30808 Federal Register / Vol. 61, No. 118 / Tuesday, June 18, 1996 / Rules and Regulations

The Federal regulations at 30 CFR

Part 943, codifying decisions concerning

the Texas program, are being amended

to implement this decision. This final

rule is being made effective immediately

to expedite the State program

amendment process and to encourage

States to bring their programs into

conformity with the Federal standards

without undue delay. Consistency of

State and Federal standards is required

by SMCRA.

Effect of Director’s Decision

Section 503 of SMCRA provides that

a State may not exercise jurisdiction

under SMCRA unless the State program

is approved by the Secretary. Similarly,

30 CFR 732.17(a) requires that any

alteration of an approved State program

be submitted to OSM for review as a

program amendment. The Federal

regulations at 30 CFR 732.17(g) prohibit

any unilateral changes to approved State

programs. In the oversight of the Texas

program, the Director will recognize

only the statutes, regulations and other

materials approved by OSM, together

with any consistent implementing

policies, directives and other materials,

and will require the enforcement by

Texas of only such provisions.

VI. Procedural Determinations

Executive Order 12866

This rule is exempted from review by

the Office of Management and Budget

(OMB) under Executive Order 12866

(Regulatory Planning and Review).

Executive Order 12988

The Department of the Interior has

conducted the reviews required by

section 3 of Executive Order 12988

(Civil Justice Reform) and has

determined that, to the extent allowed

by law, this rule meets the applicable

standards of subsections (a) and (b) of

that section. however, these standards

are not applicable to the actual language

of State regulatory programs and

program amendments since each such

program is drafted and promulgated by

a specific State, not by OSM. Under

sections 503 and 505 of SMCRA (30

U.S.C. 1253 and 1255) and the Federal

regulations at 30 CFR 730.11, 732.15,

and 732.17(h)(10), decisions on

proposed State regulatory programs and

program amendments submitted by the

States must be based solely on a

determination of whether the submittal

is consistent with SMCRA and its

implementing Federal regulations and

whether the other requirements of 30

CFR Parts 730, 731, and 732 have been

met.

National Environmental Policy Act

No evironmental impact statement is

required for this rule since section

702(d) of SMCRA (30 U.S.C. 1292(d))

provides that agency decisions on

proposed State regulatory program

provisions do not constitute major

Federal actions within the meaning of

section 102(2)(C) of the National

Environmental Policy Act (42 U.S.C.

4332(2)(C)).

Paperwork Reduction Act

This rule does not contain

information collection requirements that

require approval by OMB under the

Paperwork Reduction Act (44 U.S.C.

3507 et seq.).

Regulatory Flexibility Act

The Department of the Interior has

determined that this rule will not have

a significant economic impact on a

substantial number of small entities

under the Regulatory Flexibility Act (5

U.S.C. 601 et seq.). The State submittal

which is the subject of this rule is based

upon corresponding Federal regulations

for which an economic analysis was

prepared and certification made that

such regulations would not have a

significant economic effect upon a

substantial number of small entities.

Accordingly, this rule will ensure that

existing requirements previously

promulgated by OSM will be

implemented by the State. In making the

determination as to whether this rule

would have a significant economic

impact, the Department relied upon the

data and assumptions for the

corresponding Federal regulations.

Unfunded Mandates

This rule will not impose a cost of

$100 million or more in any given year

on any governmental entity or the

private sector.

List of Subjects in 30 CFR Part 943

Intergovernmental relations, Surface

mining, Underground mining.

Dated: May 28, 1996.

Brent Wahlquist,

Regional Director, Mid-Continent Regional

Coordinating Center.

For the reasons set out in the

preamble, Title 30, Chapter VII,

Subchapter T of the Code of Federal

Regulations is amended as set forth

below:

PART 943—TEXAS

1. The authority citation for Part 943

continues to read as follows:

Authority: 30 U.S.C. 1201 et seq.

2. Section 943.15 is amended by

adding paragraph (n) to read as follows:

§ 943.15 Approval of regulatory program

amendments.

* * * * *

(n) The amendment submitted by

Texas to OSM by letter dated August 30,

1995, and the definition of ‘‘violation

notice’’ submitted by Texas to OSM by

letter dated September 18, 1995, are

approved effective June 18, 1996.

3. Section 943.16 is amended by

removing paragraphs (r), (t), and (u) and

by revising paragraph (k) to read as

follows:

§ 943.16 Required program amendments.

* * * * *

(k) By October 19, 1992, Texas shall

submit to OSM a proposed amendment

for the definitions at TCMR 770.101 to

replace the definitions for ‘‘applicant,’’

‘‘application,’’ ‘‘complete application,’’

‘‘general area,’’ ‘‘principal shareholder,’’

and ‘‘property to be mined,’’ or

otherwise demonstrate that these

definitions are not necessary for the

Texas program to be no less effective

than the Federal regulations.

* * * * *

[FR Doc. 96–15145 Filed 6–17–96; 8:45 am]

BILLING CODE 4310–05–M

LIBRARY OF CONGRESS

Copyright Office

37 CFR Part 201

[Docket No. 93–2B]

Digital Audio Recording Devices and

Media; Verification of Statements of

Account

AGENCY: Copyright Office, Library of

Congress.

ACTION: Interim regulation.

