Verification of Statements of Account Submitted by Cable Operators and Satellite Carriers, 68623-68632 [2014-27277]

Agencies

• Library of Congress
• Copyright Office

[Federal Register Volume 79, Number 222 (Tuesday, November 18, 2014)]
[Rules and Regulations]
[Pages 68623-68632]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-27277]


-----------------------------------------------------------------------

LIBRARY OF CONGRESS

Copyright Office

37 CFR Part 201

[Docket No. 2012-5]


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

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

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The U.S. Copyright Office is adopting a final rule that 
establishes a new regulation allowing copyright owners to audit the 
statements of account that cable operators and satellite carriers file 
with the Office reflecting royalty payments due for secondary 
transmissions of copyrighted broadcast programming made pursuant to 
statutory licenses.

DATES: Effective on December 18, 2014.

FOR FURTHER INFORMATION CONTACT: Jacqueline C. Charlesworth, General 
Counsel and Associate Register of Copyrights, by email at 
jcharlesworth@loc.gov, or by telephone at 202-707-8350; Erik Bertin, 
Assistant General Counsel, by email at ebertin@loc.gov, or by telephone 
at 202-707-8350; or Sy Damle, Special Advisor to the General Counsel, 
by email at sdam@loc.gov, or by telephone at 202-707-8350.

SUPPLEMENTARY INFORMATION: 

I. Background

    Sections 111 and 119 of the Copyright Act (the ``Act''), Title 17 
of the United States Code, allow cable operators and satellite carriers 
to retransmit programming that broadcast television stations transmit 
via over-the-air broadcast signals. To use these statutory licenses, 
cable operators and satellite carriers are required to file statements 
of account (``SOAs'') and deposit royalty fees with the U.S. Copyright 
Office (``Office'') on a semi-annual basis. The Office invests these 
royalties in United States Treasury securities pending distribution of 
the funds to copyright owners that are entitled to receive a share of 
the royalties.
    The Satellite Television Extension and Localism Act of 2010 
(``STELA''), Pub. L. No. 111-175, amended the Act by directing the 
Register of Copyrights to issue regulations to allow copyright owners 
to audit the SOAs and royalty fees that cable operators and satellite 
carriers file with the Office. Section 119(b)(2) of the Act directs the 
Register to ``issue regulations to permit interested parties to verify 
and audit the statements of account and royalty fees submitted by 
satellite carriers under this subsection.'' 17 U.S.C. 119(b)(2). 
Similarly, section 111(d)(6) directs the Register to ``issue 
regulations to provide for the confidential verification by copyright 
owners whose works were embodied in the secondary transmissions of 
primary transmissions pursuant to [section 111] of the information 
reported on the semiannual statements of account filed under this 
subsection for accounting periods beginning on or after January 1, 
2010, in order that the auditor designated under subparagraph 
[111(d)(6)(A)] is able to confirm the correctness of the calculations 
and royalty payments reported therein.'' 17 U.S.C. 111(d)(6).
    On June 14, 2012, the Office issued a Notice of Proposed Rulemaking 
that set forth its initial proposal for the audit procedure (the 
``First Proposed Rule''). See 77 FR 35643 (June 14, 2012). In drafting 
this proposal the Office considered similar audit regulations that the 
Office developed for parties that make ephemeral recordings or transmit 
digital sound recordings under 17 U.S.C. sections 112(e) and 114(f), 
respectively, or manufacture, import, and distribute digital audio 
recording devices under 17 U.S.C. chapter 10. The Office also 
considered a joint proposal (``the Petition for Rulemaking'') that was 
submitted by the Motion Picture Association of America, Inc. 
(``MPAA''), its member companies, and other

[[Page 68624]]

companies that produce and distribute movies, series, and specials that 
are broadcast on television (the ``Program Suppliers''), as well as 
other groups that represent copyright owners that share in the 
royalties paid by the cable and satellite industries.\1\
---------------------------------------------------------------------------

    \1\ The groups that joined the Program Suppliers in submitting 
the Petition for Rulemaking included the Joint Sports Claimants 
(professional and college sports programming), National Association 
of Broadcasters (``NAB'') (commercial television programming), 
Commercial Television Claimants (local commercial television 
programming), Broadcaster Claimants Group (U.S. commercial 
television stations), American Society of Composers, Authors and 
Publishers (``ASCAP'') (musical works included in television 
programming), Broadcast Music, Inc. (``BMI'') (same), Public 
Television Claimants (noncommercial television programming), Public 
Broadcasting Service (``PBS'') (same), National Public Radio 
(``NPR'') (noncommercial radio programming), Canadian Claimants 
Group (Canadian television programming), and Devotional Claimants 
(religious television programming).
---------------------------------------------------------------------------

    The Office received extensive comments on the First Proposed Rule 
from groups representing copyright owners,\2\ cable operators,\3\ and 
individual companies that retransmit broadcast programming under 
sections 111 or 119 of the Act, namely, AT&T, Inc., DIRECTV, LLC, and 
DISH Network L.L.C.\4\ In lieu of reply comments, DIRECTV, the NCTA, 
and a group representing certain copyright owners \5\ submitted a joint 
proposal for revising the First Proposed Rule. This group referred to 
themselves collectively as the ``Joint Stakeholders,'' and they urged 
the Office to incorporate their suggestions ``as promptly as possible 
after receiving any further public comment.'' JS First Submission at 
1.\6\
---------------------------------------------------------------------------

    \2\ The copyright owners that submitted comments on the First 
Proposed Rule included the Program Suppliers, Joint Sports 
Claimants, Commercial Television Claimants, Broadcaster Claimants 
Group, ASCAP, BMI, SESAC, Inc., Public Television Claimants, 
Canadian Claimants Group, Devotional Claimants, and NPR. Although 
the NAB and PBS joined their fellow copyright owners in submitting 
the Petition for Rulemaking, they did not submit any comments in 
this proceeding.
    \3\ The National Cable & Telecommunications Association 
(``NCTA'') and the American Cable Association (``ACA'') filed 
comments on the First Proposed Rule on behalf of cable operators.
    \4\ Citations to the comments submitted in response to the First 
Proposed Rule are abbreviated ``[Name of Party] First Comment.''
    \5\ The copyright owners that joined the NCTA and DIRECTV in 
submitting the Joint Stakeholders' proposal included the Program 
Suppliers, Joint Sports Claimants, ASCAP, BMI, SESAC, Public 
Television Claimants, Canadian Claimants Group, Devotional 
Claimants, and NPR. The Commercial Television Claimants, the 
Broadcaster Claimants Group, the NAB, and PBS did not join their 
fellow copyright owners in submitting this proposal.
    \6\ Citations to the proposals submitted by Joint Stakeholders 
are abbreviated ``JS First Submission'' and ``JS Second 
Submission''.
---------------------------------------------------------------------------

    The Office carefully studied the Joint Stakeholders' proposal and 
the other comments submitted in response to the First Proposed Rule. 
The Joint Stakeholders' proposal addressed many of the concerns that 
the parties raised in their initial comments. The Office therefore 
incorporated most of the Joint Stakeholders' suggestions into a revised 
proposed regulation (the ``Second Proposed Rule'').
    On May 9, 2013, the Office published the Second Proposed Rule in 
the Federal Register and invited AT&T, DISH, the ACA, the Broadcaster 
Claimants Group, the Commercial Television Claimants, and other 
interested parties to comment on the proposed regulation. The Office 
also invited reply comments from the Joint Stakeholders and other 
interested parties. See 78 FR 27137, 27138 (May 9, 2013). The Office 
received comments from AT&T and the ACA, and it received reply comments 
from the ACA, the NCTA, and a group representing the copyright owners 
that negotiated the Joint Stakeholders' Proposal with the NCTA and 
DIRECTV.\7\ The parties raised a number of complex issues, including 
issues of first impression that were not addressed in the comments or 
reply comments submitted in response to the First Proposed Rule.
---------------------------------------------------------------------------

