[Federal Register Volume 79, Number 181 (Thursday, September 18, 2014)]
[Rules and Regulations]
[Pages 56190-56215]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-22235]



[[Page 56189]]

Vol. 79

Thursday,

No. 181

September 18, 2014

Part III





Library of Congress





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U.S. Copyright Office





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37 CFR Parts 201 and 210





Mechanical and Digital Phonorecord Delivery Compulsory License; Final 
Rule

  Federal Register / Vol. 79 , No. 181 / Thursday, September 18, 2014 / 
Rules and Regulations  

[[Page 56190]]


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LIBRARY OF CONGRESS

U.S. Copyright Office

37 CFR Parts 201 and 210

[Docket No. 2012-7]


Mechanical and Digital Phonorecord Delivery Compulsory License

AGENCY: U.S. Copyright Office, Library of Congress.

ACTION: Final rule.

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SUMMARY: The United States Copyright Office is issuing a final rule to 
implement section 115 of the Copyright Act of 1976. Section 115 
establishes a compulsory license for the making and distribution of 
phonorecords of nondramatic musical works. Section 115, in turn, 
requires the Register of Copyrights to prescribe by regulation the 
procedures for the monthly payment of royalties and preparation and 
service of monthly and annual statements of account by licensees. This 
final rule updates the existing payment and statement-of-account 
regulations in response to legal and marketplace developments, 
including the Copyright Royalty Board's adoption of newer percentage-
of-revenue royalty rate structures for certain digital music services, 
and changes in accounting and industry practice in the years since the 
rules were last substantially amended.

DATES: Effective Date: November 17, 2014.

FOR FURTHER INFORMATION CONTACT: Sarang V. Damle, Special Advisor to 
the General Counsel, Stephen Ruwe, Attorney-Advisor, Office of the 
General Counsel, or Rick Marshall, Attorney-Advisor, Office of the 
General Counsel, at the U.S. Copyright Office, P.O. Box 70400, 
Washington, DC 20024. Telephone: (202) 707-8350.

SUPPLEMENTARY INFORMATION:

I. Background

    The Copyright Act gives owners of musical works the exclusive right 
to make and distribute phonorecords of those works (i.e., copies in 
which the work is embodied, such as CDs or digital files). 17 U.S.C. 
106(1), (3). This right (often referred to as the ``mechanical'' right) 
is subject to a compulsory license under Section 115 of the Act. 17 
U.S.C. 115. Under that provision--instituted by Congress over a century 
ago with the passage of the 1909 Copyright Act--once a phonorecord of a 
musical work has been distributed to the public in the United States 
under the authority of the copyright owner, any person can obtain a 
license to make and distribute phonorecords of that work. Id. In 1995, 
Congress confirmed that a copyright owner's exclusive right to 
reproduce and distribute phonorecords of a musical work, and the 
Section 115 license, extend to the making of ``digital phonorecord 
deliveries'' (``DPDs''). See Digital Performance Right in Sound 
Recordings Act of 1995 (``DPRSRA''), Public Law 104-39, sec. 4, 109 
Stat. 336, 344-48 (1995) (codified at 17 U.S.C. 115(c)(3)(A)).
    A person wishing to use the compulsory license must comply with 
several requirements imposed by statute and regulation. For instance, 
licensees must first file a notice of intention to use the compulsory 
license. See 17 U.S.C. 115(b); 37 CFR 201.18. The statute also requires 
payment of royalties and compliance with terms established by the 
Copyright Royalty Board (``CRB'') in periodic ratemaking proceedings. 
See 17 U.S.C. 115(c)(3)(C)-(D). And, as most relevant here, the statute 
requires licensees to make monthly royalty payments, and provide 
monthly and annual statements of account, in compliance with 
regulations issued by the Register of Copyrights. 17 U.S.C. 
115(c)(5).\1\
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    \1\ Although, the Copyright Royalty Board (``CRB'') has general 
authority to establish royalty rates and terms for the Section 115 
license, see 17 U.S.C. 115(c)(3)(C) & (D), the Act also separately 
gives the Register of Copyrights responsibility for issuing 
regulations relating to specific aspects of that license, see id. 
115(b)(1) & (c)(4)-(5). See generally 73 FR 48396 (Aug. 19, 2008) 
(addressing division of authority between the Copyright Royalty 
Judges and the Register of Copyrights under the Section 115 
license).
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    The Copyright Office first promulgated regulations prescribing the 
procedures for the payment of royalties and the preparation and service 
of monthly and annual statements of account in 1980; those regulations 
were codified in section 201.19 of title 37 of the Code of Federal 
Regulations. See 45 FR 79038 (Nov. 28, 1980). In that rulemaking, the 
Office identified a ``guiding principle'' that is equally applicable 
today: That the regulations should preserve the compulsory license as 
``a workable tool,'' while at the same time ``assuring that copyright 
owners will receive `full and prompt payment for all phonorecords made 
and distributed.' '' Id. at 79039 (quoting H.R. Rep. No. 94-1476, at 
110 (1976)). The Office accordingly evaluated proposed regulatory 
features using ``three fundamental criteria.'' Id. First, the Office 
stressed that ``[t]he accounting procedures must not be so complicated 
as to make use of the compulsory license impractical.'' Id. Second, 
``[t]he accounting system must insure full payment, but not 
overpayment.'' Id. at 79310. Third, and finally, ``[t]he accounting 
system must insure prompt payment.'' Id.
    Although the Office has amended aspects of its payment and 
statement-of-account regulations from time to time, the regulations 
have always assumed that the compulsory mechanical license will carry a 
flat royalty rate per phonorecord made and distributed. That assumption 
is no longer true. In recent years, the CRB has adopted a ``percentage-
of-revenue'' model for calculating royalties for newer digital products 
like interactive streaming and limited downloads. See, e.g., 78 FR 
67938 (Nov. 13, 2013). Under that model, royalty calculations work 
essentially as follows, with some details omitted. First, an ``all-in 
royalty'' is defined to be a specified percentage of the service's 
revenues. Second, royalties that are separately paid to performing 
rights organizations for the public performance of musical works are 
subtracted from the all-in royalty. 37 CFR 385.12(b)(1)-(2), 
385.22(b)(1)-(2). The resulting figure represents the total royalties 
that the service must pay to all copyright owners under Section 115, 
although there are ``floors'' to ensure services make at least a 
minimum royalty payment. The total payable royalty pool must be further 
allocated to individual musical works. To do so, the pool is divided by 
the total number of ``plays'' (i.e., the total number of times the 
service played any phonorecord of any musical work during the relevant 
accounting period), and the resulting ``per-play'' royalty rate is 
multiplied by the number of plays of each individual musical work to 
obtain a ``per-work'' royalty allocation. 37 CFR 385.12(b)(3), 
385.22(b)(3).
    After a number of stakeholders expressed concern that the Office's 
statement-of-account regulations do not account for these newer royalty 
structures, the Office proposed amendments to those regulations and 
requested public comment in a notice of proposed rulemaking (``NPRM''). 
See 77 FR 44179 (July 27, 2012). The Office received five initial 
comments, and eighteen reply comments. In December 2013, the Copyright 
Office requested additional comments concerning the proposed 
amendments. 78 FR 78309 (Dec. 26, 2013). The Office received one 
initial comment, and three reply comments.\2\
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    \2\ All comments received in relation to this rulemaking are 
available on the Copyright Office Web site at http://www.copyright.gov/docs/docket2012-7/.

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[[Page 56191]]

    The Office received a particularly significant set of comments from 
a group representing both copyright owners and compulsory licensees. 
That group, referred to herein as the ``Joint Commenters,'' consisted 
of the Digital Media Association (``DiMA''), the National Music 
Publishers' Association, Inc. (``NMPA''), the Recording Industry 
Association of America, Inc. (``RIAA''), the Harry Fox Agency, Inc. 
(``HFA''), and Music Reports, Inc. (``Music Reports''). The Joint 
Commenters reached agreement on a broad range of modifications to the 
proposed rule, which were reflected in a set of proposed regulations 
they submitted along with their initial set of comments. See Joint 
Commenters, Initial Comments Submitted in Response to U.S. Copyright 
Office's July 27, 2012 Notice of Proposed Rulemaking at 2-3, exh. A 
(Oct. 25, 2012) (``Joint Commenters Initial Comments''). After 
carefully evaluating the Joint Commenters' proposal against the goals 
outlined above, the Office has adopted many elements of that proposal 
as part of the final rule. At the same time, our evaluation and 
consideration of the comments has led us to conclude that some aspects 
of the Joint Commenters' proposal would be contrary to the goal of 
providing a workable means of licensing mechanical rights for musical 
works.

II. Discussion

    Section 115(c)(5) of the Copyright Act directs the Register of 
Copyrights to issue regulations governing monthly payments and monthly 
and annual statements of account for the compulsory mechanical license 
for nondramatic musical works. Specifically, that provision states: 
``Royalty payments shall be made on or before the twentieth day of each 
month and shall include all royalties for the month next preceding. 
Each monthly payment shall be made under oath and shall comply with 
requirements that the Register of Copyrights shall prescribe by 
regulation. The Register shall also prescribe regulations under which 
detailed cumulative annual statements of account, certified by a 
certified public accountant, shall be filed for every compulsory 
license under this section. The regulations covering both the monthly 
and the annual statements of account shall prescribe the form, content, 
and manner of certification with respect to the number of records made 
and the number of records distributed.'' 17 U.S.C. 115(c)(5). As the 
legislative history makes clear, the goal of this provision is to 
ensure ``that copyright owners . . . receive full and prompt payment 
for all phonorecords made and distributed'' and to ``increase the 
protection of copyright proprietors against economic harm from 
companies which might refuse or fail to pay their just obligations.'' 
H.R. Rep. No. 94-1476, at 110-11.
    The final rule fulfills these directives by providing new payment 
and statement-of-account regulations for services subject to a 
percentage-of-revenue royalty rate, referred to here as ``percentage-
rate usages.'' See 37 CFR part 385, subparts B & C. For such usages, 
the revised regulations largely incorporate by reference the rate 
calculation methodology established by the CRB. In addition, the final 
rule adopts regulations for services subject to cents-per-phonorecord 
rates (i.e., physical phonorecord deliveries, permanent downloads, and 
ringtones, see 37 CFR part 385, subpart A, referred to here as ``cents-
rate usages'') that closely mirror existing requirements, which were 
designed with cents-rate usages in mind. The final rule also makes 
other technical and organizational changes, some of which reflect 
developments in accounting and industry practice in the years since the 
rules were last substantially amended. Overall, the final rule is 
designed to be flexible, so that as the CRB makes future amendments to 
the rates and terms under Section 115, there will be limited need to 
amend these regulations.
    The following sections highlight the major features of the final 
rule, including areas that garnered public comment or where the final 
rule substantially departed from the proposed rule.

A. Organizational and Technical Changes

1. Overall Structure of the Rule
    The proposed rule contained two separate subparts within part 210 
in title 37 of the Code of Federal Regulations. Proposed subpart B 
incorporated the existing regulations in section 201.19 with only minor 
amendments, and was designed to apply to cents-rate usages, while 
proposed subpart C was mostly new, and was designed to apply to 
percentage-rate usages. The Joint Commenters disagreed with this 
approach, and proposed merging subparts B and C of the proposed rule. 
They explained that the proposed rule was unnecessarily repetitive, and 
that its structure suggested that licensees operating services with 
different rate structures (e.g., a licensee that offers a download 
service and an interactive streaming service) would have to provide 
separate statements of account for each kind of service. See Joint 
Commenters Initial Comments at 3-5. No other commenter opposed the 
Joint Commenters' proposal.
    The Office agrees with the Joint Commenters' approach. Accordingly, 
the final rule adds only a single subpart--subpart B. Within that 
subpart, the provisions governing monthly and annual statements of 
account (sections 210.16 and 210.17, respectively) each have separate 
paragraphs governing cents-rate and percentage-rate usages.
2. GAAP Accounting Rules
    Several provisions of the rule require the application of Generally 
Accepted Accounting Principles (``GAAP''). In the NPRM, the Office 
questioned whether GAAP supplied the appropriate accounting 
methodology. 77 FR at 44181. In the time since the Office issued the 
NPRM, the CRB has affirmed the temporary reliance on GAAP in the rate-
calculation context and included language in its rules that 
contemplates the United States' eventual migration from GAAP standards 
to International Financial Reporting Standards (``IFRS''). See 37 CFR 
385.11.\3 \ To maintain consistency between the terms adopted by the 
CRB and these regulations, the final rule includes a treatment of the 
term GAAP that parallels that in the CRB rules.
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    \3\ The Joint Commenters note that the Securities Exchange 
Commission (``SEC'') has long been exploring a move towards 
incorporating IFRS into the United States' financial reporting 
system. Joint Commenters Initial Comments at 9 (citing SEC, Work 
Plan for the Consideration of Incorporating International Financial 
Reporting Standards into the Financial Reporting System for U.S. 
Issuers (2012), available at http://www.sec.gov/spotlight/globalaccountingstandards/ifrs-work-plan-final-report.pdf).
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3. Defining When Phonorecords Are ``Distributed''
    The final rule makes a purely organizational change that 
consolidates the provisions describing when phonorecords are considered 
``distributed'' within the meaning of Section 115. Section 115 provides 
that royalties are payable ``for every phonorecord made and 
distributed.'' 17 U.S.C. 115(c)(2). It also provides that ``a 
phonorecord is considered `distributed' if the person exercising the 
compulsory license has voluntarily and permanently parted with its 
possession.'' Id. The exiting statement-of-account regulations 
implemented these statutory provisions in two different places. First, 
the regulatory definition of the term ``voluntarily distributed'' 
generally addressed the circumstances in which physical phonorecords 
would be deemed ``distributed.'' See 37 CFR

[[Page 56192]]

201.19(a)(8). Second, the regulatory definition of the term ``digital 
phonorecord deliveries'' described the circumstances in which DPDs 
would be considered distributed. See 37 CFR 201.19(a)(7).
    The final rule consolidates the provisions describing when physical 
and digital phonorecords are to be considered distributed under the 
rule's definition of the term ``distributed'' in the new section 
210.12(g). No substantive effect is intended by this change. In 
addition, to better reflect the language used in the statute, the term 
``distributed'' replaces the term ``voluntarily distributed'' 
throughout the final rule. See 17 U.S.C. 115(c)(2). Again, no 
substantive effect is intended, including with respect to the 
provisions governing involuntary relinquishment.
4. Tax Withholding
    Though not addressed in the NPRM, the Joint Commenters raised an 
issue relating to tax withholding that may be required under federal 
tax law. They explain that, in certain circumstances, ``a payor may be 
required to take backup withholding from payments for remittance to the 
IRS.'' Joint Commenters Initial Comments at 28. They note, however, 
that the existing regulations do not address how such withholdings are 
to be reported in the statements of account. Id. Accordingly, they have 
proposed including a rule that requires a licensee to report such 
withholdings either on the monthly statement or on or with the payment 
itself. Id. No other commenter opposed that proposal.
    After examining the issue, the Office agrees that, in the interests 
of ensuring transparency in the accounting process, statements of 
account should make clear when money is withheld from royalty payments 
to copyright owners for remittance to the IRS. The Office has therefore 
adopted the Joint Commenters' proposal in section 210.16(f)(7) of the 
final rule.
5. Provisions Relating to Incomplete Transmissions and Retransmissions
    The existing rule contains several provisions regarding incomplete 
transmissions and retransmissions of DPDs. For instance, the rule 
requires the reporting of DPDs that were ``never delivered due to a 
failed transmission,'' or were ``digitally retransmitted in order to 
complete a digital phonorecord delivery.'' 37 CFR 201.19(e)(3)(i)(B). 
The rule also incorporates incomplete transmissions and retransmissions 
of DPDs into the calculations of royalty rates. 37 CFR 
201.19(e)(4)(ii). The proposed rule carried forward these provisions 
without alteration.
    The Joint Commenters proposed doing away with these provisions. 
Instead, they recommended that the Office add a new sentence to the 
definition of ``digital phonorecord delivery'' specifying that a DPD 
``does not include a transmission that, as reasonably determined by the 
distributor, did not result in a specifically identifiable reproduction 
of the entire product being transmitted, and for which the distributor 
did not charge, or fully refunded, any monies that would otherwise be 
due for the relevant transmission.'' Joint Commenters Initial Comments 
at 29-30.
    According to the Joint Commenters, the existing provisions relating 
to incomplete transmissions and retransmissions are problematic in 
several respects. For example, they noted that the existing rule 
defines an ``incomplete transmission'' as one in which the entire sound 
recording is not transmitted, and maintained that, taken literally, 
this definition would appear to encompass ringtones. Id. at 29. They 
also asserted that it is technically impossible to individually track 
all incomplete transmissions and retransmissions, and that even if such 
information could be comprehensively tracked, the rule would ``require 
delivery of what would seem to be massive amounts of useless 
information.'' Id. at 30. As a result, according to the Joint 
Commenters, industry practice has developed such that there is no 
reporting of incomplete transmissions or retransmissions. Id. No other 
commenter disputed the Joint Commenters' claims or opposed their 
proposal.
    The Office concludes that removing the provisions requiring 
reporting of incomplete transmissions and retransmissions would further 
the goal of ensuring that these regulations are not ``so complicated as 
to make use of the compulsory license impracticable.'' 45 FR at 79039. 
In particular, given that the Joint Commenters are not aware of any 
reporting of incomplete transmissions and retransmissions, and given 
their joint agreement that such reporting is unnecessary, it would seem 
prudent to ensure that the regulations comport with industry practice. 
The final rule thus adopts the Joint Commenters' approach of excluding 
incomplete transmissions from the rule's definition of ``digital 
phonorecord deliveries.''
6. Reconciling Overpayments in the Annual Statement
    The proposed rule, like the existing rule, provided that where an 
annual statement of account shows an underpayment by the statutory 
licensee, the licensee must deliver the amount of the underpayment 
together with the annual statement of account. See 77 FR at 44192; 37 
CFR 201.19(f)(7)(ii). The existing rule, however, did not include any 
provision addressing how overpayments by the statutory licensee are to 
be handled. To address this shortcoming, the Joint Commenters proposed 
that the final rule specify that, where an overpayment exists, such 
amount ``shall be available to the compulsory licensee as a credit.'' 
See Joint Commenters Initial Comments, exh. A, at A-21. No other 
commenter objected to that proposal.
    The Office has adopted the Joint Commenters' proposal in the final 
rule. The Office stresses, however, that the manner in which any such 
credit is taken must be consistent with GAAP.