SUMMARY: The Audio Home Recording

Act of 1992 requires the Register of

Copyrights to issue regulations that

provide for the verification of the

information contained in digital audio

recording technology (DART)

Statements of Account filed with the

Office. The Copyright Office is adopting

Interim Regulations that establish

procedures for requesting verification,

the scope of the verification, and the

allocation of costs. The regulations are

intended to ensure that proper

payments have been made to copyright

owners.

DATES: This interim regulation is

effective June 18, 1996. Comments must

be submitted on or before September 16,

1996. Reply comments must be
Federal Register / Vol. 61, No. 118 / Tuesday, June 18, 1996 / Rules and Regulations 30809

1S. 1623, 102d Cong., 1st Sess. (1991).

2The first Annual DART Statement of Account

was filed with the Office March 1, 1994. Since we

are proposing that a verification procedure of an

Annual Statement of Account can be invoked no

later than three years after the filing deadline, it is

important to provide interim regulations even while

the verification procedure is being further refined.

submitted on or before October 16,

1996.

ADDRESSES: If sent by mail, fifteen

copies of written comments should be

addressed to Marilyn J. Kretsinger,

Acting General Counsel, Copyright GC/

I&R, P.O. Box 70400, Southwest Station,

Washington, D.C. 20024. Telephone:

(202) 707–8380. Telefax: (202) 707–

8366. If by hand, fifteen copies should

be brought to: Office of the General

Counsel, Copyright Office, James

Madison Memorial Building, Room LM–

407, First and Independence Avenue,

S.E., Washington, D.C. 20540.

FOR FURTHER INFORMATION CONTACT:

Marilyn J. Kretsinger, Acting General

Counsel, Copyright GC/I&R, P.O. Box

70400, Southwest Station, Washington,

D.C. 20024, or Tanya Sandros.

Telephone: (202) 707–8380. Telefax:

(202) 707–8366.

SUPPLEMENTARY INFORMATION:

I. Background

The Audio Home Recording Act

(AHRA) requires manufacturing and

importing parties that distribute digital

audio recording devices or media in the

United States to file Statements of

Account with, and make royalty

payments to, the Copyright Office. It

also requires the Register of Copyrights

to issue regulations to protect the

confidentiality of the information

contained in Statements of Account, to

provide for the disclosure, in

confidence, of Statements to interested

copyright parties, and to provide for the

verification of Statements of Account.

17 U.S.C. 1003(c)(2).

We published a Notice of Proposed

Rulemaking on May 7, 1993. 58 FR

27251 (May 7, 1993). The Notice

contained a proposed regulation

concerning access to, and

confidentiality of, Statements of

Account and asked for public comment

on that proposal and also on the form

and content of a regulation governing

audit and verification procedures.

In separate proceedings, we issued

interim regulations governing the filing

of Notices of Initial Distribution, 57 FR

55464 (November 25, 1992), and

establishing requirements governing the

filing dates, frequency of filing, and

content of Statements of Account and

the primary auditor’s report that must

be filed by persons subject to the

statutory obligation. 59 FR 4586

(February 1, 1994). In a separate

proceeding, we published interim

regulations governing access to and

confidentiality of Statements of

Account. 60 FR 25995 (May 16, 1995).

II. Verification of Statements of

Account

In the Notice of Proposed Rulemaking

(NPRM), 58 FR 27251 (1993), we did not

propose the actual language of a

verification regulation. Instead, we

noted that the Senate version of AHRA,

S. 1623,1 contained detailed provisions

regarding audit and verification which

were eliminated from the bill as passed,

but which we indicated we were

inclined to use as the framework for the

regulations. We therefore solicited

public comments and detailed proposals

for the form and content of a verification

regulation based on S. 1623. In addition,

we asked ten specific questions.

The Office received eleven comments,

including direct, reply, and surreply

comments, from four parties. Comments

were received from (1) the American

Institute of Certified Public Accountants

(AICPA); (2) the American Society of

Composers, Authors, and Publishers,

Broadcast Music, Inc., Copyright

Management, Inc., the National Music

Publishers’ Association, Inc., SESAC,

Inc., and the Songwriters Guild of

America (The Copyright Parties); (3) the

Alliance of Artists and Recording

Companies (AARC); and (4) the

Electronic Industries Association (EIA).

The comments revealed that while

there was general agreement on a

number of issues, there were sharp

differences among the parties on certain

key issues, especially, the scope of the

verification procedure, the possible role

of an arbitrating accountant or the

Copyright Office in resolving disputes,

and the standards to measure the

independence of the verifying auditor.

The Office believes these issues need to

be resolved through another round of

comments. However, the Office believes

that interim regulations need to be

adopted to allow for the verification of

the Annual Statements of Accounts that

have already been received.2 Therefore,

in order to go forward, the Copyright

Office has had to take a certain

approach, but these interim regulations

represent only the Office’s initial

position, and are not intended

necessarily to indicate the Office’s final

conclusions. Comments on the specific

regulatory language and the issues they

raise are particularly solicited.

What follows is a discussion of the

comments and a description of the

interim regulations adopted by the

Office.

III. Period for Invoking a Verification

Procedure

The first issue is one of timing: when

should the Annual Statements of

Account be available for a verification

procedure and for how long? How often

should the Annual Statements be

audited?

S. 1623 did not provide for a time

limit for initiating a verification

procedure, but did state that no filer

should be audited more than once a

year.