    \7\ Citations to the comments submitted in response to the 
Second Proposed Rule are abbreviated ``[Name of Party] Second 
Comment'' and ``[Name of Party] Second Reply.'' For example, 
citations to the copyright owners' reply comments are abbreviated 
``CO Second Reply.'' This group included all the copyright owners 
listed in footnote five except for the Commercial Television 
Claimants, the Broadcaster Claimants Group, the NAB, and PBS.
---------------------------------------------------------------------------

    On December 26, 2013, the Office issued an interim rule that 
addresses a procedural issue that was not contested by the parties (the 
``Interim Rule''). Specifically, the Interim Rule allows copyright 
owners to identify any SOAs from accounting periods beginning on or 
after January 1, 2010 that they intend to audit. At the same time, it 
provides licensees with advance notice of the SOAs that will be subject 
to audit when this final rule goes into effect. See 78 FR 28257 (Dec. 
26, 2013).
    After analyzing the comments submitted in response to the Second 
Proposed Rule, the Office identified a number of issues that were not 
addressed in the prior proposals. Because the Office believed these 
issues might be narrowed through group discussion, it decided to 
convene a public roundtable before issuing another notice of proposed 
rulemaking. See 79 FR 31992 (June 3, 2014). During the roundtable the 
Office received valuable input from parties that previously submitted 
comments in this proceeding, including the MPAA, the Commissioner of 
Baseball, the NCTA, the ACA, and DIRECTV. The Office also received 
guidance from the Royalty Review Council (``RRC''),\8\ a company that 
conducts audits on behalf of content owners and licensees in the music 
industry.
---------------------------------------------------------------------------

    \8\ In its Federal Register document dated September 17, 2014 
the Office erroneously referred to the Royalty Review Council by the 
name of its affiliated company, ``Crunch Digital.'' 79 FR at 55696.
---------------------------------------------------------------------------

    The issues discussed at the roundtable are summarized in the 
Office's Federal Register document dated June 3, 2014 (the ``Roundtable 
Notice''). 79 FR 31992. Following the roundtable, the Joint 
Stakeholders consulted with each other regarding three of these issues, 
namely: (i) Whether there should be an initial consultation between the 
auditor and a representative of the licensee and the participating 
copyright owners prior to the commencement of an audit; (ii) the 
accounting standard that should govern the audit; and (iii) the 
procedure for allocating the cost of an audit between the participating 
copyright owners and the licensee. On July 31, 2014, the Joint 
Stakeholders informed the Office that they had reached a consensus on 
two of these issues and they offered specific recommendations for 
modifying certain aspects of the proposed rule.\9\ JS Second Submission 
at 1-2.
---------------------------------------------------------------------------

    \9\ The parties that submitted these recommendations are 
identified in footnote five.
---------------------------------------------------------------------------

    After reviewing the comments and reply comments submitted in 
response to the Second Proposed Rule, the input provided during the 
roundtable, and the Joint Stakeholders' Second Submission, the Office 
made several changes to the proposed rule (the ``Third Proposed 
Rule''). On September 17, 2014, the Office published the Third Proposed 
Rule in the Federal Register and invited interested parties to comment 
on the revised proposal. 79 FR 55696. The Office received comments from 
the Program Suppliers and the NCTA on four aspects of the proposed 
rule, which are discussed in section II below.\10\ After reviewing 
these comments the Office has made modest changes to the proposal 
(discussed below) that are incorporated into the final rule (the 
``Final Rule''). In addition, the Office has made minor technical 
amendments to the Final Rule that are summarized in footnotes 11, 13-
15, and 17-21.\11\
---------------------------------------------------------------------------

    \10\ Citations to the comments submitted in response to the 
Third Proposed Rule are abbreviated ``[Name of Party] Third 
Comment.'' All of the comments submitted in this proceeding are 
posted on the Office's Web site at https://copyright.gov/docs/soaaudit/soa_audit.html.
    \11\ The Final Rule will supersede the Interim Rule in its 
entirety. Until the Final Rule becomes effective, copyright owners 
may use the Interim Rule to preserve their right to audit any SOA 
that was filed with the Office for accounting periods 2010-2 through 
2014-1. (As of November 7, 2014 the Office has not received any 
notices filed pursuant to the Interim Rule.) The Final Rule 
clarifies that ``[i]f the Office has received a notice of intent to 
audit prior to the effective date of this [rule],'' it will publish 
a notice in the Federal Register within thirty days thereafter as 
contemplated by the Interim Rule, although the audit itself will be 
conducted in accordance with the Final Rule.

---------------------------------------------------------------------------

[[Page 68625]]

II. Discussion

A. Accounting Standard

    In the Second Proposed Rule the Office proposed that audits be 
conducted according to generally accepted auditing standards 
(``GAAS''), but in the Roundtable Notice the Office questioned whether 
this would be an appropriate standard. 78 FR at 27151; 79 FR at 31994. 
At the roundtable RRC confirmed that accountants apply GAAS when 
auditing corporate financial statements, but indicated that those 
standards are not directly relevant to the type of audit contemplated 
by this rule. In RRC's view, the auditor should not be required to 
apply a particular standard under the proposed rule; instead the 
parties should be encouraged to discuss this issue during an initial 
consultation about the conduct of the audit. 79 FR at 55701. For their 
part, the Joint Stakeholders were unable to reach agreement (either at 
the roundtable or in their written submissions) on what standard, if 
any, should be specified in lieu of GAAS. JS Second Submission at 1.
    Given the lack of consensus on this issue, the Office decided to 
eliminate the provision that would require the auditor to apply a 
particular audit standard; instead, the Third Proposed Rule would allow 
the parties to review the ``methodology'' for the audit during the 
initial consultation. 79 FR at 55701. The Office also indicated that it 
had reached a final decision on this issue. Id. at 55697 n.11.
    The NCTA urges the Office to reconsider its decision. NCTA Third 
Comment at 2. It notes that other regulations adopted by the Office 
contain express provisions directing auditors and accountants to apply 
GAAS or the attestation standards established by the American Institute 
of Certified Public Accountants (``AICPA''). Id. at 2 & n.5 (citing 37 
CFR 210.17(f)(2)(i)(A) (attestation), 201.30(e) (GAAS); 260.6(e) 
(GAAS), 261.7(e) (GAAS), 262.7(e) (GAAS)). The NCTA worries that the 
failure to designate an appropriate standard for audits involving cable 
operators and satellite carriers could complicate and delay the 
verification process. See id. at 2-3. Instead, the NCTA suggests that 
the auditor should be required to apply the AICPA's attestation 
standard as the ``default'' rule, but the parties should be allowed to 
modify that standard by mutual agreement. Id. at 2. The NCTA states 
that this ``will provide the participants in the audit with helpful 
certainty'' while giving them ``the flexibility to adjust the standard 
if that would better serve the[ir] mutual interests.'' Id. at 3.
    The Office has considered the NCTA's concerns, but concludes that 
it is unnecessary to specify a particular standard that should be 
applied in conducting audits under this Final Rule. Neither the NCTA 
nor any of the other parties provides any basis on which the Office can 
select a particular auditing standard that should govern these 
proceedings. Therefore, the Office is in no position to determine 
whether GAAS or attestation standards should be specified in the Final 
Rule (either as a mandatory requirement or as a default rule that would 
be subject to modification by the parties if they so agree). Instead, 
consistent with the recommendation of RRC (an experienced auditor) the 
Final Rule gives the auditor the flexibility to apply a standard of 
review that--in his or her professional judgment--would be most 
appropriate for this type of audit. To ensure that the standard is made 
clear to the licensee, the Final Rule requires the parties to address 
the applicable auditing standard during the initial consultation.

