If you have watched The MLC, Inc. struggle with black box payments, i.e., the unmatched royalties that have accrued but remain unpaid because they cannot be associated with a specific copyright owner, you’re probably wondering what is taking so long for them to, you know, show you the money.

After the House IP Subcommittee’s oversight hearing on The MLC, Inc., it became clear just how much The MLC was prepared to dodge any public discussion of its self-invented investment “policy.” As Garrett Levin, then head of DIMA and the DLC said, “[A challenge for the MLC] is navigating that line between administering the [blanket] license and setting policy and rules.  One is what the MMA intended, the other actually goes beyond what they’re supposed to do.”

As we go forward with that oversight, loose ends appear that help to illuminate The MLC’s investment policy and demonstrate why they don’t show you the money except in some pretty unilluminated ways. One of those loose ends has to do with how The MLC, Inc. and its board of directors complies with Congressional mandates for stewardship on the hundreds of millions of songwriter money held in the black box and protecting the beneficial interests of copyright owners while that money is unmatched under The MLC’s control.

One of those areas where The MLC is improperly “setting policy and rules” is in how it invests the black box as a kind of investment portfolio. Realize that the size of a black box investment portfolio rivals some hedge funds and regional banks. Some of these loose ends are more interesting than others. Particularly when it makes The MLC a high roller on Wall Street which could lead to all kinds of perks as a valued client (of, say, Goldman Sachs), which could include directed shares in IPOs, and who knows? It’s a mystery, really.

This exchange at the oversight hearing between Rep. Ben Cline and The MLC, Inc.’s CEO Kris Ahrend is the relevant part:

Mr. Cline:  I understand that royalty funds may be invested.  Have royalty funds actually been used for this purpose and if so how will the MLC handle any profits or losses stemming from investments?

Kris Ahrend:  Royalties are never used to fund our operations.  100% of operating costs are funded by DSPs through an assessment process.  [Not the question]. Unpaid royalties that we have accrued we hold and we hold them until we are able to pay out the underlying royalties and then we pay those royalties with interest.  [Not entirely true—the monies are held until the market share distribution occurs.]. The monies that we hold are invested conservatively through institutional financial firms in financial investments intended to deliver the rate of return the statute requires while minimizing risk as much as possible.  That is not an easy task but it is one we’ve undertaken.  We monitor it carefully.  We work with outside fee based advisors who have no financial benefit in the process either [aside from fees] to ensure that we are doing that as effectively as possible.  

Note that Mr. Ahrend did not answer the very relevant question about what happens to the profit and loss under The MLC’s self-created investment policy. Which raises other questions, like does the board (voting and nonvoting members) make up any losses?

The MLC, Inc.’s Congressional Mandate for That Pesky Black Box

Now here’s an interesting loose end. Recall that The MLC, Inc. has very specific rules about how it is to hold onto the black box which is in the hundreds of millions of dollars. Those rules are illuminated in 17 USC §115(d)(3)(H):

The legislative history gives very brief treatment to subsection H (at p. 20), possibly because it’s so self-evident that it needs no long explanation:

Subparagraph H clarifies that any unmatched royalties shall be held by the collective for at least three years after they were first accrued and must be kept in an interest bearing account.

Let’s all agree that “an interest bearing account” means an account that bears interest. Perhaps we can also agree that the account would typically be a cash account in a bank with deposit insurance. This is not necessarily the same thing as a mutual fund that seems so attractive to The MLC, Inc. as we will see. For a better understanding of cash vs. bonds (or bond funds) see this helpful explainer from Morningstar.

Now about those interest rates.

As we will see, The MLC is supposed to hold the now substantial black box in an interest bearing account for the benefit of copyright holders. When the black box is liquidated to a copyright holder, that payment includes an interest payment accruing during the period The MLC, Inc. had the unmatched funds under its stewardship. (As many comments to the Copyright Office have observed, there is a moral hazard because the lobbyists drafted the MMA to liquidate the black box on a market share basis that benefits the major publishers who also control the board of The MLC, Inc. and devised its secret investment policy.)

During the run up to the MMA in 2018 and really until 2022, interest rates had been locked in the post-2008 recession “ZIRP” or “zero interest rate policy” tied to the Federal Reserve’s quantitative easing policy, or as I like to call it, “easy money.” (See my explainer on quantitative easing and songwriter COLAs for compulsory licensing.) 

Therefore, sitting on $500,000,000 or more of other people’s money in the black box didn’t have much of a cost when the monthly interest rate was 0.44% as it was in January of 2022.