B. Issues Presented Involving Calculations of Royalties

1. Royalty Calculation Issues in General
    The existing statement-of-account regulations set forth in detail 
the process for calculating royalty payments each month. See 37 CFR 
201.19(e)(4). The proposed rule carried forward these provisions for 
cents-rate usages. See 77 FR at 44188. For percentage-rate usages, the 
proposed rule aimed to comprehensively mirror the rate calculation 
methodology promulgated by the CRB. See 77 FR at 44194.
    The proposed rule's approach to calculation of royalties for cents-
rate usages was uncontroversial, and the final rule adopts the proposed 
rule with only minor modifications (including removal of provisions for 
incomplete transmissions and retransmissions of DPDs, an issue which is 
addressed above). For percentage-rate usages, however, the Joint 
Commenters highlighted several instances where the proposed rule was 
inconsistent with the rates adopted by the CRB, including that the rule 
appeared to contemplate payment for every phonorecord distributed and a 
separate calculation of a per-phonorecord payment by offering. Joint 
Commenters Initial Comments at 5-6. The Joint Commenters explained that 
``[u]nder Part 385 Subparts B and C, the number of phonorecords made 
and distributed is not generally determinative of the rate calculation, 
and phonorecords of multiple configurations are generally treated 
together as part of a single rate

[[Page 56193]]

calculation.'' Id. at 5. The Joint Commenters instead proposed that the 
statements of account regulations ``take a minimalist approach to 
incorporating into the accounting regulations details imported from 
Part 385.'' Id. at 6. In particular, they recommended that for 
percentage-rate royalties the rule simply provide that the amount of 
the royalty payment shall be calculated as provided in the relevant 
portions of part 385. Id. at B-13 to B-14. No other commenter opposed 
this proposal.
    The Office agrees with the Joint Commenters' critique of the 
proposed rule, and adopts their proposed solution. Taking a minimalist 
approach has a distinct advantage: It is likely that the CRB will alter 
the current rates in future rate periods, and incorporating the rates 
by reference avoids the need to revisit these rules after every such 
change. The Office stresses, however, that the final rule requires the 
licensee to include a detailed and step-by-step accounting of the 
calculation of royalties, to allow the copyright owner to verify the 
accuracy of the royalty payment.
2. Accounting for Deduction of Public Performance Royalties
    As noted above, the percentage-of-revenue royalty rates established 
by the CRB allow licensees to deduct royalties due for the public 
performance of musical works from the amounts owned under the Section 
115 license. See 37 CFR 385.12(b)(2), 385.22(b)(2). In the NPRM, the 
Office recognized that the nature of the music licensing marketplace is 
such that the value of applicable performance royalty rates may be 
unknown or established on an interim basis at the time statements of 
account and corresponding royalty payments become due. 77 FR at 44181. 
To address this scenario, the Office proposed that licensees would be 
permitted to account for unknown performance royalties by using an 
established interim royalty rate or, if no interim rate is established, 
a ``reasonable estimation'' of the expected final rate.\4\ In either 
case, the proposed rule required licensees to file amended annual 
statements of account and reconcile the actual amounts of royalties 
owed to copyright owners under the Section 115 license within six 
months of the establishment of a final performance royalty rate. 77 FR 
at 44194.
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    \4\ The proposed rule called for the ``reasonable estimation'' 
to be made ``in accordance with Generally Accepted Accounting 
Principles.'' 77 FR at 44194.
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    The Joint Commenters agreed that new accounting regulations should 
permit licensees to calculate unknown performance royalties based on 
interim or estimated performance rates, with a ``true-up'' occurring 
once the final rates for a given period have been determined. Joint 
Commenters Initial Comments at 6. However, they offered two refinements 
to the Office's proposed approach. First, they suggested that the 
Office only require licensees to report any amendments based on the 
final establishment of performance rates on the next regular annual 
statement of account. Id. at 9.\5\ The Joint Commenters maintained that 
the cost of preparing and certifying both an annual statement and an 
amended annual statement for each copyright owner would be burdensome. 
Id. In addition, they noted that ``where ownership of a work may have 
changed over the relevant period, the only practicable approach is to 
make the adjustment between the licensee and the current copyright 
owner'' in the next regular annual statement of account. Id.\6\ Second, 
Joint Commenters suggested that the rules specify that amended 
statements of account should only be required when performance 
royalties have been established for ``all works used by the service in 
an accounting period.'' Id. at 7-8. As justification for that 
refinement, the Joint Commenters noted that the performance royalty 
deduction under part 385 currently is made at the level of a service 
offering, not a particular work. Id. at 7-8.
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    \5\ The Joint Commenters also recommended that the Office 
declare it reasonable to ``use the aggregate amount of public 
performance royalties then sought from the licensee by performing 
rights licensors'' as a basis for computing the interim or estimated 
public performance royalty component. Joint Commenters Initial 
Comments at 7. The Office declines to do so. The Office believes 
that GAAP will provide adequate standards for the determination of 
the estimate, and that the use of GAAP should mitigate the concern 
that licensees will adopt inappropriate estimates.
    \6\ Gear Publishing Company (``Gear'' or ``Gear Publishing''), 
the only other party to comment on this issue, suggested that, in 
the absence of an interim royalty rate, public performance royalty 
rates should be ``no less than one hundred and thirty five percent 
(135%) of the previously set rates.'' Gear Publ'g, Initial Comments 
Submitted in Response to U.S. Copyright Office's July 27, 2012 
Notice of Proposed Rulemaking at 3 (Oct. 15, 2012) (``Gear Publ'g 
Initial Comments''). The Office notes that Gear appears to 
misapprehend the function of the estimated royalty rates in this 
context. That estimate would not, as Gear appears to believe, 
actually set the interim royalty rates for public performances of 
the musical works; those rates are determined under the terms of the 
consent decrees that govern two performing rights organizations, 
ASCAP and BMI. See United States v. ASCAP, 2001-2 Trade Cas. (CCH) ] 
73,474, 2001 WL 1589999 (S.D.N.Y. June 11, 2001); United States v. 
Broadcast Music, Inc., 1966 Trade Cas. (CCH) ] 71,941 (S.D.N.Y. Dec. 
29, 1966), amended by 1996-1 Trade Cas. (CCH) ] 71,378, 1994 WL 
901652 (S.D.N.Y. Nov. 18, 1994). Instead, under the current CRB 
rates, the estimated royalty rate is an accounting method used to 
offset payments under the Section 115 license until an interim or 
final performance royalty rate is established.
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    After considering the comments, the Office maintains the basic 
approach set forth in the proposed rule, while making clear that 
amended annual statements of account will be necessary only when the 
final performance rates are known for all works used by the service. 
The Office declines to adopt the Joint Commenters' proposal to permit 
licensees whose prior annual statements (and corresponding payments) 
have been rendered inaccurate by a final performance royalty 
determination to rectify the inaccuracies via the ``single, regular 
statement of account for the year in which the final [public 
performance] royalty expense for the offering is paid.'' Joint 
Commenters Initial Comments at 9. In keeping with our statutory 
obligation to ensure the filing of detailed, cumulative, certified 
annual statements of account for each fiscal year, the Office finds it 
necessary to require licensees to file amended statements for each year 
in which a licensee's aggregate final public performance royalties were 
incorrectly reflected in its previously filed annual statements. See 
generally 17 U.S.C. 115(c)(5).
    The appropriateness of this result is underscored, not undermined, 
by the Joint Commenters' observation that there may be changes in 
musical work ownership after initial annual statements are issued and 
before the final performance royalties are determined. In particular, 
the Office questions the assertion that where there has been such a 
change in ownership, any reconciliation must be made with the current 
copyright owner, rather than the owner of the copyright at the time the 
original annual statement was issued. The transactions transferring 
copyright ownership may provide for a different result as a matter of 
private contract, but absent such an arrangement, any underpayment or 
overpayment stemming from the reconciliation of final performance 
royalty payments may properly be attributable to the copyright owner at 
the time of the relevant use of the statutory license.
    Nonetheless, to mitigate the cost of preparing the amended 
statement of account, the final rule clarifies that, in certifying such 
an amended statement, the Certified Public Accountant (``CPA'') may 
limit its examination to the licensee's recalculation of royalties. The 
accountant need not recertify matters that were already examined and 
certified in the original annual statement of account.

[[Page 56194]]

3. Negative Reserve Balances and DPDs
    The accounting requirements in the proposed rule were generally 
uncontroversial. One area of controversy, however, related to the 
rule's handling of ``negative reserve balances'' for DPDs. 
Understanding the concept of a ``negative reserve balance'' requires a 
brief discussion of the concept of a ``phonorecord reserve.'' Section 
115 provides that royalties are payable ``for every phonorecord made 
and distributed,'' and that ``a phonorecord is considered `distributed' 
if the person exercising the compulsory license has voluntarily and 
permanently parted with its possession.'' 17 U.S.C. 115(c)(2) (emphasis 
added). In enacting that provision, Congress recognized that 
``phonorecords are distributed to wholesalers and retailers with the 
privilege of returning unsold copies for credit or exchange.'' H.R. 
Rep. No. 94-1476, at 110. Thus, ``the number of recordings that have 
been `permanently' distributed will not usually be known until some 
time--six or seven months on the average--after the initial 
distribution.'' Id. Congress observed that ``it ha[d] become a well-
established industry practice, under negotiated licenses, for record 
companies to maintain reasonable reserves of the mechanical royalties 
due the copyright owners, against which royalties on the returns can 
offset.'' Id. Congress accordingly instructed the Register of 
Copyrights to promulgate rules governing the maintenance of such 
reserves. Id.; see also 45 FR at 79038.
    Thus, the existing rule allows licensees, when making initial 
distributions of phonorecords, to withhold mechanical royalties based 
on the licensee's estimate of the number of phonorecords that will be 
returned by creating a ``phonorecord reserve.'' 37 CFR 201.19(a)(10). 
As phonorecords are returned, the phonorecord reserve is reduced, 
reflecting the fact that the returned phonorecords were not 
``permanently distributed.'' Id. 201.19(c)(1). A ``negative reserve 
balance'' occurs when phonorecords have been returned to the licensee 
in an amount that exceeds the established phonorecord reserves (which 
can occur when more phonorecords than were expected are returned). Id. 
201.19(a)(11). When such a negative reserve balance exists, it 
represents an overpayment from the licensee to the copyright owner. See 
45 FR at 79043. Thus, a compulsory licensee can claim a credit against 
that balance for future physical phonorecord distributions, with the 
negative reserve balance reduced accordingly. 37 CFR 201.19(c)(4).
    When the Office issued interim payment and accounting rules for 
DPDs in 1999, it concluded that there was ``no basis for adopting the 
concept of `reserves' to DPDs,'' principally because such DPDs are not 
typically accompanied by a right of return. See 64 FR 41286, 41287 
(Jul. 30, 1999). Thus, the existing rule makes clear that record 
companies cannot establish phonorecord reserves for DPDs. See 37 CFR 
201.19(a)(9).
    Since then, a further dispute has developed: if a record company 
has a negative reserve balance stemming from returns of physical 
phonorecords, should it be able to claim a credit against that balance 
for future DPDs? Or should the licensee be limited to only using future 
physical phonorecord distributions to offset that negative reserve 
balance? The NPRM sought comment on that issue. See 77 FR at 44181-82. 
Favoring the ability to claim a credit for DPDs were the RIAA and the 
American Association of Independent Music (``A2IM''). See RIAA, Initial 
Comments Submitted in Response to U.S. Copyright Office's July 27, 2012 
Notice of Proposed Rulemaking 3-11 (Oct. 25, 2012) (``RIAA Initial 
Comments''); A2IM, Reply Comments Submitted in Response to U.S. 
Copyright Office's July 27, 2012 Notice of Proposed Rulemaking 2-3 
(Dec. 3, 2012) (``A2IM Reply Comments''). Opposing that position were a 
group comprising the NMPA, HFA, the Songwriters Guild of America 
(``SGA''), and the Nashville Songwriters Association International 
(``NSAI'') (hereafter referred to collectively as the ``Joint 
Publishers and Songwriters'') and Gear Publishing. See Joint Publishers 
and Songwriters, Initial Comments Submitted in Response to U.S. 
Copyright Office's July 27, 2012 Notice of Proposed Rulemaking 5-7 
(Oct. 25, 2012) (``Joint Publishers and Songwriters Initial 
Comments''); Gear Publ'g Initial Comments at 3.
    In considering this issue, the Office is guided by the goals of the 
accounting regulations, particularly the requirements that ``[t]he 
accounting system must insure full payment, but not overpayment,'' and 
that ``[t]he accounting procedures must not be so complicated as to 
make use of the compulsory license impractical.'' 45 FR at 79039. For 
the reasons discussed in detail below, the Office concludes that 
licensees may claim a credit against negative reserve balances for 
future DPD distributions, but only where the DPDs have the same royalty 
rate as physical phonorecords (i.e., under the current rates, permanent 
physical downloads).
a. Whether Negative Reserve Balances Can Be Applied to DPD 
Distributions
    The Joint Publishers and Songwriters suggested that the Office had 
already addressed this issue in the regulatory amendments adopted in 
1999, and determined that negative reserve balances could not be 
applied to future DPD deliveries. See Joint Publishers and Songwriters, 
Reply Comments Submitted in Response to U.S. Copyright Office's July 
27, 2012 Notice of Proposed Rulemaking 10 (Dec. 10, 2012) (``Joint 
Publishers and Songwriters Reply Comments'') (referencing 64 FR at 
41287-89). But, as the RIAA correctly observed, the 1999 interim 
rulemaking addressed only whether licensees could be permitted to 
maintain phonorecord reserves for DPD distributions. See RIAA Initial 
Comments at 7-8. The Office did not opine on the separate issue of 
whether negative reserve balances developed as a result of returns of 
physical product could be applied to future DPD distributions.
    The NPRM here raised two questions relevant to that previously 
unaddressed issue. First, the NPRM asked ``whether there is statutory 
authority for allowing the application of a credit for negative reserve 
balances to digital phonorecord deliveries.'' 77 FR at 44182. The 
Office concludes that there is such authority. The statute broadly 
delegates to the Register the authority to prescribe regulations for 
monthly royalty payments and monthly and annual statements of account. 
See 17 U.S.C. 115(c)(2). The commenters have pointed to nothing to 
suggest Congress wished to constrain that authority with respect to 
DPDs when enacting the DPRSRA.
    Second, the NPRM asked whether ``there are reasons to limit the 
application of credits for negative reserve balances to physical 
phonorecords.'' After considering the comments, the Office agrees with 
the RIAA that there is no sound basis for such a limitation. As the 
Office has previously explained, a negative reserve balance represents 
an overpayment from the licensee to the copyright owner. 45 FR at 
79043. Thus, permitting licensees to use DPDs to offset negative 
reserve balances would help satisfy one of Congress's goals in enacting 
section 115(c)(5): That ``[t]he accounting system . . . insure full 
payment, but not overpayment.'' 45 FR at 79039.
    For their part, the Joint Publishers and Songwriters urged that 
because ``digital phonorecord deliveries cannot be returned, it would 
be incongruous to apply the negative reserve balance accounting to 
DPDs.'' Joint Publishers

[[Page 56195]]

and Songwriters Reply Comments at 9. But that observation conflates two 
separate issues. The fact that DPDs cannot be returned is the reason 
licensees are not permitted to develop reserves for DPDs. See 64 FR at 
41287. That fact has no bearing on whether a licensee can claim a 
credit against an existing negative reserve balance for future DPDs.
    To be sure, as the Joint Publishers and Songwriters noted, Congress 
was concerned about ``the possibility that, without proper safeguards, 
the maintenance of . . . reserves could be manipulated to avoid making 
payments of the full amounts owing to copyright owners.'' See Joint 
Publishers and Songwriters Reply Comments at 12 (quoting H.R. Rep. No. 
45-1476, at 110). But, as the Office explained in its 1980 rulemaking, 
that concern is principally addressed via ``the statutory requirement 
for an annual CPA audit, coupled with our regulatory requirements 
including the application of `generally accepted accounting 
principles.' '' 45 FR at 79040.\7\
---------------------------------------------------------------------------

    \7\ The Joint Publishers and Songwriters claim that allowing 
licensees to offset the negative reserve balance using DPDs would 
encourage ``overshipping'' of physical product. Joint Publishers and 
Songwriters Initial Comments at 6. The Office does not, however, 
understand how that concern would justify a music publisher's 
retention of a royalty overpayment.
---------------------------------------------------------------------------

b. Limitations on Licensees' Ability To Apply Negative Reserve Balances 
to DPDs
    While the Office concludes that licensees may offset negative 
reserve balances using future DPDs, that conclusion raises a few 
further questions. First is whether a negative reserve balance must be 
applied to future DPD distributions of the same musical work, or 
whether it can be applied at the statement level to other works owned 
by the same person. See 77 FR at 44182. The Office agrees with the 
Joint Publishers and Songwriters that the negative reserve balance 
should be applied at the work level, not the statement level.
    As the RIAA noted, the language of the existing rule as codified in 
the Code of Federal Regulations is somewhat ambiguous on the issue. 
RIAA Initial Comments at 11-12. But when the Office first promulgating 
that rule in 1980, it unequivocally explained in the rule's preamble 
that the negative reserve balance is ``to be reduced by applying it 
against shipments of the same recording under the same compulsory 
license.'' 45 FR at 79043 (emphasis added).
    The Office sees no basis for reconsidering that determination. The 
Joint Publishers and Songwriters and Gear Publishing convincingly 
described the practical difficulties that would result from the 
application of negative reserve balances at the statement level. See 
Joint Publishers and Songwriters Reply Comments at 14-15; Gear Publ'g 
Initial Comments at 5-6. Among other things, ``[c]ompulsory accountings 
are generally not made and delivered to the author, but rather to a 
publisher or administrator.'' Gear Publ'g Initial Comments at 6. Thus, 
``[i]f a compulsory licensee was permitted to cross negative royalty 
balances between two or more songs then the writer of one work might be 
unfairly punished by the application of a negative reserve balance 
against another author's work.'' Id. Indeed, the RIAA acknowledged this 
problem, and proposed a solution that would create obvious 
administrative difficulties.\8\ Accordingly, to confirm that a negative 
reserve balance may only be applied at the work level, the Office has 
amended the regulations to specifically note that phonorecord reserves 
and negative reserve balances may only be comprised of the number of 
phonorecords ``made under a particular compulsory license.''
---------------------------------------------------------------------------

    \8\ RIAA Initial Comments at 12-13 (``If the record company 
applied a negative reserve balance to works by a writer other than 
the one who received the overpayment, the music publisher would need 
to debit the account of the writer who received the overpayment and 
credit the account of the writer whose work had the negative reserve 
balance applied to it.'').
---------------------------------------------------------------------------

    The second question is how the negative reserve balance, which is 
expressed in units of physical phonorecords, should be applied to DPD 
distributions, which are not necessarily tracked on the same basis. 
Balancing the competing principles discussed above, the Office 
concludes that the negative reserve balance should be applied to those 
DPDs that have the same statutory royalty structure and same statutory 
royalty rate as the physical product--i.e., under current rates, 
permanent digital downloads. See 37 CFR 385.3 (establishing identical 
structure and rate for physical phonorecord deliveries and permanent 
digital downloads). As the RIAA noted, ``applying negative reserve 
balances to standalone sales of permanent digital downloads is trivial, 
because the statutory royalty rate is the same for downloads as for 
physical products.'' RIAA Initial Comments at 9. Moreover, the RIAA 
acknowledged that limiting the application of negative reserve balances 
to permanent digital downloads ``takes care of the vast majority of 
relevant commerce, because the overwhelming proportion of DPDs 
accounted for by the record companies that potentially have negative 
reserve balances are permanent digital downloads.'' Id.
    The RIAA nevertheless asked us to go further, and allow record 
companies to apply negative reserve balances to DPDs that have a 
different cents rate, like ringtones, (see 37 CFR 385.3(b) (setting 
rate at 24 cents per ringtone delivery)), and DPDs that have rates that 
are calculated on a percentage-of-revenue basis, like interactive 
streams (see 37 CFR 385.12, 385.22). The Office declines to do so 
because that would run afoul of the principle that ``[t]he accounting 
procedures must not be so complicated as to make use of the compulsory 
license impractical.'' 45 FR at 79039. The complication arises because 
phonorecord reserves (and thus, negative reserve balances) ``have 
historically been measured in product units'' of physical product, not 
in dollars and cents. RIAA Initial Comments at 9.\9\ The RIAA's 
solution for ringtones would be to divide the 24-cent ringtone rate by 
the base 9.1 cent physical phonorecord delivery rate to achieve a 
conversion factor, so that a delivery of a ringtone would be ``worth'' 
approximately 2.6374 physical phonorecord deliveries. Id. at 10. But 
that would result in reserves being expressed as fractions of physical 
units, which could cause problems when attempting to apply reserves to 
future physical phonorecord shipments. Moreover, that solution would 
work only for royalties that are expressed in cents terms; the RIAA 
offers little guidance on the manner in which credit could be claimed 
against negative reserves for digital distributions that carry a 
percentage-of-revenue royalty rate. Id. at 11. This would also make the 
accounting more difficult to understand and less transparent.
---------------------------------------------------------------------------

    \9\ See also 37 CFR 201.19(a)(10) (defining ``phonorecord 
reserve'' in terms of ``the number of phonorecords''); see also id. 
201.19(a)(11) (defining ``negative reserve balance'' in terms of 
``the aggregate number of phonorecords'').
---------------------------------------------------------------------------

    The Office notes that this problem might be dealt with more 
comprehensively by expressing phonorecord reserves in terms of dollars 
and cents rather than in terms of physical units. But that would 
require a significant reworking of the existing regulations, including 
the manner in which royalties are calculated and accounted for. See 
generally 37 CFR 201.19(d)(4)(ii). Notably, no commenter has suggested 
the Office make such drastic modifications to the rules. Moreover, the 
benefits of such modifications are uncertain, given the RIAA's 
acknowledgment that applying the negative reserve balances to permanent 
digital downloads ``takes