B. Supplementary Royalty Payments

    The Third Proposed Rule specified that a licensee could cure 
underpayments identified in the auditor's final report by depositing 
additional royalties with the Office. Paying additional royalties 
directly to the participating copyright owners pursuant to a negotiated 
settlement would not satisfy this requirement because, as the Office 
explained, this would unfairly prevent non-participating copyright 
owners from claiming an appropriate share of those payments. 79 FR at 
55704.
    The Program Suppliers object to the requirement that additional 
royalties be paid to the Office, contending that it will discourage 
negotiated settlements. PS Third Comment at 3. The Program Suppliers 
urge that such settlements offer ``a fair and valuable means'' for 
copyright owners and licensees to resolve their differences, and that 
the Third Proposed Rule will discourage such settlements from taking 
place. Id. at 1-3. They also contend that the Third Proposed Rule will 
create a free rider problem. See id. at 3. Copyright owners that 
decline to participate in the audit process will be entitled to claim a 
share of any additional royalties that are deposited with the Office as 
a result of the audit, but will not be required to pay for the 
auditor's services. The Program Suppliers assert that this is unfair, 
because the participating copyright owners will be forced to pay for 
the audit but will receive only some of the resulting benefits. The 
Program Suppliers contend that negotiated settlements (i.e., allowing a 
licensee to make supplemental royalty payments directly to the 
participating copyright owners instead of depositing them with the 
Office) ``would substantially reduce the free rider problem.'' \12\ Id.
---------------------------------------------------------------------------

    \12\ Specifically, the Program Suppliers contend that the 
availability of negotiated settlements will encourage copyright 
owners to conduct a cost-benefit analysis when deciding whether to 
opt in or opt out of an audit. PS Third Comment at 3-4. If the 
possibility of obtaining a share of the additional royalties from 
the licensee outweighs the cost of participating in the audit, a 
copyright owner might decide to opt in; but if the certainty of 
avoiding those costs outweighs the risk of not receiving a share of 
the additional royalties, that party might decide to opt out. See 
id.
---------------------------------------------------------------------------

    The Office has considered the Program Suppliers' comments but 
declines to incorporate their suggestion into the Final Rule. The 
statute states that the auditor should be given the ``exclusive 
authority'' to audit an SOA and that the auditor should review that 
statement ``on behalf of all copyright owners whose works were subject 
of secondary transmissions of primary transmissions by the [licensee] 
(that deposited the statement) during the accounting period covered by 
the statement.'' 17 U.S.C. 111(d)(6)(A)(i). That is, the auditor should 
conduct the audit on behalf of any party that owns a copyrighted work 
that was embodied in a secondary transmission made by the licensee, 
regardless of whether that party decides to participate in the audit or 
not.\13\ See 77 FR at 35647.
---------------------------------------------------------------------------

    \13\ The auditor will review the statements that the licensee 
filed with the Office and the royalty payments reported therein, but 
the auditor will not audit the actual payments that the licensee 
deposited with the Office. To clarify this point, the Office removed 
the term ``royalty fee payments'' from the heading and paragraph (a) 
of the Final Rule.
---------------------------------------------------------------------------

    The statute also provides that the Office ``shall issue 
regulations'' that ``shall . . . establish a mechanism for the 
[licensee] to remedy any errors identified in the auditor's report and 
to cure any underpayment identified.'' \14\

[[Page 68626]]

17 U.S.C. 111(d)(6)(C)(ii). In other words, Congress envisioned a 
regulatory procedure for curing underpayments that would be 
administered by the Office. Indeed, remedying an error in an SOA and 
curing any associated underpayment necessarily requires submission of a 
corrected statement and royalty payment to the Office; a private 
settlement with a specific copyright owner could not accomplish that 
objective. Accordingly, in response to Congress's directive, the Office 
decided to use an existing administrative procedure that allows a 
licensee to cure underpayments by depositing additional royalties with 
the Office. See 77 FR at 35648. The Program Suppliers correctly note 
that any copyright owner would be allowed to claim an appropriate share 
of any additional royalties that are deposited with the Office as a 
result of this process, even if that party did not participate in the 
audit or pay for the auditor's services.\15\ See id. at 35649; PS Third 
Comment at 2 (noting that section 111(d)(4) of the Copyright Act 
``entitles eligible [copyright] owners to share in all royalties 
contained in any year's fund, no matter how [those funds were] 
collected (e.g., additional royalties collected due to the Licensing 
Division's SOA examination)'').
---------------------------------------------------------------------------

    \14\ In addition, the statute directs the Office to issue 
regulations that ``require a consultation period for the independent 
auditor to review its conclusions with a designee of the 
[licensee].'' 17 U.S.C. 111(d)(6)(C)(i). Under the Third Proposed 
Rule the auditor would be required to consult with the licensee 
``for no more than thirty days.'' 79 FR at 55710. The Final Rule 
retains this requirement but clarifies that the auditor should 
consult with the licensee ``for up to thirty days'' since the 
auditor and the licensee may not need this much time in some cases.
    \15\ The Third Proposed Rule provided that other copyright 
owners may participate in the audit if they provide a written notice 
to the licensee and the party that filed the initial notice with the 
Office. It also provided that this notice should be sent to the 
Office at the address designated for time-sensitive requests. The 
Final Rule corrects this discrepancy by clarifying that the written 
notice should be sent to the Office, the licensee, and the party 
that filed the initial notice with the Office, and that notices 
submitted to the Office should be sent to the address specified in 
Sec.  201.1(c)(1) of the regulations.
---------------------------------------------------------------------------

    Although there is no legislative history for STELA, the approach 
that the Office adopted in the Final Rule is supported by the House 
Report for a prior version of the legislation. In that report, Congress 
indicated that following an audit, the licensee could cure any 
shortfall in royalty payments by using the ordinary method for 
correcting statements of account under the Office's regulations, i.e., 
filing amended statements of account and supplemental royalty fees with 
the Office: ``The regulations should permit a cable operator . . . to 
amend its statement of account and to supplement its royalty payments 
(subject to the filing fee and interest requirements generally 
applicable to late, corrected, or supplemental statements of account 
and royalty fees) to conform with the auditor's findings.'' H.R. Rep. 
No. 111-319, at 10 (2009).
    The Program Suppliers consistently supported this approach 
throughout this proceeding. In their Petition for Rulemaking, the 
Program Suppliers and their fellow copyright owners encouraged the 
Office to establish a procedure that would allow a licensee to ``cure 
any underpayment identified [in the auditor's report] (subject to the 
filing fee and interest requirements generally applicable to late, 
corrected, or supplemental Statements of Account and royalty fees).'' 
Petition for Rulemaking, Ex. A, ] 9(iii), Ex. B. ] 9(iii). In other 
words, the Program Suppliers believed that licensees should be given an 
opportunity to cure an underpayment by submitting additional royalties 
to the Office (as opposed to paying them directly to the participating 
copyright owners). The Office included similar language in its First 
Proposed Rule and the Program Suppliers and their fellow copyright 
owners supported that proposal in their first round of comments.\16\
---------------------------------------------------------------------------

