[Federal Register Volume 77, Number 115 (Thursday, June 14, 2012)]
[Proposed Rules]
[Pages 35643-35652]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-14454]


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LIBRARY OF CONGRESS

Copyright Office

37 CFR Part 201

[Docket No. 2012-5]


Verification of Statements of Account Submitted by Cable 
Operators and Satellite Carriers

AGENCY: Copyright Office, Library of Congress.

ACTION: Notice of proposed rulemaking and request for comments.

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SUMMARY: The Copyright Office is proposing a new regulation to 
implement provisions in the Satellite Television Extension and Localism 
Act of 2010 (``STELA'') that will allow copyright owners to audit 
certain Statements of Account filed with the Copyright Office. Cable 
operators and satellite carriers pay royalties to and file Statements 
of Account with the Copyright Office every six months as required by 
law for the use of the statutory licenses that allow for the 
retransmission of programming carried on over-the-air broadcast 
signals. However, until the passage of STELA the licenses did not 
authorize the copyright owners, who are the beneficiaries of the 
royalties collected, to audit the information on Statements of Account 
and the amounts paid for use of the statutory licenses.

DATES: Comments on the proposed regulation must be received in the 
Office of the General Counsel of the Copyright Office no later than 5 
p.m. Eastern Daylight Time (EDT) on August 13, 2012. Reply comments 
must be received in the Office of the General Counsel no later than 5 
p.m. EDT on September 12, 2012.

ADDRESSES: The Copyright Office strongly prefers that comments be 
submitted electronically. A comment submission page is posted on the 
Copyright Office Web site at http://www.copyright.gov/docs/soaaudit/. 
The Web site interface requires submitters to complete a form 
specifying name and other required information, and to upload comments 
as an attachment. To meet accessibility standards, all comments must be 
uploaded in a single file in either the Adobe Portable Document File 
(PDF) format that contains searchable, accessible text (not an image); 
Microsoft Word; WordPerfect; Rich Text Format (RTF); or ASCII text file 
format (not a scanned document). The maximum file size is 6 megabytes 
(MB). The name of the submitter and organization should appear on both 
the form and the face of the comments. All comments will be posted 
publicly on the Copyright Office Web site exactly as they are received, 
along with names and organizations if provided. If electronic 
submission of comments is not feasible, please contact the Copyright 
Office at (202) 707-8380 for special instructions.

FOR FURTHER INFORMATION CONTACT: Tanya Sandros, Deputy General Counsel, 
or Erik Bertin, Attorney Advisor, Copyright GC/I&R, P.O. Box 70400, 
Washington, DC 20024. Telephone: (202) 707-8380. Telefax: (202) 707-
8366.

SUPPLEMENTARY INFORMATION:

I. Background

    Every five years Congress considers legislation to reauthorize the 
statutory license that allows satellite carriers to retransmit 
television programs that are embodied in distant broadcast 
transmissions, provided that the satellite carrier files a Statement of 
Account and pays royalties to the Copyright Office. 17 U.S.C. 119. In 
May 2010, Congress passed the Satellite Television Extension and 
Localism Act of 2010 (``STELA''), Public Law 111-175, 124 Stat. 1218, 
for this purpose. STELA reauthorized the Section 119 statutory license 
for satellite carriers and, in addition, it made certain amendments to 
the Section 119 license and a second statutory license, set forth in 
Section 111 of title 17 of the United States Code, that allows cable 
systems to retransmit television and radio programs that are embodied 
in local and distant broadcast transmissions.
    A significant change to the law is the addition of new provisions 
directing the Register of Copyrights to develop procedures for the 
verification of the Statements of Account and royalty fees that cable 
operators and satellite carriers deposit with the Copyright Office 
under Sections 111 and 119. Specifically, Section 119(b)(2) directs the 
Register to

[[Page 35644]]

``issue regulations to permit interested parties to verify and audit 
the statements of account and royalty fees submitted by satellite 
carriers under [that] subsection.'' Similarly, Section 111(d)(6) 
directs the Register to ``issue regulations to provide for the 
confidential verification by copyright owners whose works were embodied 
in the secondary transmissions of primary transmissions pursuant to 
[section 111] of the information reported on the semiannual statements 
of account filed under this subsection for accounting periods beginning 
on or after January 1, 2010, in order that the auditor designated under 
subparagraph [111(d)(6)(A)] is able to confirm the correctness of the 
calculations and royalty payments reported therein.''
    These provisions authorize the implementation of a process by which 
copyright owners, whose works are retransmitted under the statutory 
licenses, can for the first time verify the accuracy of the royalty 
payments made by cable operators and satellite carriers. They also make 
clear that the Register should consider the interests of the parties 
who will be subject to this verification procedure. For example, 
Section 111(d)(6) directs the Register to give cable operators an 
opportunity to review the auditor's conclusions, to remedy any errors 
identified in the auditor's report, and to correct any underpayments 
that the auditor may discover. Congress indicated that a single auditor 
should conduct the verification procedure on behalf of all copyright 
owners and that the Register should limit the number of times that a 
party may be subjected to an audit. Congress also directed the Register 
to establish procedures for protecting the confidentiality of non-
public financial and business information that may be provided to the 
auditor during the course of his or her investigation.
    Generally speaking, the proposed regulation is based on similar 
regulations that the Office has adopted for the verification of 
Statements of Account and royalty payments that are made under the 
statutory licenses for the use of ephemeral recordings and the digital 
performance of sound recordings under 17 U.S.C. sections 112(e) and 
114(f), and for the importation and distribution of or the manufacture 
and distribution of digital audio recording devices under 17 U.S.C. 
chapter 10. See generally 37 CFR 201.30, 260.5, 260.6, 261.6, 261.7, 
262.6, and 262.7. The Office also considered a Petition for Rulemaking 
[http://www.copyright.gov/docs/soaaudit/soa-audit-petition.pdf] which 
was filed on behalf of the copyright owners who are the beneficiaries 
of the royalties that are paid under the Section 111 and 119 statutory 
licenses.\1\ The copyright owners asked the Office to adopt separate 
regulations for Statements of Account that are filed by cable operators 
and satellite carriers and provided the Office with proposed language 
for each regulation. Separate regulations, however, do not appear to be 
necessary because the basic elements for verifying and auditing 
Statements of Account filed under Section 111 and 119 should be the 
same. Therefore, the Office is proposing a single regulation setting 
forth a process for verifying Statements of Account that would apply to 
cable operators and to satellite carriers. In formulating this 
regulation, the Office has adopted some of the suggestions included in 
the Petition for Rulemaking and welcomes comments on the proposed 
regulation from copyright owners, cable operators, satellite carriers, 
accounting professionals, and other interested parties.
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    \1\ Representatives of Program Suppliers (commercial 
entertainment programming); Joint Sports Claimants (professional and 
college sports programming); Commercial Television Claimants (local 
commercial television programming); Music Claimants (musical works 
included in television programming); Public Television Claimants 
(noncommercial television programming); Canadian Claimants (Canadian 
television programming); National Public Radio (noncommercial radio 
programming); Broadcaster Claimants Group (U.S. commercial 
television stations), and Devotional Claimants (religious television 
programming) filed the petition jointly.
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II. Verification Procedures