[[Page 56196]]

care of the vast majority of relevant commerce.'' RIAA Initial Comments 
at 9. Thus, for all of the above reasons, the Office declines to allow 
licensees to apply their negative reserve balances to DPDs that carry a 
different royalty structure or rate than the physical product.
    Finally, the Joint Publishers and Songwriters noted that, in 
practice, the rates for permanent digital downloads and physical 
products may not be the same because of the prevalence of controlled-
composition rates for physical distribution, and the limitation on such 
rates in the DPRSRA. See Joint Publishers and Songwriters Initial 
Comments at 12-14; see also 17 U.S.C. 115(c)(3)(E). Accordingly, they 
are concerned that allowing licensees to offset a negative reserve 
balance expressed in terms of physical units carrying a lower royalty 
under such private agreements using digital distributions that may have 
a higher royalty under the statutory license would give the record 
companies a windfall. See Joint Publishers and Songwriter Initial 
Comments at 13-14.
    That concern, however, is purely the result of terms of private 
licenses--specifically, the fact that such licenses apparently 
``incorporate the regulations attendant to Section 115, including the 
reserve accounting rules.'' Id. at 13. Such private agreements could 
avoid the problem by instead adopting different reserve accounting 
rules. To the extent there may be an underpayment of royalties as a 
result of the terms of private agreements, ``resolution of [that] issue 
in particular cases is best left to application of general legal 
principles in the appropriate forum.'' 45 FR at 79041.
4. Degree of Rounding for Decimal Points
    In drafting the proposed rule, the Office recognized the need for 
new regulations that determine the appropriate degree of rounding (in 
terms of the number of decimal places, based upon a fraction of a 
dollar rate) when licensees compute percentage-rate royalties 
associated with limited downloads, interactive streams, and incidental 
DPDs. 77 FR at 44182. The NPRM solicited comments on the extent to 
which licensees are to calculate per work royalty allocations. It also 
requested that commenters address whether a variance can be allowed in 
the degree of rounding based on the technical capabilities of various 
accounting systems, or whether reporting to a certain decimal place 
should be completely uniform. Id.
    In addressing these issues, the Joint Commenters maintained that 
rounding does not inherently favor one party over another. Joint 
Commenters Initial Comments at 10. They suggested that the new 
regulations require payors to calculate ``actual or constructive per-
play allocations (the number that is then multiplied by the number of 
plays to determine the per-work royalty allocation)'' to at least six 
decimal places, provided their systems are technologically able to do 
so. Id. They further suggested that the new regulations require payors 
that are not technically equipped to make a six-decimal place 
calculation round to four decimal places. Id. The Joint Commenters did 
not view the benefits of the additional precision (rounding to six 
places as opposed to four) as sufficient to require reengineering of 
already existing accounting systems. However, they did note that where 
payors are capable of making a calculation beyond four decimal places, 
the added precision is desirable.\10\ The only additional commenter on 
this issue, Gear Publishing, asserted that rounding should be limited 
to three decimal places and that ``rates should never be less than 1/
10th of a penny.'' Gear Publ'g Initial Comments at 6-7.
---------------------------------------------------------------------------

    \10\ The Joint Commenters explained: ``[t]he issue is that older 
royalty accounting systems originally designed primarily for 
physical configurations may not have been designed to perform 
royalty calculations to more than four decimal places, while newer 
systems generally would. As a result, the Joint Commenters 
understand that many, but not all, payors have the capability to 
make this calculation to at least six decimal places, and view that 
degree of precision as desirable where available.'' Joint Commenters 
Initial Comments at 10.
---------------------------------------------------------------------------

    The Office agrees with the general proposition that the benefits 
and detriments of calculating actual or constructive per-work royalty 
allocations to six digits rather than four are essentially random, will 
generally be very small, and do not inherently favor the payee or the 
payor. As such, the Office has implemented language in the final rule 
that requires all compulsory licensees to make royalty calculations to 
at least four decimal places.
    Regarding the Joint Commenters' request that the new regulations 
mandate additional precision based on technical accounting 
capabilities, the Office declines to include language in the final rule 
that would create a regulatory distinction between compulsory licensees 
with accounting systems designed to make royalty calculations to four 
decimal places and compulsory licensees whose systems are capable of 
making royalty calculations beyond four decimal places. The Office 
finds that the degree of reporting from licensee to licensee need not 
be completely uniform, provided all licensees make royalty calculations 
to at least four decimal places. Licensees may utilize additional 
precision beyond four decimal places where desirable, but the final 
rule does not require that they do so.

C. Issues Presented Involving Method of Payment and Delivery of 
Royalties

1. Electronic Payment
    The existing regulations provide that monthly statements of account 
shall be ``served on the copyright owner or the agent with authority to 
receive Monthly Statements of Account on behalf of the copyright owner 
to whom or which it is directed, together with the total royalty for 
the month covered by the Monthly Statement, by mail or by reputable 
courier service. . . .'' 37 CFR 201.19(e)(7)(i).
    In the NPRM, the Office proposed maintaining the current default 
requirement that payment be sent by mail or courier service. 77 FR at 
44182. The Office also proposed amending the existing regulations to 
allow copyright owners and licensees to independently agree to 
alternative payment methods, including electronic payment. Id. Finally, 
the Office proposed adopting a regulation that echoed the existing 
requirement that ``when both the Monthly Statement of Account and 
payment are sent by mail or courier service, they should be sent 
together,'' but permitted licensees participating in independent 
agreements that authorize the sending of statements and payment by 
means other than mail or courier service to send them 
contemporaneously. Id.
    The final rule reflects the commenters' general agreement with the 
Office's proposal to retain service by mail or courier service as the 
default requirement. Likewise, it reflects the commenters' general 
support of a rule that provides for independently agreed upon 
alternative payment methods.
    Regarding the timing of service requirements, the final rule 
deviates from the Office's proposal that when a licensee serves 
statements and payment via mail or courier service, they must be sent 
together. The Joint Commenters' explanation of the often-times separate 
processes for generating paper checks and paper royalty statements has 
persuaded the Office that it is sometimes impractical for licensees to 
send statements and payments simultaneously.\11\ Thus, the Office has

[[Page 56197]]

included language in the final rule that reflects the Joint Commenters' 
suggestion that payments may be sent together or separately, but if 
sent separately, the payments must include information reasonably 
sufficient to allow the payee to match them with corresponding 
statements. The final rule remains consistent with the existing 
requirement that both monthly statements of account and payment shall 
be served on or before the 20th day of the immediately succeeding 
month.
---------------------------------------------------------------------------

    \11\ See Joint Commenters Initial Comments at 12 (explaining 
that ``[p]aper checks sometimes originate from a payor department 
other than the department that generates royalty statements, and the 
printing and mailing of checks is sometimes outsourced to a third 
party,'' and that ``some payees of mechanical royalties prefer to 
have their payments sent to their lockbox service, while receiving 
their statements themselves'').
---------------------------------------------------------------------------

2. Electronic Statements of Account
    The existing regulations require compulsory licensees to serve 
statements of account via mail or reputable courier service. 37 CFR 
201.19(e)(7), (f)(7). At the urging of stakeholders, the NPRM 
contemplated adopting a rule that would alter the existing regulations 
by compelling licensees to serve, and copyright owners to accept, 
statements of account via electronic transmissions. 77 FR at 44182-83. 
Although the proposed rule did not go so far as to fully require 
stakeholders to serve and accept electronic statements of account, it 
did include provisions whereby a copyright owner could notify a 
licensee of its willingness to accept statements by means of electronic 
transmission and require licensees whose statements covered more than 
50 works to serve them electronically. The proposed rule also included 
a provision that would permit stakeholders to agree upon a procedure 
for verification of authority, other than a handwritten signature, when 
statements of account are served electronically.
a. Electronic Statements in General
    Most commenters agreed in principle with the proposed rule's 
attempt to reconcile the various stakeholder preferences concerning the 
format and method of delivery for statements of account. In this vein, 
the Joint Commenters proposed that the Office adopt regulations whereby 
``[e]ach payor could in the first instance choose its preferred mode of 
delivery, but if a payee requests the other approach, that request 
would be honored within a reasonable grace period.'' Joint Commenters 
Initial Comments at 13. They further proposed that, to ``minimize 
disruption,'' the new regulations should only permit a payor to change 
its elected preference once annually. Id. In support of their proposal, 
the Joint Commenters explained: ``What has happened in practice is that 
services and agents making large scale use of the compulsory license 
have defaulted to electronic delivery, but when some payees have 
requested paper statements, they have provided them. Conversely, record 
companies have defaulted to paper statements, and still use them for 
many payees, but deliver statements electronically when requested.'' 
Id. at 12-13.
    The final rule takes into account the general agreement among 
commenters that the new regulations should authorize electronic service 
of statements of account by adopting provisions that permit copyright 
owners to elect the format (paper or electronic) in which they receive 
statements. However, contrary to the Joint Commenters' proposal, the 
Office declines to authorize licensees to unilaterally elect to serve 
statements of account electronically. Instead, consistent with Gear 
Publishing's proposal, the final rule retains its requirement that 
licensees submit statements of account by mail or reputable courier by 
default, and provides copyright owners with the option to demand 
electronic statements. See Gear Publ'g Initial Comments at 8-9. The 
final rule does not restrict the copyright owners' ability to amend 
their elected service preference. However, licensees will not be 
required to make such changes effective until the first accounting 
period ending at least 30 days after the receipt of a copyright owner's 
election.
b. Mode of Electronic Delivery
    The proposed rule included language that suggested various 
acceptable means of formatting and delivering electronic statements of 
account. The Joint Commenters disagreed with this approach, suggesting 
that the Office should avoid specifics and instead address mode of 
electronic delivery with ``only a general statement concerning format 
and security.'' Joint Commenters Initial Comments at 13. Specifically, 
they stated: ``In practice, electronic statements are generally sent by 
email, made available for download from a portal, or uploaded to an FTP 
site. Since electronic delivery is accomplished in many ways, and 
future technological changes could bring further changes in the way 
statements are delivered, the Joint Commenters believe that regulations 
should not address this subject in detail.'' Id.
    The Office agrees with the Joint Commenters and has adopted 
language in the final rule that requires licensees to submit statements 
of account in ``a readily accessible electronic format consistent with 
prevailing industry practices applicable to comparable electronic 
delivery of comparable financial information.'' Id., exh. A, A-14. The 
Office declines, however, to adopt the Joint Commenters' further 
proposal that the rule specify that ``[r]easonable measures, consistent 
with prevailing industry practices applicable to comparable electronic 
delivery of comparable financial information, shall be taken to limit 
access to the Annual Statement of Account to the copyright owner or 
agent to whom or which it is directed.'' Id. The Joint Commenters 
nowhere explain the rationale for this provision's inclusion in their 
proposal, and thus the Office has no basis in the record for adopting 
it. Moreover, for reasons explained infra, the Office declines to 
include language in the regulations that may be construed as permitting 
``confidentiality'' provisions intended to limit access to the 
statements of account to the copyright owner or agent to whom the 
statement is directed.
c. Verification of Authority
    The NPRM proposed an exception to the requirement for a handwritten 
signature when service is made electronically. 77 FR 44183. 
Specifically, the proposed rule specified that if a statement is served 
electronically, the licensee and copyright owner are to agree upon a 
procedure for verification of authority.
    The Joint Commenters have pointed out that this aspect of the 
proposed regulations is ``impracticable for large-scale uses of the 
compulsory license'' and creates the risk of unnecessary strain on the 
licensing system. Joint Commenters Initial Comments at 13. 
Specifically, they state: ``Federal law supports the use of electronic 
signatures, see 15 U.S.C. Sec.  7004(b); sending of unauthorized 
mechanical accounting statements has not been a problem; and there is 
no reason to believe that unauthorized mechanical accounting statements 
are more likely to be a problem with electronic transmission than 
paper-based transmission.'' Id.
    The Office agrees that the proposed approach has the potential to 
create an unnecessary administrative burden, and that electronic 
signatures are an acceptable means for verifying electronic records. 
See 15 U.S.C. 7006(4)-(5). Accordingly, the final rule allows for the 
use of electronic

[[Page 56198]]

signatures on electronic statements of account.
3. Minimum Amount for Payment
    The NPRM recognized that, under the current rates for the making 
and distribution of physical and digital phonorecords, there is 
potential for the transactional costs associated with making a 
particular monthly royalty payment to a given copyright owner to 
outstrip the actual value of the payment (for both copyright owners and 
compulsory licensees). 77 FR at 44183. To address such a scenario, the 
NPRM queried whether it would be permissible under the statute for the 
Office to implement a rule that requires royalty payments to meet a 
minimum threshold before they become due. Id. The Office also sought 
comment on what would constitute an acceptable minimum threshold. Id.
    The Joint Commenters urged that it was within the Office's 
authority to adopt a minimum payment threshold, and proposed that the 
Office implement regulations that give licensees discretion to set a 
minimum payment threshold of up to $50, with payment of any royalty 
accrual that remains less than that amount to be deferred until either 
the time of the annual statement or whenever the royalty accrual 
exceeds $50, whichever comes first. Joint Commenters Initial Comments 
at 15. Gear Publishing agrees in principle with the Joint Commenters' 
approach, but proposes that the Office adopt a default threshold of one 
cent and place the burden of obtaining the optional $50 minimum on the 
licensee. Gear Publ'g, Add'l Reply Comments Submitted in Response to 
U.S. Copyright Office's Dec. 26, 2013 Request for Add'l Comments at 1-3 
(Feb. 14, 2014) (``Gear Publ'g Add'l Reply Comments'').
    After carefully considering the issue, the Office concludes that it 
has only very limited authority to establish a minimum payment 
threshold. Although, as the Joint Commenters note, the statute gives 
the Office discretion in setting forth the scope and form of any 
monthly payments made under the statute, the statute also cabins the 
Office's ability to alter the basic schedule of royalty payments.\12\ 
In particular, the statute states that ``the royalty under a compulsory 
license shall be payable for every phonorecord made and distributed in 
accordance with this license,'' and that a phonorecord is 
``distributed'' when the licensee ``has voluntarily and permanently 
parted with its possession.'' 17 U.S.C. 115(c)(2). In addition, the 
statute specifies that ``[r]oyalty payments shall be made on or before 
the twentieth day of every month and shall include all royalties for 
the month next preceding.'' Id. 115(c)(5). Thus, when read as a whole, 
the statute provides that royalties are payable when the phonorecords 
have been made and distributed by the licensee, and that all royalties 
payable for the prior month must be made by the twentieth of every 
month.\13\
---------------------------------------------------------------------------

    \12\ 17 U.S.C. 115(c)(5) (``Each monthly payment shall be made 
under oath and shall comply with requirements that the Register of 
Copyrights shall prescribe by regulation'').
    \13\ The Joint Commenters focused on the language of paragraph 
(c)(5), arguing that ``determining precisely what are the `royalties 
for the month next proceeding' is a topic for the accounting 
regulations.'' Joint Commenters Initial Comments at 14-15. But that 
view fails to account for the language of paragraph (c)(2), which 
appears to provide that royalties are ``payable'' when phonorecords 
are made and distributed. The Joint Commenters' reliance on the 
provisions for reserve accounting is similarly misplaced. See Joint 
Commenters Initial Comments at 14-15. The reserve accounting rules 
specify that, in certain cases, a licensee need not make a royalty 
payment when a record is sold with a return privilege. See 37 CFR 
201.19(c). But those rules are based on the logic that phonorecords 
that have been sold with a return privilege have not been 
``distributed'' within the meaning of the statute, and thus 
royalties are not yet ``payable.'' See 17 U.S.C. 115(c)(2) 
(providing that a phonorecord is considered ``distributed'' when the 
licensee ``has voluntarily and permanently parted with its 
possession''); see also H.R. Rep. No. 94-1476, at 110-11. In 
contrast, a DPD is distributed on the date that it is digitally 
transmitted.
---------------------------------------------------------------------------

    But while the statute on its face appears to leave the Office 
little discretion to alter the basic rules regarding when royalties 
must be paid, the Office does have the inherent authority to allow the 
withholding of amounts it determines are de minimis. As the DC Circuit 
has explained, ``inherent in most statutory schemes'' is the power for 
administrative agencies to ``overlook circumstances that in context may 
fairly be considered de minimis.'' Ala. Power Co. v. Costle, 636 F.2d 
323, 360 (DC Cir. 1979). The court explained that ``[t]he `de minimis' 
doctrine that was developed to prevent trivial items from draining the 
time of the courts has room for sound application to administration by 
the Government of its regulatory programs.'' Id. (internal quotation 
marks and citation omitted). The court stressed that ``[t]he ability . 
. . to exempt de minimis situations from a statutory command is not an 
ability to depart from the statute, but rather a tool to be used in 
implementing the legislative design.'' Id. Thus, there is ``likely a 
basis for an implication of de minimis authority to provide exemption 
when the burdens of regulation yield a gain of trivial or no value.'' 
Id. at 360-61.
    Accordingly, the Office concludes that a regulation permitting 
licensees to defer royalty payments that do not meet a de minimis 
payment threshold would be consistent with the Office's regulatory 
authority, but that the Office lacks authority to establish a higher 
threshold.
    In determining the appropriate de minimis payment threshold, the 
Office notes as an initial matter that the calculation mechanisms in 
the rates established by the CRB are such that payments to some 
copyright owners may amount to only fractions of a cent. Given the 
impossibility of paying a fraction of a cent via commonly used banking 
systems, it is obvious that our authority to declare certain otherwise 
payable royalties as de minimis would allow setting a minimum payment 
threshold of one cent. See Joint Commenters Initial Comments at 14 
(``Because the banking system cannot process payments for less than a 
cent, a minimum royalty threshold of a cent is simply necessary''). 
Accordingly, the final rule provides for a mandatory minimum payment 
threshold of one cent and permits a compulsory licensee to defer 
delivery of monthly statements of account and any associated royalty 
payments until the cumulative unpaid royalties that it owes a copyright 
owner equal at least one cent.
    The Office further concludes, however, that its authority to 
declare certain payments as being de minimis extends beyond that bare 
minimum threshold. There appears to be some understanding among the 
parties that, in the specific circumstances associated with the Section 
115 license, the transaction costs involved with making a royalty 
payment could possibly justify a threshold of up to $50. See generally 
Joint Commenters Initial Comments at 14-15. In particular, the licensee 
must incur cost to generate and deliver the monthly statement and 
payment, and the copyright owner must incur cost in processing those 
statements and payments in their financial and royalty systems. Id. at 
14. Thus, as the Joint Commenters explain, ``[t]he effort and expense 
required on each side can dwarf the payments sometimes generated from 
use of less popular songs.'' Id. at 14. The Office does not believe, 
however, that the record in this rulemaking can support the finding 
that all payments of under $50 are de minimis. The Office instead 
finds, based on our understanding of the transaction costs involved, 
and limited to the specific circumstances associated with the Section 
115 license, that royalty payments of under $5 can fairly be described 
as de minimis. See Ala.

[[Page 56199]]

Power, 636 F.2d at 360-61 (holding that there is ``likely a basis for 
an implication of de minimis authority to provide exemption when the 
burdens of regulation yield a gain of trivial or no value''); cf. 37 
CFR 201.11(i)(3) (establishing a five-dollar threshold for payment of 
interest charges for any royalty underpayment or late payment).
    To be sure, the Office recognizes that this assessment of the 
transaction costs is inexact, and that certain copyright owners may 
wish to receive statements of account and payments where the royalties 
owed are less than five dollars in a given month.\14\ The Joint 
Commenters' proposal, however, addresses these concerns by allowing a 
copyright owner to opt-out of the minimum threshold. See Joint 
Commenters Initial Comments at 15 (``[T]he Joint Commenters' proposed 
regulations provide a mechanism for a copyright owner to obtain a 
monthly payment anytime it has at least a cent in royalty accruals.''). 
In addition, the Joint Commenters' proposal requires payment of any 
cumulative unpaid royalties, even if they are below the threshold 
amount, at the time of delivery of the annual statement of account. Id.
---------------------------------------------------------------------------

    \14\ For instance, David Lowery, the lone objecting commenter 
addressing this issue, urged that licensees should ``pay [copyright 
owners] what they owe when they owe it like everyone else.'' David 
C. Lowery, Comments Submitted in Response to U.S. Copyright Office's 
July 27, 2012 Notice of Proposed Rulemaking at 2 (Dec. 10, 2012).
---------------------------------------------------------------------------

    Accordingly, in addition to setting the mandatory minimum threshold 
of one cent described above, the final rule gives licensees the 
discretion to set a default minimum payment threshold of up to $5 for 
payments to any copyright owner. (The Office stresses that this is a 
per-copyright-owner threshold, and not a per-work threshold). It allows 
the licensee to defer production of statements of account and payment 
of any royalty accrual that remains less than that amount until the 
earlier of the time for rendering the annual statement of account, the 
time for rendering the monthly statement of account for the month in 
which the compulsory licensee's cumulative unpaid royalties meet or 
exceed the minimum threshold, or the time for rendering the monthly 
statement of account that is due no sooner than 30 days after the 
copyright owner provides written notice of its desire to receive 
payments that are less than the minimum threshold established by the 
licensee.
    While the Office contemplated adopting Gear Publishing's proposed 
approach, it finds it too onerous a burden to force licensees to 
proactively negotiate minimum payment thresholds with all copyright 
owners. Further, it would defeat the purpose of permitting a minimum 
threshold--which is to implement a default means of preventing 
situations where the transactional costs associated with a given 
royalty payment outweigh the actual value of the payment (for both 
copyright owners and compulsory licensees).