    \16\ See 77 FR at 35648-49; CO First Comment at 8-9 (if the 
``auditor concludes that a licensee has not paid the appropriate 
royalties for the use of the license, the Office should require that 
a licensee who wishes to take advantage of STELA's safe harbor . . . 
must file a supplemental SOA and accompanying payment. . . .'').
---------------------------------------------------------------------------

    Likewise, in the Joint Stakeholders' First Submission, the Program 
Suppliers and their fellow copyright owners urged the Office to adopt a 
procedure that would allow a licensee to cure an ``underpayment by 
filing with the Office an amendment to the Statement of Account and 
supplemental royalty fee payments utilizing the procedures set forth in 
sections 201.11(h) or 201.17(m)'' of the Office's regulations. JS First 
Submission at 8. Once again, the Office incorporated that suggestion in 
both the Second and Third Proposed Rules. See 78 FR at 27144-45; 79 FR 
at 55704.
    Contrary to the Program Suppliers' contention, the approach that 
the Office adopted in the Third Proposed Rule and the Final Rule does 
not ``discourage'' or ``preclude negotiated settlements'' between the 
participating copyright owners and the licensee. PS Third Comment at 1. 
The parties would still be able to discuss and agree to the amount of 
any additional royalties due from the licensee--presumably using the 
auditor's conclusions and the licensee's written rebuttal as reference 
points. If the parties reached a mutually acceptable agreement, the 
Final Rule would then require the licensee to deposit any additional 
payments with the Office for the benefit of all copyright owners.\17\ 
Notably, the Program Suppliers acknowledge that ``direct deposit with 
the Copyright Office, [will] provide a valuable mechanism for avoiding 
infringement litigation related to royalty underpayment, thus 
furthering the object of the audit rights process.'' Id. at 4.
---------------------------------------------------------------------------

    \17\ The Third Proposed Rule provided that the licensee may 
exercise its right to cure the deficiencies identified in the 
auditor's report provided that the licensee ``reimburses'' the 
participating copyright owners for any audit costs that the licensee 
is required to pay. See 79 FR at 55704. The Final Rule retains this 
requirement, but clarifies that the license must have ``reimbursed'' 
the participating copyright owners. While the additional royalties 
must be deposited with the Office, the Final Rule also clarifies 
that the audit costs should be paid to a representative of the 
participating copyright owners.
---------------------------------------------------------------------------

    Even if the Final Rule might benefit some ``free riders,'' the 
Program Suppliers do not suggest that this would dissuade all copyright 
owners from using the audit procedure. In fact, the participating 
copyright owners enjoy a number of benefits that are not available to 
copyright owners that do not elect to join the proceeding. As the 
Program Suppliers note, copyright owners that decline to participate 
``have no control over or interaction with the auditor.'' See id. at 2. 
Nor are they entitled to receive a copy of the audit report, which 
could make it more difficult to take action if the licensee fails to 
cure any underpayments.
    By contrast, the participating copyright owners can direct the 
audit process by selecting the licensee and the statements that are 
subject to audit,\18\ nominating the auditor who will review the 
licensee's records, and identifying issues or irregularities that the 
auditor should consider in his or her review. At the beginning of the 
audit, the participating copyright owners will receive a list of the 
broadcast signals that the licensee transmitted during the accounting 
periods that are subject to the audit, including the call sign for each 
broadcast signal and each multicast signal (as well as the 
classification of each signal on a community-by-community basis in an 
audit involving a cable system). See 79 FR at 55700. As the Program 
Suppliers and their fellow copyright owners noted in their second round 
of comments, this ``provides tangible benefits'' for the participating 
copyright owners by helping them to determine whether the

[[Page 68627]]

licensee has correctly classified the carriage of each signal. See CO 
Second Reply at 9, 10.
---------------------------------------------------------------------------

    \18\ The Third Proposed Rule provided that the copyright owners 
must prepare a written notice identifying both the licensee and the 
statements that they intend to audit, and they must file that notice 
with the Office in the month of December. The Final Rule retains 
this requirement but clarifies that the notice must be filed ``on or 
after December 1st and no later than December 31st.''
---------------------------------------------------------------------------

    At the conclusion of the audit, the participating copyright owners 
will receive a copy of the auditor's final report. Thus, they will have 
the benefit of the auditor's findings and analysis, as well as the 
information that the auditor cites in support of his or her 
conclusions. Presumably, the participating copyright owners could use 
this information to identify similar irregularities in the licensee's 
other statements that may warrant further review--either through an 
audit process, a negotiated settlement, or appropriate legal 
action.\19\ By contrast, the non-participating copyright owners would 
not be privy to this information, and would be foreclosed from 
initiating a separate audit with respect to the SOAs analyzed in the 
final report. See 77 FR at 35649; PS Third Comment at 3.
---------------------------------------------------------------------------

    \19\ For example, if the auditor discovered a net aggregate 
underpayment of more than 5% in an audit involving a multiple system 
operator (``MSO''), the copyright owners would be entitled to audit 
a larger sample of the cable systems owned by that entity. The Final 
Rule preserves this option but clarifies that the copyright owners 
must conduct a ``new'' initial audit and must notify the Office 
their intent to conduct ``such'' an audit.
---------------------------------------------------------------------------

