How are $1.2B MLC royalty fund investments doing now?

Chris Castle looks at the $1.2 billion in MLC royalty fund investments and as global markets crash asks who bears the risk of this high-stakes strategy.

How are $1.2B MLC royalty fund investments doing now?

Op-ed by CHRIS CASTLE via Music Tech Policy

The MLC’s 2023 tax return shows that as of 12/31/23 the quango was holding $1,212,282,220 invested in publicly traded securities which is a fortune for an organization that makes no money and has no profits. That means that one way or another, all of those holdings belong to someone else. I suspect that the cash is either black box money for unmatched funds, royalties that have been earned but not yet distributed, or its unspent monies paid by music services as part of the “allocation” that services using the blanket license pay to cover the MLC’s operating costs. The MLC may think that the allocation money belongs to them, and they do have the right to spend it according to the Copyright Royalty Board’s allocation rulings–but if the CRB’s determination of that possession includes the right to engage in securities trading with it, I would love for someone to point it out to me.

As we’ve pointed out many times, the MLC has failed to disclose, in fact I think they have actually refused to disclose, who gets the upside for any trading profits made with these monies. Or perhaps more importantly in the current environment, who bears the trading losses.

Despite the fact that Members of Congress have raised this question a couple different times, the Copyright Office has failed to publicly exercise its oversight role and force the MLC to disclose what’s going on with this money. That inquiry includes Congressman Fitzgerald’s inquiries in his recent letter to the Copyright Office demanding that the Office do that very thing along with demanding increased transparency about the MLC’s finances in general. To my knowledge, there has been no reply and the Copyright Office’s redesignation process to allow the MLC’s current regime to continue operating the collective has now entered its second year. Look, we all know that the Office is going to bend the knee and comply with the wishes of the powers that be, but why is it taking so long for them to do so publicly?

However, the recent downturn in the market brings new focus on the MLC’s unilateral decision that they have the right to “invest” what is now over $1 billion dollars that the songwriter community sorely needs. That investment policy also requires that the MLC keep their holdings a secret, which is very convenient.

The Supplement to the MLC’s 2023 tax return includes this language:

In our Form 990 for 2023, we provided information regarding funds we were holding in banks and investments as of the beginning of 2023 and the end of 2023. These included assessment funds that we
subsequently use to fund our operations; royalty funds we were not yet able to distribute and on which we are required to earn interest in accordance with the Music Modernization Act (MMA) of 2018; and royalty funds we were holding pending distribution.

What the MMA actually says in the black box penalty language of 17 USC §115 (d)(3)(H)(ii) is:

Interest-bearing account.—Accrued royalties for unmatched works (and shares thereof) shall be maintained by the mechanical licensing collective in an interest-bearing account that earns monthly interest—

(I) at the Federal, short-term rate; and

(II) that accrues for the benefit of copyright owners entitled to payment of such accrued royalties.

The black box penalty in 17 USC §115 (d)(3)(H)(ii) is similar to the late fee charged to licensees. The code creates an incentive for the MLC to pay out unmatched funds quickly to avoid the market share distribution of black box which could happen any minute now (particularly since the Copyright Office hasn’t completed the five-year review it started over a year ago).

This language of 17 USC §115 (d)(3)(H)(ii) does not “require” the MLC to “earn interest”, it requires them to PAY interest. Because it is inextricably tied to job performance, it would not be a payment borne by the licensees as part of the administrative assessment because it would not be part of the “collective total costs.”

That’s why I think it’s a penalty. It is, in my view, absolutely false and misleading to state in a matter under the jurisdiction of the federal government that the MLC is in compliance with a code section that does not say what they say it says. And it’s not just this one time, the CEO has said almost these exact words in testimony to the House IP Subcommittee and in supplemental written testimony to answer questions for the record from the Subcommittee.

Even if you want to be generous and accept the MLC’s argument–and it’s just an argument–that the MMA “requires” the MLC to “earn” interest, an “interest bearing account” simply does not contemplate “investing” other people’s money–your money–in publicly traded securities by a stock broker. When asked direct questions about who bears the downside and who gets the ups on their stock trading, the MLC has never answered the question. 

The closest to an answer we get from the plain statutory language is that the MLC is required to pay interest on unmatched funds at the “federal short term rate” which is approximately 4.23%. Does that mean that if the MLC makes more than a 4.23% return they keep the upside? Or if the stock brokers don’t achieve that return, does that mean the licensees cough up the difference in additional administrative assessment contributions? Unlikely, so would the MLC’s board members pass the hat? I’ll believe that when I see it.

Now that we are seeing a global market crash with indices down around 10%, songwriters are more than justified in asking how that portfolio is doing, and what happens if the music stops–meaning that the MLC has to pay out all of the unmatched money they are holding? How will they cover the losses? Or alternatively, what if they needed to use the administrative assessment funds they are using to play the market–sorry–I meant invest very conservatively? If there’s a shortfall, what happens then?

Well, according to the “Hoffa Clause” in the MMA (17 U.S.C. § 115 (d)(7)(C)), the MLC is allowed to dip into the black box to cover costs in excess of the “Administrative Assessment” paid by the licensees. Strangely enough, when the lobbyists drafted the Hoffa Clause, they never said that the MLC had to explain why they had a shortfall. There’s a big difference in a sudden increase in costs causing a shortfall no one could anticipate compared to a sudden market shock causing a trading loss for monies the MLC is obligated to pay out. 

Do you think this would create an incentive to avoid the black box interest penalty by accelerating your matching program? Or do you think that it’s equally or even more likely that nobody is going to be in a big hurry to incur a liability payment for the black box?

Well, markets go up, markets go down, can’t pick a top and can’t pick a bottom. That’s fine when it’s your money, but when it’s other people’s money, it’s not OK at all. We have no way of knowing how much is in the MLC’s portfolio and what additional gains or losses have accrued since 2023 because they won’t tell us. 

Of course, if the MLC was planning on pocketing the spread between the interest rate penalty and gains from trading, they need to explain that, too. Just sayin’.

Why won’t they disclose their holdings? They use the laughable excuse that they keep it secret because it’s so much money it might move markets. I guess that’s because Warren Buffett is sitting by the phone waiting to find out what the MLC is going to do before he makes a move. This kind of bullshit may work with the Copyright Office, but it doesn’t work with anyone else. Particularly when an estimate of the potential decline in the MLC’s portfolio on a matching percentage basis compared to the current overall stock market could be well north of $100,000,000. Of other people’s money.

The time to have forced that disclosure was well over a year ago because this trend has been in motion since the MLC first started collecting and spending other people’s money. It seemed so natural for them to adopt this insane policy that it makes you wonder if HFA was doing the same thing all those years.