D. Issues Presented Involving Reporting on Statements of Account

1. Statement of Account Issues in General
    The existing rule set forth detailed requirements for the content 
of monthly and annual statements, including information about the 
licensee and the licensee's use of the compulsory license. See 37 CFR 
201.19(e)(2) and (3); 201.19(f)(3) and (4). The proposed rule carried 
forward these basic requirements both for cents-rate and percentage-
rate usages, with only minor alterations to account for the newer 
royalty rate structures. See 77 FR at 44188-89, 44194.
    The Joint Commenters recommended a number of technical changes to 
the reporting information. See generally Joint Commenters Initial 
Comments, exh. C. For instance, the Joint Commenters recommended the 
Office require the reporting of International Standard Recording Codes 
(``ISRC''), an international standard code for uniquely identifying 
sound recordings, where that code is known. According to the Joint 
Commenters, this will further the ability to automatically match large 
statements to repertoire databases. For the same reason, the Joint 
Commenters also recommended that the Office require the reporting of 
the writers of the musical work, when that information is known.
    The Office has largely accepted these technical suggestions, which 
garnered no opposition from other commenters.\15\ The final rule, 
however, includes a few minor changes to the amendments proposed by the 
Joint Commenters. The Joint Commenters proposed that the ISRC not be 
reported for cents-rate usages and for multi-recording products in a 
music bundle. The Office concludes that these carve-outs would add 
needless complication to the rule. Instead, the Office has adopted a 
broad rule requiring the reporting of ISRCs when that information is 
known. The Office has also added to the writer name requirement to 
permit the reporting of other unique identifiers, such as the 
International Standard Name Identifier (``ISNI'') of the writer, or the 
International Standard Musical Work Code (``ISWC'') for the musical 
work. In addition, the Joint Commenters' proposal would have not 
required the reporting of writer name information for statements with 
fewer than 50 lines. Again, if that information is known, the Office 
sees no reason to exclude it from the statements of account.
---------------------------------------------------------------------------

    \15\ The Office has not adopted the Joint Commenters' proposal 
to specify that the ``copyright owner and the compulsory licensee or 
authorized agent may agree upon alternative methods of accounting 
and payment'' and that statements of account or payments ``provided 
in accordance with such an agreement shall not be rendered invalid 
for failing to comply with the specific requirements of'' the 
regulations. Joint Commenters Initial Comments, exh. A, at A-15, A-
22. Inclusion of these provisions is unnecessary. The statute itself 
provides that ``[l]icense agreements voluntarily negotiated at any 
time . . . shall be given effect in lieu of'' the rates and terms 
established by the CRB. 17 U.S.C. 115(c)(3)(E)(i). It necessarily 
follows that such agreements can also diverge from the Register's 
payment and statement-of-account regulations, because those 
regulations are so closely intertwined with the rates and terms 
adopted by the CRB.
---------------------------------------------------------------------------

    More substantively, the Joint Commenters criticized the proposed 
rule's requirement that, for all percentage-rate usages, the statements 
of account must report information such as the number of phonorecords 
involved broken down by configuration. The Joint Commenters explained 
that ``[u]nder Part 385 Subparts B and C, the number of phonorecords 
made and distributed is not generally determinative of the rate 
calculation, and phonorecords of multiple configurations are generally 
treated together as part of a single rate calculation.'' Id. at 5. 
Thus, as with the royalty calculation provisions addressed above, the 
Joint Commenters recommended a minimalist approach, requiring simply a 
``separate listing of the information required'' to calculate the rates 
under part 385. Joint Commenters Initial Comments, exh. A, at A-9. No 
other commenter opposed that proposal.
    The Office agrees with the Joint Commenters' critique of the 
proposed rule and largely adopts its recommendation to incorporate by 
reference the requirements of the rates in part 385. The final rule 
makes clear, however, that licensees are obligated to provide a 
detailed and step-by-step calculation of royalties under that part.\16\
---------------------------------------------------------------------------

    \16\ In so providing, the rule incorporates the essential 
features of the detail requirements that the Copyright Royalty 
Judges had adopted in the latest Section 115 rate proceeding, but 
that the Register determined would impermissibly encroach on the 
Register's authority to establish requirements for monthly and 
annual statements of account. See 78 FR 28770 (May 16, 2013); see 
also Joint Commenters, Add'l Comments Submitted in Response to U.S. 
Copyright Office's July 27, 2012 Notice of Proposed Rulemaking (Jan. 
30, 2013) at 2-3 (urging the adoption of these ``detail 
requirements'').

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[[Page 56200]]

2. Reporting of Promotional Digital Phonorecord Deliveries
    As the NPRM explained, ``[p]romotional Digital Phonorecord 
Deliveries are often an important tool for record labels and services 
to attract new listeners, create awareness about a particular artist, 
and increase plays.'' 77 FR at 44183. In light of these considerations, 
the CRB established a royalty rate of zero for certain promotional 
interactive streams and limited downloads and for free trial periods 
for mixed service bundles, paid locker services, and limited offerings. 
See 37 CFR 385.14; 385.24. (There is no promotional rate for cents-rate 
usages.) The CRB imposed detailed limitations on the use of the 
promotional rates, including recordkeeping requirements. See 37 CFR 
385.14(a)(2),(3); 385.24(a)(4)(i), (b)-(c).
    This raised the question of whether and how promotional DPDs should 
be accounted for in the statements of account. The proposed rule noted 
that ``[e]ven though no royalty is owed in these circumstances, it is 
unclear whether licensees should give a full accounting of all the 
phonorecords made under the license in the Statement of Account.'' 77 
FR at 44183. The NPRM thus asked ``whether the statute requires that 
Statements of Account contain play information on promotional digital 
phonorecord deliveries.'' Id. It further asked ``[i]f the conclusion is 
that there is no statutory requirement, . . . whether digital 
phonorecords offered at a promotional rate or for a free trial period 
should be reported and with what frequency, e.g., monthly or 
annually.'' Id. The proposed rule required detailed accounting of 
promotional DPDs, on the theory that such a requirement ``would not 
seem to be a hardship on the licensees,'' because the CRB's 
recordkeeping rules ``require[] retention of complete and accurate 
records of the relevant authorization, identification of each sound 
recording of a musical work made available through the free trial 
period, the activity involved, and the number of plays and downloads 
for each recording.'' Id.
    The Joint Commenters opposed any requirement to report promotional 
uses as part of statements of account, on the ground that any such 
requirement would be administratively burdensome. See Joint Comments at 
15-19. Gear Publishing supported the imposition of such a reporting 
requirement, citing the utility of such information for copyright 
owners. Gear Add'l Reply Comments at 4.
    After careful consideration, the Office has decided not to require 
detailed reporting of promotional uses. Instead, the final rule only 
requires the licensee to affirmatively provide the copyright owner with 
detailed instructions on how to obtain the records of any promotional 
uses that are required to be maintained under the CRB's existing rules.
    First, the Office concludes that the statute does not unambiguously 
require statements of account to include detailed information (like 
play counts) about licensees' use of DPDs for promotional purposes. The 
statute generally grants the Register broad discretion to adopt 
regulations governing monthly and annual statements of account. It 
states that ``[e]ach monthly payment . . . shall comply with 
requirements that the Register of Copyrights shall prescribe by 
regulation,'' and requires the Register to ``prescribe regulations 
under which detailed cumulative annual statements of account . . . 
shall be filed[.]'' 17 U.S.C. 115(c)(5). The only arguable limitation 
on that generally broad delegation of rulemaking authority comes in the 
last sentence of section 115(c)(5): ``The regulations covering both the 
monthly and annual statements of account shall prescribe the form, 
content, and manner of certification with respect to the number of 
records made and the number of records distributed.'' Id.
    Properly understood, this sentence instructs the Register to 
prescribe (1) the ``form'' of the statements, (2) the ``content'' of 
the statements, and (3) the ``manner of certification'' of the 
statements ``with respect to the number of records made and the number 
of records distributed.'' Id. The last clause requires only that the 
``manner'' of certification relate in some way to the number of records 
made and distributed by the licensee. Cf. Landmark Legal Found. v. IRS, 
267 F.3d 1132, 1136 (D.C. Cir. 2001) (noting ``the extremely general 
character of the connecting phrase--`with respect to' ''). The clause 
does not, however, require statements of account themselves to reflect 
the exact number of records made and distributed in all 
circumstances.\17\
---------------------------------------------------------------------------

    \17\ See also Village of Barrington, Ill. v. Surface Transp. 
Bd., 636 F.3d 650, 661 (D.C. Cir. 2011) (explaining that a statute 
must ``unambiguously'' foreclose the exercise of agency discretion). 
The Office acknowledges that it has, on an earlier occasion, 
suggested that the statute mandates that statements of account 
contain an individual accounting of promotional DPDs. See 74 FR 
4537, 4543 (Jan. 26, 2009) (``There is no statutory authority for an 
exception to this requirement for certain types of ``phonorecords' 
or for the participants to alter this provision by agreement.' ''). 
That sentence, however, was not directly relevant to the issue that 
was being addressed on that earlier occasion, which was related to 
the relevant division of authority between the CRB and the Register 
with respect to statements of account. Id.
---------------------------------------------------------------------------

    Second, given that the statute does not clearly require statements 
of account to track distributions of promotional DPDs, the Office must 
instead consider whether such a requirement would nevertheless be 
appropriate in light of the overall purposes of the statute, including 
the goals of preventing ``economic harm from companies which might 
refuse or fail to pay their just obligations'' and of ensuring the 
administrability of the statutory license. H.R. Rep. No. 94-1476, at 
111.
    Several competing considerations are relevant to that analysis. On 
the one hand, as Gear Publishing notes, information regarding 
promotional uses may have value for copyright owners, and could help 
ensure that licensees are complying with the conditions imposed by the 
CRB for use of the promotional rate. Gear Publ'g Add'l Reply Comments 
at 4. On the other hand, promotional uses carry a zero rate, and such 
uses thus have little direct financial impact on the copyright owners. 
Moreover, the Joint Commenters--representing both copyright owners and 
compulsory licensees--have described in detail the administrative 
burden associated with reporting promotional uses in the statements of 
account. Joint Commenters Initial Comments at 15-19. According to the 
Joint Commenters, many promotional uses are conducted by third-party 
licensees, as with the ``streaming of preview clips from download 
stores,'' but detailed information regarding play counts and the like 
are typically not reported into the royalty accounting systems of 
compulsory licensees. Id. at 16. Thus, ``[i]mposing a new reporting 
requirement would necessitate creating new reporting processes.'' Id. 
In addition, as noted, the CRB already requires licensees to keep 
records of promotional uses and make them available to copyright owners 
on request, and thus the proposed rule was largely duplicative of 
provisions already in effect. Id. at 18.
    Balancing these considerations, the Office has decided not to 
require detailed reporting of promotional uses in the monthly and 
annual statement of account. In particular, we believe that the needs 
of copyright owners are largely satisfied by the recordkeeping terms 
the CRB has adopted for

[[Page 56201]]

promotional uses, which give copyright owners the right to obtain 
records of promotional uses on request. See 37 CFR 385.14(a)(2), (3); 
385.24(a)(4)(i), (b)-(c). At the same time, the Office is concerned 
that some copyright owners may not know how to invoke that right. 
Accordingly, the final rule provides that statements of account must 
include detailed instructions on how a copyright owner may obtain the 
records of promotional uses that are required to be maintained or 
provided under section 385.14 and section 385.24, or any other similar 
regulation the CRB may promulgate in the future, including records that 
are required to be maintained or provided by third-party services that 
are authorized by the licensee to engage in promotional uses.\18\ Where 
licensees are themselves engaged in promotional uses of the copyrighted 
works (e.g., a record label Web site that streams free previews), 
providing this basic information should be a trivial burden. Where a 
licensee has authorized a third-party service to engage in promotional 
uses, the annual statement should disclose sufficient information to 
allow the copyright owner to request the material that the service is 
required to maintain under the terms adopted by the CRB. This modest 
requirement will ensure that copyright owners are regularly informed of 
their right to request records of promotional uses.
---------------------------------------------------------------------------

    \18\ The Office notes that the CRB regulations do not appear to 
require services to maintain per-play counts of promotional uses of 
interactive streaming of clips. See 37 CFR 385.14(a)(1)(iii)(A), 
(d). At this time, the Office is not requiring the collection of 
that information in its statement-of-account regulations, on the 
ground that the parties in the proceedings before the CRB believed 
that such detailed recordkeeping was not necessary for those 
specific uses.
---------------------------------------------------------------------------

3. Reporting the Identification of Third-Party Licensees
    The NPRM highlighted the ongoing disagreement between copyright 
owners and compulsory licensees regarding the identification of 
authorized third-party distributors of DPDs and ringtones in statements 
of account.\19\ FR at 44183-84.19. The Office accordingly solicited 
comments on whether new regulations should require licensees to issue 
statements that include both the identities of the third-party services 
they authorize to distribute DPDs and ringtones and the number of DPDs 
and ringtones each such service distributes. Id.
---------------------------------------------------------------------------

    \19\ For percentage-rate usages, information about third-party 
distributors is provided to copyright owners as a matter of course. 
As the RIAA notes, ``[t]he percentage rate calculation is specific 
to a particular service offering, so it is only natural that the 
offering would be identified in applicable statements. Moreover, 
this usage is typically accounted for by the services [who pay a 
percentage rate] themselves, making identification of the 
distributor trivial.'' RIAA Initial Comments at 14. The final rule 
codifies the practice of identifying the distributor or third-party 
distributor for percentage-rate usages.
---------------------------------------------------------------------------

    The responses received were consistent with the summary of the 
disagreement laid out in the NPRM. 77 FR 44183-84. Commenting copyright 
owners--represented by the Joint Publishers and Songwriters group, and 
Gear Publishing--favored amending the existing regulations to require 
compulsory licensees to identify each third-party service that 
distributes a DPD or ringtone in connection with the compulsory license 
as well as the total number of DPDs and ringtones that specific service 
distributed. See Joint Publishers and Songwriters Initial Comments at 
3; see also Gear Publ'g Initial Comments at 14-15. The copyright owners 
claimed that, without such information, publishers and songwriters have 
no way of determining what third-party services are authorized to 
distribute DPDs and ringtones. Id. They further asserted that, given 
the rise in the number of third parties providing digital distribution 
services, permitting original licensees to ``cloak'' the identities of 
sublicensees deprives them of valuable information and limits their 
ability to participate in the expanding digital marketplace. Joint 
Publishers and Songwriters Initial Comments at 4-5. Regarding the ease 
with which licensees could implement such regulations, the copyright 
owners claimed that third-party services already track and report DPD 
and ringtone distributions to compulsory licensees, making the 
licensees' identification of third-party services in their statements 
of accounts ``not only reasonable, but also necessary to ensure 
transparency in the digital environment.'' Joint Publishers and 
Songwriters Initial Comments at 3-4.
    Commenting compulsory licensees--represented by RIAA and A2IM--took 
the opposing view. RIAA Reply Comments at 11-17; A2IM Reply Comments at 
3-4. They disagreed with the copyright owners' assertion that this 
aspect of the Section 115 license requires additional transparency and 
maintained that ``[t]he mere fact that some publishers are curious to 
have this information is not a sufficient reason to require record 
companies to reengineer their royalty reporting systems to provide 
it.'' RIAA Reply Comments at 15; see also RIAA Initial Comments at 13-
14. In this regard, the RIAA claimed that separately calculating and 
reporting usage figures for each third-party distributor would lead to 
a multiplication in the volume of data processed by record companies, 
would cause an increase in the size of the statements delivered to 
copyright owners, and would require record companies with ``legacy 
royalty accounting systems'' to make ``significant changes to business 
processes and systems, at a substantial cost.'' RIAA Initial Comments 
at 14. Likewise, A2IM claimed that small- and medium-sized record 
companies often do not have access to this information (where digital 
distribution is handled through an aggregator) and that, even if they 
could obtain this information, a requirement to report it in the manner 
the commenting copyright owners suggested would ``dramatically 
increase'' their administrative burden. A2IM Reply Comments at 3.
    After careful consideration of the comments, the Office has decided 
to amend the regulations to require licensees to issue statements of 
account that identify authorized third-party distributors, and list the 
number of DPDs and ringtones each such party distributes. The Office is 
of the opinion that transparency is critical where copyright owners are 
compelled by law to license their works. As the Joint Publishers and 
Songwriters pointed out, information regarding the breadth of the 
distribution of their works has the potential to influence their future 
business decisions and impact the scope of their involvement in the 
digital music industry. Joint Publishers and Songwriters Initial 
Comments at 5. In addition, increasing transparency of the uses of 
music is likely to enhance the copyright owners' faith in the accuracy 
of the accounting statements. The Office fails to see the advantages in 
permitting licensees to withhold such basic information as: What 
services are exploiting their works, who is authorizing the services to 
exploit their works, and the frequency with which the works are being 
exploited. To the contrary, the music industry stands to profit from 
increased transparency among copyright owners and the licensees who 
exploit protected works pursuant to the compulsory license.
    The Office is cognizant that compulsory licensees will have to bear 
some administrative burden in implementing this amendment. As the RIAA 
correctly noted, the Office has previously cautioned against the 
implementation of regulations that would ``substantially multiply 
necessary paperwork'' and ``put compulsory licensing beyond the means 
of many record companies.'' 45 FR at 79039. Nevertheless, the Office is 
not persuaded by the licensees' argument that the burden in this 
instance would

[[Page 56202]]

be unreasonable. Based on the information the Office received over the 
course of numerous rounds of stakeholder comments, it is not convinced 
that tracking and reporting works across multiple distributors is cost- 
or resource-prohibitive. As discussed, the new regulations will only 
require a change in reporting practices with respect to DPDs and 
ringtones distributed by third-party licensees. Our understanding is 
that most third-party licensees already collect and report relevant 
usage information to compulsory licensees for payment purposes. See 
Joint Publisher and Songwriter Reply Comments at 5 & nn.2-3. The 
licensee's only burden, then, is to report the information that they 
already receive to copyright owners. Thus, balancing all the factors, 
the Office believes the added transparency will benefit rather than 
harm the compulsory licensing marketplace.
4. CPA Certification of Annual Statements of Account
    The statute requires the Register to ``prescribe regulations under 
which detailed cumulative annual statements of account, certified by a 
certified public accountant, shall be filed for every compulsory 
license.'' 17 U.S.C. 115(c)(5). The statute also instructs the Register 
to issue regulations that ``prescribe the form, content, and manner of 
certification with respect to the number of records made and the number 
of records distributed.'' Id. As the Office explained in the NPRM, the 
certification requirement ``should assure that copyright owners receive 
the royalties to which they are entitled, but . . . should not burden 
the licensee to the point that it would prevent the compulsory license 
from being a practical option for record companies or services.'' 77 FR 
at 44184.\20\ For purposes of the proposed rule, the Office retained 
the existing regulations for CPA certification of annual statements of 
account, which had been in place since 1980. 77 FR at 44191, 44196. The 
NPRM nevertheless asked whether there were ``alternative certification 
methods that . . . should be considered by the Office.'' Id. at 44184.
---------------------------------------------------------------------------

    \20\ The Office recognizes that some commenters requested the 
establishment of a right to audit the records kept by users of the 
compulsory license as part of these statement-of-account 
regulations. The Office declines to adopt such audit provisions 
because it is not apparent that the statute authorizes the Register 
to do so. However, the Office reiterates its conclusion that the CRB 
does have the authority to issue requirements regarding audit of 
records that are required to be kept as part of the terms of the 
compulsory license. See 73 FR at 48398.
---------------------------------------------------------------------------