EIA said it would accept a two or

three year time limit following the filing

of the Annual Statement of Account for

verification. EIA, comments at 28. The

Copyright Parties supported a rule

stating that the verification procedure

should not be conducted more than

three years after the filing date of the

Annual Statement of Account.

Copyright Parties, reply at 25. AICPA

supported a deadline beyond which

verification procedures could not be

conducted, and in its reply comments

supported the three-year rule advanced

by the Copyright Parties. AICPA,

comments at 5, reply at 6.

AICPA recommends that only one

verification audit should be permitted

per Statement of Account. AICPA,

comments at 5. EIA states there should

be no more than one verification audit

per year per Statement of Account. EIA,

comments at 27. The Copyright Parties

urge the adoption of regulations that

permit interested parties to consolidate

the verification procedure for several

Annual Statements. The Copyright

Parties agree that no manufacturer or

importer should be audited more than

once in a calendar or fiscal year and the

Annual Statements should be verified

no more than once. Copyright Parties,

comments at 29, reply at 24.

While there was general agreement

among the commentators supporting a

time limit, because of the procedure for

selecting a verifying auditor discussed

below, we are measuring the time limit

somewhat differently from the

measurements proposed in the

comments.

First, within three months of the filing

deadline of the Annual Statement of

Account, no verification procedure may

be invoked. This will give the Licensing

Division time to review the Annual

Statement and resolve any

discrepancies.

Second, after the three months, any

interested copyright party will have

until the third year anniversary of the

filing deadline of the Annual Statement

to notify the Copyright Office, the filer
30810 Federal Register / Vol. 61, No. 118 / Tuesday, June 18, 1996 / Rules and Regulations

3The interested copyright parties may, after

consultation with each other, decide not to conduct

a verification procedure. In that case, they will not

select a verifying auditor, but will, instead, notify

the filer, the primary auditor and the Register of

Copyrights that they do not intend to proceed.

and the primary auditor of his or her

intent to invoke a verification

procedure. The notice of one party will

preserve the right of all interested

copyright parties to participate in a

verification procedure. While EIA’s and

the Copyright Parties’ comments

contemplated that the verification

procedure itself would have to

commence within three years of the

filing of the Annual Statement of

Account, the Office believes that this is

not workable, because too many events,

such as the Office publishing a notice in

the Federal Register, and the

subsequent coordination and selection

of the verifying auditor, are beyond the

petitioning party’s sole control. The

interested copyright party could not

know how much time before the end of

the three years he or she needed to

allow to assure that the verification

procedure began within three years of

the filing deadline. Therefore, the Office

has moved the tolling of the deadline

from the time the verification procedure

commences to the time when notice is

filed by the interested copyright party

that he or she wants to begin a

verification procedure.

The interim regulations provide that

there can be no more than one

verification procedure a year of any

manufacturing or importing party, but

the verification procedure may include

more than one Annual Statement of

Account.

IV. Selection of Verifying Auditor

Assuming that one or more copyright

parties wants to invoke a verification

procedure, how do they coordinate the

selection of the verifying auditor? S.

1623 provided that the Register of

Copyrights should establish a procedure

by which interested copyright parties

will coordinate the engagement of a

verifying auditor to perform the

verification procedure.

EIA commented that all parties would

be best served by a formal procedure by

which interested copyright parties

provide public notice of their intent to

invoke a verification procedure, permit

other interested copyright parties to

express an interest, and then jointly

select a verifying auditor. EIA,

comments at 29. The Copyright Parties

recommended that we establish

procedures by which interested

copyright parties may coordinate the

engagement of a verifying auditor to

ensure that no manufacturing or

importing party is audited more than

once per year. Copyright Parties,

comments at 10–11.

The Office believes that it is the

responsibility of the copyright parties to

select the verifying auditor and

coordinate the verification procedure.

The Office can only play a limited role

in this process, acting to notify the

copyright parties that a verification

procedure is contemplated and who is

proposing the procedure.

The Office will perform that role by

publishing a notice in the Federal

Register when it has been informed by

an interested copyright party that he or

she is interested in invoking a

verification procedure. The notice will

include whom to contact so that all

interested copyright parties who want to

be involved may coordinate their

selection of the auditor. The party, or,

if more than one, the joint interested

parties will select the verifying auditor

and will notify, within two months of

the publication of the original Federal

Register notice, the filer of the Annual

Statement of Account, the primary

auditor and the Register of Copyrights

whether or not they wish to start a

verification procedure.3

V. Notice and Length of Verification

Procedure

The NPRM also asked what would be

reasonable notice before commencing a

verification procedure, and how long

the verification procedure should take.

EIA recommended that at least 30

days notice should be required and the

manufacturer, importer, or primary

auditor should be able to postpone the

verification up to 60 days. EIA,

comments at 6The Copyright Parties

stated that 60 days is a reasonable notice

before the verification procedure

commences. The Copyright Parties

observed that the duration of a

verification procedure will vary from

case to case, and that the duration is as

much in the control of the manufacturer

or importer as of the interested

copyright parties or their verifying

auditor. Copyright Parties, comments at

21–22. AICPA had no comment on the

length of time required for notice of a

verification procedure. It did suggest

that the length of time to perform the

procedure should be 90 to 120 days.

AICPA, comments at 3.