C. Conclusion of the Audit

    Under the Third Proposed Rule, a representative of the 
participating copyright owners would be required to notify the Office 
if the auditor discovered an underpayment or overpayment on any of the 
statements that were reviewed during the audit (although the amounts 
specified in the auditor's report would not have to be disclosed). The 
NCTA suggests that it would be more efficient for the auditor to inform 
the Office that the audit has been completed. NCTA Third Comment at 4. 
The Office agrees with the NCTA's suggestion and has incorporated it 
into the Final Rule.
    The NCTA also states that there is no need for the auditor to share 
his findings with the Office. It contends that the auditor should file 
``a simple declaration'' confirming that the audit ``has been timely 
completed,'' but the auditor should not disclose whether he or she 
discovered an underpayment or overpayment on any of the statements that 
were reviewed. Id. The NCTA correctly notes that any document filed 
with the Office would become a public record, which means that the 
notification would be available to other copyright owners even if they 
declined to participate in the audit. See id. The NCTA states that 
there is no need to share this information with non-participating 
copyright owners, because the auditor would provide a final report to 
the participating copyright owner (including the specific amount of any 
overpayment or underpayment that the auditor discovered). Id.
    The Office did not include this suggestion in the Final Rule, 
because there are legitimate reasons for notifying the Office when the 
auditor discovers an overpayment or an underpayment and for making that 
information available to the public. Providing this information to the 
Office will alert both the Office and the copyright owners that did not 
participate in the audit of the possibility that additional royalty 
payments or refunds may be forthcoming, thus serving the interests of 
administrative efficiency. When the Office receives a notice of intent 
to audit a particular SOA, the Office can hold certain royalties to 
ensure that funds are available in the event that the licensee 
subsequently requests a refund. See 78 FR at 27146. If the auditor 
informs the Office that he or she found an overpayment on a particular 
statement, the Office can anticipate a potential refund request from 
the licensee. If the licensee fails to request a refund within the time 
allowed, the Office can release those funds. Conversely, if the auditor 
informs the Office that he or she found an underpayment on a particular 
statement, the Office will know that it may receive additional royalty 
deposits from the licensee.
    The NCTA did not explain why this type of information should be 
withheld from the non-participating copyright owners and the Office can 
see no legitimate reason for keeping this information from the public. 
As discussed in section II.B, any party that owns the copyright in a 
work that was embodied in a secondary transmission made by a licensee 
that was subject to an audit is entitled to an appropriate share of 
additional royalties paid to the Office by that licensee--regardless of 
whether that party decided to participate in the audit. Thus, non-
participating copyright owners have a legitimate reason to know if a 
licensee overpaid or underpaid royalties (or paid the correct amount 
due).
    Moreover, if the auditor discovers an underpayment and the licensee 
fails to deposit additional royalties with the Office, the non-
participating copyright owners should be given an opportunity to 
consider how to protect their interests. The fact that the auditor 
discovered an underpayment may suggest that there could be similar 
problems with the licensee's other statements. In such cases, non-
participating copyright owners may be inclined to conduct their own 
review of additional statements (although as discussed in section II.B 
they would not have the benefit of the information and analysis set 
forth in the auditor's final report). They also may be inclined to 
participate in future audits involving that licensee. Conversely, if 
the auditor determines that the licensee overpaid or paid the correct 
amount, the non-participating copyright owners may be inclined to focus 
their attention elsewhere.
    The Final Rule also provides safeguards for licensees by protecting 
their confidential information.\20\ The auditor must inform the Office 
if he or she discovers an overpayment or underpayment on a particular 
statement, but the auditor is not required to submit a copy of the 
final report or disclose the specific amounts reported therein. The 
auditor must also notify the Office if the licensee contests the 
auditor's findings but need not submit a copy of the licensee's 
rebuttal. This additional information will put non-participating 
copyright owners on notice that a licensee disputes the auditor's 
findings and may decline to pay the full amount (or any amount) of what 
the auditor found to be due. But because the auditor will not be 
submitting non-public financial or business information, such 
information will not be made public.
---------------------------------------------------------------------------

    \20\ To protect the licensee's interests both during the audit 
and after it has been completed, the Final Rule clarifies that the 
parties shall protect the confidentiality of any non-public 
financial or business information pertaining to an SOA that ``is the 
subject of an audit.''
---------------------------------------------------------------------------

D. Retention of Records

    Under the Second Proposed Rule a statutory licensee would be 
required to retain any records needed to confirm the correctness of the 
calculations and royalty payments reported in an SOA or amended SOA for 
three and a half years after the last day of the year that the SOA or 
amendment was filed with the Office. None of the parties objected to 
this aspect of the proposal.
    If an SOA or amended SOA is subject to an audit, then under the 
Second Proposed Rule, the licensee would be required to retain its 
records concerning that statement for another three years after the 
auditor delivered the final report to the parties. In an earlier round 
of comments, the NCTA contended that this would impose a burden on 
small cable operators as well as MSOs that file multiple SOAs in each 
accounting period. NCTA Second Reply at 4. Instead, the NCTA suggested 
that a licensee should be required to retain its

[[Page 68628]]

records for no more than one year after the auditor issues his or her 
final report. Id.
    The Office weighed the NCTA's concerns when it drafted the Third 
Proposed Rule, but concluded that a three-year retention period would 
be more appropriate, because it would ensure that the licensee does not 
discard its records before the three-year statute of limitations may 
expire. 79 FR at 55708. The Office also stated that it had reached a 
final decision on this issue. Id. at 55697 n.11.
    In this third round of comments, the NCTA again urges the Office to 
reconsider its decision. NCTA Third Comment at 3. The NCTA notes that 
the Third Proposed Rule would require the auditor to complete his or 
her review within less than a year, and notes that the Office cited the 
``administrative burdens associated with retaining records for extended 
periods'' as one of the reasons for this requirement. Id.; see also 79 
FR at 55699. To reduce these burdens even further, the NCTA reiterates 
that licensees should be required to retain their records for no more 
than one year after the completion of the audit. NCTA Third Comment at 
3. It also contends that the Office should give more weight to the fact 
that the Joint Stakeholders mutually agreed that a one-year retention 
period would be sufficient to protect their respective interests. Id. 
at 4.
    The Office has considered the NCTA's renewed concerns, and has 
again concluded that a licensee should retain its records for three 
years after the auditor issues his or her final report. There is a 
significant difference between the burdens associated with maintaining 
records relating to all of the statements that a licensee has filed 
with the Office, and the burdens associated with maintaining records 
relating to a statement that has been subject to an audit. The Final 
Rule limits the number of statements that may be reviewed in an audit 
(ordinarily two SOAs \21\), which in turn limits the number of records 
that a particular licensee must retain when the auditor issues his or 
her final report. Many licensees collect, report, and maintain their 
records in electronic form, which also mitigates the burden. Moreover, 
the licensee is only required to keep such records as are ``necessary 
to confirm the correctness of the calculations and royalty payments 
reported'' in those SOAs (emphasis added).
---------------------------------------------------------------------------

    \21\ The Third Proposed Rule provided that an audit of a 
particular cable system or satellite carrier could include no more 
than two of the statements filed by that licensee during ``the 
previous eight accounting periods.'' 79 FR at 55711. If the auditor 
discovered a net aggregate underpayment of more than 5%, the rule 
provided that the copyright owners may expand the audit to include 
``all previous Statements filed by that [licensee] that may be 
timely noticed for audit.'' Id. The Final Rule maintains this 
approach, but in the interest of consistency it employs similar 
language in paragraphs (m)(2) and (n)(1).
---------------------------------------------------------------------------

List of Subjects in 37 CFR Part 201

    Copyright, General provisions.

Final Regulations

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

PART 201--GENERAL PROVISIONS

0
1. Revise the authority citation for part 201 to read as follows:

    Authority:  17 U.S.C. 702.


0
2. Revise Sec.  201.16 to read as follows:


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

    (a) General. This section prescribes procedures pertaining to the 
verification of a Statement of Account filed with the Copyright Office 
pursuant to sections 111(d)(1) or 119(b)(1) of title 17 of the United 
States Code.
    (b) Definitions. As used in this section:
    (1) The term cable system has the meaning set forth in Sec.  
201.17(b)(2).
    (2) Copyright owner means any person or entity that owns the 
copyright in a work embodied in a secondary transmission made by a 
statutory licensee that filed a Statement of Account with the Copyright 
Office for an accounting period beginning on or after January 1, 2010, 
or a designated agent or representative of such person or entity.
    (3) Multiple system operator or MSO means an entity that owns, 
controls, or operates more than one cable system.
    (4) Net aggregate underpayment means the aggregate amount of 
underpayments found by the auditor less the aggregate amount of any 
overpayments found by the auditor, as measured against the total amount 
of royalties reflected on the Statements of Account examined by the 
auditor.
    (5) Participating copyright owner means a copyright owner that 
filed a notice of intent to audit a Statement of Account pursuant to 
paragraph (c)(1) or (2) of this section and any other copyright owner 
that has given notice of its intent to participate in such audit 
pursuant to paragraph (c)(3) of this section.
    (6) The term satellite carrier has the meaning set forth in 17 
U.S.C. 119(d)(6).
    (7) The term secondary transmission has the meaning set forth in 17 
U.S.C. 111(f)(2).
    (8) Statement of Account or Statement means a semiannual Statement 
of Account filed with the Copyright Office under 17 U.S.C. 111(d)(1) or 
119(b)(1) or an amended Statement of Account filed with the Office 
pursuant to Sec. Sec.  201.11(h) or 201.17(m).
    (9) Statutory licensee or licensee means a cable system or 
satellite carrier that filed a Statement of Account with the Office 
under 17 U.S.C. 111(d)(1) or 119(b)(1).
    (c) Notice of intent to audit. (1) Any copyright owner that intends 
to audit a Statement of Account for an accounting period beginning on 
or after January 1, 2010 must provide written notice to the Register of 
Copyrights no later than three years after the last day of the year in 
which the Statement was filed with the Office. The notice must be 
received in the Office on or after December 1st and no later than 
December 31st, and a copy of the notice must be provided to the 
statutory licensee on the same day that it is filed with the Office. 
Between January 1st and January 31st of the next calendar year the 
Office will publish a notice in the Federal Register announcing the 
receipt of the notice of intent to audit. A notice of intent to audit 
may be filed by an individual copyright owner or a designated agent 
that represents a group or multiple groups of copyright owners. The 
notice shall include a statement indicating that it is a ``notice of 
intent to audit'' and it shall contain the following information:
    (i) It shall identify the licensee that filed the Statement(s) with 
the Office, and the Statement(s) and accounting period(s) that will be 
subject to the audit.
    (ii) It shall identify the party that filed the notice, including 
its name, address, telephone number, and email address, and it shall 
include a statement that the party owns or represents one or more 
copyright owners that own a work that was embodied in a secondary 
transmission made by the statutory licensee during one or more of the 
accounting period(s) specified in the Statement(s) that will be subject 
to the audit.
    (2) Notwithstanding the schedule set forth in paragraph (c)(1) of 
this section, any copyright owner that intends to audit a Statement of 
Account pursuant to an expanded audit under paragraph (n) of this 
section may provide written notice of such to the Register of 
Copyrights during any month, but no later than three years after the 
last day of the year in which the Statement was filed with the Office. 
A copy of the

[[Page 68629]]

notice must be provided to the licensee on the same day that the notice 
is filed with the Office. Within thirty days after the notice has been 
received, the Office will publish a notice in the Federal Register 
announcing the receipt of the notice of intent to conduct an expanded 
audit. A notice given pursuant to this paragraph may be provided by an 
individual copyright owner or a designated agent that represents a 
group or multiple groups of copyright owners. The notice shall include 
a statement indicating that it is a ``notice of intent to conduct an 
expanded audit'' and it shall contain the information specified in 
paragraphs (c)(1)(i) and (ii) of this section.
    (3) Within thirty days after a notice is published in the Federal 
Register pursuant to paragraphs (c)(1) or (2) of this section, any 
other copyright owner that owns a work that was embodied in a secondary 
transmission made by that statutory licensee during an accounting 
period covered by the Statement(s) of Account referenced in the Federal 
Register notice and that wishes to participate in the audit of such 
Statement(s) must provide written notice of such participation to the 
Copyright Office as well as to the licensee and party that filed the 
notice of intent to audit. A notice given pursuant to this paragraph 
may be provided by an individual copyright owner or a designated agent 
that represents a group or multiple groups of copyright owners, and 
shall include the information specified in paragraphs (c)(1)(i) and 
(ii) of this section.
    (4) Notices submitted to the Office under paragraphs (c)(1) through 
(3) of this section should be addressed to the ``U.S. Copyright Office, 
Office of the General Counsel'' and should be sent to the address for 
time-sensitive requests set forth in Sec.  201.1(c)(1).
    (5) Once the Office has received a notice of intent to audit a 
Statement of Account under paragraphs (c)(1) or (2) of this section, a 
notice of intent to audit that same Statement will not be accepted for 
publication in the Federal Register.
    (6) Once the Office has received a notice of intent to audit two 
Statements of Account filed by a particular satellite carrier or a 
particular cable system, a notice of intent to audit that same carrier 
or that same system under paragraph (c)(1) of this section will not be 
accepted for publication in the Federal Register until the following 
calendar year.
    (7) If the Office has received a notice of intent to audit prior to 
the effective date of this section, the Office will publish a notice in 
the Federal Register within thirty days thereafter announcing the 
receipt of the notice of intent to audit. In such a case, the audit 
shall be conducted using the procedures set forth in paragraphs (d) 
through (l) of this section, with the following exceptions:
    (i) The participating copyright owners shall provide the statutory 
licensee with a list of three independent and qualified auditors 
pursuant to paragraph (d)(1) by March 16, 2015.
    (ii) The auditor shall deliver his or her final report to the 
participating copyright owners and the licensee pursuant to paragraph 
(i)(3) of this section by November 1, 2015.
    (d) Selection of the auditor. (1) Within forty-five days after a 
notice is published in the Federal Register pursuant to paragraph 
(c)(1) of this section, the participating copyright owners shall 
provide the statutory licensee with a list of three independent and 
qualified auditors, along with information reasonably sufficient for 
the licensee to evaluate the proposed auditors' independence and 
qualifications, including:
    (i) The auditor's curriculum vitae and a list of audits that the 
auditor has conducted pursuant to 17 U.S.C. 111(d)(6) or 119(b)(2);
    (ii) A list and, subject to any confidentiality or other legal 
restrictions, a brief description of any other work the auditor has 
performed for any of the participating copyright owners during the 
prior two calendar years;
    (iii) A list identifying the participating copyright owners for 
whom the auditor's firm has been engaged during the prior two calendar 
years; and,
    (iv) A copy of the engagement letter that would govern the 
auditor's performance of the audit and that provides for the auditor to 
be compensated on a non-contingent flat fee or hourly basis that does 
not take into account the results of the audit.
    (2) Within five business days after receiving the list of auditors 
from the participating copyright owners, the licensee shall select one 
of the proposed auditors and shall notify the participating copyright 
owners of its selection. That auditor shall be retained by the 
participating copyright owners and shall conduct the audit on behalf of 
all copyright owners who own a work that was embodied in a secondary 
transmission made by the licensee during the accounting period(s) 
specified in the Statement(s) of Account identified in the notice of 
intent to audit.
    (3) The auditor shall be independent and qualified as defined in 
this section. An auditor shall be considered independent and qualified 
if:
    (i) He or she is a certified public accountant and a member in good 
standing with the American Institute of Certified Public Accountants 
(``AICPA'') and the licensing authority for the jurisdiction(s) where 
the auditor is licensed to practice;
    (ii) He or she is not, for any purpose other than the audit, an 
officer, employee, or agent of any participating copyright owner;
    (iii) He or she is independent as that term is used in the Code of 
Professional Conduct of the AICPA, including the Principles, Rules, and 
Interpretations of such Code; and
    (iv) He or she is independent as that term is used in the 
Statements on Auditing Standards promulgated by the Auditing Standards 
Board of the AICPA and Interpretations thereof issued by the Auditing 
Standards Division of the AICPA.
    (e) Commencement of the audit. (1) Within ten days after the 
selection of the auditor, the auditor shall meet by telephone or in 
person with designated representatives of the participating copyright 
owners and the statutory licensee to review the scope of the audit, 
audit methodology, applicable auditing standard, and schedule for 
conducting and completing the audit.
    (2) Within thirty days after the selection of the auditor, the 
licensee shall provide the auditor and a representative of the 
participating copyright owners with a list of all broadcast signals 
retransmitted pursuant to the statutory license in each community 
covered by each of the Statements of Account subject to the audit, 
including the call sign for each broadcast signal and each multicast 
signal. In the case of an audit involving a cable system or MSO, the 
list must include the classification of each signal on a community-by-
community basis pursuant to Sec.  201.17(e)(9)(iv) through (v) and 
201.17(h). The list shall be signed by a duly authorized agent of the 
licensee and the signature shall be accompanied by the following 
statement ``I, the undersigned agent of the statutory licensee, hereby 
declare under penalty of law that 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.''
    (f) Failure to proceed with a noticed audit. If the participating 
copyright owners fail to provide the statutory licensee with a list of 
auditors or fail to retain the auditor selected by the licensee 
pursuant to paragraph (d)(2) of this section, the Statement(s) of 
Account