    Commenters broadly agreed that the existing certification 
regulations should be revised, and agreed in general terms about the 
basic structure and many of the specific elements of the revised 
certification provisions. After considering fully the comments 
received, the Office has adopted the structure and uncontroversial 
elements of the Joint Commenters' proposal regarding certification of 
the annual statements of account in the new section 210.17(f), with 
conforming revisions to the certification requirements for the monthly 
statements of account in the new section 210.16(f). At bottom, the 
Office has designed the CPA certification rule to provide copyright 
owners with firm assurance that the annual statement accurately 
reflects, in all material respects, the compulsory licensee's usage of 
musical works, the statutory royalties applicable thereto, and any 
other data that is necessary for the proper calculation of the 
statutory royalties in accordance with the statute and applicable 
regulations. See H.R. Rep. No. 94-1476, at 111 (explaining that the 
annual statement requirement should ``increase the protection of 
copyright proprietors against economic harm from companies which might 
refuse or fail to pay their just obligations'').
    One of the key features of this new rule is the accommodation for 
alternative methods of certification for small-scale users and large-
scale users. According to the commenters, the existing regulations 
appeared to assume individual review and certification of all 
statements of account, a step that is impracticable for large-scale use 
of the compulsory license.\21\ The Office agrees. The revised rule thus 
provides that, where the accountant determines in its professional 
judgment that the volume of data involved would render individual 
review and certification of annual statements of account impracticable, 
an accountant certifying the annual statement of account may instead 
examine the internal processes and controls of the licensee to 
determine whether they were suitably designed and operated effectively 
to accurately calculate royalties and generate compliant statements of 
account. A similar provision applies to monthly account statements.\22\
---------------------------------------------------------------------------

    \21\ See Joint Commenters Reply Comments at 5-6; Music Reports, 
Reply Comments Submitted in Response to U.S. Copyright Office's July 
27, 2012 Notice of Proposed Rulemaking at 9 (Dec. 10, 2012) (``Music 
Reports Reply Comments''); see also RIAA Reply Comments at 2, 18 
(urging the Office to adopt a certification option for small-scale 
use of the compulsory license).
    \22\ Although no commenter has disputed our statutory authority 
to adopt this amendment, the Office has independently concluded that 
this bifurcated certification procedure is consistent with the 
statutory instruction to ``prescribe the form, content, and manner 
of certification with respect to the number of records made and the 
number of records distributed.'' 17 U.S.C. 115(c)(5). As indicated 
above, the statutory language gives the Register broad discretion 
with regard to certification of the processes used to track usage of 
the license Cf. Landmark Legal Found. v. IRS, 267 F.3d 1132, 1136 
(DC Cir. 2001) (noting ``the extremely general character of the 
connecting phrase--`with respect to'''). The statute does not 
mandate an individual count of records in all cases.
---------------------------------------------------------------------------

    Another notable revision is the removal of the requirement that the 
CPA use specific certification language. Instead, consistent with the 
commenters' proposals, the final rule now specifies the scope of the 
examination and the general substance of the opinion the CPA must 
render after that examination. Although this departs from our 
conclusion in 1978,\23\ the Office believes it is appropriate to do so 
in light of the following factors: First, the commenters in this 
proceeding, who have dealt with the certification language under the 
existing rule for many years, all agreed that the Office should not 
specify the certification language. Second, as the Joint Commenters 
pointed out, ``[i]f the required substance of the certification is 
anchored in appropriate professional standards, it is not necessary to 
provide exact certification language to have a rigorous certification 
process.'' Joint Commenters Reply Comments at 6. Finally, our 
understanding is that the language used in opinions rendered by CPAs is 
largely dictated by the American Institute of Certified Public 
Accountants' (``AICPA'') standards.\24\ The Office is wary of requiring 
the use of specific certification language that could interfere with 
those standards.
---------------------------------------------------------------------------

    \23\ 43 FR at 4515-16.
    \24\ See AICPA, Statements on Standards for Attestation 
Engagements at 101.114, http://www.aicpa.org/Research/Standards/AuditAttest/DownloadableDocuments/AT-00101.pdf (examples of 
examination reports) (last updated June 1, 2013).
---------------------------------------------------------------------------

    Beyond these uncontroversial changes, there were three areas of 
disagreement between Music Reports and the Joint Publishers and 
Songwriters about the particulars of the manner of certification, 
particularly as they related to large-scale uses of the compulsory 
license. As explained below, the Office largely agreed with the Joint 
Publishers and Songwriters on each of these points, and the final rule 
reflects their proposal.

[[Page 56203]]

a. Requirement for a Single Certification
    Many compulsory licensees outsource royalty accounting services to 
a third-party service provider like Music Reports, which raises the 
question of how the CPA certification should operate in those 
circumstances. Music Reports proposed that two separate CPAs would 
issue two separate and essentially unrelated certifications--the CPA 
for the licensee would certify the statement to the extent it contains 
usage and other data used to calculate royalties, and the CPA for the 
service provider would certify the process used to generate the 
statement. Music Reports, Add'l Reply Comments Submitted in Response to 
U.S. Copyright Office's Dec. 26, 2012 Notice of Proposed Rulemaking at 
8-9 (Feb. 14, 2014). By contrast, the Joint Publishers and Songwriters 
proposed requiring a single certification from a CPA engaged by the 
compulsory licensee. See Joint Publishers and Songwriters Reply 
Comments at 15-16. Under that proposal, to the extent the licensee 
relies on a third-party service provider for royalty accounting 
services, the licensee's CPA would be able to rely on a report and 
opinion generated by the service provider's CPA certifying the process 
used to generate the annual statement. Id. Gear Publishing proposed 
that, where the licensee's CPA relies on a report of the CPA of the 
third-party service provider, the licensee's CPA should be required to 
disclose that they have relied on such a report. Gear Publ'g Initial 
Comments at 16.
    After careful consideration of the comments, the Office adopts in 
general Gear Publishing and the Joint Publishers and Songwriters' 
proposals. Allowing different CPAs to certify different portions of 
annual statements would substantially detract from the chief goals of 
the CPA certification requirement--assuring transparency and certainty 
of royalty payments. Permitting piecemeal certifications creates a risk 
that no person bears responsibility for examining the process as a 
whole to ensure that it is suitably designed to generate compliant 
annual statements. Under the statute, a compulsory licensee bears full 
responsibility to produce accurate and complete annual account 
statements, and should ultimately be responsible for shortcomings in 
those statements no matter their source. See 17 U.S.C. 115(c)(5). The 
CPA engaged by the compulsory licensee should similarly bear 
responsibility to provide a certification as to all aspects of the 
statement.
    The final rule thus provides that the licensee's CPA must certify 
the statement as a whole, even where a third party provides services 
related to the annual statement. The Office appreciates Music Reports' 
concern that requiring the licensee's CPA to base its certification on 
a report received from a third-party service provider's CPA could 
introduce complexity into the certification process. See Music Reports 
Reply Comments at 8. In response to that concern, the final rule makes 
clear that the licensee's CPA may rely on the report produced by the 
service provider's CPA, if that fact is disclosed in the certification. 
Whether in a particular case the licensee's CPA might be required to 
assess the bases for the third-party report is a matter that the Office 
entrusts to the judgment of the licensee's CPA under the pertinent 
professional standards. The Office notes, however, that nothing in the 
rule prevents the same CPA from examining and rendering an opinion with 
respect to both the licensee and the third-party service provider.
b. Requirement To Examine the Process by Which Usage Data Is Generated
    The second area of dispute relates to the examination of large-
scale licensees who use third-party services (like Music Reports) to 
generate annual statements of account. Typically, such licensees supply 
usage and other data relevant to the royalty calculation (e.g., 
revenues, performance rights payments, play counts, and subscriber 
counts) to the third-party service, which in turn is responsible for 
actually generating the statements of account based on that data. Music 
Reports argues that, for such licensees, the CPA examination should 
exclude the processes used by the licensee to track usage and other 
royalty data supplied to the third-party service. Instead, Music 
Reports appears to take the view that the accuracy of that data should 
be taken at face value. Music Reports Add'l Reply Comments at 6-7. In 
particular, Music Reports suggests that this data is already ``highly 
scrutinized'' by ``the CFO of the licensee, by the sound recording 
owners and performance rights organizations, [and] by the licensee's 
potential investors.'' Id. at 8. The Joint Publishers and Songwriters 
take the opposite view, urging that an examination of the processes 
used to generate the usage and other data is necessary to ensure that 
the annual statements are accurate. See Joint Publishers and 
Songwriters Reply Comments at 3-5.
    The Office agrees with the Joint Publishers and Songwriters. As 
explained, the purpose of the CPA certification requirement is to give 
the copyright owner firm assurance that it is receiving all the 
royalties to which it is entitled. Given that goal, Music Reports 
nowhere explains how an acceptable CPA examination can realistically 
take place for large-scale licensees without examining the reliability 
of the processes used to track the data used in royalty calculation. 
See generally Music Reports Reply Comments at 8. Music Reports' 
assertion that licensees ``have had no reason under current law and 
regulation'' to think that these processes would be subject to 
examination (Music Reports Add'l Reply Comments at 7), is difficult to 
fathom. It should have been obvious to any licensee that a fair 
assessment of the accuracy of royalty payments necessarily requires an 
examination of the accuracy of the data used for the royalty 
calculations and, if necessary, of the processes used to track that 
data.\25\
---------------------------------------------------------------------------

    \25\ For that reason, Music Reports also missed the mark when it 
asserted that the Joint Publishers and Songwriters' proposal would 
``require a process audit of the Usage and Royalty data in high-
volume contexts, but not require a process audit in low-volume 
contexts,'' and that the proposal thus ``creates a double standard 
which discriminates against DSPs vis a vis [sic] record companies.'' 
Music Reports Add'l Reply Comments at 7. A low-volume context would 
presumably be one in which it is unnecessary to examine the 
processes used to generate annual statements because it is 
relatively easy to examine the annual statements and the underlying 
data directly.
---------------------------------------------------------------------------

c. Underlying Auditing Standard
    The third and final area of disagreement relates to the 
professional standards that the CPA must employ when examining annual 
statements. Under the current rule, the CPA must certify that they have 
examined the annual statement in accordance with ``generally accepted 
auditing standards,'' or GAAS. 37 CFR 201.19(f)(6)(ii)(A). The Joint 
Commenters explained, however, that GAAS is not the most directly 
applicable standard under modern accounting practice. According to 
them, GAAS provides specific standards for the audits of corporate 
financial statements rather than the activities contemplated by Section 
115. See Joint Commenters Reply Comments at 3-4. Instead, ``[t]he 
certification required by the current regulations is more akin to the 
certification that applicable professional standards contemplate when a 
CPA completes an examination under the AICPA Attestation Standards,'' a 
different set of professional standards for CPAs. Id. at 4.\26\ 
Christian Castle reinforced this

[[Page 56204]]

point, proposing that the Office ``specify . . . that the certified 
public accountant certifying Annual Statements of Account must perform 
their certification review in accordance with the attestation standards 
designated by the Copyright Office.'' Christian L. Castle, Initial 
Comments Submitted in Response to U.S. Copyright Office's July 27, 2012 
Notice of Proposed Rulemaking at 11 (Oct. 25, 2012) (``Castle Initial 
Comments'').
---------------------------------------------------------------------------

    \26\ See also AICPA, Clarified Statements on Auditing Standards 
AU-C Sec.  200.01, http://www.aicpa.org/Research/Standards/AuditAttest/DownloadableDocuments/AU-C-00200.pdf (last updated June 
1, 2013); AICPA, Statements on Standards for Attestation Engagements 
AT Sec.  101.01, http://www.aicpa.org/Research/Standards/AuditAttest/DownloadableDocuments/AT-00101.pdf (last updated June 1, 
2013).
---------------------------------------------------------------------------

    Thus, there appears to be general agreement that the AICPA's 
``attestation standards'' are appropriate in at least some 
circumstances. Music Reports, however, proposed that our regulation 
specify the use of these attestation standards only for high-volume 
uses of the compulsory license, and even then only for the CPA's 
examination of the processes used to generate the annual statements 
(either by the licensee or a third party) and not for the examination 
of the usage and other data used in the royalty calculation. Music 
Reports Reply Comments, exh. A, at A-2 to A-3. For those other 
situations, Music Reports proposed leaving the particular standard 
open-ended, by providing that the examination must take place ``in 
accordance with the professional standards of the American Institute of 
Certified Public Accountants.'' Id., exh. A, at A-2. The Joint 
Publishers and Songwriters, in contrast, urged the specification of 
attestation standards in all circumstances. Joint Publishers and 
Songwriters Reply Comments at 15-18. And notably, the RIAA, whose 
members are typically small-scale users of compulsory licenses, 
disagreed with Music Reports, and proposed the use of the attestation 
standard for CPA examination of annual statements generated by such 
users. RIAA Reply Comments at 18.
    After full consideration of the comments on this issue, the Office 
agrees in general with the Joint Publishers and Songwriters' proposal, 
and rejects Music Reports' competing proposal. Most problematically, 
the reference to ``professional standards'' in Music Reports' proposal 
is non-specific, and could encompass examinations that are not 
especially demanding.\27\ Moreover, as the Joint Publishers and 
Songwriters convincingly explain, requiring CPAs to employ the 
attestation standards, and by further specifying that the attest 
engagement must include an ``examination'' of the annual statements 
followed by an ``opinion'' that those statements accurately reflect the 
relevant information, ``provide[s] a high level of assurance that 
compulsory licensees were complying [with] Section 115 and the 
attendant regulations.'' Joint Publishers and Songwriters Reply at 
17.\28\ The Office believes that adopting those standards is thus 
likely to fulfill Congress's overarching goal in enacting the 
certification requirement, i.e., ``to increase the protection of 
copyright proprietors against economic harm from companies which might 
refuse or fail to pay their just obligations.'' H.R. Rep. No. 94-1476, 
at 111.\29\ Accordingly, the final rule requires the use of the AICPA's 
``attestation standards'' in all circumstances, and further specifies 
that the CPA must conduct an ``examination'' and render an ``opinion'' 
regarding the annual statements under those standards.
---------------------------------------------------------------------------

    \27\ For example, CPAs can be engaged to conduct 
``compilations'' or ``reviews,'' which provide comparatively lower 
levels of service. See AICPA, What is the Difference Between a 
Compilation, a Review, and an Audit?, http://www.aicpa.org/InterestAreas/PrivateCompaniesPracticeSection/QualityServicesDelivery/KeepingUp/DownloadableDocuments/Brochure%20Customizable-%20Difference%20between%20Comp%20ReviewAudit.pdf (last visited July 
31, 2014).
    \28\ See AICPA, Statements on Standards for Attestation 
Engagements, supra note 21, Sec.  101.54, (noting that ``an attest 
engagement designed to provide a high level of assurance'' is 
``referred to as an examination''); id. Sec.  101.69 (``In an 
engagement to achieve a high level of assurance (an examination), 
the practitioner's conclusion should be expressed in the form of an 
opinion.'').
    \29\ Music Reports also asks us to provide a view of whether the 
AICPA's attestation standards require use of an ``independent'' 
auditor. See Music Reports Reply Comments at 8. The Office is not in 
a position to provide such a view.
---------------------------------------------------------------------------

    Certain commenters asked us to go even further and provide more 
detail regarding the precise manner of examination. For instance, the 
Joint Publishers and Songwriters proposed that the rule provide 
detailed guidance regarding the CPA's examination. See Joint Publishers 
and Songwriters Reply Comments at 23. Similarly, the Joint Publishers 
and Songwriters and Music Reports together urged that the Office 
specify that the CPA examination of third-party service providers take 
place under the AICPA's Statement on Standards for Attestation 
Engagements No. 16 (SOC), Type II. Songwriters Reply Comments at 18. 
Similarly, Christian Castle proposed that the Office adopt ``specific 
attestation standards.'' See Castle Initial Comments at 10.
    The Office declines to provide more detail governing the conduct of 
the CPA's examination. Among the concerns the Office has is that the 
AICPA amends or recodifies its standards with some regularity.\30\ It 
would thus be inappropriate to embed specific standards into the rule. 
Accordingly, the final rule simply provides the examination of third-
party providers should simply take place under the AICPA's attestation 
standards generally. The Office believes details of how a CPA will 
conduct its examination in accordance with the standards set forth in 
the regulations are best left to the CPA's professional judgment, and 
trusts that CPAs will choose the specific standards and procedures that 
are most appropriate for each examination.
---------------------------------------------------------------------------

    \30\ Indeed, it appears that the AICPA is currently engaged in 
an effort to clarify and recodify several of its professional 
standards, including the attestation standards. See AICPA, Proposed 
Statement on Standards for Attestation Engagements (July 24, 2013), 
http://www.aicpa.org/Research/ExposureDrafts/AccountingandAuditing/DownloadableDocuments/20130724a_ED_Attestation_Standards_1to4.pdf.
---------------------------------------------------------------------------

5. Adjustment of Timetables for Reporting
    The NPRM proposed extending the deadline for filing annual 
statements of account from three months after the close of the 
licensee's fiscal year to six months after the close of the licensee's 
fiscal year. 77 FR at 44184. The Joint Commenters agreed that the 
increased complexity of compiling annual statements of account that 
include percentage-of-revenue based royalty allocations warrants a 
deadline extension.\31\
---------------------------------------------------------------------------

    \31\ In their initial comments, the Joint Commenters explain, 
``Large-scale use of the compulsory license, particularly for 
percentage-rate usages, has made preparation and auditing of annual 
statements a complex process. In addition, it is important to 
remember that the first month of the annual statement period is 
necessarily devoted to completing the monthly accounting for the 
last month of the year, since the monthly statements can't be 
tallied until the last one is done. Two months after preparation of 
the last monthly statement is completed is not long to complete the 
whole annual statement process.'' Joint Commenters Initial Comments 
at 20.
---------------------------------------------------------------------------

    Gear Publishing, however, opposed an extension, claiming ``[t]he 
digital age is supposed to make things faster not slower'' and ``[a] 
summary of streams related to any musical work should be available at 
any time.'' Gear Publ'g Initial Comments at 17. They countered the 
proposed extension with a request that the time to produce an annual 
statement be reduced from three months to forty-five days. Id. A number 
of independent commenters also opposed the extension, claiming 
extending the deadline creates a ``new safe harbor'' which provides 
licensees with additional time to meet obligations they could have 
easily fulfilled under the existing regulations. See, e.g., Castle 
Initial Comments at 9-10.