A. Cable Operators and Satellite Carriers Would Be Subject to the Same 
Verification Procedure

    As discussed above, Section 119(b)(2) directs the Register to issue 
regulations to allow ``interested parties'' to verify the Statements of 
Account and royalty fees that are filed with the Copyright Office under 
Section 119. The term ``interested parties'' was not defined, and the 
statute does not provide any guidance on the nature and extent of this 
verification procedure. For example, Section 119(b)(2) does not 
indicate whether satellite carriers should be allowed to review the 
auditor's conclusions or to correct any underpayments that the auditor 
may discover. Nor does it provide for the confidential treatment of 
information that the satellite carrier may provide to the auditor. 
Section 111(d)(6), on the other hand, contains detailed instructions 
regarding the verification of Statements of Account and royalty 
payments filed by cable operators, including the number of times that a 
cable system may be audited, the qualifications of the auditor, and the 
deadline for initiating an audit, among other requirements.
    However, the differences between the two provisions do not preclude 
the Register from adopting a single regulation for verification 
procedures conducted under Section 111(d)(6) and 119(b)(2). Nor is 
there anything in Section 111(d)(6) that directly contradicts the 
requirements of 119(b)(2) (or vice versa). Section 119(b)(2) allows 
``interested parties'' to verify and audit Statements of Account and 
royalty payments filed by a satellite carrier. By contrast, Section 
111(d)(6) only allows ``copyright owners whose works were embodied in 
the secondary transmission of primary transmissions'' to audit 
Statements of Account and royalty payments filed by a cable operator. 
While the statutory language in Section 111(d)(6) is more precise and 
identifies who may request an audit, it is nonetheless reasonable to 
assume that the only parties who would have an interest in verifying 
Statements of Account and royalty payments filed under Section 119 
would be copyright owners whose works were embodied in a secondary 
transmission made by the party that filed that Statement. Moreover, 
virtually the same set of copyright owners participates in proceedings 
before the Copyright Royalty Board concerning the distribution of 
royalties under the cable and satellite licenses.
    Consequently, because Congress provided a blueprint for the 
verification of Statements of Account in Section 111(d)(6) and because 
those requirements are similar to verification procedures that the 
Office has adopted in the past, the Office is inclined to use this 
provision as the framework for the regulations governing the 
verification of Statements of Account and royalty fees filed by both 
cable operators and satellite carriers.\2\ Adoption of the same 
procedures for both statutory licenses has advantages. It will reduce 
regulatory complexity for copyright owners, it will promote fairness 
among statutory licensees, and it will encourage auditors to develop 
best practices that could be used regardless of whether an audit 
involves Statements of Account filed by a cable operator or a satellite 
carrier. The copyright owners apparently agree with this approach. 
Although they proposed separate regulations for cable operators and 
satellite carriers their drafts are essentially identical, except

[[Page 35645]]

for one difference which is discussed in more detail in the next 
section.
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    \2\ As the proposed regulation applies to both cable operators 
and satellite carriers, they are collectively referred to as 
``statutory licensees.''
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    The Office invites comments on whether Section 111(d)(6) should be 
used as the framework for the verification of Statements of Account 
filed under Sections 119(b)(2) or whether there are policy or 
administrative reasons for adopting a different approach for the 
verification of Statements and royalties filed by cable operators and 
satellite carriers.

B. Retroactivity

    As discussed above, the copyright owners have asked the Office to 
adopt separate regulations for cable operators and satellite carriers 
and they have provided the Office with a proposed draft for each 
regulation. The primary difference between the two suggested 
regulations is that the copyright owners' draft regulation for 
satellite carriers would apply retroactively, while their draft 
regulation for cable operators would apply on a prospective basis only. 
Specifically, the copyright owners' draft regulation for cable 
operators would apply to Statements of Account for accounting periods 
beginning on or after January 1, 2010 (i.e., the semiannual accounting 
period that was in effect when the President signed STELA into law on 
May 27, 2010). By contrast, the copyright owners' draft for satellite 
carriers would apply to any Statement of Account, even if the Statement 
was filed with the Office before STELA was enacted.
    In support of this distinction, copyright owners argue that Section 
119(b)(2) of ``STELA permits verification of Statements of Account 
filed by satellite carriers prior to the 2010-1 accounting period.'' 
Petition for Rulemaking at 4. However, Section 119(b)(2) does not 
contain any language that expressly permits copyright owners to audit a 
Statement of Account for an accounting period that predated the 
enactment of STELA. Nor does it contain any language that expressly 
permits the Office to adopt regulations providing for the verification 
of Statements of Account on a retroactive basis. On the contrary, when 
STELA does address this issue, it clearly states that copyright owners 
may audit a cable operator's Statements of Account, but only with 
respect to ``accounting periods beginning on or after January 1, 2010 * 
* *.'' Section 111(b)(6). The fact that the verification procedure for 
cable operators only applies to the accounting period that was in 
effect when STELA was enacted and any subsequent accounting period is 
clear evidence that Congress did not intend to impose a retroactive 
verification requirement on cable operators. On the other hand, the 
lack of similar language in Section 119 is not an indication that 
Congress intended to allow retroactive verification of Statements of 
Account filed by satellite carriers.
    ``Retroactivity is not favored in the law. Thus, congressional 
enactments and administrative rules will not be construed to have 
retroactive effect unless their language requires this result. By the 
same principle, a statutory grant of legislative rulemaking authority 
will not, as a general matter, be understood to encompass the power to 
promulgate retroactive rules unless that power is conveyed by Congress 
in express terms.'' Bowen v. Georgetown University Hospital, 488 U.S. 
204, 208 (1988) (citations omitted). See also Motion Picture 
Association of America, Inc. v. Oman, 969 F.2d 1154, 1156 (D.C. Cir. 
1992) (explaining that the Register of Copyrights does ``not have 
authority to promulgate retroactive rules unless Congress gives [her] 
that authority in express terms'').
    Because the copyright owners are asking ``for something the Office 
could not give as a matter of law,'' Motion Picture Association of 
America, 969 F.2d at 1156, i.e., allowing copyright owners to audit 
Statements of Account for accounting periods that preceded the 2010/1 
accounting period, the Office has not adopted the draft language that 
they proposed for the verification of Statements of Account filed by 
satellite carriers.

