, now, for all intents and purposes, it is possible 

to have 100% foreign ownership of a U.S. communications facility with certain exceptions that we can 

talk about. 

So... since 1934, when the Communications Act was promulgated, wireless communications 

licenses − think broadcasters, and for our purposes today, think cell phone operators, right, anything 

that allows you to communicate by, over spectrum without putting a signal through a wire − has been 

subject to section 310 of the Act. 310 does about three different things. First, it prohibits any foreign 
government or its representative or any alien or any representative of an alien (and “an alien” has the 

common sense definition here) or any foreign organized corporation from holding an FCC license. 

Period, full stop. If you're a foreigner, if you’re a foreign corporation, much less a foreign government, 

you may not apply to the FCC to hold a radio license. That's the first thing. The second thing 310 does is 

prohibits foreign individuals and foreign governments and foreign organized corporations from owning 

or voting more than 20% of the equity or voting interests in an FCC licensee. So, you can’t be a licensee 

outright but you can hold up to a 20% interest in a licensee, whether it's a C Corp., whether it’s a 

partnership, whether it’s an LLC. 

Interestingly, and we'll sort of touch on this in a little bit, too, the FCC, notwithstanding that it's 

an outright and categorical limit, the FCC has determined within the last three or four years that it has 

discretion to forebear from enforcing that limit when it believes that the public interest warrants doing 

so. So, in effect, the FCC has determined that it has discretion and that hasn't been challenged to allow 

relaxation of that 20% statutory cap. 

And then we get to section 310B4 which is the provision that has most bedeviled our industry 

and the FCC and which I most want to focus on today, and that has to do with the limitation of indirect 

investment in FCC licensees. That is, an investment in a U.S.-organized entity that itself directly or 

indirectly controls that licensee entity that we were talking about a second ago. Here’s what it does, and 

it is... I can't project it here. If you're interested, you should go back and look at it because it is one of the 

least artfully drafted statutory provisions I've ever come across. Admittedly, my practice area is narrow, 

but the Communications Act is a really big document.

Section 310B4 limits indirect foreign ownership to 25%. Okay, so it's a bump up from the direct 

ownership cap if the commission finds the public interest would be served by prohibiting it, right? So, a 

common sense reading of the statute and the statute by its terms appears to say, it's okay to own as 
much as you want unless the FCC tells you that you can't. However, historically, the FCC interpreted it as 

a cap, as a categorical cap that could only be, if you will, waived, not the technically correct term, upon 

application to the FCC. So it’s an interesting tension. The FCC historically just read the statute wrong in 

my view and said “no, no, no, you can't own more than 25% unless you come to us.” Even though what 

the statute says is, you can own as much as you want unless the FCC tells you you can’t. That has been 

one of the challenges we dealt with with the interpretation on the application of this statute through 

the years. 

I should note, and I don’t want to get too far down into the weeds, but it also may be relevant to 

some of the things that you're going to be thinking about. The 25% limitation is calculated separately for 

voting and equity interests. So the FCC will run two separate calculations and must be satisfied that 

neither the voting prong nor the economic prong exceeds 25% in order for you to certify or for it to find 

you're in compliance with the limitation. 

And that equity ownership generally is calculated on an outstanding, rather than a fully diluted 

basis, and it generally disregards debt, including convertible debt, it disregards contingent future 

interests such as warrants or options until they're exercised. And over time, this will not surprise you, 

vehicles such as debt, including convertible debt and options and warrants, have become preferred 

mechanisms in the industry in order to screen ownership from the foreign ownership calculation, right? 

In other words, I can issue warrants to my foreign investors and until they're exercised, they're not 

relevant to, either to my disclosure to the FCC or to the FCC's calculation of the, you know, the foreign 

ownership quotient. But of course because there's an exception to every rule, the FCC also determined, 

goaded by Rupert Murdoch in 1995, it has discretion to pierce a nominal capital structure or it has 

reason to believe that that structure doesn't align, at least reasonably, that it's not on the curve with the 

actual locus of economic ownership. 
Let’s digress there briefly. My disclaimer and disclosure here is that this was my case. You recall 

that Murdoch became a U.S. citizen in 1985-86 because he wanted to buy a bunch of TV stations here. 

