In a decision this week on the sale of radio stations by Univision Radio to Latino Media Network, the Audio Division of the FCC’s Media Bureau discussed the FCC’s longstanding prohibition on the seller of a broadcast station retaining a “reversionary interest” in the station it is selling.  In this case, FCC staff found that the intent of the buyer to enter into a Local Marketing Agreement by which the seller would program some of the stations after closing was not a reversionary interest, because the buyer was free to make programming decision for the stations as long as it retained ultimate control over that programming and station operations.  Had the LMA been a condition of the sale, or had it served as partial consideration for the sale, the FCC suggested that it would have violated the prohibition against revisionary interests. But as the seller did not make the LMA a condition of the sale, the post-closing decision to enter into an LMA was a programming decision under the control of the buyer and thus was not deemed to be a prohibited reversionary interest.  No matter what the holding of this case, a more fundamental question arises – what is a reversionary interest and why is it prohibited?

In reviewing our blog when writing this article, we noted that in the almost 17 years we have been publishing, we don’t seem to have ever referred specifically to the question of reversionary or retained interests in a broadcast station.  It is an issue that does not come up often, but it is related to another issue that we have written about before – the prohibition on a lender taking a security interest in a broadcast license (see, for instance, our two part article on security interests in broadcast licenses, here and here).  The prohibition on the right of reversion or retained interest in a broadcast license is set out in Section 73.1150 of the FCC rules, which states:

(a) In transferring a broadcast station, the licensee may retain no right of reversion of the license, no right to reassignment of the license in the future, and may not reserve the right to use the facilities of the station for any period whatsoever.

(b) No license, renewal of license, assignment of license or transfer of control of a corporate licensee will be granted or authorized if there is a contract, arrangement or understanding, express or implied, pursuant to which, as consideration or partial consideration for the assignment or transfer, such rights, as stated in paragraph (a) of this section, are retained.

The prohibition against the right of reversion, and the prohibition against a lender taking a security interest directly in a license, were both adopted by the FCC to implement Communications Act requirements that state that a broadcast license does not convey an ownership interest in the spectrum being used, but instead only confers on the license holder a right to use the spectrum that does not extend “beyond the terms, conditions, and periods of the license.”  In adopting the prohibitions against a reversionary interest, and the prohibitions on taking a security interest in a license, the FCC believed that these interests would imply an ownership interest in the license akin to the ownership interest that one might hold in other forms of property that can be subject to leases, mortgages, and other security interests.  Thus, the restrictions were imposed over half a century ago.  But, since being implemented, the FCC has from time to time questioned whether these restrictions really were necessary.

In 1995, for instance, the FCC issued a Notice of Proposed Rulemaking and Notice of Inquiry to ask whether these provisions really were required by the Communications Act, and whether the abolition of these restrictions might increase the availability of financing in the broadcast industry.  No action was taken at that time but the issue has since arisen, including in proposals advanced in the Modernization of Media Regulation proceeding begun by former FCC Chairman Pai (see our article here).  In these proceedings, many have argued that allowing broadcasters to retain interests in a license (or the right to reacquire the license if a buyer who pays with a promissory note defaults on the loan) or to take a security interest in a license would not necessarily mean that there was an ownership interest in a license.  Instead, it would only signify that the holder had a valuable right like that granted under any contract or similar agreement, that would be held pursuant to any limitations on the license, including the requirement that, before the station could be reacquired or before a security interest could be exercised, the party seeking to exercise the right would need to secure FCC approval for any transfer of the license.  It was argued that this would make financing for broadcast acquisitions, particularly those by new entrants, more available as lenders would feel more secure in their rights that could be exercised upon any default in a manner in the same way that those rights are protected in other business transactions.  In these proceedings, the FCC itself has recognized that decisions in other communications services, where FCC licenses have been recognized as valuable property rights, have undercut the argument that these prohibitions are necessary under the Communications Act.

In these past proceedings, some have expressed concerns that these interests, if allowed, would give a lender a greater ability to interfere with the licensee’s exclusive control over the way that it operates the station.  The fear is that, if the lender can threaten to repossess a station, the actions of the licensee will be constrained.  Yet, even under current rules, the lender can threaten to foreclose on all of the non-license assets of a station and can threaten to force a licensee into a bankruptcy or receivership in which the lender has a security interest in any proceeds from the sale of the license (as noted in our articles here and here, a security interest in the proceeds from the sale of a license is permitted).  While the station’s license is not guaranteed to come back to the lender, the influence on the licensee seems to be similar – and is not prohibited under current FCC rules.

In today’s media marketplace, where dealmaking has become more sophisticated and station operations more complicated (particularly with the advent of multicasting and spectrum sharing for advanced services that can be provided by new technologies like ATSC 3.0, Next Gen TV), these rules seem to impose unnecessary regulatory hurdles on broadcast operations.  It may be time for the FCC to once again revisit these policies to see if they are really necessary.