C. Initiation of an Audit

    The proposed regulation follows the same approach that is used to 
initiate audit and verification procedures for examining Statements of 
Account filed under the Section 112 and 114 licenses and under Chapter 
10. In keeping with this approach, a copyright owner would have to 
notify the Copyright Office in writing in order to initiate an audit 
procedure, and at the same time, it would have to serve a copy of that 
notice on the statutory licensee that would be subject to the audit. 
The Office does not intend to create a form for this notice, but at a 
minimum, the proposed regulation requires the copyright owner to 
identify the Statement(s) of Account and accounting period(s) that 
would be included in the audit and the statutory licensee that filed 
those Statement(s) with the Office. In addition, the notice of intent 
to audit would have to provide specific information about the copyright 
owner filing the notice, including its name, address, telephone number, 
facsimile number, and email address (if any), and the copyright owner 
would have to provide a brief statement establishing that it owns at 
least one work that was embodied in a secondary transmission made by 
that licensee.
    Under the proposed regulation a notice of intent to audit filed by 
one copyright owner would preserve the right of all interested 
copyright owners to participate in the audit procedure. This would mean 
that once the Office has received a notice of intent to audit a 
particular semiannual Statement of Account, it would not accept another 
notice of intent to audit that same Statement. As discussed in Section 
G below, a satellite carrier or cable operator that owns one cable 
system would be subject to no more than one audit per year, while a 
cable operator that owns multiple cable systems would be subject to no 
more than three audits per year. This would mean that once the Office 
has received a notice of intent to audit a particular satellite carrier 
or a particular cable system that owns a single cable system, the 
Office would not accept another notice of intent to audit that licensee 
until January 1st of the following year. Likewise, once the Office has 
received three notices of intent to audit a particular multiple cable 
system operator within a specific calendar year, it would not accept 
another notice of intent to audit that same licensee until January 1st 
of the following year.\3\
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    \3\ However, if a copyright owner filed a notice of intent to 
audit a particular Statement of Account or a particular statutory 
licensee in calendar year 2013 and if that audit was still ongoing 
as of January 1, 2014, the Office would accept a notice of intent to 
audit filed in calendar year 2014 concerning other Statements filed 
by that same licensee.
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    The filing of the notice would then require the Office to publish a 
notice in the Federal Register within 30 days after receiving the 
notice of intent to audit. The Federal Register notice would identify 
the Statement(s) of Account and statutory licensee that would be 
subject to audit, it would identify the copyright owner that filed the 
notice of intent to audit, and it would provide appropriate contact 
information for that party. Any other copyright owner that wishes to 
participate in the audit of the Statement(s) of Account identified in 
the Federal Register notice would have to contact the copyright owner 
that filed the notice of intent to audit. Copyright owners that join in 
the audit would be entitled to participate in the selection of the 
auditor, and they would be entitled to participate in the selection of 
additional cable systems that may be included in an expanded audit, if 
the audit involves a multiple cable system operator which has been 
shown to have

[[Page 35646]]

underpaid its royalties during the initial examination. In addition, 
copyright owners that join in the audit would be entitled to receive a 
copy of the auditor's report and they would be required to pay for the 
auditor for his or her work in connection with the audit.
    Conversely, a copyright owner that failed to join the audit within 
30 days would not be permitted to participate in the selection of the 
auditor or the selection of cable systems that would be included in an 
audit of a multiple system operator. Nor would they be entitled to 
receive a copy of the auditor's report. Moreover, a copyright owner 
that failed to join the audit within the time allowed would not be 
permitted to conduct its own audit of the semiannual Statement(s) of 
Account identified in the Federal Register notice at a later time. If 
the licensee identified in the Federal Register notice is a satellite 
carrier or a single cable system operator, a copyright owner that 
failed to join the audit within 30 days would not be permitted to 
conduct another audit of that same licensee until the following year 
because under the proposed regulations these systems shall be subject 
only to a single audit during a given calendar year. See Section G, 
Frequency of the Audit Procedure. Likewise, if the Office already 
published three Federal Register notices involving a multiple cable 
system operator, a copyright owner that failed to join any of these 
audits within the time allowed would not be permitted to conduct 
another audit of Statements filed by that same licensee for additional 
accounting periods until the following year.

D. Designation of the Auditor

    Under the copyright owners' proposal, the Office would be 
responsible for selecting a qualified and independent person to conduct 
the audit, and copyright owners and statutory licensees would be given 
an opportunity to comment on the proposed auditor before the final 
selection is made. Copyright owners who wished to participate in the 
audit and to receive a copy of the auditor's final report would have 15 
days after the selection of the auditor to notify the Office of their 
intention to join the audit process, and the Office would be 
responsible for posting the names of these copyright owners on its Web 
site.
    The Office has considered the copyright owners' approach but can 
see little justification for this degree of involvement by the 
Copyright Office. Section 111(d)(6)(A) directs the Office to 
``establish procedures for the designation of a qualified independent 
auditor,'' but it does not require the Office to make this designation. 
The Office does not have the knowledge, experience, or resources needed 
to select an appropriate auditor or to manage the selection process 
beyond the initial notification step, and doing so would be a dramatic 
departure from the audit regulations that the Office has adopted in the 
past. See 37 CFR 201.30(d)(2), 260.5(c), 260.6(c), 261.6(c), 261.7(c). 
Therefore, the Office is not inclined to adopt the copyright owners' 
proposal. Moreover, the Office is unaware of any problems with this 
initiation practice as used in the verification process for auditing 
statements of account filed under the Section 112 and 114 licenses or 
under Chapter 10.
    The Office believes that the copyright owners should be responsible 
for designating an auditor who will verify the Statement(s) of Account 
and royalty payments on their behalf and for resolving any disputes 
amongst themselves over the selection of the auditor. Likewise, the 
Office believes that the copyright owners who join in the audit should 
be responsible for paying the auditor for his or her work in connection 
with the audit, and for resolving any disputes amongst themselves 
concerning the allocation of those costs.\4\ The Office can establish 
regulatory guidelines for the verification process, but it strongly 
believes that the copyright owners are better situated to assume the 
costs and the responsibility for selecting the auditor and coordinating 
the verification procedure, including the identification of those 
copyright owners who wish to participate in the verification process.
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    \4\ The copyright owners' proposal states that the copyright 
owners that join in the audit ``shall pay the costs of the Qualified 
Independent Auditor.'' However, they did not indicate whether those 
costs should be split evenly among the copyright owners or whether 
those costs should be divided in some other manner.
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    To this end, the proposed regulation would establish clear 
guidelines for the process, such as defining what constitutes a 
``qualified'' and ``independent'' auditor. Specifically, an auditor 
would be considered ``qualified'' if he or she is a certified public 
accountant. Consistent with Section 111(d)(6)(A)(ii), an auditor would 
be considered ``independent'' if he or she is not an officer, employee, 
or agent of a copyright owner for any purpose other than the audit. In 
addition, an auditor would be considered ``independent'' for purposes 
of this procedure if that person is considered to be ``independent'' as 
that term is used in the Code of Professional Conduct of the American 
Institute of Certified Public Accountants (``AICPA''), in the 
Statements on Auditing Standards promulgated by the Auditing Standards 
Board of the AICPA, and in the Interpretations thereof issued by the 
Auditing Standards Division of the AICPA. See, e.g., AICPA Code of 
Professional Conduct, ET Section 101 (Independence), 102 (Integrity and 
Objectivity), 191 (Ethics Rulings on Independence, Integrity, and 
Objectivity), available at http://www.aicpa.org/interestareas/professionalethics/resources/codeofconduct/pages/default.aspx. However, 
the Office does agree with the copyright owners that an auditor should 
be disqualified if there is any conflict of interest that would prevent 
him or her from participating in the verification procedure, and notes 
that conflicts of interest are prohibited under AICPA Code of 
Professional Conduct Section 102-2.
    The standard for evaluating an auditor's independence is based on 
the Office's audit regulation for digital audio recording technology, 
which has been in effect since 1996. See 37 CFR 201.30(j)(3). The 
Office welcomes comments from accounting professionals and other 
interested parties as to whether accountants currently use this 
standard to evaluate their independence or whether the standard has 
changed over the past 16 years.
    If a statutory licensee has reason to believe that an auditor is 
not qualified or independent, it would have to raise those concerns 
with the copyright owner(s) who selected the auditor before the audit 
begins. If the parties are unable to resolve the matter, the cable 
operator or satellite carrier could raise its concerns with AICPA's 
Professional Ethics Division or with the State Board of Accountancy 
that licensed the auditor. Consistent with the verification procedures 
that the Office has adopted for other statutory licenses, the auditor 
would be allowed to proceed with the audit while his or her 
qualifications were under review. See 37 CFR 201.30(j)(1).