And remember, under 310, he couldn't because he wasn't a U.S. citizen. And he arranged, shall we say, 

an expedited path to citizenship. That was not my part of the case. My part of the case came [laughter] 

my part came ten years later when a whistle blower went to the FCC and said, “Hang on. His ownership 

disclosures at the FCC indicated that he has 76% of the voting and equity interests,” right, because he 

had to keep the foreign interests below 25%. Whereas the News Corporation, an Australian company, 

owns the other 24%; but records indicate that he only paid $760,000 for his 76% voting control interest 

and the company is worth however many multiple billions of dollars. That resulted in a protracted and 

very difficult FCC proceeding and that case resulted in the FCC's determination that in fact, it has the

power to pierce the capital structure because what it said was “hang on, Murdoch only put down 

$760,000 and yet says he controls 76% of this company; 99% plus of the economic value and risk is 

flowing out to the shareholders of the News Corporation Limited, an Australian company.”

Here's another behind the scenes look at the FCC. It’s a very results-driven agency, alright? They 

had a huge problem when they made the finding that the company was out of compliance with the 

statute. Because theoretically it could have led to the revocation of those licenses and would have been 

the end of the line for FOX, which at that time was only a few years old and had provided a fourth 

national broadcast network which had been a huge policy objective and initiative for the FCC for 

generations. 

We first argued from the statute and we lost. I won't go into that argument. We then tried to 

recapitalize the company using debt and we said “Okay, fine, you know, you don’t count debt, we’ll just, 

you know, we’ll just recapitalize and all that and the company will issue debt to News Corporation” and 

the FCC, looking in part to the service and tax law said “no, no, no; you can’t have a 99.9% − .1 debt 
equity ratio” and so the FCC reverted to plan C which was purple cow and a waiver, right? They couldn't 

take the risk that Murdoch would take his chips and go home and shut down the fourth network. So 

they said “You know what? This is a unique situation. It's never going to recur. The public interest value 

of that fourth network is really important. So we will allow this structure, we will bless this structure and 

essentially forebear from enforcing that 25% gap under the statute, even though everybody 

acknowledges that it's not in compliance. So, life went on. That’s not an unusual approach for the FCC to 

take when they have two conflicting sort of policy objectives. 

And as it happened, this is a footnote, you probably know that news Corp. has been redomiciled 

in Delaware. The public float has done what a public float will do over time. And over time, the 

attributable foreign ownership of the public float has settled down at around 25% or less. There've been 

a couple bumps up. The FCC has mechanisms to deal with that. 

Let's go back to history, briefly. As I mentioned, the Radio Act of 1912 completely forbade any 

foreign ownership. Period. Nothing. Fifteen years later, Congress in the 1927 radio act decided that they 

would begin to permit some foreign ownership so they set limits on direct foreign ownership, that 20% 

that we’ve talked about. But that’s all that they did. And the legislative history emphasized national 

security concerns for those restrictions and that’s something, again, that we’ve been talking about a 

little bit today. And in particular they wanted to prevent foreign influence over domestic 

communications in time of war. By 1927, of course, there was, over the air, entertainment radio, right? 