The Office’s interim regulations state

that after the joint interested parties

notify the filer of their intent to conduct

a verification procedure, the verification

procedure can begin one month later, or

up to two months later if the filer or the

primary auditor asks for a

postponement. The Office agrees with

the comments of the Copyright Parties

that the duration of the verification

procedure can vary from case to case

and, therefore, the Office has not

adopted any rules concerning how long

the verification procedure should take.

VI. Scope of Verification Procedure

The scope of the verification

procedure has been one of the most

contentious issues faced by the Office in

drafting regulations to implement the

AHRA. The Office is required to balance

the need of the manufacturing and

importing parties to avoid the

disruption of their business and the

exposure of confidential information,

with the need of the interested

copyright parties to be assured that

sufficient royalties are deposited for

distribution. EIA, comments at 2;

Copyright Owners, comments at 2.

Section 1011(e)(1)(D) of S. 1623

provided that the goal of verification

should be limited to examining the

accuracy of information contained in

the Statements of Account filed by

manufacturing and importing parties,

and that the procedure to achieve this

goal should be no broader than is

reasonably necessary in accordance

with generally accepted auditing

standards (GAAS). All parties to this

proceeding agreed with these two

principles, but nevertheless disagreed

on how much review was needed to

verify the information in the Statements

of Accounts.

Of the four commenting parties, EIA

advocated the narrowest scope of

review. The Copyright Parties advocated

the widest scope of review. AICPA and

AARC took positions somewhere in

between.

EIA said that the scope of the

verification procedure should be a

review by the verifying auditor of the

audit performed by the primary auditor.

This review would encompass an

evaluation of the primary auditor’s audit

procedures, examination of the primary

auditor’s work papers, and

consideration of the primary auditor’s

conclusions. In the event the verifying

auditor believes the audit was not

properly performed, or that additional

procedures are needed, he or she would

consult with the primary auditor. If the

two auditors are unable to agree, they

would submit the matter to a neutral,

independent accountant selected by

both parties to arbitrate the dispute. The

role of this third party accountant

would be strictly to determine whether

the primary auditor complied with

GAAS in performing the work and to

determine, and possibly perform, the

additional procedures needed to correct

noted deficiencies. EIA, comments at 5.
Federal Register / Vol. 61, No. 118 / Tuesday, June 18, 1996 / Rules and Regulations 30811

4The consultation with the primary auditor is not

intended to give the primary auditor any veto over

the decision of the verifying auditor to require

additional records. It is only intended as a means

to get additional advice on what records may or

may not be needed.

EIA opposes any regulation that

would provide for or permit a verifying

auditor to conduct a duplicative full

scope audit or to have unfettered access

to the books and records of a filer that

has already been audited by a primary

auditor. Such an approach, in EIA’s

view, would impose unreasonable

burden and expense, and would be a

prescription for misunderstanding,

controversy, and the unanticipated

disclosure of confidential information.

Furthermore, such an approach would

not provide additional assurance

beyond the assurance provided by EIA’s

proposed procedure. EIA, comments at

6.

The Copyright Parties believe that the

Copyright Office should allow for the

possibility of a full scale audit without

specific limitations on audit tests and

procedures to be performed. The

Copyright Parties assert that the

verification procedure should include

‘‘the examination of evidence

supporting the amounts and disclosure

in the Statement of Account, an

assessment of the accounting principles

used by the manufacturer or importer in

preparing the statement, and an

evaluation of the overall presentation of

the statement.’’ Copyright Parties,

comments at 27.

The Copyright Parties state that the

limited review of working papers

proposed by EIA does not contribute to

effective enforcement of royalty

obligations under AHRA. Instead, they

want the ability to use an independent

verifying auditor to determine whether

the Statement of Account fairly

presents, in all material respects, the

royalty obligations of a particular filer.

Copyright Parties, reply at 18. However,

the Copyright Parties supported a

regulation that would promote initial

reliance on the working papers and

related documents generated in the

course of the primary audit to avoid

duplication of effort, and to concentrate

the verifying auditor’s focus on the

additional work he or she considers

necessary under the circumstances.

Copyright Parties, surreply at 13–14.

AICPA commented that consideration

should be given to using ‘‘agreed-upon

procedures’’ which all users of the

report would agree to so that the

verifying auditor does not duplicate the

effort of the first auditor. AICPA noted

that ‘‘agreed-upon procedures’’ are

generally less in scope than an audit

under generally accepted auditing

standards, and the verifying auditor

would not express an opinion on the

fair presentation of the information. He

or she would report the procedures

performed and any findings. Further,

users of the report, namely, the

Copyright Office and the interested

copyright parties, must agree upon the

procedures that the verifying auditor

would perform. AICPA, comments at 4.

While disagreeing with the Copyright

Parties about the wisdom of a full scale

verifying audit, AICPA also did not

believe that the suggested procedures

and approach of the EIA were

appropriate. AICPA argued that the

procedures to be performed must be

more than the EIA suggested review of

the working papers of the initial audit.

The procedures should be objective

procedures that test the amounts

reported by the manufacturer or

importer. The EIA proposal would

require the auditor to formulate an

opinion that the audit was properly

conducted based upon a review of the

working papers. This proposal is more

in the nature of a quality review of the

primary auditor’s work than an audit of

the royalty schedule, and in AICPA’s

view, not an appropriate ‘‘agreed-upon

procedures’’ engagement. AICPA, reply

at 2.