E. Time Period for Conducting an Audit

    Section 111(d)(6) allows copyright owners to audit Statements of 
Account and royalty payments filed with the Copyright Office for any 
accounting period beginning on or after January 1, 2010. In order to 
provide cable operators with a measure of certainty and to encourage 
copyright owners to exercise their audit rights in a prompt manner, 
Congress directed the Register to set a deadline for initiating an 
audit

[[Page 35647]]

procedure. Specifically, Section 111(d)(6)(D) states that the Register 
shall ``permit requests for verification of a statement of account to 
be made only within 3 years after the last day of the year in which the 
statement of account is filed.''
    Taking its cue from the statutory text, the proposed regulation 
would provide that the deadline for initiating a verification procedure 
would be calculated from the last day of the year in which the 
Statement of Account was filed. Thus, the final date for filing a 
notice of intent to audit a particular Statement would be December 31, 
regardless of whether the Statement was filed by a cable operator or a 
satellite carrier, whether the Statement covers the first or second 
half of the year, or whether the Statement was filed before or after 
the filing deadline. If the copyright owner intends to audit more than 
one Statement of Account, the notice of intent to audit would have to 
be filed within three years after the last day of the year that the 
earliest Statement was filed with the Office. For example, a notice of 
intent to audit three Statements of Account filed by a satellite 
carrier on July 30, 2010, January 30, 2011, and July 30, 2011 would 
have to be received in the Office on or before December 31, 2013.
    The copyright owners' draft regulation would require the Office to 
designate an auditor within 60 days after the notice of intent to audit 
was published in the Federal Register. The auditor would be required to 
contact the statutory licensee within 30 days thereafter, and the 
statutory licensee would be required to make its records available to 
the auditor 30 days later. The Office assumes that the amount of time 
required for an audit will vary depending on the number and complexity 
of the Statements of Account that will be subject to review. The only 
statutory requirement is that the request for verification must be made 
``within 3 years after the last day of the year in which the statement 
of account is filed.'' 17 U.S.C. 111(d)(6)(E). Therefore, the Office is 
not inclined to set a precise deadline for when the auditor should be 
selected, when the audit should begin, or when the audit should be 
completed. Nor is it aware that failure to establish a regulatory 
timeline for completing these tasks has been a problem with the 
verification of Statements of Accounts filed under other statutory 
licenses.

F. Retention of Records

    The copyright owners' draft regulation would require statutory 
licensees to keep records that may be necessary to confirm the 
correctness of the calculations and royalty payments reported in a 
Statement of Account for at least five years after the Statement has 
been filed. While the Office agrees that statutory licensees should be 
required to retain their records until the deadline for auditing a 
Statement of Account has passed, it is not clear that such records need 
to be maintained for five years. See, e.g., 37 CFR 260.4(f) and 
261.5(f) (requiring books and records relating to the payment of 
statutory licensing fees to be kept for three years).
    Under the proposed regulation, a statutory licensee would be 
required to retain such records for a minimum of three and a half years 
(e.g., 42 months) after the last day of the year in which the Statement 
of Account was filed with the Office. Should the Office announce the 
receipt of a notice of intent to audit a particular Statement, the 
statutory licensee would be required to retain its records concerning 
the calculations and royalty payments reported in that Statement for at 
least three years after the date that the auditor delivers his or her 
final report to the copyright owner(s). This will preserve the records 
for the benefit of all parties in the event that the copyright owner(s) 
decide to take legal action based on the facts and conclusions set 
forth in the auditor's report. Conversely, if the Office does not 
announce the receipt of a notice of intent to audit within three and a 
half years (e.g., 42 months) after the last day of the year in which a 
particular Statement of Account was filed, the statutory licensee would 
no longer be required to retain its records concerning that Statement, 
at least for the purpose of verifying the Statement of Account under 
this regulation.

G. Frequency of the Audit Procedure

    Section 111(d)(6)(A)(i) appears to provide copyright owners with a 
single opportunity to verify a particular Statement of Account. This 
provision directs the Register to ``establish procedures for the 
designation of a qualified independent auditor with exclusive authority 
to request verification of such a statement of account on behalf of all 
copyright owners. * * *'' Once an auditor has been selected, he or she 
would conduct that audit on behalf of ``all'' copyright owners, 
regardless of whether they decide to join the audit or not. Once the 
auditor has completed his or her review of that Statement, there is no 
apparent need for additional audits, because all copyright owners would 
have been given an opportunity to audit that Statement already. In 
light of this reading, the proposed regulation explains that a 
Statement of Account may be audited no more than once.
    However, this basic limitation to a single audit for each Statement 
of Account does not address Congress's directive to ``limit the 
frequency of requests for verification for a particular cable system 
and the number of audits that a multiple system operator can be 
required to undergo in a single year.'' 17 U.S.C. 111(d)(6)(D). The 
statute does not indicate what those limits should be and there is no 
legislative history for STELA. It is clear that Congress did not intend 
to overburden cable operators that own and operate multiple systems, 
but striking an appropriate balance is not an easy question.
    Under the copyright owners' proposal, it appears that a satellite 
carrier or a cable operator that owns one cable system would be subject 
to no more than one audit per year. However, a cable operator that owns 
more than one system would be subject to as many as three audits per 
year.
    The Office included the copyright owners' proposal in the initial 
draft of the regulation, because the statute does not provide any 
meaningful guidance concerning the phrase ``limit the frequency of 
requests for verification.'' However, this is merely a starting point 
for further discussion on this issue. The Office welcomes comment from 
interested parties concerning the limit on the total number of audits 
that a satellite carrier, a cable system operator that owns a single 
cable system, or a multiple system operator can be required to undergo 
in a single year, and in particular, whether there is a legitimate 
reason for treating cable operators differently depending on whether 
they own one cable system or more than one system (i.e., whether the 
multiple system operator should be subject to a single audit or up to 
three audits per year).
    By contrast, the proposed regulation does not fully embrace the 
copyright owners' proposal concerning multiple system cable operators, 
because it does not appear to place any meaningful limit on the number 
of cable systems that can be included within each audit. Allowing the 
auditor to evaluate all of the cable systems owned by a multiple system 
operator may be unduly burdensome for the operator--depending on the 
number of systems within its portfolio. In order to protect the 
interests of a multiple system operator, the proposed regulation 
directs the auditor to study a sampling of the cable systems owned by 
that operator. At the same time, the regulation protects the interests 
of copyright owners by allowing them to