You could get your crystal set and you could listen to the radio. And so the concern had evolved, not just 

from the ship-to-shore communications that had a very sort of practical implication and consequence, 

but the concern had broadened to a more generalized concern that a hostile foreign power could 

propagandize and influence the hearts and minds of American radio listeners. But the ’27 Congress left 

something out. The forgot about indirect foreign ownership and of course communications lawyers 
being what they are and the industry being what it is, they determined that this loophole could allow 

them to evade foreign restriction altogether simply by organizing a U.S. holding company, right? In ’34 

that loophole was closed and that’s when we landed on the regime that we have now with the 

limitations 25% on indirect foreign ownership 60 or so years passed, the Commission from time to time 

and on a very ad hoc basis would permit foreign ownership in excess of 25%, although always in the 

common carrier context, the telephone context, never in the broadcast context, and I want to spend just 

a few minutes on that too, because I think it's relevant to what we're talking about here. 

And then came the WTO in the mid-90s. And, in particular, the basic telecommunications 

agreement, pursuant to which, I think about 65 or 70 countries around the world undertook to open 

their telecommunications markets. We, of course, joined the WTO and ratified it but we took a 

reservation for broadcasting. We said we will only open our wireless radio markets, that is, cell phones, 

but we're not going to open the broadcast sector. And, in short order, after the adoption of the WTO, 

you saw the flood gates opening a little bit. You saw more access to foreign capital. And, I think in 2001, 

you saw Deutsche Telecom's acquisition of what was then called Voice Stream Wireless, which you 

would now know as T-Mobile, which is owned 100% by the government of Germany. Senator Hollings 

vociferously opposed that transaction but the FCC concluded that under the WTO, it really had no choice 

and could not identify any public interest harms to allowing a friendly foreign state to own a critical 

United States telecommunications infrastructure. 

And in the years since then, that was sort of the signal event in this transition, but since that 

time, I think the FCC has approved 150 to 200 instances of foreign ownership of a wireless common 

carrier licensee in excess of 25%. They have only allowed such ownership, twice, in the broadcast 

context, once was Murdoch and more recently, the Pandora case, in which Pandora, you know, the 

music service, was seeking to acquire a terrestrial radio station, as a public company had difficulty 
calculating its foreign ownership, went to the FCC and asked for permission to go to 49% which the 

Commission approved, subject to certain reporting and other requirements. 

A couple of minutes, and I'm finishing soon, I promise. A couple minutes on this common carrier 

broadcast dichotomy, again because I think it might inform some of the stuff that we're talking about 

today. As I mentioned, you know, historically, the concern in general about foreign ownership was that 

foreign powers could acquire and disrupt our sort of private communications or ship to shore 

communications. Later, as I mentioned, with the emergence of commercial broadcasting there was a 

concern that foreign powers could manipulate U.S. public opinion over the radio or over television. In 

contrast to what the FCC has characterized as its traditionally heightened concern for foreign influence 

over control of licensees which exercise editorial discretion over the content of their transmissions, re: 

broadcasters, they’ve justified their willingness to consider foreign investment and common carrier 

licensees on the ground that they're just merely passive conduits for information provided by others. 

Let's pause for a second. I'd ask you to think about whether that rationale can continue to be 

squared with the realities of telecommunications technology and the media marketplace in the 21st

century. And, in fact, I think what you’ll see is that policymakers, not just telecommunications policy 

makers, are becoming increasingly concerned about foreign influence, not over broadcast content 

(because, as we all know nobody watches broadcast television anymore anyway); but the possibility that 

foreign agents or hostile foreign governments could engage in cyber warfare using our communications 

networks. And I'd dare say that's probably trending in the right direction because communications 

infrastructure, think about the information that you know, they may be passive conduits, and after the 

open Internet decision from the court a couple of weeks ago they may be sort of locked into being 

passive conduits, but our communications networks control the delivery and processing of vast amounts 

of highly sensitive information not just for the government but for financial institutions and other 
markets. And I think one could argue, you know, the Commission, if it were to reexamine these issues, 

might want to be shifting its focus away from broadcasting, you know, how much influence can you 

exercise by owning a radio station in Fargo? To our wired and unwired communications networks, given 

the vast quantities of data that they distribute and given their vulnerabilities from a national security 

perspective. In partial recognition of that reality I think starting at around 2000, 2001, the Commission 

started to refer transactions involving foreign investment to Team Telecom. Do you know what I mean 

when I talk about...? Isn't that like a great name, by the way? Like Team USA, Team Telecom, right? 