[[Page 68630]]

identified in the notice of intent to audit shall not be subject to 
audit under this section.
    (g) Ex parte communications. Following the initial consultation 
pursuant to paragraph (e)(1) of this section and until the distribution 
of the auditor's final report to the participating copyright owners 
pursuant to paragraph (i)(3) of this section, there shall be no ex 
parte communications regarding the audit between the auditor and the 
participating copyright owners or their representatives; provided, 
however, that the auditor may engage in such ex parte communications 
where either:
    (1) Subject to paragraph (i)(4) of this section, the auditor has a 
reasonable basis to suspect fraud and that participation by the 
licensee in communications regarding the suspected fraud would, in the 
reasonable opinion of the auditor, prejudice the investigation of such 
suspected fraud; or
    (2) The auditor provides the licensee with a reasonable opportunity 
to participate in communications with the participating copyright 
owners or their representatives and the licensee declines to do so.
    (h) Auditor's authority and access. (1) The auditor shall have 
exclusive authority to verify all of the information reported on the 
Statement(s) of Account subject to the audit in order to confirm the 
correctness of the calculations and royalty payments reported therein; 
provided, however, that the auditor shall not determine whether any 
cable system properly classified any broadcast signal as required by 
Sec.  201.17(e)(9)(iv) through (v) and 201.17(h) or whether a satellite 
carrier properly determined that any subscriber or group of subscribers 
is eligible to receive any broadcast signals under 17 U.S.C. 119(a).
    (2) The statutory licensee shall provide the auditor with 
reasonable access to the licensee's books and records and any other 
information that the auditor needs in order to conduct the audit. The 
licensee shall provide the auditor with any information the auditor 
reasonably requests promptly after receiving such a request.
    (3) The audit shall be conducted during regular business hours at a 
location designated by the licensee with consideration given to 
minimizing the costs and burdens associated with the audit. If the 
auditor and the licensee agree, the audit may be conducted in whole or 
in part by means of electronic communication.
    (4) With the exception of its obligations under paragraphs (d) and 
(e) of this section, a licensee may suspend its participation in an 
audit for no more than sixty days before the semi-annual due dates for 
filing Statements of Account by providing advance written notice to the 
auditor and a representative of the participating copyright owners, 
provided however, that if the participating copyright owners notify the 
licensee within ten days of receiving such notice of their good-faith 
belief that the suspension could prevent the auditor from delivering 
his or her final report to the participating copyright owners before 
the statute of limitations may expire on any claims under the Copyright 
Act related to a Statement of Account covered by that audit, the 
licensee may not suspend its participation in the audit unless it first 
executes a tolling agreement to extend the statute of limitations by a 
period of time equal to the period of the suspension.
    (i) Audit report. (1) After reviewing the books, records, and any 
other information received from the statutory licensee, the auditor 
shall prepare a draft written report setting forth his or her initial 
conclusions and shall deliver a copy of that draft report to the 
licensee. The auditor shall then consult with a representative of the 
licensee regarding the conclusions set forth in the draft report for up 
to thirty days. If, upon consulting with the licensee, the auditor 
concludes that there are errors in the facts or conclusions set forth 
in the draft report, the auditor shall correct those errors.
    (2) Within thirty days after the date that the auditor delivered 
the draft report to the licensee pursuant to paragraph (i)(1) of this 
section, the auditor shall prepare a final version of the written 
report setting forth his or her ultimate conclusions and shall deliver 
a copy of that final version to the licensee. Within fourteen days 
thereafter, the licensee may provide the auditor with a written 
rebuttal setting forth its good faith objections to the facts or 
conclusions set forth in the final version of the report.
    (3) Subject to the confidentiality provisions set forth in 
paragraph (l) of this section, the auditor shall attach a copy of any 
written rebuttal timely received from the licensee to the final version 
of the report and shall deliver a copy of the complete final report to 
the participating copyright owners and the licensee. The final report 
must be delivered by November 1st of the year in which the notice was 
published in the Federal Register pursuant to paragraph (c)(1) of this 
section and within five business days after the last day on which the 
licensee may provide the auditor with a written rebuttal pursuant to 
paragraph (i)(2) of this section. Upon delivery of the complete and 
final report, the auditor shall notify the Office that the audit has 
been completed. The notice to the Office shall specify the date that 
the auditor delivered the final report to the parties; whether, with 
respect to each statement examined, the auditor has discovered any 
underpayment or overpayment; and whether the auditor has received a 
written rebuttal from the licensee. The notice should be addressed to 
the ``U.S. Copyright Office, Office of the General Counsel'' and should 
be sent to the address for time-sensitive requests specified in Sec.  
201.1(c)(1).
    (4) Prior to the delivery of the final report pursuant to paragraph 
(i)(3) of this section the auditor shall not provide any draft of his 
or her report to the participating copyright owners or their 
representatives; provided, however, that the auditor may deliver a 
draft report simultaneously to the licensee and the participating 
copyright owners if the auditor has a reasonable basis to suspect 
fraud.
    (j) Corrections, supplemental payments, and refunds. (1) If the 
auditor concludes in his or her final report that any of the 
information reported on a Statement of Account is incorrect or 
incomplete, that the calculation of the royalty fee payable for a 
particular accounting period was incorrect, or that the amount 
deposited in the Office for that period was too low, a statutory 
licensee may cure such incorrect or incomplete information or 
underpayment by filing an amendment to the Statement and, in case of a 
deficiency in payment, by depositing supplemental royalty fee payments 
with the Office using the procedures set forth in Sec. Sec.  201.11(h) 
or 201.17(m); provided, however, that the amendment and/or payments are 
received within sixty days after the delivery of the final report to 
the participating copyright owners and the licensee or in the case of 
an audit of an MSO, within ninety days after the delivery of such 
report; and further provided that the licensee has reimbursed the 
participating copyright owners for the licensee's share of the audit 
costs, if any, determined to be owing pursuant to paragraph (k)(3) of 
this section. While reimbursement of audit costs shall be paid to a 
representative of the participating copyright owners, supplemental 
royalty fee payments made pursuant to this paragraph shall be delivered 
to the Office and not to the participating copyright owners or their 
representatives.
    (2) Notwithstanding Sec. Sec.  201.11(h)(3)(i) and 201.17(m)(4)(i), 
if the auditor