AARC took a similar position to

AICPA in finding problems with both

EIA’s and the Copyright Parties’

positions. AARC commented that while

it agrees with the EIA that a full scope

audit by a verifying auditor may be

inappropriate, AARC believes that the

approach suggested by EIA does not go

far enough. AARC argues that the

interested copyright parties must have

the ability to direct their own verifying

auditor in the conduct of a verification

procedure. At the same time, while

AARC is generally in agreement with

the intent of the approach suggested by

the Copyright Parties, AARC believes

the scope of verification sought in their

initial comments may be unnecessarily

broad in order to achieve the intended

results.

AARC believes that what is more

appropriate is a ‘‘compliance’’ type

audit; a type customarily used within

the music industry to determine the

proper payment of music publishers

and/or artist royalties. When preparing

royalty accountings, the manufacturers

and distributors will have to set up a

system that will provide information to

their accounting department. The basis

of this information will be their

manufacturing, inventory, sales and

shipping records. AARC asserts that the

verifying auditor retained by the

interested copyright parties should be

able, at minimum, to test these

accounting records and the underlying

documents. AARC, reply at 2–3.

With access to the documents

described above, AARC does not believe

it would be necessary for the verifying

auditor to have access to the

manufacturer’s or importer’s general

ledgers as proposed by the Copyright

Parties, so long as the primary auditor’s

opinion indicates that the royalty

accountings tie into the general books of

account. AARC, reply at 4.

VII. Discussion of Scope of Verification

Clearly, the most contentious issue in

this rulemaking is the very scope of the

verification audit which, in turn dictates

the need to access particular business

records to perform the verification

procedure. The Copyright Parties want

the potential for a full scale audit. EIA

wants the verifying auditor simply to

review the primary auditor’s work.

AICPA recommends ‘‘agreed-upon

procedures,’’ agreed to by the Copyright

Parties and the verifying auditor which

is something more than just a review of

the primary auditor’s work but

something less than full access to all

records. AARC recommends a

‘‘compliance’’ audit where the filer is

told in advance what business records

to segregate.

The Office has decided to adopt a

procedure for these interim regulations

whereby the verifying auditor first

reviews the primary auditor’s work

papers. If, in the verifying auditor’s

opinion, according to generally accepted

auditing standards (GAAS), he or she

needs access to the business records of

the filer, the verifying auditor, after

consulting with the primary auditor,

shall be able to have access to those

records as well.4

The Office believes that two

independent accountants—the verifying

auditor and the primary auditor—acting

in good faith, are the best judge of what

additional information is needed from

the filer.

However, we highlight this provision

in our interim regulations as one in

which we particularly solicit comments

from the parties. If the parties believe

that the question of the scope of the

verification should not rest with the

independent accountants, they should

so notify the Office in their comments.

Moreover, the Office asks the parties

whether they could agree upon which

business records the filer should make

available, in addition to the primary

auditor’s work papers, that would

assure the accuracy of the Annual

Statement of Account but at the same

time would not create an overly

extensive demand on the filer.
30812 Federal Register / Vol. 61, No. 118 / Tuesday, June 18, 1996 / Rules and Regulations

VIII. Independence of the Verifying

Auditor

AICPA states that GAAS requires that

a verifying auditor be independent.

AICPA recommends that if there is a

question about an auditor’s

independence, it should be referred to

the AICPA Professional Ethics Division

and/or the State Board of Accountancy.

AICPA, comments at 3.

The Copyright Parties believe the

Office should require that the verifying

auditor be independent within the

meaning of AICPA’s Code of

Professional Conduct. In addition, the

Copyright Parties recommend that we

establish a procedure to accept petitions

from parties wishing to challenge the

use of a particular auditor. Such petition

should explain why the verifying

auditor should not be used and should

provide specific facts to support the

petition. Where the Office considers that

the petition raises a question as to

whether the verifying auditor is

independent, the matter should be

referred to the proper professional

authorities. Copyright Owners,

comments at 17–19.

EIA believes that the Office need not

become involved in the question of a

verifying auditor’s independence, but it

opposes sending the question to the

AICPA Professional Ethics Division

and/or the appropriate State Board

because ‘‘(1) these bodies have not

applied a financial dependence

standard and (2) they apply the

traditional independence standard most

often in a disciplinary context, where

generally the presumptions and burdens

favor the accused accountant.’’ EIA,

reply at 13. It suggested that an

independent arbitrating accountant,

chosen by the primary auditor and the

verifying auditor, should help

determine the independence of the

verifying auditor. EIA, comments at 30–

32, reply at 13.

The Office agrees that it should not

become involved in deciding whether a

verifying auditor is independent, and

any disputes involving the

independence of an auditor should be

referred to the AICPA or State Boards of

Accountancy. EIA’s opposition,

notwithstanding, the Office considers

that referring the matter to AICPA or

State Boards is preferable to referring it

to an independent arbitrating

accountant. See, discussion at X, below.

If there is a challenge to the verifying

auditor’s independence, the interim

regulations nonetheless call for the

verification procedure to continue while

the question of the auditor’s

independence is being resolved.

