At its December meeting, at the same time as it adopted rules relaxing the newspaper-broadcast cross-ownership rules, the FCC adopted new rules to expand diversity in the ownership of broadcast stations, encouraging new entrants into such ownership.  The full text of that decision was just released last week, providing a number of specific rule changes adopted to promote diverse ownership, as well as a number of proposals for changes on which it requests further comment.  Comments on the proposed changes will be due 30 days after this order is published in the Federal Register.  As this proceeding involves extensive changes and proposals, we will cover it in two parts.  This post will focus on the rule changes that have already been made – a subsequent post will cover the proposed changes.  The new rules deal not only with ownership rule modifications, but also with issues of discrimination in the sale of broadcast stations and in the sale of advertising on broadcast stations, new rules that leave some important unanswered questions. 

The rules that the Commission adopted were for the benefit of "designated entities."  Essentially, to avoid constitutional issues of preferences based on race or gender, the definition of a designated entity adopted by the Commission is based on the size of the business, and not the characteristics of the owners.  A small business is one designated as such by the Small Business Administration classification system.  Essentially, a radio business is small if it had less than $6.5 million in revenue in the preceding year.  A television company is small if it had less than $13 million in revenues.  These tests take into account not only the revenue of the particular entity, but also entities that are under common control, and those of parent companies.  For FCC purposes, investment by larger companies in the proposed FCC licensee is permissible as long as the designated entity is in voting control of the proposed FCC licensee and meets one of three tests as to equity ownership: (1) the designated entity holds at least 30% of the equity of the proposed licensee, or (2) it holds at least 15% of the equity and no other person or entity holds more than 25%, or (3) in a public company, regardless of the equity ownership, the designated entity must be in voting control of the company.

The specific proposals that were adopted, and which will go into effect 30 days after Federal Register publication, include:

  • Allowing designated entities to purchase construction permits for new stations that are nearing their expiration dates, and giving the designated entity 18 months after the purchase in which to construct the new stations.
  • Modified the Equity Debt Plus rule (which makes an otherwise non-attributable ownership in a broadcast station interest attributable if the interest exceeds 33% of the financial interest – debt plus equity – in the company and either (a) the holder has an attributable ownership interest in another station in the same market, or (b) it provides more than 15% of the programming to a station) to allow that holder to have a financial interest in a designated entity if (i) the interest is less than 50%, or (ii) the financial interest is less than 80% and the holder of the interest has no equity interest, option, agreement, or understanding by which it can acquire an equity interest in the designated entity
  • Revived the FCC’s distress sale policy by allowing a broadcaster whose license has been set for a revocation hearing or is facing a renewal challenge on basic qualifications grounds to sell to a designated entity to avoid the issues that it is facing.  Ordinarily, if a licensee is facing issues which could lead to a loss of license, it is not allowed to sell the station until the issues are resolved.
  • Allowed the sale of existing grandfathered combinations of radio stations which exceed the limits established by the multiple ownership rules (as revised in 2003) to one owner, provided that the owner agrees to sell the stations which exceed the limits to a designated entity within a year
  • Provided additional time for spin-offs of broadcast stations in "substantial transactions" if efforts were being made to sell excess stations to designated entities
  • Gave a preference to companies which "incubated" companies owned by designated entities (i.e. provided them financing or other similar assistance) if the company was in a situation where the company and another both filed, on the same day, to create a TV duopoly in a market where only one such duopoly could exist (i.e because there must be 8 separately owned and controlled television operators remaining in a market after the permitted combination).
  • Adopted a new rule prohibiting discrimination in the sale of a commercial broadcast station on the base of race, sex, religion or national origin.  A certification that no discrimination has taken place will be required in applications submitted to the FCC for approval of station sales.
  • Adopted a zero tolerance policy against "ownership fraud," situations where the putative owner of a station is not truly involved in station operations.  The FCC promises to try to resolve any such allegations within 90 days, and also promised to keep confidential, to the extent that it can consistent with the Freedom of Information Act, the names of whistleblowers on such frauds
  • Adopted a rule prohibiting any advertising contract containing "no urban" or "no Spanish" dictates, meaning that an advertiser cannot specify in an advertising contract that the ads will not run on stations targeted to the African-American or Hispanic communities.  A certification that no such advertising discrimination has taken place will be required in license renewal applications.
  • Agreed to conduct a number of initiatives to promote minority ownership, including conducting a study of the extent of minority and female ownership in broadcasting (and amending the FCC Form 323 Ownership Report to obtain such information), encouraging local banks to lend to the broadcast industry, holding an access to capital summit, and publishing a guidebook on diversity in contracting and ownership.

While some of these initiatives seem to have real promise for designated entities (e.g the sale of expiring construction permits for new stations and the distress sale policy expansion), others seem to be less likely to be used.  Just how often will two television operators file an application to create a duopoly on the same day in a market with just 9 independent television voices?  I don’t know that it has ever occurred, and doubt that it will be likely enough to occur in the future to provide much incentive for companies to enter into incubation agreements.

Several other proposals really need more details to avoid being a trap for the unwary, getting broadcasters into trouble for routine practices.  For instance, the Commission does not explain how this would they will insure that there is no discrimination in the sale of a broadcast station, or exactly what circumstances they would consider to be discriminatory.  For instance, to what extent must a seller go to make sure that the station is offered to minority and female prospective purchasers?  If there is a direct sale from one non-minority to another without any advertisement of the availability of the station, has there been some sort of discrimination?  Or if there is a sale of a religious commercial radio station to another person of the same religious affiliation, has there been discrimination?  The Commission does not address these questions. "Ownership fraud" is also curiously undefined.  What will happen to an entity that is found to have engaged in such fraud?  How can the FCC fulfill its promise to resolve allegations of fraud within 90 days – a very quick resolution for what can be a very complex issue?  These questions are unanswered.

Perhaps most surprising is the limited discussion of the prohibition on no urban-no Spanish dictates, as press reports had indicated that members of the advertising community had been visiting the Commission, lobbying on the issue.  But the Commission says nothing more than that there is a prohibition on these clauses in advertising contracts.  But if a broadcast company owns two stations – one a Spanish language station and the other an Adult Contemporary station broadcasting in English, if an advertiser says "run my ads only on the AC station", does that violate the prohibition?  If so, that might actually encourage some groups to avoid programming Spanish and urban formatted stations, to avoid having advertisers specify that their advertising run on only one or two other stations, and perhaps creating an issue even if the advertiser was just trying to reach the unique demographic served by that particular station.

Apparently, these issues will be sorted out through cases or future FCC pronouncements.  But, for now, broadcasters will have to guess what they mean.