[[Page 56205]]

    The Office concludes that the accounting requirements are 
sufficiently complex to justify extending the period for statutory 
licensees to file their annual statements from three to six months. The 
Office also believes this extended deadline will generally benefit 
copyright owners by allowing sufficient time for the robust CPA 
examination and certification contemplated by the regulations.
6. Reporting for Periods Prior to Enactment of New Regulations
    As noted, one key purpose of this rulemaking is to amend the 
existing statement-of-account regulations to reflect the CRB's 
establishment of new rate structures for DPD configurations not 
previously subject to the Section 115 license. See 37 CFR part 385. One 
question the NPRM addressed was whether statements of account that 
complied with these new accounting rules would have to be filed for 
reporting periods occurring after those rates took effect on March 1, 
2009. 77 FR at 44184. The proposed rule required the delivery of 
statements of account for any prior accounting period within 180 days 
after the new statement-of-account regulations took effect. Id.
    The Joint Commenters objected to providing statements of account 
for past reporting periods, on the ground that it would be a needless 
administrative burden. Joint Commenters Initial Comments at 21-23. They 
observed that monthly statements of account produced by the digital 
music services already take into consideration percentage-rate usages. 
Id. At the same time, they noted that with respect to annual statements 
``certain licensees making large-scale use of the compulsory license 
for percentage rate configurations have not been providing annual 
statements,'' because it was ``difficult or impracticable to do so'' in 
the absence of regulatory guidance. Id. at 23. In recognition of that 
fact, the Joint Commenters proposed a rule providing that ``when an 
annual statement for a fiscal year after March 1, 2009 was not provided 
because it was impracticable for the licensee to provide it'' the 
copyright owner may demand a statement that confirms with the new 
statement-of-account regulations. Id. Notably, no other commenter 
opposed the Joint Commenters' proposal.\32\
---------------------------------------------------------------------------

    \32\ In the only other comments the Office received on this 
aspect of the proposed rule, Gear Publishing urged that the rule had 
been confusingly drafted. Gear Publ'g Initial Comments at 17. Since 
the Office is departing substantially from the proposed rule, that 
comment is moot.
---------------------------------------------------------------------------

    After carefully weighing the issue, the Office adopts the Joint 
Commenters' approach. Based on the representation that ``[r]estating 
several years of monthly statements that have passed without objection 
would be a massing undertaking serving no useful purpose,'' the final 
rule does not require the preparation and service of compliant monthly 
statements of account for periods prior to the effective date of these 
rules. Joint Commenters Initial Comments at 23. But as suggested by the 
Joint Commenters, the final rule will allow copyright owners to request 
annual statements of account for fiscal years ending after March 1, 
2009 and before the effective date of this rule, where the copyright 
owner did not receive any annual statement of account for any 
reason.\33\
---------------------------------------------------------------------------

    \33\ The Joint Commenters' proposal would have required 
licensees to provide compliant statements for past reporting periods 
only where ``it was impracticable for the licensee to provide'' the 
statement earlier. See Joint Commenters Initial Comments, exh. A, at 
A-22. The final rule does not contain this limitation; if the annual 
statement was not provided, the reason for that failure is 
irrelevant.
---------------------------------------------------------------------------

7. Record Retention (AKA Documentation)
    In the NPRM, the Office proposed extending the existing regulations 
that require licensees to retain all records and documents necessary to 
support information set forth in annual statements of account and 
monthly statements of account from three years from the date of service 
to five years from the date of service. 77 FR at 44184-85. The 
commenters agreed in principle that it would be appropriate to extend 
the general record retention requirement, though some proposed the 
Office adopt an even longer mandatory retention period. See Joint 
Commenters Initial Comments at 24; see also Gear Publ'g Initial 
Comments at 18. The final rule adopts the Office's original proposal to 
extend the retention period from three to five years from the date of 
service.
    The final rule also includes language that requires licensees to 
retain all records and documents necessary to support information set 
forth in amended annual statements of account for five years from the 
date of service of the amended statements. This additional regulation 
is intended to alleviate the Office's concern, as expressed in the 
NPRM, regarding the timing of record retention in situations where a 
licensee files an annual statement of account prior to public 
performance rates having been set for the time period covered therein. 
77 FR at 44185.
8. Harmless Error Provision
    The NPRM noted that ``[b]ecause of the detailed requirements in the 
regulations, licensees' accounting statements may contain inadvertent 
errors.'' 77 FR at 44185. The Office accordingly sought comment on 
``the Office's authority to include a harmless error provisions and 
whether such a provision in the Statement of Account regulations would 
be useful as a way to protect licensees from inadvertent errors that do 
not materially affect the adequacy of the information provided on the 
Statement of Account.'' Id.
    The Joint Commenters favored the inclusion of such a provision, 
essentially for the reasons identified in the NPRM. Joint Commenters 
Initial Comments at 24-25. Gear Publishing, on the other hand, 
disagrees with the inclusion of a harmless error provision. They claim 
that an inquiry into whether an error was harmless ``has the potential 
to become the focus of many copyright infringement claim.'' See Gear 
Publ'g Initial Comments at 18-19. There was no dispute that the Office 
possessed the authority to adopt a harmless error rule.
    After carefully weighing the comments, the final rule provides that 
errors in statements of account that do not materially prejudice the 
rights of a copyright owner shall be deemed harmless and shall not 
render the account statement invalid or provide a basis for the 
exercise of remedies under 17 U.S.C. 115(c)(6). As the Office noted, 
the accounting regulations here require licensees to provide a detailed 
accounting of their use of the statutory license. Requiring licensees 
to provide this information serves Congress's goal of protecting 
copyright owners from ``economic harm from companies which might refuse 
or fail to pay their just obligations.'' H.R. Rep. No. 94-1476, at 111. 
But that requirement carries with it the risk that account statements 
will occasionally contain insubstantial deviations from the strictures 
of these regulations. It would be unduly severe to treat such 
inconsequential mistakes as equal to errors that result in material 
prejudice to the copyright owner.
    Indeed, as the NPRM noted, similar considerations led the Register 
to adopt a harmless error provision as part of the rules governing 
notices of intention. See 37 CFR 201.18(f); 66 FR 45241, 45243 (Aug. 
28, 2001). To Gear Publishing's point that adoption of such a rule 
would be difficult to apply in the context of infringement litigation, 
our experience with section 201.18(f) belies that concern: The Office 
is not aware of any difficulties with applying the harmless

[[Page 56206]]

error rule in the notice of intention context.
9. Confidentiality
    In the NPRM, the Office noted that the rates the CRB had originally 
proposed included provisions that would have restricted a copyright 
owner's ability to disclose the contents of statements of account 
received pursuant to Section 115. See 77 FR 29259, 29262, 29267-68 (May 
17, 2012) (proposed sections 385.12(f) and 385.22(e)). Specifically, 
the provisions stated that a ``licensee's statements of account, 
including any and all information provided by a licensee with respect 
to the computation of a subminimum, shall be maintained in confidence 
by any copyright owner, authorized representative or agent that 
receives it.'' Id. at 29262. Accordingly, under the CRB proposal, 
copyright owners and their authorized representatives or agents could 
use the statements of account only ``for purposes of reviewing the 
amounts paid by the licensee and verifying the accuracy of any such 
payments,'' and for no other purpose. Id.
    The Office observed in the NPRM that these proposed requirements 
illustrated a ``general desire among licensees and licensors for 
maintaining confidentiality of information contained in statements of 
account,'' but questioned the validity of such a ``broadly framed'' 
provision. 77 FR at 44185. Accordingly, the Office solicited comments 
regarding the Office's authority to adopt regulations that would 
require copyright owners to keep information contained in statements of 
account confidential, as well as the appropriate limits of any such 
regulations. Id. The Office did not include a confidentiality 
requirement as part of the proposed rule.
    In response to the NPRM, the Joint Commenters urged the Office to 
either allow the CRB to adopt the confidentiality provision proposed as 
part of the rates and terms for the statutory license, or to itself 
adopt an identical provision in the Office's statement-of-account 
regulations. Joint Commenters Initial Comments at 25-28. Specifically, 
the Joint Commenters noted that, in the case of percentage-rate usages, 
the statements of account would reflect ``competitively sensitive'' 
information like the licensee's overall revenues, royalty payments to 
record companies and performance rights organizations, and overall 
usage. Id. at 27. Gear Publishing, by contrast, did not believe that a 
confidentiality provision for a statutorily obtained license should be 
permitted. It stated: ``There should be no restriction on what a 
copyright owner does with their own royalty information under a 
compulsory license. Once again, if a music user wishes to secure 
confidentiality provisions then they are free to negotiate directly 
with the copyright owner to achieve such an arrangement.'' Gear Publ'g 
Initial Comments at 19.
    Since the NPRM issued and these comments were received, the Office 
has further analyzed the confidentiality issue in proceedings outside 
of, but related to, this rulemaking. On June 25, 2013, the CRB referred 
a novel material question of substantive law to the Register, inquiring 
whether the CRB is authorized to adopt regulations imposing a duty of 
confidentiality upon copyright owners where, like the proposed 
requirement, the duty is ``included in a voluntarily negotiated license 
agreement between copyright owners and licensees in a proceeding under 
section 115 of the Act.'' 78 FR 47421 (Aug. 5, 2013). The Register 
answered the CRB's question in the negative, finding the CRB lacked the 
authority under 17 U.S.C. 115(c)(3)(C) to restrict what a copyright 
owner may do with information in a statement of account after that 
statement has been prepared and served in accordance with the Office's 
regulations. Id. at 47423. As particularly relevant to this rulemaking, 
the Register noted that, as a matter of policy, ``government actors 
should err on the side of transparency'' where transparency ``serves to 
provide maximum confidence in the law for all who rely upon it, 
including those who require access to the details of license records.'' 
Id. at 47423. In addition, the Register noted the general legal 
principle ``that statutory licenses must `be construed narrowly' '' as 
applied ``against the rights of copyright owners.'' Id. at 47424 
(quoting Fame Publ'g Co. v. Ala. Custom Tape, Inc., 507 F.2d 667, 670 
(5th Cir. 1975)).
    These previously announced policy decisions dictate the outcome 
here. The competitive concerns raised by the Joint Commenters are 
insufficient to overcome the strong policy that ``in the context of 
statutory licenses, government actors should err on the side of 
transparency.'' 78 FR at 47423. Thus, the Office concludes that once 
the statements of account have been delivered to the copyright owners, 
there should be no restrictions on the copyright owners' ability to use 
the statements or disclose their contents.
    Indeed, an examination of the Joint Commenters' sweeping 
confidentiality proposal only buttresses that conclusion. The proposal 
would have restricted not only the disclosure of the statements of 
account, but also the permissible uses of those statements. 77 FR at 
29262 (providing that the statements can only be used ``for purposes of 
reviewing the amounts paid by the licensee and verifying the accuracy 
of any such payments''). As written, the proposal would also have 
barred copyright owners from disclosing the contents of the statements 
of account to other parties who were downstream beneficiaries of the 
statutory royalties (such as songwriters entitled to receive a share of 
the royalties as part of their publishing contracts). And, most 
troublingly, the Joint Commenters' proposal would have burdened 
copyright owners' ability to disclose to the public the royalties they 
received under the statutory license. The Office is particularly 
reluctant to so drastically restrict copyright owners' ability to 
freely discuss the effects of government policy.

List of Subjects

37 CFR Part 201

    Copyright.

37 CFR Part 210

    Copyright, Phonorecords, Recordings.

Final Regulations

    For the reasons set forth in the preamble, the U.S. Copyright 
Office amends 37 CFR part 201 and adds part 210 as follows:

PART 201--GENERAL PROVISIONS

0
1. The authority citation for part 201 continues to read as follows:

    Authority: 17 U.S.C. 702.

0
2. Revise paragraph (b) of Sec.  201.18, to read as follows:


Sec.  201.18  Notice of intention to obtain a compulsory license for 
making and distributing phonorecords of nondramatic musical works.

* * * * *
    (b) Agent. An agent who has been authorized to accept Notices of 
Intention in accordance with paragraph (a)(4) of this section and who 
has received a Notice of Intention on behalf of a copyright owner shall 
provide within two weeks of the receipt of that Notice of Intention the 
name and address of the copyright owner or its agent upon whom the 
person or entity intending to obtain the compulsory license shall serve 
Statements of Account and the monthly royalty in accordance with Sec.  
210.11(e) of this chapter.
* * * * *


Sec.  201.19  [Removed and reserved]

0
3. Remove and reserve Sec.  201.19.

0
4. Add part 210 to read as follows:

[[Page 56207]]

PART 210--COMPULSORY LICENSE FOR MAKING AND DISTRIBUTING PHYSICAL 
AND DIGITAL PHONORECORDS OF NONDRAMATIC MUSICAL WORKS

Subpart A--[Reserved]
Sec.
210.1-210.10 [Reserved]
Subpart B--Royalties and Statements of Account Under Compulsory License
210.11 General.
210.12 Definitions.
210.13 Accounting requirements where sales revenue is 
``recognized.''
210.14 Accounting requirements for offsetting phonorecord reserves 
with returned phonorecords.
210.15 Situations in which a compulsory licensee is barred from 
maintaining reserves.
210.16 Monthly statements of account.
210.17 Annual statements of account.
210.18 Documentation.
210.19 Harmless errors.

    Authority: 17 U.S.C. 115, 702.

Subpart A--[Reserved]


Sec. Sec.  210.1-210.10  [Reserved]

Subpart B--Royalties and Statements of Account Under Compulsory 
License


Sec.  210.11  General.

    This subpart prescribes rules for the payment of royalties and the 
preparation and service of statements of account under the compulsory 
license for the making and distribution of phonorecords of nondramatic 
musical works, including by means of a digital phonorecord delivery, 
pursuant to 17 U.S.C. 115 and the rates and terms in part 385 of this 
title.


Sec.  210.12  Definitions.

    As used in this subpart:
    (a) A Monthly Statement of Account or Monthly Statement is a 
statement accompanying monthly royalty payments identified in 17 U.S.C. 
115(c)(5), and required by that section to be filed under the 
compulsory license to make and distribute phonorecords of nondramatic 
musical works, including by means of a digital phonorecord delivery.
    (b) An Annual Statement of Account or Annual Statement is a 
statement identified in 17 U.S.C 115(c)(5), and required by that 
section to be filed under the compulsory license to make and distribute 
phonorecords of nondramatic musical works, including by means of a 
digital phonorecord delivery. Such term, when used in this rule, 
includes an Amended Annual Statement of Account filed pursuant to Sec.  
210.17(d)(2)(iii).
    (c) A digital phonorecord delivery is each individual delivery of a 
phonorecord by digital transmission of a sound recording which results 
in a specifically identifiable reproduction by or for any transmission 
recipient of a phonorecord of that sound recording, regardless of 
whether the digital transmission is also a public performance of the 
sound recording or any nondramatic musical work embodied therein. The 
reproduction of the phonorecord must be sufficiently permanent or 
stable to permit it to be perceived, reproduced, or otherwise 
communicated for a period of more than transitory duration. Such a 
phonorecord may be permanent or it may be made available to the 
transmission recipient for a limited period of time or for a specified 
number of performances. A digital phonorecord delivery includes all 
phonorecords that are made for the purpose of making the digital 
phonorecord delivery. A digital phonorecord delivery does not include 
any transmission that did not result in a specifically identifiable 
reproduction of the entire product being transmitted, and for which the 
distributor did not charge, or fully refunded, any monies that would 
otherwise be due for the relevant transmission.
    (d) Ringtone shall have the meaning given in Sec.  385.2 of this 
title.
    (e) The term copyright owner, in the case of any work having more 
than one copyright owner, means any one of the co-owners.
    (f) A compulsory licensee is a person or entity exercising the 
compulsory license to make and distribute phonorecords of nondramatic 
musical works as provided under 17 U.S.C. 115, including by means of a 
digital phonorecord delivery.
    (g) A phonorecord is considered distributed if the compulsory 
licensee has voluntarily and permanently parted with possession of the 
phonorecord, which shall occur as follows:
    (1) In the case of physical phonorecords relinquished from 
possession for purposes other than sale, at the time at which the 
compulsory licensee actually first parts with possession;
    (2) In the case of physical phonorecords relinquished from 
possession for purposes of sale without a privilege of returning unsold 
phonorecords for credit or exchange, at the time at which the 
compulsory licensee actually first parts with possession;
    (3) In the case of physical phonorecords relinquished from 
possession for purposes of sale accompanied by a privilege of returning 
unsold phonorecords for credit or exchange:
    (i) At the time when revenue from a sale of the phonorecord is 
``recognized'' by the compulsory licensee; or
    (ii) Nine months from the month in which the compulsory licensee 
actually first parted with possession, whichever occurs first. For 
these purposes, a compulsory licensee shall be considered to 
``recognize'' revenue from the sale of a phonorecord when sales revenue 
would be recognized in accordance with GAAP.
    (4) In the case of a digital phonorecord delivery, on the date that 
the phonorecord is digitally transmitted.
    (h) A phonorecord reserve comprises the number of phonorecords made 
under a particular compulsory license, if any, that have been 
relinquished from possession for purposes of sale in a given month 
accompanied by a privilege of return, as described in paragraph (g)(3) 
of this section, and that have not been considered distributed during 
the month in which the compulsory licensee actually first parted with 
their possession. The initial number of phonorecords comprising a 
phonorecord reserve shall be determined in accordance with GAAP.
    (i) A negative reserve balance comprises the aggregate number of 
phonorecords made under a particular compulsory license, if any, that 
have been relinquished from possession for purposes of sale accompanied 
by a privilege of return, as described in paragraph (g)(3) of this 
section, and that have been returned to the compulsory licensee, but 
because all available phonorecord reserves have been eliminated, have 
not been used to reduce a phonorecord reserve.
    (j) GAAP means U.S. Generally Accepted Accounting Principles, 
except that if the U.S. Securities and Exchange Commission permits or 
requires entities with securities that are publicly traded in the U.S. 
to employ International Financial Reporting Standards, as issued by the 
International Accounting Standards Board, or as accepted by the 
Securities and Exchange Commission if different from that issued by the 
International Accounting Standards Board, in lieu of Generally Accepted 
Accounting Principles, then an entity may employ International 
Financial Reporting Standards as ``GAAP'' for purposes of this subpart.


Sec.  210.13  Accounting requirements where sales revenue is 
``recognized.''

    Where under Sec.  210.12(g)(3)(i), revenue from the sale of 
phonorecords is ``recognized'' during any month after the month in 
which the compulsory

[[Page 56208]]

licensee actually first parted with their possession, said compulsory 
licensee shall reduce particular phonorecord reserves by the number of 
phonorecords for which revenue is being ``recognized,'' as follows:
    (a) If the number of phonorecords for which revenue is being 
``recognized'' is smaller than the number of phonorecords comprising 
the earliest eligible phonorecord reserve, this phonorecord reserve 
shall be reduced by the number of phonorecords for which revenue is 
being ``recognized.'' Subject to the time limitations of Sec.  
210.12(g)(3)(ii), the number of phonorecords remaining in this reserve 
shall be available for use in subsequent months.
    (b) If the number of phonorecords for which revenue is being 
``recognized'' is greater than the number of phonorecords comprising 
the earliest eligible phonorecord reserve but less than the total 
number of phonorecords comprising all eligible phonorecord reserves, 
the compulsory licensee shall first eliminate those phonorecord 
reserves, beginning with the earliest eligible phonorecord reserve and 
continuing to the next succeeding phonorecord reserves, that are 
completely offset by phonorecords for which revenue is being 
``recognized.'' Said compulsory licensee shall then reduce the next 
succeeding phonorecord reserve by the number of phonorecords for which 
revenue is being ``recognized'' that have not been used to eliminate a 
phonorecord reserve. Subject to the time limitations of Sec.  
210.12(g)(3)(ii), the number of phonorecords remaining in this reserve 
shall be available for use in subsequent months.
    (c) If the number of phonorecords for which revenue is being 
``recognized'' equals the number of phonorecords comprising all 
eligible phonorecord reserves, the person or entity exercising the 
compulsory license shall eliminate all of the phonorecord reserves.
    (d) Digital phonorecord deliveries shall not be considered as 
accompanied by a privilege of return as described in Sec.  
210.12(g)(3), and the compulsory licensee shall not take digital 
phonorecord deliveries into account in establishing phonorecord 
reserves.


Sec.  210.14  Accounting requirements for offsetting phonorecord 
reserves with returned phonorecords.

    (a) In the case of a phonorecord that has been relinquished from 
possession for purposes of sale accompanied by a privilege of return, 
as described in Sec.  210.12(g)(3), where the phonorecord is returned 
to the compulsory licensee for credit or exchange before said 
compulsory licensee is considered to have ``voluntarily and permanently 
parted with possession'' of the phonorecord as described in Sec.  
210.12(g), the compulsory licensee may use such phonorecord to reduce a 
``phonorecord reserve,'' as defined in Sec.  210.12(h).
    (b) In such cases, the compulsory licensee shall reduce particular 
phonorecord reserves by the number of phonorecords that are returned 
during the month covered by the Monthly Statement of Account in the 
following manner:
    (1) If the number of phonorecords that are returned during the 
month covered by the Monthly Statement is smaller than the number 
comprising the earliest eligible phonorecord reserve, the compulsory 
licensee shall reduce this phonorecord reserve by the total number of 
returned phonorecords. Subject to the time limitations in Sec.  
210.12(g)(3)(ii), the number of phonorecords remaining in this reserve 
shall be available for use in subsequent months.
    (2) If the number of phonorecords that are returned during the 
month covered by the Monthly Statement is greater than the number of 
phonorecords comprising the earliest eligible phonorecord reserve but 
less than the total number of phonorecords comprising all eligible 
phonorecord reserves, the compulsory licensee shall first eliminate 
those phonorecord reserves, beginning with the earliest eligible 
phonorecord reserve, and continuing to the next succeeding phonorecord 
reserves, that are completely offset by returned phonorecords. Said 
compulsory licensee shall then reduce the next succeeding phonorecord 
reserve by the number of returned phonorecords that have not been used 
to eliminate a phonorecord reserve. Subject to the time limitations in 
Sec.  210.12(g)(3)(ii), the number of phonorecords remaining in this 
reserve shall be available for use in subsequent months.
    (3) If the number of phonorecords that are returned during the 
month covered by the Monthly Statement is equal to or is greater than 
the total number of phonorecords comprising all eligible phonorecord 
reserves, the compulsory licensee shall eliminate all eligible 
phonorecord reserves. Where said number is greater than the total 
number of phonorecords comprising all eligible phonorecord reserves, 
said compulsory licensee shall establish a ``negative reserve 
balance,'' as defined in Sec.  210.12(i).
    (c) Except where a negative reserve balance exists, a separate and 
distinct phonorecord reserve shall be established for each month during 
which the compulsory licensee relinquishes phonorecords from possession 
for purposes of sale accompanied by a privilege of return, as described 
in Sec.  210.12(g)(3). In accordance with Sec.  210.12(g)(3)(ii), any 
phonorecord remaining in a particular phonorecord reserve nine months 
from the month in which the particular reserve was established shall be 
considered ``distributed''; at that point, the particular monthly 
phonorecord reserve shall lapse and royalties for the phonorecords 
remaining in it shall be paid as provided in Sec.  210.16(d)(2).
    (d) Where a negative reserve balance exists, the aggregate total of 
phonorecords comprising it shall be accumulated into a single balance 
rather than being separated into distinct monthly balances. Following 
the establishment of a negative reserve balance, any phonorecords 
relinquished from possession by the compulsory licensee for purposes of 
sale or otherwise, shall be credited against such negative balance, and 
the negative reserve balance shall be reduced accordingly. Digital 
phonorecord deliveries may be credited against such negative reserve 
balance, but only if such digital phonorecord deliveries have the same 
royalty rate as physical phonorecords under part 385 of this title. The 
nine-month limit provided in Sec.  210.12(g)(3)(ii) shall have no 
effect upon a negative reserve balance; where a negative reserve 
balance exists, relinquishment from possession of a phonorecord by the 
compulsory licensee at any time shall be used to reduce such balance, 
and such phonorecord shall not be considered ``distributed'' within the 
meaning of Sec.  210.12(g).
    (e) In no case shall a phonorecord reserve be established while a 
negative reserve balance is in existence; conversely, in no case shall 
a negative reserve balance be established before all available 
phonorecord reserves have been eliminated.