The Office considered two specific

proposals concerning a verifying

auditor’s independence, but ultimately

decided not to adopt them in the

interim regulations. They were that the

auditing firm retained to perform the

verification procedure does not receive

more than 15% of its gross revenues

from services performed for the

interested copyright parties, and that the

auditor is not performing the

verification procedure for a contingent

fee. These proposals were supported by

EIA but opposed by AICPA. EIA,

comments at Appendix 2, at 18; AICPA,

reply at 5. The Office solicits comments

on whether these two specific proposals

should be added to the definition of an

independent verifying auditor. The

Office also is aware that its current

regulations on the primary auditor

found in § 201.28 do not discuss the

primary auditor’s independence beyond

stating that the primary audit shall be

performed according to GAAS. The

Office solicits comments on whether

any additional provisions should be

adopted to assure the primary auditor’s

independence.

IX. Work Papers of the Verifying

Auditor

Section 1011(e)(2) of S. 1623 provided

that the certification and results of all

verification procedures shall be filed

with the Register of Copyrights. In our

Notice we asked if we should require

the filing of the verifying auditor’s work

papers along with the results of a

verification procedure.

AICPA filed a strong objection to any

requirement to file work papers in

addition to the results of the verification

procedure. It states that the auditor’s

report, not the work papers, provides

the auditor’s opinion as to the fairness

of the presentation of figures on the

Statement of Account and the primary

auditor’s report. The work papers are

considered the personal property of the

independent auditor. AICPA, comments

at 4.

EIA believes that work papers will

contain extremely confidential

information and should not be filed in

the Office. EIA, comments at 2.

The Copyright Parties believe that

only the auditor’s report must be filed

with the Office. They propose that all

work papers be deposited only if the

verification procedure results in a

dispute. Copyright Parties, comments at

24–25.

In our interim regulations, therefore,

the auditor’s report to the Copyright

Office will contain only the auditor’s

conclusions. If the verifying auditor

concludes that there was any failure of

the primary auditor to conduct properly

the primary audit or obtain a reliable

result, or that there was any error in the

Annual Statement of Account, the

supporting documentation will be

included in an appendix to the report

and distributed to the interested

copyright parties, the filer, and the

primary auditor only. It will not be

included in the report sent to the

Copyright Office.

X. Disputes Regarding Conduct of

Verification Procedure

AICPA had no comment on whether

the Copyright Office has a role in the

event there is a dispute in the conduct

or the result of the verification

procedure. It recommended requiring

arbitration of disputes. AICPA,

comment at 4. EIA said the Office

should not be burdened with the task of

resolving disputes. Disputes would best

be handled between the primary auditor

and the verifying auditor. If such

discussions do not resolve the dispute,

the auditors should mutually select a

neutral arbitrating accountant who will

examine all work papers and decide if

additional procedures are required. EIA,

comments at 22. The Copyright Parties

also stated that ‘‘there is no statutory

role for the Office in resolving disputes

arising from the conduct of a

verification procedure or the primary

audit.’’ They said that, in practice,

disputes will be resolved through

negotiation. Copyright Parties,

comments at 23.

From the Office’s viewpoint, there are

three key points in the verification

procedure when a dispute could take

place. One, the filer could refuse to

produce business records the verifying

auditor considers necessary. Two, the

filer could object that the verifying

auditor is not independent. Three, the

verifying auditor could file a report that

there was a failure of the primary

auditor to conduct the primary audit

properly or to obtain a reliable result, or

there was an error in the Annual

Statement of Account.

At this point, the Office has decided

not to institute binding arbitration in

these interim regulations. The Office

solicits comments on how such disputes

should be resolved. If the commentators

believe binding arbitration should be

established, the Office solicits

comments on how it would work, and

whether the Office has the authority to

require it.

XI. Cost of Verification Procedure

Sec. 1011(f) of S. 1623 specified that

in the case of a verification procedure

that ‘‘leads ultimately to recovery of an

annual royalty payment of 5 percent or

more of the annual payment made, the
Federal Register / Vol. 61, No. 118 / Tuesday, June 18, 1996 / Rules and Regulations 30813

importing or manufacturing party shall

provide reimbursement of the

reasonable cost’’ of such procedure.

In all other cases, ‘‘any recovery of

royalty underpayments as a result of the

audit shall be used first to provide

reimbursement for the reasonable costs

of such audit,’’ and ‘‘any remaining

recovery shall be deposited with the

Register.’’

EIA did not object to the cost

allocation scheme proposed in S. 1623,

provided that the verification procedure

is limited to an ‘‘agreed-upon

procedures’’ audit and there is

arbitration between the primary and

verification auditors in case of dispute

to avoid duplication of audit work. EIA,

comments at 30, and Appendix 2, at 16.

The Copyright Parties recommended

that the interested copyright parties who

initiate the engagement of a verifying

auditor should bear the cost of the

verification procedure, but such cost

should be reimbursable under the

system proposed in S. 1623. Copyright

Parties, comments at 28. AICPA

recommended that the cost of the

verification procedure should be borne

by the copyright party(s) that engage the

verification auditor, but was silent on

the 5% provision in S. 1623. AICPA,

comments at 5.

The interim regulation is based upon

the system detailed in S. 1623,

described above, with which the

Copyright Parties and EIA agree.