But no more.  After the Federal Reserve’s many interest rate increases recently, the Federal short term interest rate is now 5.13% monthly and is almost certain to go higher. Also remember that the short term rate is tied to a three-year holding period.  That’s what makes short term a short term. If the holding period exceeds three years, it pokes into the mid-term interest rate which currently is 4.71% monthly. By referring to the Federal short term rate in the Copyright Act, Congress anticipated these changes.

The point of the Congressional mandate in clause (H)(ii) is not to grant permission for The MLC, Inc. to take on risk through investing or trading the black box on the public markets. Rather–and crucially–Congress established one specific, low-risk, and liquid vehicle for holding what have turned out to be substantial sums for the benefit of unidentified copyright owners: An interest bearing account accruing monthly interest. And this on the assumption that The MLC, Inc. simultaneously worked diligently to reunite those as yet unknown copyright owners with their money.

Note that Congress could have, but did not, direct The MLC, Inc. quango to establish an investment policy for stock trading of other people’s money. Yet it appears that is exactly what The MLC, Inc. has done according to its stated “Investment Policy” that was self-created and published in its 2022 Annual Report:

Investment Policy: This policy covers the investment of royalty and assessment funds, respectively, and sets forth The MLC’s goals and objectives in establishing policies to implement The MLC’s investment strategy. The anti-comingling policy required by 17 U.S.C. § 115(d)(3)(D)(ix)(I)(cc) is contained in The MLC’s Investment Policy. (The Investment Policy was approved by The MLC Board in January 2021.)

When you consider that The MLC is making unilateral investment decisions about hundreds of millions of other people’s money, it doesn’t seem like too much to ask that they publish some detail, if not considerable detail, about how those investments are being made. By not doing so, their investment policy seems like a prime example of what Mr. Levin was describing when he warned about The MLC making up its own rules. Particularly when we do not know who gets the profits or bears the losses.

Investment in Payden Limited Maturity Fund

If you follow mutual funds you’ll know that there are some funds that are marketed to institutional investors that have a high initial investment limit, like say $100,000 or $1,000,000. Or $10,000,000 in the case of the Payden Limited Maturity SI fund.

How did we come to focus on this particular mutual fund? Well, as it turns out, The MLC invests in this fund. A lot.

Although The MLC has not publicly disclosed its “Investment Policy” for the hundreds of millions in black box funds under its stewardship, based on public SEC filings brought to my attention, the Payton Limited Maturity Fund SI (PYLSX) must fit the profile.

In fact, The MLC, Inc. has a pretty substantial position in this fund, sufficient to be what is called a “Control Person” that owns 25% or more of the fund that the PYLSX is required to disclose in its fundraising materials to the Securities and Exchange Commission (Form N-1A Registration Statement filed February 28, 2023).

A mutual fund’s registration statement is an important disclosure. According to Rule 405 of the Securities Act, a control person has “the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.” I’m not sure this is what Congress had in mind in Title I of the Music Modernization Act.

This is what we find in the Payden registration statement (at p. 57)

It appears that The MLC, Inc. is a control person of PYLSX holding approximately 44.62% of the fund, at least as of February 28, 2023. So what is that investment worth today?

Note that the “Net Assets” of PYLSX is currently $1.95 billion according to Yahoo Finance. Rough justice, if MLC is still a control person and has not increased its holdings from the levels in PYLSX’s SEC filing last February, that means MLC’s position in the fund may be worth approximately $877.5 million. (That’s approximately double the amount it received in historical black box in 2021.). Of course, The MLC’s control person’s share could have been somewhat diluted by trading or issuance of new shares, but there’s only a handful of people who know the truth. The MLC does not appear inclined to disclose either its holdings or its secret investment policy to anyone, including Congress.

It must also be said that Congress mandated the black box earn monthly interest at the Federal Short Term Rate which currently is 5.13%, nearly 20% more than PYLSX’s yield of 4.35%.

So here’s a few questions to think about that echo Representative Cline’s thoughtful question from the IP Subcommittee Oversight hearing:

1. What is The MLC’s Investment Policy? What investments have The MLC made with the black box?
2. How did The MLC come to select the Payden funds as an investment vehicle? Are there any conflicts of interest present with that decision?
3. Will The MLC publish the account statements for all their investments?
4. Was The MLC offered any perks, benefits or investment opportunities (for The MLC or any officer, director, consultant, vendor or employee as a result of investing in Payden?
5. If there is a shortfall between the yield on the Payden investment and the statutory interest rate, who makes up that shortfall?
6. To restate Rep. Cline’s question:
   
   Mr. Cline:  I understand that royalty funds may be invested.  Have royalty funds actually been used for this purpose and if so how will the MLC handle any profits or losses stemming from investments?