Sec.  210.15  Situations in which a compulsory licensee is barred from 
maintaining reserves.

    Notwithstanding any other provisions of this section, in any case 
where, within three years before the phonorecord was relinquished from 
possession, the compulsory licensee has had final judgment entered 
against it for failure to pay royalties for the reproduction of 
copyrighted music on phonorecords, or within such period has been 
definitively found in any proceeding involving bankruptcy, insolvency, 
receivership, assignment for

[[Page 56209]]

the benefit of creditors, or similar action, to have failed to pay such 
royalties, that compulsory licensee shall be considered to have 
``Permanently parted with possession'' of a phonorecord made under the 
license at the time at which that compulsory licensee actually first 
parts with possession. For these purposes the compulsory licensee shall 
include:
    (a) In the case of any corporation, the corporation or any 
director, officer, or beneficial owner of twenty-five percent (25%) or 
more of the outstanding securities of the corporation;
    (b) In all other cases, any entity or individual owning a 
beneficial interest of twenty-five percent (25%) or more in the entity 
exercising the compulsory license.


Sec.  210.16  Monthly statements of account.

    (a) Forms. The Copyright Office does not provide printed forms for 
the use of persons serving Monthly Statements of Account.
    (b) General content. A Monthly Statement of Account shall be 
clearly and prominently identified as a ``Monthly Statement of Account 
Under Compulsory License for Making and Distributing Phonorecords,'' 
and shall include a clear statement of the following information:
    (1) The period (month and year) covered by the Monthly Statement.
    (2) The full legal name of the compulsory licensee, together with 
all fictitious or assumed names used by such person or entity for the 
purpose of conducting the business of making and distributing 
phonorecords.
    (3) The full address, including a specific number and street name 
or rural route, of the place of business of the compulsory licensee. A 
post office box or similar designation will not be sufficient for this 
purpose, except where it is the only address that can be used in that 
geographic location.
    (4) For each nondramatic musical work that is owned by the same 
copyright owner being served with the Monthly Statement and that is 
embodied in phonorecords covered by the compulsory license, a detailed 
statement of all of the information called for in paragraph (c) of this 
section.
    (5) The total royalty payable to the relevant copyright owner for 
the month covered by the Monthly Statement, computed in accordance with 
the requirements of this section and the formula specified in paragraph 
(d) of this section, including detailed information regarding how the 
royalty was computed.
    (6) The amount of late fees, if applicable, included in the payment 
associated with the Monthly Statement.
    (7) In any case where the compulsory licensee falls within the 
provisions of Sec.  210.15, a clear description of the action or 
proceeding involved, including the date of the final judgment or 
definitive finding described in that section.
    (8) Detailed instructions on how to request records of any 
promotional uses of the copyright owner's works that are required to be 
maintained or provided under Sec.  385.14 or Sec.  385.24 of this 
title, or other applicable provision, including, where applicable, 
records required to be maintained or provided by any third parties that 
were authorized by the compulsory licensee to engage in promotional 
uses during any part of the month. If this information is provided, 
Monthly Statements need not reflect phonorecords subject to the 
promotional royalty rate provided in Sec.  385.14 or Sec.  385.24 of 
this title, or any similar promotional royalty rate of zero that may be 
provided in part 385 of this title.
    (c) Specific content of monthly statements--(1) Accounting of 
phonorecords subject to a cents rate royalty structure. The information 
called for by paragraph (b)(4) of this section shall, with respect to 
each nondramatic musical work as to which the compulsory licensee has 
made and distributed phonorecords subject to part 385, subpart A of 
this title or any other provisions requiring computation of applicable 
royalties on a cents-per-unit basis, include a separate listing of each 
of the following items of information:
    (i) The number of phonorecords made during the month covered by the 
Monthly Statement.
    (ii) The number of phonorecords that, during the month covered by 
the Monthly Statement and regardless of when made, were either:
    (A) Relinquished from possession for purposes other than sale;
    (B) Relinquished from possession for purposes of sale without any 
privilege of returning unsold phonorecords for credit or exchange;
    (C) Relinquished from possession for purposes of sale accompanied 
by a privilege of returning unsold phonorecords for credit or exchange;
    (D) Returned to the compulsory licensee for credit or exchange; or
    (E) Placed in a phonorecord reserve (except that if a negative 
reserve balance exists give either the number of phonorecords added to 
the negative reserve balance, or the number of phonorecords 
relinquished from possession that have been used to reduce the negative 
reserve balance).
    (iii) The number of phonorecords, regardless of when made, that 
were relinquished from possession during a month earlier than the month 
covered by the Monthly Statement but that, during the month covered by 
the Monthly Statement either have had revenue from their sale 
``recognized'' under Sec.  210.12(g)(3)(i), or were comprised in a 
phonorecord reserve that lapsed after nine months under Sec.  
210.12(g)(3)(ii).
    (iv) The per unit statutory royalty rate applicable to the relevant 
configuration; and
    (v) The total royalty payable for the month covered by the Monthly 
Statement (i.e., the result in paragraph (d)(2)(v) of this section) for 
the item described by the set of information called for, and broken 
down as required, by paragraph (c)(1) of this section.
    (vi) The phonorecord identification information required by 
paragraph (a)(3) of this section.
    (2) Accounting of phonorecords subject to a percentage rate royalty 
structure. The information called for by paragraph (b)(4) of this 
section shall, with respect to each nondramatic musical work as to 
which the compulsory licensee has made and distributed phonorecords 
subject to part 385, subparts B or C of this title, or any other 
provisions requiring computation of applicable royalties on a 
percentage-rate basis, include a detailed and step-by-step accounting 
of the calculation of royalties under Sec.  385.12, Sec.  385.22, or 
other provisions of part 385 of this title as applicable, sufficient to 
allow the copyright owner to assess the manner in which the licensee 
determined the royalty owed and the accuracy of the royalty 
calculations, including but not limited to the following information:
    (i) The number of plays, constructive plays, or other payable 
units, of the relevant sound recording for the month covered by the 
Monthly Statement for the relevant offering.
    (ii) The total royalty payable for the month for the item described 
by the set of information called for, and broken down as required, by 
paragraph (c)(3) of this section (i.e., the per-work royalty allocation 
for the relevant sound recording and offering).
    (iii) The phonorecord identification information required by 
paragraph (c)(3) of this section.
    (3) Identification of phonorecords in monthly statements. The 
information required by this paragraph shall include, and if necessary 
shall be broken down to identify separately, the following:

[[Page 56210]]

    (i) The title of the nondramatic musical work subject to compulsory 
license.
    (ii) A reference number or code identifying the relevant Notice of 
Intention, if the compulsory licensee chose to include such a number or 
code on its relevant Notice of Intention for the compulsory license.
    (iii) The International Standard Recording Code (ISRC) associated 
with the relevant sound recording, if known, and at least one of the 
following, as applicable and available for tracking sales and/or usage:
    (A) The catalog number or numbers and label name or names, 
associated with the phonorecords;
    (B) The Universal Product Code (UPC) or similar code used on or 
associated with the phonorecords; or
    (C) The sound recording identification number assigned by the 
compulsory licensee or a third-party distributor to the relevant sound 
recording.
    (iv) The names of the principal recording artist or group engaged 
in rendering the performances fixed on the phonorecords.
    (v) The playing time of the relevant sound recording, except that 
playing time is not required in the case of ringtones or licensed 
activity to which no overtime adjustment is applicable.
    (vi) If the compulsory licensee chooses to allocate its payment 
between co-owners of the copyright in the nondramatic musical work, as 
described in paragraph (g)(1) of this section, and thus pays the 
copyright owner (or agent) receiving the statement less than one 
hundred percent of the applicable royalty, the percentage share paid.
    (vii) The names of the writer or writers of the nondramatic musical 
work, or the International Standard Name Identifiers (ISNIs) or other 
unique identifier of the writer or writers, if known.
    (viii) The International Standard Musical Work Code (ISWC) or other 
unique identifier for the nondramatic musical work, if known.
    (ix) Identification of the relevant phonorecord configuration (for 
example: compact disc, permanent digital download, ringtone) or 
offering (for example: limited download, music bundle) for which the 
royalty was calculated, including, if applicable and except for 
physical phonorecords, the name of the third-party distributor of the 
configuration or offering.
    (d) Royalty payment and accounting--(1) In general. The total 
royalty called for by paragraph (b)(5) of this section shall be 
computed so as to include every phonorecord ``distributed'' during the 
month covered by the Monthly Statement.
    (2) Phonorecords subject to a cents rate royalty structure. For 
phonorecords subject to part 385, subpart A of this title, or any other 
applicable royalties computed on a cents-per-unit basis, the amount of 
the royalty payment shall be calculated as follows:
    (i) Step 1: Compute the number of phonorecords shipped for sale 
with a privilege of return. This is the total of phonorecords that, 
during the month covered by the Monthly Statement, were relinquished 
from possession by the compulsory licensee, accompanied by the 
privilege of returning unsold phonorecords to the compulsory licensee 
for credit or exchange. This total does not include:
    (A) Any phonorecords relinquished from possession by the compulsory 
licensee for purposes of sale without the privilege of return; and
    (B) Any phonorecords relinquished from possession for purposes 
other than sale.
    (ii) Step 2: Subtract the number of phonorecords reserved. This 
involves deducting, from the subtotal arrived at in Step 1, the number 
of phonorecords that have been placed in the phonorecord reserve for 
the month covered by the Monthly Statement. The number of phonorecords 
reserved is determined by multiplying the subtotal from Step 1 by the 
percentage reserve level established under GAAP. This step should be 
skipped by a compulsory licensee barred from maintaining reserves under 
Sec.  210.15.
    (iii) Step 3: Add the total of all phonorecords that were shipped 
during the month and were not counted in Step 1. This total is the sum 
of two figures:
    (A) The number of phonorecords that, during the month covered by 
the Monthly Statement, were relinquished from possession by the 
compulsory licensee for purposes of sale, without the privilege of 
returning unsold phonorecords to the compulsory licensee for credit or 
exchange; and
    (B) The number of phonorecords relinquished from possession by the 
compulsory licensee, during the month covered by the Monthly Statement, 
for purposes other than sale.
    (iv) Step 4: Make any necessary adjustments for sales revenue 
``recognized,'' lapsed reserves, or reduction of negative reserve 
balance during the month. If necessary, this step involves adding to or 
subtracting from the subtotal arrived at in Step 3 on the basis of 
three possible types of adjustments:
    (A) Sales revenue ``recognized.'' If, in the month covered by the 
Monthly Statement, the compulsory licensee ``recognized'' revenue from 
the sale of phonorecords that had been relinquished from possession in 
an earlier month, the number of such phonorecords is added to the Step 
3 subtotal.
    (B) Lapsed reserves. If, in the month covered by the Monthly 
Statement, there are any phonorecords remaining in the phonorecord 
reserve for the ninth previous month (that is, any phonorecord reserves 
from the ninth previous month that have not been offset under FOFI, the 
first-out-first-in accounting convention, by actual returns during the 
intervening months), the reserve lapses and the number of phonorecords 
in it is added to the Step 3 subtotal.
    (C) Reduction of negative reserve balance. If, in the month covered 
by the Monthly Statement, the aggregate reserve balance for all 
previous months is a negative amount, the number of phonorecords 
relinquished from possession by the compulsory licensee during that 
month and used to reduce the negative reserve balance is subtracted 
from the Step 3 subtotal.
    (v) Step 5: Multiply by the statutory royalty rate. The total 
monthly royalty payment is obtained by multiplying the subtotal from 
Step 3, as adjusted if necessary by Step 4, by the statutory royalty 
rate set forth in Sec.  385.3 or other provisions of part 385 of this 
title as applicable.
    (3) Phonorecords subject to a percentage rate royalty structure. 
For phonorecords subject to part 385, subparts B or C of this title, or 
any other applicable royalties computed on a percentage-rate basis, the 
amount of the royalty payment shall be calculated as provided in Sec.  
385.12, Sec.  385.22, or other provisions of part 385 of this title as 
applicable. The calculations shall be made in good faith and on the 
basis of the best knowledge, information, and belief of the licensee at 
the time payment is due, and subject to the additional accounting and 
certification requirements of 17 U.S.C. 115(c)(5) and this section. The 
following additional provisions shall also apply:
    (i) A licensee may, in cases where the final public performance 
royalty has not yet been determined, compute the public performance 
royalty component based on the interim public performance royalty rate, 
if established; or alternatively, on a reasonable estimation of the 
expected royalties to be paid in accordance with GAAP. Royalty payments 
based on anticipated payments or interim public performance royalty 
rates must be reconciled on the Annual Statement of Account, or by

[[Page 56211]]

complying with Sec.  210.17(d)(2)(iii) governing Amended Annual 
Statements of Account.
    (ii) When calculating the per-work royalty allocation for each 
work, as described in Sec.  385.12(b)(4), Sec.  385.22(b)(3), or any 
similar provisions of part 385 of this title as applicable, an actual 
or constructive per-play allocation is to be calculated to at least the 
hundredth of a cent (i.e., to at least four decimal places).
    (e) Clear statements. The information required by paragraphs (b) 
and (c) of this section requires intelligible, legible, and unambiguous 
statements in the Monthly Statements of Account without incorporation 
of facts or information contained in other documents or records.
    (f) Certification. (1) Each Monthly Statement of Account shall be 
accompanied by:
    (i) The printed or typewritten name of the person who is signing 
and certifying the Monthly Statement of Account.
    (ii) A signature, which in the case of a compulsory licensee that 
is a corporation or partnership, shall be the signature of a duly 
authorized officer of the corporation or of a partner.
    (iii) The date of signature and certification.
    (iv) If the compulsory licensee is a corporation or partnership, 
the title or official position held in the partnership or corporation 
by the person who is signing and certifying the Monthly Statement of 
Account.
    (v) One of the following statements:
    (A) I certify that (1) I am duly authorized to sign this Monthly 
Statement of Account on behalf of the compulsory licensee; (2) I have 
examined this Monthly Statement of Account; and (3) all statements of 
fact contained herein are true, complete, and correct to the best of my 
knowledge, information, and belief, and are made in good faith; or
    (B) I certify that (1) I am duly authorized to sign this Monthly 
Statement of Account on behalf of the compulsory licensee, (2) I have 
prepared or supervised the preparation of the data used by the 
compulsory licensee and/or its agent to generate this Monthly Statement 
of Account, (3) such data is true, complete, and correct to the best of 
my knowledge, information, and belief, and was prepared in good faith, 
and (4) this Monthly Statement of Account was prepared by the 
compulsory licensee and/or its agent using processes and internal 
controls that were subject to an examination, during the past year, by 
a licensed Certified Public Accountant in accordance with the 
attestation standards established by the American Institute of 
Certified Public Accountants, the opinion of whom was that the 
processes and internal controls were suitably designed to generate 
monthly statements that accurately reflect, in all material respects, 
the compulsory licensee's usage of musical works, the statutory 
royalties applicable thereto, and any other data that is necessary for 
the proper calculation of the statutory royalties in accordance with 17 
U.S.C. 115 and applicable regulations.
    (2) If the Monthly Statement of Account is served by mail or by 
reputable courier service, certification of the Monthly Statement of 
Account by the compulsory licensee shall be made by handwritten 
signature. If the Monthly Statement of Account is served 
electronically, certification of the Monthly Statement of Account by 
the compulsory licensee shall be made by electronic signature as 
defined in section 7006(5) of title 15 of the United States Code.
    (g) Service. (1) The service of a Monthly Statement of Account on a 
copyright owner under this subpart may be accomplished by means of 
service on either the copyright owner or an agent of the copyright 
owner with authority to receive Statements of Account on behalf of the 
copyright owner. In the case where the work has more than one copyright 
owner, the service of a Statement of Account on at least one co-owner 
or upon an agent of at least one of the co-owners shall be sufficient 
with respect to all co-owners. The compulsory licensee may choose to 
allocate its payment between co-owners. In such a case the compulsory 
licensee shall provide each co-owner (or its agent) a Monthly Statement 
reflecting the percentage share paid to that co-owner. Each Monthly 
Statement of Account shall be served on the copyright owner or the 
agent to whom or which it is directed by mail, by reputable courier 
service, or by electronic delivery as set forth in paragraph (g)(2) of 
this section on or before the 20th day of the immediately succeeding 
month. The royalty payment for a month also shall be served on or 
before the 20th day of the immediately succeeding month. The Monthly 
Statement and payment may be sent together or separately, but if sent 
separately, the payment must include information reasonably sufficient 
to allow the payee to match the Monthly Statement to the payment. 
However, in the case where the compulsory licensee has served its 
Notice of Intention upon an agent of the copyright owner pursuant to 
Sec.  201.18 of this chapter, the compulsory licensee is not required 
to serve Monthly Statements of Account or make any royalty payments 
until the compulsory licensee receives from the agent with authority to 
receive the Notice of Intention notice of the name and address of the 
copyright owner or its agent upon whom the compulsory licensee shall 
serve Monthly Statements of Account and the monthly royalty fees. Upon 
receipt of this information, the compulsory licensee shall serve 
Monthly Statements of Account and all royalty fees covering the 
intervening period upon the person or entity identified by the agent 
with authority to receive the Notice of Intention by or before the 20th 
day of the month following receipt of the notification. It shall not be 
necessary to file a copy of the Monthly Statement in the Copyright 
Office.
    (2) A copyright owner or authorized agent may send a licensee a 
demand that Monthly Statements of Account be submitted in a readily 
accessible electronic format consistent with prevailing industry 
practices applicable to comparable electronic delivery of comparable 
financial information.
    (3) When a compulsory licensee receives a request to deliver or 
make available Monthly Statements of Account in electronic form, or a 
request to revert back to service by mail or reputable courier service, 
the compulsory licensee shall make such a change effective with the 
first accounting period ending at least 30 days after the compulsory 
licensee's receipt of the request and any information (such as a postal 
or email address, as the case may be) that is necessary for the 
compulsory licensee to make the change.
    (4)(i) In any case where a Monthly Statement of Account is sent by 
mail or reputable courier service and the Monthly Statement of Account 
is returned to the sender because the copyright owner or agent is no 
longer located at that address or has refused to accept delivery, or 
the Monthly Statement of Account is sent by electronic mail and is 
undeliverable, or in any case where an address for the copyright owner 
is not known, the Monthly Statement of Account, together with any 
evidence of mailing or attempted delivery by courier service or 
electronic mail, may be filed in the Licensing Division of the 
Copyright Office. Any Monthly Statement of Account submitted for filing 
in the Copyright Office shall be accompanied by a brief statement of 
the reason why it was not served on the copyright owner. A written 
acknowledgment of receipt and filing will be provided to the sender.