XII. Miscellaneous—Retention of

Report; Use of the Word ‘‘Verification’’

AICPA had no comment on the length

of time verification procedure reports

should be retained by the Office. EIA

and the Copyright Parties proposed that

they be retained for three years. EIA,

comments at 28; Copyright Parties,

comments at 13. AICPA supported EIA’s

and the Copyright Parties’ three-year

proposal in its reply comments. AICPA,

reply at 6. The Office has adopted the

proposed three-year retention, but seeks

more comments on how it should work.

Should it apply equally to positive as

well as negative verification procedure

reports? Should it include follow-up

reports if the filer and the verifying

auditor come to subsequent agreements

addressing the concerns of a negative

report? May the Office, in its discretion,

retain the report more than three years?

Last, AICPA commented that the

word ‘‘verification’’ is a misnomer

because it implies a full scale audit

while the scope of the verifying

auditor’s work might be well less than

that. AICPA recommends that the

procedure to be followed by the

verifying auditor be called a ‘‘second

audit’’ or a ‘‘special audit.’’ We have

chosen to call it a ‘‘verification

procedure,’’ because the word

‘‘verification’’ was used in the AHRA,

but we have given it its own special

definition in § 201.30(b)(5), so that it

will not carry the implication of a full

scale audit.

List of Subjects in 37 CFR Part 201

Copyright; Digital audio recording

products.

Interim Regulations

In consideration of the foregoing, the

Copyright Office is amending part 201

of 37 CFR, chapter II in the manner set

forth below:

PART 201—GENERAL PROVISIONS

[AMENDED]

1. The authority citation for part 201

is revised to read as follows:

Authority: 17 U.S.C. 702; 17 U.S.C. 1003.

2. Section 201.30 is added to read as

follows:

§ 201.30 Verification of Statements of

Account.

(a) General. This section prescribes

rules pertaining to the verification of

information contained in the Statements

of Account by interested copyright

parties pursuant to section 1003(c) of

title 17 of the United States Code.

(b) Definitions.

(1) Annual Statement of Account,

generally accepted auditing standards

(GAAS), and primary auditor have the

same meaning as the definition in

§ 201.28 of this part.

(2) Filer is a manufacturer or importer

of digital devices or media who is

required by 17 U.S.C. 1003 to file with

the Copyright Office Quarterly and

Annual Statements of Account and a

primary auditor’s report on the Annual

Statement of Account.

(3) Interested copyright party has the

same meaning as the definition in

§ 201.29 of this part.

(4) Verifying auditor is the person

retained by interested copyright parties

to perform a verification procedure. He

or she is independent and qualified as

defined in paragraphs (j)(2) and (j)(3) of

this section.

(5) Verification procedure is the

process followed by the verifying

auditor to verify the information

reported on an Annual Statement of

Account.

(c) Purpose of Verification. The

purpose of verification is to determine

whether there was any failure of the

primary auditor to conduct the primary

audit properly or to obtain a reliable

result, or whether there was any error in

the Annual Statement of Account.

(d) Timing of Verification Procedure.

(1) Requesting a verification

procedure. No sooner than three months

nor later than three years after the filing

deadline of the Annual Statement of

Account to be verified, any interested

copyright party shall notify the Register

of Copyrights of its interest in

instituting a verification procedure.

Such notification of interest shall also

be served at the same time on the filer

and the primary auditor identified in

the Annual Statement of Account. Such

notification shall include the year of the

Annual Statement of Account to be

verified, the name of the filer,

information on how other interested

copyright parties may contact the party

interested in the verification including

name, address, telephone number,

facsimile number and electronic mail

address, if any, and a statement

establishing the party filing the

notification as an interested copyright

party. The notification of interest may

apply to more than one Annual

Statement of Account and more than

one filer.

(2) Coordination and selection of

verifying auditor. The Copyright Office

will publish in the Federal Register

notice of having received a notification

of interest to institute a verification

procedure. Interested copyright parties

have one month from the date of

publication of the Federal Register

notice to notify the party interested in

instituting the verification procedure of

their intent to join with it and to

participate in the selection of the

verifying auditor. Any dispute about the

selection of the verifying auditor shall

be resolved by the parties themselves.

(3) Notification of the filer and

primary auditor. As soon as the

verifying auditor has been selected, and

in no case later than two months after

the publication in the Federal Register

of the notice described in paragraph

(d)(2) of this section, the joint interested

copyright parties shall notify the

Register of Copyrights, the filer, and the

primary auditor identified in the

Annual Statement of Account to be

verified, that they intend or do not

intend to initiate a verification

procedure.

(4) Commencement of the verification

procedure. The verification procedure

shall begin no sooner than one month

after notice of intent to initiate a

verification procedure was given to the

filer and the primary auditor by the joint

interested copyright parties. The joint

interested copyright parties shall grant

the filer or the primary auditor a

postponement of the beginning of the

verification procedure of up to one

additional month if either one requests
30814 Federal Register / Vol. 61, No. 118 / Tuesday, June 18, 1996 / Rules and Regulations

it. Verification procedures shall be

conducted at reasonable times during

normal business hours.

(5) Anti-duplication rules. A filer

shall be subject to no more than one

verification procedure per calendar

year. An Annual Statement of Account

shall be subject to a verification

procedure only once.