[[Page 35648]]

maximize their opportunity by including more than one Statement of 
Account in each audit.
    According to the AICPA, ``the basic concept of sampling is well 
established in auditing practice.'' American Institute of CPAs, 
Statement on Auditing Standards Sec.  350.06 at 516, available at 
http://www.aicpa.org/Research/Standards/AuditAttest/DownloadableDocuments/AU-00350.pdf. It involves ``the application of an 
audit procedure to less than 100 percent of the items within * * * [a] 
class of transactions for the purposes of evaluating some 
characteristic of the * * * class.'' Id. at 515. ``The size of a sample 
necessary to provide sufficient audit evidence depends on both the 
objectives and the efficiency of the sample.'' Id.
    The proposed regulation does not require the auditor to review a 
specific number of cable systems, because the number of systems owned 
by each multiple system operator will vary. On the one hand, an audit 
involving five or six cable systems may impose an undue burden on the 
operator if it owns only a half dozen systems. On the other hand, if a 
multiple system operator owns dozens of cable systems, e.g., Time 
Warner, an audit involving only five of those systems may not be 
statistically significant given the size of the company.
    To address this conundrum, the Office believes that the interests 
of multiple system cable operators, copyright owners, and the auditor 
would be better served by allowing the auditor to study a percentage of 
the cable systems owned by a multiple system operator. The proposed 
regulation states that, in the case where there are two or more systems 
under common ownership, audits should involve no more than fifty 
percent of those systems. However, if the auditor discovers an 
underpayment of five percent or more in any Statement of Account filed 
by that operator, the size of the sample could be expanded to include 
any and all of the systems owned by that operator. The specific cable 
systems that would be included within the sample of the expanded audit 
would be selected by the copyright owner(s) who elected to participate 
in the audit. Setting the trigger at five percent would be generally 
consistent with the copyright owners' proposal for allocating the cost 
of the audit, which would require the auditor's fee to be paid by the 
statutory licensee if the auditor concludes that there was an 
underpayment of five percent or more reported in any Statement of 
Account that was included in the audit. However, this is merely a 
preliminary suggestion, and the Office solicits comments from all 
interested parties.
    The Office invites comments on whether a sampling approach should 
be used for audits involving a multiple system operator, and if so, 
whether an audit involving up to fifty percent of the systems owned by 
a particular operator is likely to produce a statistically significant 
result or whether this threshold would be unduly burdensome for the 
operator and, if so, what percentage would be appropriate. The Office 
also invites comments on whether copyright owners should be allowed to 
increase the number of systems subject to audit if the auditor 
discovers an underpayment of royalties, and if so, whether the 
underpayment should be higher or lower than five percent in order to 
trigger this requirement.

H. Proposed Remedies for Cable Operators and Satellite Carriers

    STELA directed the Register to ``require a consultation period for 
the independent auditor to review its conclusions with a designee of 
the cable system.'' In addition, Congress directed the Register to 
``establish a mechanism for the cable system to remedy any errors 
identified in the auditor's report and to cure any underpayment 
identified,'' and to ``provide an opportunity to remedy any disputed 
facts or conclusions.'' See 17 U.S.C. 111(d)(6)(C)(i)-(ii). Congress 
did not indicate whether the regulation should provide these remedies 
to satellite carriers, but as discussed above there is nothing in 
Sections 111(d)(6)(C)(i)-(ii) or 119(b)(2) that prevents the Office 
from taking this approach and the Office can think of no good reason to 
adopt different approaches for the two licenses. Therefore, the Office 
is proposing a single regulation for both cable operators and satellite 
carriers which would allow any statutory licensee to review the 
auditor's conclusions before the auditor delivers his or her report to 
the copyright owner(s), to correct errors and underpayments identified 
in the auditor's report, and to dispute any of the facts and 
conclusions set forth in that report. Each of these remedies is 
discussed below.
1. Consultation With the Statutory Licensee
    Once the auditor has completed his or her review of the Statements 
of Account, the proposed regulation directs the auditor to prepare a 
written report setting forth his or her conclusions. The proposed 
regulation explains that the auditor should deliver a copy of that 
report to the statutory licensee before it is delivered to any of the 
copyright owner(s) that are participating in the audit. However, there 
is one exception to this rule. The auditor may deliver a copy of his or 
her report directly to the copyright owner(s) without sharing it with 
the statutory licensee if the auditor has reason to suspect that the 
statutory licensee has committed fraud and that disclosing his or her 
conclusions to the statutory licensee would prejudice further 
investigation of that fraud. The Office has taken a similar approach in 
other audit regulations. See 37 CFR 261.6(g), 261.7(f), 262.6(f), 
262.7(f).
    Consistent with Section 111(d)(6)(C)(i), the auditor would be 
required to review his or her report with a designee of the statutory 
licensee before it is delivered to the copyright owner(s). 
Specifically, the auditor would be required to consult with a designee 
of the statutory licensee within 30 days after the auditor has 
delivered his or her report to the licensee. The Office assumes that 
the consultation would take place at a time and place that is mutually 
convenient for both parties, and that it would be conducted in person, 
by telephone, or video conference as the parties may agree. Because the 
issues presented in each audit will be unique, the regulation does not 
provide specific topics that the parties should review. But as 
discussed in Section H.3 below, if the statutory licensee discovers any 
factual errors or erroneous conclusions in the auditor's report, the 
designee must bring those issues to the auditor's attention during the 
consultation.
    The Office invites comment on whether the regulation should provide 
a precise amount of time for the auditor to meet and confer with the 
statutory licensee's designee, and if so, whether 30 days would be a 
sufficient amount of time for the consultation period.
2. Correcting Errors and Curing Underpayments Identified in the 
Auditor's Report
    STELA directed the Register to ``establish a mechanism for the 
cable system to remedy any errors identified in the auditor's report 
and to cure any underpayment identified.'' The Office already has a 
process that allows cable operators and satellite carriers to amend 
their Statements of Account and to make additional royalty payments 
that may be due. See 37 CFR 201.11(h) and 201.17(m). The Office is 
inclined to use the same approach here.
    If the auditor concludes that any of the information in a Statement 
of