[[Page 68631]]

concludes in his or her final report that there was an overpayment on a 
particular Statement, the licensee may request a refund from the Office 
using the procedures set forth in Sec. Sec.  201.11(h)(3) or 
201.17(m)(4), provided that the request is received within sixty days 
after the delivery of the final report to the participating copyright 
owners and the licensee or within ninety days after the delivery of the 
final report in the case of an audit of an MSO.
    (k) Costs of the audit. (1) No later than the fifteenth day of each 
month during the course of the audit, the auditor shall provide the 
participating copyright owners with an itemized statement of the costs 
incurred by the auditor during the previous month, and shall provide a 
copy to the licensee that is the subject of the audit.
    (2) If the auditor concludes in his or her final report that there 
was no net aggregate underpayment or a net aggregate underpayment of 
five percent or less, the participating copyright owners shall pay for 
the full costs of the auditor. If the auditor concludes in his or her 
final report that there was a net aggregate underpayment of more than 
five percent but less than ten percent, the costs of the auditor are to 
be split evenly between the participating copyright owners and the 
licensee that is the subject of the audit. If the auditor concludes in 
his or her final report that there was a net aggregate underpayment of 
ten percent or more, the licensee will be responsible for the full 
costs of the auditor.
    (3) If a licensee is responsible for any portion of the costs of 
the auditor, a representative of the participating copyright owners 
shall provide the licensee with an itemized accounting of the auditor's 
total costs, the appropriate share of which should be paid by the 
licensee to such representative no later than sixty days after the 
delivery of the final report to the participating copyright owners and 
licensee or within ninety days after the delivery of such report in the 
case of an audit of an MSO.
    (4) Notwithstanding anything to the contrary in paragraph (k) of 
this section, no portion of the auditor's costs that exceed the amount 
of the net aggregate underpayment may be recovered from the licensee.
    (l) Confidentiality. (1) For purposes of this section, confidential 
information shall include any non-public financial or business 
information pertaining to a Statement of Account that is the subject of 
an audit under 17 U.S.C. 111(d)(6) or 119(b)(2).
    (2) Access to confidential information under this section shall be 
limited to:
    (i) The auditor; and
    (ii) Subject to the execution of a reasonable confidentiality 
agreement, outside counsel for the participating copyright owners and 
any third party consultants retained by outside counsel, and any 
employees, agents, consultants, or independent contractors of the 
auditor who are not employees, officers, or agents of a participating 
copyright owner for any purpose other than the audit, who are engaged 
in the audit of a Statement or activities directly related hereto, and 
who require access to the confidential information for the purpose of 
performing such duties during the ordinary course of their employment.
    (3) The auditor and any person identified in paragraph (l)(2)(ii) 
of this section shall implement procedures to safeguard all 
confidential information received from any third party in connection 
with an audit, using a reasonable standard of care, but no less than 
the same degree of security used to protect confidential financial and 
business information or similarly sensitive information belonging to 
the auditor or such person.
    (m) Frequency and scope of the audit. (1) Except as provided in 
paragraph (n)(2) of this section with respect to expanded audits, a 
cable system, MSO, or satellite carrier shall be subject to no more 
than one audit per calendar year.
    (2) Except as provided in paragraph (n)(1) of this section, the 
audit of a particular cable system or satellite carrier shall include 
no more than two of the Statements of Account filed by that cable 
system or satellite carrier that may be timely noticed for audit under 
paragraph (c)(1) of this section.
    (3) Except as provided in paragraph (n)(3)(ii) of this section, an 
audit of an MSO shall be limited to a sample of no more than ten 
percent of the MSO's Form 3 cable systems and no more than ten percent 
of the MSO's Form 2 systems.
    (n) Expanded audits. (1) If the auditor concludes in his or her 
final report that there was a net aggregate underpayment of five 
percent or more on the Statements of Account examined in an initial 
audit involving a cable system or satellite carrier, a copyright owner 
may expand the audit to include all previous Statements filed by that 
cable system or satellite carrier that may be timely noticed for audit 
under paragraph (c)(2) of this section. The expanded audit shall be 
conducted using the procedures set forth in paragraphs (d) through (l) 
of this section, with the following exceptions:
    (i) The expanded audit may be conducted by the same auditor that 
performed the initial audit, provided that the participating copyright 
owners provide the licensee with updated information reasonably 
sufficient to allow the licensee to determine that there has been no 
material change in the auditor's independence and qualifications. In 
the alternative, the expanded audit may be conducted by an auditor 
selected by the licensee using the procedure set forth in paragraph (d) 
of this section.
    (ii) The auditor shall deliver his or her final report to the 
participating copyright owners and the licensee within five business 
days following the last day on which the licensee may provide the 
auditor with a written rebuttal pursuant to paragraph (i)(2) of this 
section, but shall not be required to deliver the report by November 
1st of the year in which the notice was published in the Federal 
Register pursuant to paragraph (c) of this section.
    (2) An expanded audit of a cable system or a satellite carrier that 
is conducted pursuant to paragraph (n)(1) of this section may be 
conducted concurrently with another audit involving that same licensee.
    (3) If the auditor concludes in his or her final report that there 
was a net aggregate underpayment of five percent or more on the 
Statements of Account examined in an initial audit involving an MSO:
    (i) The cable systems included in the initial audit of that MSO 
shall be subject to an expanded audit in accordance with paragraph 
(n)(1) of this section; and
    (ii) The MSO shall be subject to a new initial audit involving a 
sample of no more than thirty percent of its Form 3 cable systems and 
no more than thirty percent of its Form 2 cable systems, provided that 
the notice of intent to conduct that audit is filed in the same 
calendar year as the delivery of such final report.
    (o) Retention of records. For each Statement of Account or amended 
Statement that a statutory licensee files with the Office for 
accounting periods beginning on or after January 1, 2010, the licensee 
shall maintain all records necessary to confirm the correctness of the 
calculations and royalty payments reported in each Statement or amended 
Statement for at least three and one-half years after the last day of 
the year in which that Statement or amended Statement was filed with 
the Office and, in the event that such Statement or amended Statement 
is the subject of an audit conducted pursuant to this section, shall 
continue to maintain those records until three years after the auditor 
delivers the final report to the participating copyright owners and the

[[Page 68632]]

licensee pursuant to paragraph (i)(3) of this section.


Sec.  201.17  [Amended]

0
3. Amend Sec.  201.17 as follows:
0
a. In paragraphs (m)(2) introductory text and (m)(4)(i) by removing 
``(m)(3)'' and adding in its place ``(m)(4)''.
0
b. In paragraphs (m)(2)(ii), (m)(4)(iii)(C), and (m)(4)(iv)(A) by 
removing ``(m)(1)(iii)'' and adding in its place ``(m)(2)(iii)''.
0
c. In paragraph (m)(4) introductory text by removing ``(m)(1)'' and 
adding in its place ``(m)(2)''.
0
d. In paragraph (m)(4)(iii)(A) by removing ``(m)(1)(i)'' and adding in 
its place ``(m)(2)(i)''.
0
e. In paragraph (m)(4)(iii)(B) by removing ``(m)(1)(ii)'' and adding in 
its place ``(m)(2)(ii)''.
0
f. In paragraph (m)(4)(vi) by removing ``(m)(3)(i)'' and adding in its 
place ``(m)(4)(i)''.

    Dated: November 10, 2014.
Maria A. Pallante,
Register of Copyrights and Director of the U.S. Copyright Office.
James H. Billington,
Librarian of Congress.
[FR Doc. 2014-27277 Filed 11-17-14; 8:45 am]
BILLING CODE 1410-30-P