(e) Scope of verification. The verifying

auditor shall limit his or her

examination to verifying the

information required in the Annual

Statement of Account. To the extent

possible, the verifying auditor shall

inspect the information contained in the

primary auditor’s report and the

primary auditor’s working papers. If the

verifying auditor believes that access to

the records, files, or other materials in

the control of the filer is required

according to GAAS, he or she may, after

consultation with the primary auditor,

require the production of these

documents as well. The verifying

auditor and the primary auditor shall

act in good faith using reasonable

professional judgment, with the

intention of reaching a reasonable

accommodation as to the necessity and

scope of examination of any additional

documents, but the decision to require

the production of additional documents

is solely that of the verifying auditor.

(f) Verification Report. Upon

concluding the verification procedure,

the verifying auditor shall render a

report enumerating in reasonable detail

the procedures performed by the

verifying auditor and his or her

findings. Such findings shall state

whether there was any failure of the

primary auditor to conduct properly the

primary audit or obtain a reliable result,

and whether there was any error in the

Annual Statement of Account, itemized

by amount and by the filer’s elected

fiscal year. If there was such failure or

error, the report shall specify all

evidence from which the verifying

auditor reached such conclusions. Such

evidence shall be listed and identified

in an appendix to the report in

sufficient detail to enable a third party

to reasonably understand or interpret

the evidence on which the verifying

auditor based his or her conclusion. If

there was no such failure or error, the

report shall so state.

(g) Distribution of Report. Copies of

the verifying auditor’s report shall be

subject to the confidentiality provisions

of § 201.29 and shall be distributed as

follows:

(1) One copy, excluding the appendix,

if applicable, shall be filed with the

Register of Copyrights.

(2) One copy, with the appendix, if

applicable, shall be submitted to each of

the interested copyright parties who

retained the services of the verifying

auditor and who are authorized to

receive such information according to

§ 201.29.

(3) One copy, with the appendix, if

applicable, shall be submitted to the

filer of the Annual Statement of

Account.

(4) One copy, with the appendix, if

applicable, shall be submitted to the

primary auditor.

(h) Retention of Report. The Register

of Copyrights will retain his or her copy

of the verifying auditor’s report for three

years following the date the copy of the

verifying auditor’s report is filed.

(i) Costs of Verification. The joint

interested copyright parties who

requested the verification procedure

shall pay the fees of the verifying

auditor and the primary auditor for their

work performed in connection with the

verification procedure, except, if the

verification procedure results in a

judicial determination or the filer’s

agreement that royalty payments were

understated on the Annual Statement of

Account, then,

(1) if the amount is less than five

percent (5%) of the amount stated on

the Annual Statement of Account, that

amount shall first be used to pay the

fees of the verifying auditor and the

primary auditor, and any remaining

amount plus any applicable interest on

the total amount shall be deposited,

allocated by the filer’s elected fiscal

year, with the Register of Copyrights, or

(2) if the amount is equal to or greater

than five percent (5%) of the amount

stated on the Annual Statement of

Account, the filer shall pay the fees of

the verifying auditor and the primary

auditor, and, in addition, shall deposit

the amount found to be due plus any

applicable interest on the total amount,

allocated by the filer’s elected fiscal

year, with the Register of Copyrights.

(j) Independence and qualifications of

verifying auditor.

(1) The verifying auditor shall be

qualified and independent as defined in

this section. If the filer has reason to

believe that the verifying auditor is not

qualified or independent, it shall raise

the matter with the joint interested

copyright parties before the

commencement of the verification

procedure, and if the matter is not

resolved, it may raise the issue with the

American Institute of Certified Public

Accountants’ Professional Ethics

Division and/or the verifying auditor’s

State Board of Accountancy while the

verification procedure is being

performed.

(2) A verifying auditor shall be

considered qualified if he or she is a

certified public accountant or works

under the supervision of a certified

public accounting firm.

(3) A verifying auditor shall be

considered independent if:

(i) he or she is independent as that

term is used in the Code of Professional

Conduct of the American Institute of

Certified Public Accountants, including

the Principles, Rules and Interpretations

of such Code applicable generally to

attest engagements (collectively, the

‘‘AICPA Code’’); and (ii) 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.

Dated: June 6, 1996.

Marybeth Peters,

Register of Copyrights.

Approved by:

James H. Billington,

The Librarian of Congress.

[FR Doc. 96–15390 Filed 6–17–96; 8:45 am]

BILLING CODE 1410–30–P

ENVIRONMENTAL PROTECTION

AGENCY

40 CFR Part 63

[AD–FRL–5521–5]

RIN 2060–AD98

National Emission Standards for

Hazardous Air Pollutants for

Shipbuilding and Ship Repair (Surface

Coating) Operations

AGENCY: Environmental Protection

Agency (EPA).

ACTION: Direct final rule.

SUMMARY: On December 15, 1995, the

EPA issued national emission standards

for hazardous air pollutants (NESHAP)

under Section 112 of the Clean Air Act

as amended in 1990 for shipbuilding

and ship repair (surface coating)

operations. The NESHAP requires

existing and new major sources to

control emissions using the maximum

achievable control technology to control

hazardous air pollutants. This action

revises the compliance date for sources

subject to this standard and revises the

date for submittal of implementation

plans. Specifically, this action extends

the June 13, 1996 deadline for submittal

of an implementation plan to December

16, 1996. The compliance date is

extended from December 16, 1996 to

December 16, 1997. This action is being

taken because the EPA has learned that

sufficient time was not provided to