[[Page 35649]]

Account is incorrect or incomplete, that the calculation of the royalty 
fee was incorrect, or that the statutory licensee failed to deposit the 
royalties owed with the Office, the statutory licensee may correct 
those errors by filing an amended Statement of Account or by submitting 
supplemental royalty payments to the Office. To do so, the licensee 
must comply with the procedures set forth in 37 CFR 201.11(h)(1) and 
201.17(m)(3), including the obligation to pay interest on any 
underpayment that may be due and the requisite filing fee set forth in 
37 CFR 201.3.
    The copyright owners apparently agree with this approach. Their 
proposed regulation states that the statutory licensee ``may * * * 
remedy any errors identified in the [auditor's] report * * * and cure 
any underpayment identified (subject to the filing fee and interest 
requirements generally applicable to late, corrected, or supplemental 
Statements of Account and royalty fees).'' Petition for Rulemaking at 
10. However, the copyright owners' proposal would give licensees only a 
brief opportunity to correct errors or underpayments identified in the 
auditor's report. Specifically, corrections and underpayments would 
have to be made during a 30-day consultation period when the auditor 
would be required to discuss his or her tentative findings with a 
representative of the licensee.
    The statute directs the Office to establish a mechanism for 
correcting errors identified in the auditor's report and for curing 
underpayments, but it does not specify a deadline for making these 
adjustments. The proposed regulation would allow the Office to accept 
corrected Statements of Account and supplemental royalty payments 
before, during, or after a verification procedure. Certainly, it would 
be in the best interest of the licensee to file an amended Statement of 
Account and any royalties fees owed as soon as possible to avoid 
accruing additional interest payments and possible exposure to an 
infringement suit.
    The Office welcomes comment on whether the proposed regulation 
provides statutory licensees with an adequate opportunity to ``remedy 
any errors identified in the auditor's report and to cure any 
underpayments identified,'' as required by Section 111(d)(6)(C)(ii). 
The Office also welcomes comment on whether it would be beneficial to 
give statutory licensees a specific deadline for correcting errors in 
their Statements of Account and for making supplemental royalty 
payments. If so, would 30 days be a sufficient amount of time, and 
should the deadline be based on the date that the auditor delivers his 
or her preliminary report to the statutory licensee or the date that 
the auditor delivers his or her final report to the copyright owner(s)?
3. Disputing the Facts and Conclusions Set Forth in the Auditor's 
Report
    If the statutory licensee disagrees with any of the facts or 
conclusions set forth in the auditor's report, the licensee's designee 
must raise those issues during the initial consultation with the 
auditor. If the auditor agrees that a mistake has been made, he or she 
should correct those errors before the report is delivered to the 
copyright owner(s). If facts or conclusions set forth in the report 
remain in dispute after the consultation, the licensee may provide the 
auditor with a written response setting forth its views. The licensee's 
deadline for providing this response would be two weeks (e.g., 14 
calendar days) after the date of the initial consultation between the 
auditor and the licensee's representative.
    Within 60 days after the auditor delivers his or her report to the 
statutory licensee, the auditor would be required to prepare a final 
report setting forth his or her conclusions and would be required to 
deliver that report to the copyright owner(s) that participated in the 
audit process. At the same time, the auditor would be required to 
provide the statutory licensee with a copy of the final report. (The 
copyright owners made a similar suggestion in their draft regulation, 
but they did not specify a deadline for the delivery of the final 
report nor did they offer to share the final report with the statutory 
licensee.) If the statutory licensee prepared a written response 
contesting the facts or conclusions set forth in the auditor's report, 
the auditor would be required to include that response as an attachment 
to his or her final report to the copyright owner(s).
    The Office invites comment on whether the proposed regulation 
provides statutory licensees with an adequate ``opportunity to remedy 
any disputed facts or conclusions'' as required by Section 
111(d)(6)(C)(iii). The Office also welcomes comment on whether two 
weeks would be a sufficient amount of time for the statutory licensee 
to prepare a written response to the auditor's report (if any), and 
whether 60 days would be a sufficient amount of time for the auditor to 
prepare his or her final report for the copyright owners.

I. Cost of the Audit Procedure

    The statute does not indicate whether the costs of the audit should 
be paid by the copyright owners or by the statutory licensee. The 
Office has, however, considered this same issue in its regulations 
concerning the audit of Statements of Account and royalty payments made 
under Section 112, Section 114, and Chapter 10, and it is inclined to 
use the same approach in this regulation. See 37 CFR 201.30(i), 
260.5(f), 260.6(f), 261.6(g), 261.7(g), 262.6(g), 262.7(g).\5\
---------------------------------------------------------------------------

    \5\ There is no legislative history for STELA, although a prior 
iteration of the legislation contained language concerning the 
verification of Statements of Account. The House Report for the 
earlier bill stated that ``[t]he rules adopted by the Office shall 
include procedures allocating responsibility for the cost of audits 
consistent with such procedures in other audit provisions in its 
rules.'' See Satellite Home Viewer Update and Reauthorization Act of 
2009, H. Rep. No. 111-319, 111th Cong., 1st Sess., at 10 (2009).
---------------------------------------------------------------------------

    As a general rule, the copyright owner(s) who selected the auditor 
would be expected to pay for the auditor's work in connection with the 
audit. Copyright owner(s) who do not participate in the verification 
procedure would not be required to pay for the auditor's services, and 
consequently they would not be entitled to receive a copy of the 
auditor's report, although they would benefit from the payment of any 
additional royalty fees made as a result of the audit. However, if the 
auditor concludes that there was an underpayment of five percent or 
more reported in any Statement of Account that was included in the 
audit, the proposed regulation would require the auditor's fee to be 
paid by the statutory licensee that filed that Statement with the 
Office with the proviso that if a court, in a final judgment (i.e., 
after all appeals have been exhausted) rejects that determination, the 
copyright owners would have to reimburse the licensee for its payment 
of the auditor's services. The copyright owners included a similar 
proposal in their draft regulation.
    The Office invites comment on whether the regulation should include 
a cost-shifting provision, and if so, whether the percentage of 
underpayment needed to trigger a cost shifting to the statutory 
licensee should be more or less than five percent.