[[Page 56212]]

    (ii) The Copyright Office will not accept any royalty fees 
submitted with Monthly Statements of Account under this section.
    (iii) Neither the filing of a Monthly Statement of Account in the 
Copyright Office, nor the failure to file such Monthly Statement, shall 
have effect other than that which may be attributed to it by a court of 
competent jurisdiction.
    (iv) No filing fee will be required in the case of Monthly 
Statements of Account submitted to the Copyright Office under this 
section. Upon request and payment of the fee specified in Sec.  
201.3(e) of this chapter, a Certificate of Filing will be provided to 
the sender.
    (5) Subject to paragraph (g)(6) of this section, a separate Monthly 
Statement of Account shall be served for each month during which there 
is any activity relevant to the payment of royalties under 17 U.S.C. 
115. The Annual Statement of Account described in Sec.  210.17 of this 
subpart does not replace any Monthly Statement of Account.
    (6) Royalties under 17 U.S.C. 115 shall not be considered payable, 
and no Monthly Statement of Account shall be required, until the 
compulsory licensee's cumulative unpaid royalties for the copyright 
owner equal at least one cent. Moreover, in any case in which the 
cumulative unpaid royalties under 17 U.S.C. 115 that would otherwise be 
payable by the compulsory licensee to the copyright owner are less than 
$5, and the copyright owner has not notified the compulsory licensee in 
writing that it wishes to receive Monthly Statements of Account 
reflecting payments of less than $5, the compulsory licensee may choose 
to defer the payment date for such royalties and provide no Monthly 
Statements of Account until the earlier of the time for rendering the 
Monthly Statement of Account for the month in which the compulsory 
licensee's cumulative unpaid royalties under section 17 U.S.C. 115 for 
the copyright owner exceed $5 or the time for rendering the Annual 
Statement of Account, at which time the compulsory licensee may provide 
one statement and payment covering the entire period for which royalty 
payments were deferred.
    (7) If the compulsory licensee is required, under applicable tax 
law and regulations, to make backup withholding from its payments 
required hereunder, the compulsory licensee shall indicate the amount 
of such withholding on the Monthly Statement or on or with the payment.
    (8) If a Monthly Statement of Account is sent by certified mail or 
registered mail, a mailing receipt shall be sufficient to prove that 
service was timely. If a Monthly Statement of Account is sent by a 
reputable courier, documentation from the courier showing the first 
date of attempted delivery shall be sufficient to prove that service 
was timely. If a Monthly Statement of Account or a link thereto is sent 
by electronic mail, a return receipt shall be sufficient to prove that 
service was timely. In the absence of the foregoing, the compulsory 
licensee shall bear the burden of proving that the Monthly Statement of 
Account was served in a timely manner.


Sec.  210.17  Annual statements of account.

    (a) Forms. The Copyright Office does not provide printed forms for 
the use of persons serving Annual Statements of Account.
    (b) Annual period. Any Annual Statement of Account shall cover the 
full fiscal year of the compulsory licensee.
    (c) General content. An Annual Statement of Account shall be 
clearly and prominently identified as an ``Annual Statement of Account 
Under Compulsory License for Making and Distributing Phonorecords,'' 
and shall include a clear statement of the following information:
    (1) The fiscal year covered by the Annual Statement of Account.
    (2) The full legal name of the compulsory licensee, together with 
all fictitious or assumed names used by such person or entity for the 
purpose of conducting the business of making and distributing 
phonorecords.
    (3) If the compulsory licensee is a business organization, the name 
and title of the chief executive officer, managing partner, sole 
proprietor or other person similarly responsible for the management of 
such entity.
    (4) The full address, including a specific number and street name 
or rural route, or the place of business of the compulsory licensee (a 
post office box or similar designation will not be sufficient for this 
purpose except where it is the only address that can be used in that 
geographic location).
    (5) For each nondramatic musical work that is owned by the same 
copyright owner being served with the Annual Statement and that is 
embodied in phonorecords covered by the compulsory license, a detailed 
statement of all of the information called for in paragraph (d) of this 
section.
    (6) The total royalty payable for the fiscal year covered by the 
Annual Statement computed in accordance with the requirements of Sec.  
210.16, and, in the case of offerings for which royalties are 
calculated pursuant to part 385, subparts B or C of this title, or any 
other provision requiring computation of applicable royalties on a 
percentage-rate basis, calculations showing in detail how the royalty 
was computed (for these purposes, the applicable royalty as specified 
in part 385, subpart A of this title shall be payable for every 
phonorecord ``distributed'' during the fiscal year covered by the 
Annual Statement).
    (7) The total sum paid under Monthly Statements of Account by the 
compulsory licensee to the copyright owner being served with the Annual 
Statement during the fiscal year covered by the Annual Statement.
    (8) In any case where the compulsory license falls within the 
provisions of Sec.  210.15, a clear description of the action or 
proceeding involved, including the date of the final judgment or 
definitive finding described in that section.
    (9) Any late fees, if applicable, included in any payment 
associated with the Annual Statement.
    (d) Specific content of annual statements--(1) Accounting of 
phonorecords subject to a cents rate royalty structure. The information 
called for by paragraph (c)(5) of this section shall, with respect to 
each nondramatic musical work as to which the compulsory licensee has 
made and distributed phonorecords subject to part 385, subpart A of 
this title, or any other provision requiring computation of applicable 
royalties on a cents-per-unit basis, include a separate listing of each 
of the following items of information:
    (i) The number of phonorecords made through the end of the fiscal 
year covered by the Annual Statement, including any made during earlier 
years.
    (ii) The number of phonorecords which have never been relinquished 
from possession of the compulsory licensee through the end of the 
fiscal year covered by the Annual Statement.
    (iii) The number of phonorecords involuntarily relinquished from 
possession (as through fire or theft) of the compulsory licensee during 
the fiscal year covered by the Annual Statement and any earlier years, 
together with a description of the facts of such involuntary 
relinquishment.
    (iv) The number of phonorecords ``distributed'' by the compulsory 
licensee during all years before the fiscal year covered by the Annual 
Statement.
    (v) The number of phonorecords relinquished from possession of the 
compulsory licensee for purposes of sale during the fiscal year covered 
by the Annual Statement accompanied by a

[[Page 56213]]

privilege of returning unsold records for credit or exchange, but not 
``distributed'' by the end of that year.
    (vi) The number of phonorecords ``distributed'' by the compulsory 
licensee during the fiscal year covered by the Annual Statement.
    (vii) The per unit statutory royalty rate applicable to the 
relevant configuration.
    (viii) The total royalty payable for the fiscal year covered by the 
Annual Statement for the item described by the set of information 
called for, and broken down as required, by this paragraph (d)(1).
    (ix) The phonorecord identification information required by 
paragraph (d)(3) of this section.
    (2) Accounting of phonorecords subject to a percentage rate royalty 
structure. (i) The information called for by paragraph (c)(5) of this 
section shall identify each offering for which royalties are to be 
calculated separately and, with respect to each nondramatic musical 
work as to which the compulsory licensee has made and distributed 
phonorecords subject to part 385, subparts B or C of this title, or any 
other provision requiring computation of applicable royalties on a 
percentage-rate basis, include the number of plays, constructive plays, 
or other payable units during the fiscal year covered by the Annual 
Statement, together with, and which if necessary shall be broken down 
to identify separately, the following:
    (A) The total royalty payable for the fiscal year for the item 
described by the set of information called for, and broken down as 
required, by paragraph (d)(3) of this section (i.e., the per-work 
royalty allocation for the relevant sound recording and offering).
    (B) The phonorecord identification information required by 
paragraph (d)(3) of this section.
    (ii) If the information given under paragraph (d)(2)(i) of this 
section does not reconcile, the Annual Statement shall also include a 
clear and detailed explanation of the difference.
    (iii) In any case where a licensee serves an Annual Statement of 
Account based on anticipated payments or interim public performance 
royalty rates prior to the final determination of final public 
performance royalties for all musical works used by the service in the 
relevant fiscal year, the licensee shall serve an Amended Annual 
Statement of Account within six months from the date such public 
performance royalties have been established. The Amended Annual 
Statement of Account shall recalculate the royalty fees reported on the 
relevant Annual Statement of Account to adjust for any change to the 
public performance rate used to calculate the royalties reported. 
Service shall be made in accordance with paragraph (g) of this section. 
Certification of the Amended Annual Statement shall be made in 
accordance with paragraph (f) of this section, except that the CPA 
examination under paragraph (f)(2) of this section may be limited to 
the licensee's recalculation of royalty fees in accordance with this 
paragraph.
    (3) Identification of phonorecords in annual statements. The 
information required by this paragraph shall include, and if necessary 
shall be broken down to identify separately, the following:
    (i) The title of the nondramatic musical work subject to compulsory 
license.
    (ii) A reference number or code identifying the relevant Notice of 
Intention, if the compulsory licensee chose to include such a number or 
code on its relevant Notice of Intention for the compulsory license.
    (iii) The International Standard Recording Code (ISRC) associated 
with the relevant sound recording, if known; and at least one of the 
following, as applicable and available for tracking sales and/or usage:
    (A) The catalog number or numbers and label name or names, used on 
or associated with the phonorecords;
    (B) The Universal Product Code (UPC) or similar code used on or 
associated with the phonorecords; or
    (C) The sound recording identification number assigned by the 
compulsory licensee or a third-party distributor to the relevant sound 
recording;
    (iv) The names of the principal recording artist or group engaged 
in rendering the performances fixed on the phonorecords.
    (v) The playing time of the relevant sound recording, except that 
playing time is not required in the case of ringtones or licensed 
activity to which no overtime adjustment is applicable.
    (vi) If the compulsory licensee chooses to allocate its payments 
between co-owners of the copyright in the nondramatic musical work as 
described in paragraph (g)(1) of Sec.  210.16, and thus pays the 
copyright owner (or agent) receiving the statement less than one 
hundred percent of the applicable royalty, the percentage share paid.
    (vii) The names for the writer or writers of the nondramatic 
musical work, or the International Standard Name Identifiers (ISNIs) or 
other unique identifier of the writer or writers, if known.
    (viii) The International Standard Work Code (ISWC) or other unique 
identifier for the nondramatic musical work, if known.
    (ix) Identification of the relevant phonorecord configuration (for 
example: Compact disc, permanent digital download, ringtone) or 
offering (for example: Limited download, music bundle) for which the 
royalty was calculated, including, if applicable and except for 
physical phonorecords, the name of the third-party distributor of the 
configuration or offering.
    (e) Clear statement. The information required by paragraph (c) of 
this section requires intelligible, legible, and unambiguous statements 
in the Annual Statement of Account without incorporation by reference 
of facts or information contained in other documents or records.
    (f) Certification. (1) Each Annual Statement of Account shall be 
accompanied by:
    (i) The printed or typewritten name of the person who is signing 
the Annual Statement of Account on behalf of the compulsory licensee.
    (ii) A signature, which in the case of a compulsory licensee that 
is a corporation or partnership, shall be the signature of a duly 
authorized officer of the corporation or of a partner.
    (iii) The date of signature.
    (iv) If the compulsory licensee is a corporation or partnership, 
the title or official position held in the partnership or corporation 
by the person signing the Annual Statement of Account.
    (v) The following statement: I am duly authorized to sign this 
Annual Statement of Account on behalf of the compulsory licensee.
    (2) Each Annual Statement of Account shall also be certified by a 
licensed Certified Public Accountant. Such certification shall comply 
with the following requirements:
    (i) Except as provided in paragraph (f)(2)(ii) of this section, the 
accountant shall certify that it has conducted an examination of the 
Annual Statement of Account prepared by the compulsory licensee in 
accordance with the attestation standards established by the American 
Institute of Certified Public Accountants, and has rendered an opinion 
based on such examination that the Annual Statement conforms with the 
standards in paragraph (f)(2)(iv) of this section.
    (ii) If such accountant determines in its professional judgment 
that the volume of data attributable to a particular compulsory 
licensee renders it impracticable to certify the Annual Statement of 
Account as required by paragraph (f)(2)(i) of this section, the

[[Page 56214]]

accountant may instead certify the following:
    (A) That the accountant has conducted an examination in accordance 
with the attestation standards established by the American Institute of 
Certified Public Accountants of the following assertions by the 
compulsory licensee's management:
    (1) That the processes used by or on behalf of the compulsory 
licensee, including calculation of statutory royalties, generated 
Annual Statements that conform with the standards in paragraph 
(f)(2)(iv) of this section; and
    (2) That the internal controls relevant to the processes used by or 
on behalf of the compulsory licensee to generate Annual Statements were 
suitably designed and operated effectively during the period covered by 
the Annual Statements.
    (B) That such examination included examining, either on a test 
basis or otherwise as the accountant considered necessary under the 
circumstances and in its professional judgment, evidence supporting the 
management assertions in paragraph (f)(2)(ii)(A) of this section, 
including data relevant to the calculation of statutory royalties, and 
performing such other procedures as the accountant considered necessary 
in the circumstances.
    (C) That the accountant has rendered an opinion based on such 
examination that the processes used to generate the Annual Statement 
were designed and operated effectively to generate Annual Statements 
that conform with the standards in paragraph (f)(2)(iv) of this 
section, and that the internal controls relevant to the processes used 
to generate Annual Statements were suitably designed and operated 
effectively during the period covered by the Annual Statements.
    (iii) In the event a third party or third parties acting on behalf 
of the compulsory licensee provided services related to the Annual 
Statement, the accountant making a certification under either paragraph 
(f)(2)(i) or paragraph (f)(2)(ii) of this section may, as the 
accountant considers necessary under the circumstances and in its 
professional judgment, rely on a report and opinion rendered by a 
licensed Certified Public Accountant in accordance with the attestation 
standards established by the American Institute of Certified Public 
Accountants that the processes and/or internal controls of the third 
party or third parties relevant to the generation of the compulsory 
licensee's Annual Statements were suitably designed and operated 
effectively during the period covered by the Annual Statements, if such 
reliance is disclosed in the certification.
    (iv) An Annual Statement of Account conforms with the standards of 
this paragraph if it presents fairly, in all material respects, the 
compulsory licensee's usage of the copyright owner's musical works 
under compulsory license during the period covered by the Annual 
Statement, the statutory royalties applicable thereto, and such other 
data as are relevant to the calculation of statutory royalties in 
accordance with 17 U.S.C. 115 and applicable regulations.
    (v) Each certificate shall be signed by an individual, or in the 
name of a partnership or a professional corporation with two or more 
shareholders. The certificate number and jurisdiction are not required 
if the certificate is signed in the name of a partnership or a 
professional corporation with two or more shareholders.
    (3) If the Annual Statement of Account is served by mail or by 
reputable courier service, the Annual Statement of Account shall be 
signed by handwritten signature. If the Annual Statement of Account is 
served electronically, the Annual Statement of Account shall be signed 
by electronic signature as defined in section 7006(5) of title 15 of 
the United States Code.
    (4) If the Annual Statement of Account is served electronically, 
the compulsory licensee may serve an electronic facsimile of the 
original certification of the Annual Statement of Account signed by the 
licensed Certified Public Accountant. The compulsory licensee shall 
retain the original certification of the Annual Statement of Account 
signed by the licensed Certified Public Accountant for the period 
identified in Sec.  210.18, which shall be made available to the 
copyright owner upon demand.
    (g) Service. (1) The service of an Annual Statement of Account on a 
copyright owner under this subpart may be accomplished by means of 
service on either the copyright owner or an agent of the copyright 
owner with authority to receive Statements of Account on behalf of the 
copyright owner. In the case where the work has more than one copyright 
owner, the service of the Statement of Account on one co-owner or upon 
an agent of one of the co-owners shall be sufficient with respect to 
all co-owners. Each Annual Statement of Account shall be served on the 
copyright owner or the agent to whom or which it is directed by mail, 
by reputable courier service, or by electronic delivery as set forth in 
paragraph (g)(2) of this section on or before the 20th day of the sixth 
month following the end of the fiscal year covered by the Annual 
Statement. It shall not be necessary to file a copy of the Annual 
Statement in the Copyright Office. An Annual Statement of Account shall 
be served for each fiscal year during which at least one Monthly 
Statement of Account was required to have been served under Sec.  
210.16(g).
    (2) If an Annual Statement of Account is being sent electronically, 
it may be sent or made available to a copyright owner or its agent in a 
readily accessible electronic format consistent with prevailing 
industry practices applicable to comparable electronic delivery of 
comparable financial information.
    (3) If the copyright owner or agent has made a request pursuant to 
Sec.  210.16(g)(3) to receive statements in electronic or paper form, 
such request shall also apply to Annual Statements to be rendered on or 
after the date that the request is effective with respect to Monthly 
Statements.
    (4) In any case where the amount required to be stated in the 
Annual Statement of Account under paragraph (c)(6) of this section 
(i.e., the total royalty payable) is greater than the amount stated in 
that Annual Statement under paragraph (c)(7) of this section (i.e., the 
total sum paid), the difference between such amounts shall also be 
served on or before the 20th day of the sixth month following the end 
of the fiscal year covered by the Annual Statement. The Annual 
Statement and payment may be sent together or separately, but if sent 
separately, the payment must include information reasonably sufficient 
to allow the payee to match the Annual Statement and the payment. The 
delivery of such sum does not require the copyright owner to accept 
such sum, or to forego any right, relief, or remedy which may be 
available under law. In any case where the amount required to be stated 
in the Annual Statement of Account under paragraph (c)(6) of this 
section is less than the amount stated in that Annual Statement under 
paragraph (c)(7) of this section, the difference between such amounts 
shall be available to the compulsory licensee as a credit.
    (5)(i) In any case where an Annual Statement of Account is sent by 
mail or by reputable courier service and is returned to the sender 
because the copyright owner or agent is no longer located at that 
address or has refused to accept delivery, or the Annual Statement of 
Account is sent by electronic mail and is undeliverable, or in any case 
where an address for the copyright owner is not known, the Annual 
Statement of Account, together

[[Page 56215]]

with any evidence of mailing or attempted delivery by courier service 
or electronic mail, may be filed in the Licensing Division of the 
Copyright Office. Any Annual Statement of Account submitted for filing 
shall be accompanied by a brief statement of the reason why it was not 
served on the copyright owner. A written acknowledgment of receipt and 
filing will be provided to the sender.
    (ii) The Copyright Office will not accept any royalty fees 
submitted with Annual Statements of Account under paragraph (g)(5)(i) 
of this section.
    (iii) Neither the filing of an Annual Statement of Account in the 
Copyright Office, nor the failure to file such Annual Statement, shall 
have any effect other than that which may be attributed to it by a 
court of competent jurisdiction.
    (iv) No filing fee will be required in the case of Annual 
Statements of Account submitted to the Copyright Office under paragraph 
(g)(5)(i) of this section. Upon request and payment of the fee 
specified in Sec.  201.3(e) of this chapter, a Certificate of Filing 
will be provided to the sender.
    (6) If an Annual Statement of Account is sent by certified mail or 
registered mail, a mailing receipt shall be sufficient to prove that 
service was timely. If an Annual Statement of Account is sent by a 
reputable courier, documentation from the courier showing the first 
date of attempted delivery shall be sufficient to prove that service 
was timely. If an Annual Statement of Account or a link thereto is sent 
by electronic mail, a return receipt shall be sufficient to prove that 
service was timely. In the absence of the foregoing, the compulsory 
licensee shall bear the burden of proving that the Annual Statement of 
Account was served in a timely manner.
    (h) Annual Statements for periods before November 17, 2014. If a 
copyright owner did not receive an Annual Statement of Account from a 
compulsory licensee for any fiscal year ending after March 1, 2009 and 
before November 17, 2014, the copyright owner may, at any time before 
November 17, 2014, make a request in writing to that compulsory 
licensee requesting an Annual Statement of Account for the relevant 
fiscal year conforming to the requirements of this section. If such a 
request is made, the compulsory licensee shall provide the Annual 
Statement of Account within 6 months after receiving the request. If 
such a circumstance and request applies to more than one of the 
compulsory licensee's fiscal years, such years may be combined on a 
single statement.


Sec.  210.18  Documentation.

    All compulsory licensees shall, for a period of at least five years 
from the date of service of an Annual Statement of Account or Amended 
Annual Statement of Account, keep and retain in their possession all 
records and documents necessary and appropriate to support fully the 
information set forth in such Annual Statement or Amended Annual 
Statement and in Monthly Statements served during the fiscal year 
covered by such Annual Statement or Amended Annual Statement.


Sec.  210.19  Harmless errors.

    Errors in a Monthly or Annual Statement of Account that do not 
materially prejudice the rights of the copyright owner shall be deemed 
harmless, and shall not render that statement of account invalid or 
provide a basis for the exercise of the remedies set forth in 17 U.S.C. 
115(c)(6).

    Dated: August 8, 2014,
Maria A. Pallante,
Register of Copyrights.
James H. Billington,
Librarian of Congress.
[FR Doc. 2014-22235 Filed 9-17-14; 8:45 am]
BILLING CODE 1410-30-P