Team Telecom is an interagency task force comprising DOJ, FBI, Homeland Security, and Defense, which 

reviews every single FCC transaction involving a certain quantum of foreign investment and they review 

it from a national security perspective. And, in fact, the process has evolved to the point now where the 

FCC will either unilaterally refer a transaction out to Team Telecom or more often, we'll hear from Team 

Telecom as soon as the transaction is filed. And Team Telecom will instruct the FCC to put down its pen 

until such time that the Team Telecom national security review has been completed. Sometimes it's 

uneventful. Sometimes it results in what’s called a national security agreement in which the transaction 

parties are obligated to enter into essentially a contract with the government, regulating certain aspects 

of their network operations. 

And now it appears from the Pandora case and a couple of other pending proceedings that that 

same lens will be brought to bear on broadcast transactions as well as the Commission works to 

rationalize its approach to foreign ownership now across sectors and is taking baby steps to harmonize 

its treatment of broadcasters and its treatment of common carriers. And finally, on methodology. 

Because I know that is another issue. And I will shut up now. You know, once you get me started 

on this, it's very hard to get me to stop. But, historically, the Commission, I should say, is a very open 

agency, it's very transparent. There are fairly extensive disclosure obligations on applicants for new 
radio stations, on applicants to sell or acquire radio stations or FCC licenses. There are periodic 

ownership reporting requirements of all FCC licensees, just in the ordinary course, they have to make 

certain disclosures about their owners. And they also have to certify compliance with the foreign 

ownership provisions of the communications act. That's certain junctures in a licensing process or 

license renewal process. 

Historically the FCC has left it to licensees to determine how they're going to figure out what 

their foreign ownership is. Obviously in closely held corporations, they know. The commission has 

allowed you to rely on known shareholders, registered shareholders, management holdings. They have 

allowed you to conduct surveys and they will accept any survey that produces a statistically significant 

result but more recently they’ve started to legislate the types of methodology that are acceptable, in 

particular, in recognition of the challenge that big, global, public companies face in knowing who owns 

them. 

And the Commission, I think, has conceded, in fact, it's very difficult − and you guys will keep me 

honest − for corporations to know who owns them. And I think, if you were to go carefully and review 

SEC filings and give it some thought, maybe do a little regression analysis, you might find that companies 

that nominally are in compliance with the 25% cap or believe they are, or can represent that they are, 

aren't. And that their foreign ownership may be well in excess of 25% from time to time or at any given 

time but it may be impossible for them to know that. So among those steps that the Commission is 

considering in a pending proceeding that was launched last October would be to accept shareholder 

street addresses as proxy for citizenship. Absent circumstances under which the filer has knowledge or 

should know that a domestic street address is being used by a foreigner. They’re taking a very close look 

and I was in last week talking to them about whether to use the SEG-100 process, you know what that 

is? I can't understand it, but it is, I guess, an algorithm or software that's deployed by the depository 
trust company that allows corporations to tag shares and to segregate them based on certain 

characteristics, in this case, whether the corporation has reason to believe that they're foreign-owned or 

I guess whether the holder itself acknowledges that it's foreign-owned or not. 

The FCC is asking a lot of questions about that. And, in an interesting liberalization, they are 

reconsidering their historic position that an unknown response to a survey or an unknown shareholder 

must be deemed to be foreign. And among the proposals they're considering, would be some sort of 

proportional test that, you know, that unreported shares or unknown shares would be treated in 

proportion to known shares with respect to foreign versus domestic ownership. That proceeding is 

pending. The Commission is working very hard to rationalize its process and the industry is, I think, very 

engaged in trying to get to something that works both for the industry and for the agency. I'll be quiet.