J. Confidentiality

    STELA directed the Register to issue regulations ``to provide for 
the confidential verification'' of Statements of Account and royalty 
payments, and to ``establish procedures for safeguarding all non-public 
financial

[[Page 35650]]

and business information'' that may be provided during the course of 
the investigation. The proposed regulation explains that confidential 
information should be made available for use in the audit procedure, 
and that access to that information should be limited to the auditor 
who conducts the procedure. The auditor may share confidential 
information with his or her employees, agents, consultants, and 
independent contractors who need access to the information in order to 
perform their duties in connection with the audit. However, the 
auditor's employees, agents, consultants, and independent contractors 
would be required to enter into an appropriate confidentiality 
agreement governing the use of the confidential information and they 
could not be employees, officers, or agents of a copyright owner for 
any purpose other than the audit. In addition, the auditor and any 
other person that receives confidential information would have to 
implement procedures to safeguard that information, using at least the 
same level of security that they would use to protect his or her own 
confidential information.
    The Office also seeks comment on whether there are situations where 
copyright owner(s) would have a legitimate need to review the 
confidential information that may be provided by the licensee and, if 
so, whether the licensee's legitimate interest in safeguarding that 
information would be adequately protected by adopting a regulation 
requiring the copyright owner(s) to enter into an appropriate non-
disclosure agreement with the statutory license. Under most of the 
audit regulations adopted by the Office, access to confidential 
information has been limited to the auditor and his or her employees 
and agents. See 37 CFR 260.4(d)(2), 261.5(d)(2), 262.5(d)(2). The 
Office's regulations concerning digital audio recording technology 
allow copyright owners to access confidential information ``for 
verification purposes,'' but only if the copyright owner is neither 
owned nor controlled by another manufacturing or importing party that 
is subject to royalty obligations under Chapter 10. See 37 CFR 
201.29(d)(1), 201.29(f)(2). By contrast, the regulations concerning 
ephemeral recordings allow the copyright owners and their attorneys, 
consultants, and other authorized agents to access confidential 
information ``[i]n connection with bona fide royalty disputes or claims 
* * * and under an appropriate confidentiality agreement or protective 
order * * *''. 37 CFR 262.5(d)(e). The statute provides no guidance on 
the issue and the copyright owners did not address this issue in their 
draft regulation. Therefore, the Office seeks comment on whether and, 
if so, the circumstances under which access to confidential information 
by copyright owner(s) is appropriate and the best approach for 
protecting the information from unauthorized disclosure in such 
situations.

III. Conclusion

    The Office seeks comment from the public on the subjects discussed 
above related to the implementation of the audit provisions adopted by 
Congress with the passage of the Satellite Television Extension and 
Localism Act of 2010.

List of Subjects in 37 CFR Part 201

    Copyright, General provisions.

Proposed Regulations

    In consideration of the foregoing, the Copyright Office proposes to 
amend part 201 of 37 CFR Chapter II, as follows:

PART 201--GENERAL PROVISIONS

    1. The authority citation for part 201 reads as follows:

    Authority:  17 U.S.C. 702, 17 U.S.C. 111(d)(6), and 17 U.S.C. 
119(b)(2).


    2. Add new Sec.  201.16 to read as follows:


Sec.  201.16  Verification of a Statement of Account and royalty fee 
payments for secondary transmissions made by cable systems and 
satellite carriers.

    (a) General. This section prescribes general rules pertaining to 
the verification of a Statement of Account and royalty fees filed with 
the Copyright Office pursuant to sections 111(d)(1) and 119(b)(1) of 
title 17 of the United States Code, as amended by Public Law 111-175.
    (b) Definitions. (1) Auditor means a qualified and independent 
accountant who is not an officer, employee or agent of a copyright 
owner, but has been selected to audit a Statement of Account on behalf 
of copyright owners under sections 111(d)(6) and 119(b)(2) of title 17 
of the United States Code, as amended by Public Law 111-175.
    (2) The term cable system has the meaning set forth in Sec.  
201.17(b)(2) of this chapter.
    (3) Copyright owner means the copyright owner of a work embodied in 
a secondary transmission made by a statutory licensee that filed a 
Statement of Account with the Copyright Office for an accounting period 
beginning on or after January 1, 2010.
    (4) Generally accepted auditing standards (GAAS) means the auditing 
standards promulgated by the American Institute of Certified Public 
Accountants.
    (5) The term satellite carrier has the meaning set forth in section 
119(d)(6) of title 17 of the United States Code.
    (6) The term secondary transmission has the meaning set forth in 
section 111(f)(2) of title 17 of the United States Code, as amended by 
Public Law 111-175.
    (7) Statement of Account or Statement means a semiannual Statement 
of Account filed with the Copyright Office for an accounting period 
beginning on or after January 1, 2010 under sections 111(d)(1) or 
119(b)(1) of title 17 of the United States Code, as amended by Public 
Law 111-175.
    (8) Statutory licensee or licensee means a cable system or 
satellite carrier that filed a Statement of Account with the Office 
under sections 111(d)(1) or 119(b)(1) of title 17 of the United States 
Code, as amended by Public Law 111-175.
    (c) Notice of intent to audit. Any copyright owner that intends to 
audit a semiannual Statement of Account must notify the Register of 
Copyrights no later than three years after the last day of the year in 
which the Statement was filed with the Office. The notice shall 
identify the statutory licensee that filed the Statement(s) with the 
Copyright Office, the Statement(s) and accounting period(s) that will 
be subject to the audit, and the copyright owner that filed the notice, 
including its name, address, telephone number, facsimile number, and 
email address, if any. In addition, the notice shall include a 
statement establishing that the copyright owner owns a work that was 
embodied in a secondary transmission made by the statutory licensee 
during the accounting period(s) specified in the Statement(s) of 
Account that will be subject to the audit. The copyright owner shall 
serve the notice of intent to audit on the statutory licensee at the 
same time that the notice is filed with the Copyright Office. Within 30 
days after the notice has been received in the Office, the Office will 
publish a notice in the Federal Register announcing the receipt of the 
notice of intent to audit.
    (d) Selection of the auditor. Any other copyright owner who wishes 
to participate in the audit of the Statement(s) of Account identified 
in a notice of intent to audit must notify the copyright owner that 
filed the notice of intent to audit within 30 days of the publication 
of the notice in the Federal Register. Those copyright owner(s) who 
have agreed to participate in the audit

[[Page 35651]]

shall designate an independent and qualified auditor to audit the 
Statement(s) on behalf of all copyright owners who own a work that was 
embodied in a secondary transmission made by the statutory licensee 
during the accounting period(s) specified in those Statement(s). Any 
dispute about the selection of the auditor shall be resolved by these 
copyright owner(s). Promptly after the auditor has been selected, these 
copyright owner(s) shall provide the statutory licensee with the 
auditor's name, address, telephone number, facsimile number, and email 
address, if any.
    (e) Independence and qualifications of the auditor. (1) The auditor 
shall be qualified and independent as defined in this subsection. If 
the statutory licensee has reason to believe that the auditor is not 
qualified or independent, it shall raise the matter with the copyright 
owner(s) who selected the auditor before the commencement of the audit. 
If the matter is not resolved, the statutory licensee may raise the 
issue with the American Institute of Certified Public Accountants' 
Professional Ethics Division and/or the auditor's State Board of 
Accountancy while the audit is being performed.
    (2) An auditor shall be considered qualified if:
    (i) He or she is a certified public accountant,
    (ii) He or she is not an officer, employee, or agent of a copyright 
owner for any purpose other than the audit;
    (iii) He or she is independent as that term is used in the Code of 
Professional Conduct of the American Institute of Certified Public 
Accountants, including the Principles, Rules, and Interpretations of 
such Code applicable generally to attest engagements; and
    (iv) He or she is independent as that term is used in the 
Statements on Auditing Standards promulgated by the Auditing Standards 
Board of the AICPA and Interpretations thereof issued by the Auditing 
Standards Division of the AICPA.
    (f) Scope of the audit. The audit shall be performed in accordance 
with generally accepted auditing standards (GAAS).
    (g) Consultation. Before delivering a report to any copyright 
owner(s), except where the auditor has a reasonable basis to suspect 
fraud and that disclosure would, in the reasonable opinion of the 
auditor, prejudice the investigation of such suspected fraud, the 
auditor shall deliver a copy of that report to the statutory licensee 
and shall review his or her conclusions with a designee of the licensee 
within 30 days thereafter. If the statutory licensee disagrees with any 
of the facts or conclusions set forth in the report, the licensee may 
provide the auditor with a written response setting forth its views 
within two weeks after the date of the initial consultation between the 
auditor and the licensee's designee. If the auditor agrees that there 
are errors in the report, he or she shall correct those errors before 
the report is delivered to the copyright owner(s). The auditor shall 
include the licensee's written response, if any, as an attachment to 
his or her report before it is delivered to any copyright owner(s).
    (h) Corrections and supplemental payments. Where the auditor has 
concluded that any of the information given in a Statement of Account 
is incorrect or incomplete, that the calculation of the royalty fee 
payable for a particular accounting period was incorrect, or that the 
amount deposited in the Copyright Office for that period was too low, a 
licensee may file a correction to the Statement of Account and 
supplemental royalty fee payments with the Office in accordance with 
the procedures set forth in Sec. Sec.  201.11(h) or 201.17(m).
    (i) Distribution of the auditor's report. No less than 60 days 
after the date that the auditor delivered his or her report to the 
statutory licensee and subject to the confidentiality provisions set 
forth in paragraph (m) of this section, the auditor shall deliver a 
written report to the copyright owner(s) who retained the auditor's 
services setting forth his or her conclusions. At the same time the 
auditor shall deliver a copy of that report to the statutory licensee. 
The copyright owner(s) shall retain this report for a period of not 
less than three years.
    (j) Costs of the audit. The copyright owner(s) who selected the 
auditor shall pay the auditor for his or her work in connection with 
the audit, unless the auditor concludes that there was an underpayment 
of five percent or more reported in any Statement of Account that is 
subject to the audit, in which case, the auditor's fee shall be paid by 
the statutory licensee that deposited that Statement with the Copyright 
Office with the proviso that if a court, in a final judgment (i.e., 
after all appeals have been exhausted) rejects that determination, the 
copyright owners will reimburse the licensee for its payment of the 
auditor's services.
    (k) Frequency of verification. (1) Subject to the limitations in 
paragraph (k)(3) of this section, a copyright owner may include more 
than one Statement of Account in its notice of intent to audit, but 
each Statement of Account shall be subject to audit only once. Once a 
notice of intent to audit a particular semiannual Statement of Account 
has been received in the Office, a notice of intent to audit the same 
Statement of Account will not be accepted for publication in the 
Federal Register.
    (2) A satellite carrier or a cable operator that owns a single 
cable system shall be subject to no more than one audit per calendar 
year.
    (3) A cable operator that owns multiple cable systems shall be 
subject to no more than three audits per calendar year. Each audit 
shall be limited to a sampling of no more than fifty percent of the 
cable systems owned by that operator, unless the auditor concludes that 
there was an underpayment of five percent or more reported in any 
Statement of Account filed by that operator, in which case, the audit 
may be expanded to include any and all of the cable systems owned by 
that operator. The specific cable systems to be included within each 
sampling shall be selected by the copyright owner(s) who retained the 
auditor's services. The limitation on the number of systems under 
common ownership that can be audited in a calendar year does not limit 
in any way the number of Statements of Account submitted by the 
selected systems that may be audited in a calendar year.
    (l) Retention of records. For each semiannual Statement of Account 
that a statutory licensee files with the Copyright Office for 
accounting periods beginning on or after January 1, 2010, the licensee 
shall maintain all records necessary to confirm the correctness of the 
calculations and royalty payments reported in each Statement for at 
least three and a half years after the last day of the year in which 
that Statement was filed with the Office. If the Office publishes a 
Federal Register notice announcing the receipt of a notice of intent to 
audit a specific Statement of Account, the statutory licensee shall 
maintain all records necessary to confirm the correctness of the 
calculations and royalty payments reported in that Statement for at 
least three years after the date that the auditor delivers a written 
report setting forth his or her conclusions to the copyright owner(s) 
who retained the auditor's services.
    (m) Confidentiality. (1) For purposes of this section, confidential 
information shall include any non-public financial or business 
information pertaining to a Statement of Account that has been 
subjected to an audit under sections 111(d)(6) or 119(b)(2) of title 17 
of the United States Code, as amended by Public Law 111-175. 
Confidential information also shall include any information so 
designated in a

[[Page 35652]]

confidentiality agreement which has been duly executed between a 
statutory licensee and any other interested party, or between one or 
more interested parties; provided that all such information shall be 
made available for the audit procedure provided for in this section.
    (2) Access to confidential information under this section shall be 
limited to:
    (i) The auditor; and
    (ii) Subject to an appropriate confidentiality agreement, those 
employees, agents, consultants and independent contractors of the 
auditor who are not employees, officers, or agents of a copyright owner 
for any purpose other than the audit, who are engaged in the audit of a 
Statement of Account or activities directly related hereto, and who 
require access to the confidential information for the purpose of 
performing such duties during the ordinary course of their employment.
    (3) The auditor and any person identified in paragraph (m)(2)(ii) 
of this section shall implement procedures to safeguard all 
confidential information received from any third party in connection 
with an audit, using a reasonable standard of care, but no less than 
the same degree of security used to protect confidential financial and 
business information or similarly sensitive information belonging to 
the auditor or such person.

    Dated: June 8, 2012.
David O. Carson,
General Counsel.
[FR Doc. 2012-14454 Filed 6-13-12; 8:45 am]
BILLING CODE 1410-30-P