Over the past six months, artists and producers have been rushing to sell their royalty streams in unprecedented numbers as investors pour into music assets and drive prices to heady new heights. So at least two artist representatives became concerned in May when they received messages from different executives at Universal Music Group about its “corporate policy” on the so-called “letters of direction” that artists have long sent their labels, publishers and performing rights organizations when they sell their royalties — notes that instruct the company to pay the artist’s royalty buyer directly.
According to one of several such emails reviewed by Billboard, received mid-May by a representative of an artist who had recently sold a royalty stream on a recording: “UMG has instituted a new policy where we are not accepting LODs in connection with the sale of royalty streams.”
But although such messages have sparked some worry among buyers and sellers eager to close deals, UMG tells Billboard those fears are completely unfounded. While the world’s biggest record company has indeed decided to apply more scrutiny to the explosion of LODs it has been receiving, many of which force it into business with unfamiliar third parties and raise tricky questions about accounting, auditing and approval rights and taxation, a UMG representative says the company has not turned down a single artist request to direct royalties to a buyer, including those by their producer, engineer and side-player collaborators so long as the filings for the requests have met UMG’s standard requirements.
“To be clear, nothing prevents our artists from independently entering into a transaction to sell their royalty streams — or from transferring the royalties UMG pays them to a third party,” UMG told Billboard in a statement on May 28. “Our long-standing approach regarding the acceptance of letters of direction to pay third parties for the sale of royalty streams has not changed. We remain committed to working with artists to find solutions to any issues that may arise when royalties are sold or transferred.”
In an earlier statement, provided for a May 24 article about the market concerns surrounding LODs, UMG said of its philosophy, “Nothing is more important to us than our relationships with our artists and fulfilling the terms of our recording agreements. Even though most of our agreements prohibit assigning rights, we had voluntarily accommodated these requests, and we will continue to do so for artists who assign a share of their royalty streams to producers who work on their records. However, the acceptance of letters of direction for the sale of royalty streams, essentially reassigning these payments to entities with no legally recognized relationship with the company, potentially posed significant tax and legal liability issues. To be very clear, should our artists choose, nothing prevents them from independently entering into these transactions or transferring the royalties UMG pays them to a third party.”
Some sources say that UMG’s increased caution surrounding LODs has been misinterpreted, due to a change in how the company deals with such requests internally — but not due to an external change in policy. UMG, meanwhile, says the emails from UMG executives to an artist representative and a lawyer who had LOD requests turned down, reviewed by Billboard, were either taken out of context from a lengthy email exchange or the requests failed to meet all of UMG requirements.
As recently as a year ago, requests for LODs on master recording royalties to third-party buyers were relatively infrequent, label sources say. They have most commonly been used to assign artist royalties due to producers, engineers and musicians who receive “points” — a percentage of revenue — on a recording. Suddenly, though, labels are being deluged with such requests, as all types of music assets soar in value.
UMG is not the only music company having internal discussions on how to handle this influx. It has become a pressing issue across the industry as the sheer volume of income-stream sales create headaches for royalty departments, business affairs executives and legal teams. SoundExchange has a long standing policy of not accepting letters of direction and for years so did ASCAP, except when heirs of a late songwriter decided to sell rights. Both organizations declined to comment but industry sources say that their policies on letters of direction were put in place to protect creators from being tempted — or even strong-armed — to direct royalty streams to their label or publisher.
Music asset traders have long considered this policy from SoundExchange — which collects master recording performance royalty payments for programmed streams from digital services like Pandora and Sirius — burdensome and it has required financial work arounds to navigate. Since the the Music Modernization Act passed in 2018, however, SoundExchange has been required to accept letters of direction from artists for producers and others who have points on a recording. Some critics say this is not enough, and as the market for artist and producer royalty streams continues to heat up, they would like to see SoundExchange change its policy prohibiting irrevocable assignment of royalties. That policy, though strictly enforced, according to sources, does not seem to appear in writing in the member’s agreement or bylaws on the organizations website. Instead, it appears to be simply a policy put in place by a vote of the SoundExchange board.
ASCAP, meanwhile, has gone in the opposite direction. It used to have a policy like the one SoundExchange has now, but over the last eight years, sources say the performance rights organization has eliminated, in incremental steps, almost all of its barriers for letters of direction from living writers who wish to sell their income streams. ASCAP now even has LOD forms on its website that writers can use to assign rights — one that is revocable for things like loans, and the other is irrevocable for instances where writers sell their writer’s share.
ASCAP still has some minor requirements for the irrevocable LOD: a writer’s royalty must hit a certain threshold of $100,000 a year, or at least $125,000 in payments over a five-year period, in order to easily get a letter of direction. Otherwise, if the writer doesn’t reach that threshold, the matter is brought before the ASCAP board for approval. Also, whoever is designated — a buyer, a divorced spouse, or a future heir — must agree to keep that income stream with ASCAP for five years. That’s to deal with licenses-in-effect for instances where the catalog in question is still under license with licensees until their terms expire.
At UMG, the company’s current mindset is of increased corporate oversight over decisions to grant LODs — decisions that were previously left to the sublabel behind the music in question, says a source familiar with the situation.
The reason for the additional oversight as music asset sales boom: These arrangements “put the label in business with someone it didn’t choose to be in business with,” says a major-label executive. “A label would have no problem with artists selling the income stream, but wouldn’t want to be put in a position where its priority is to the third party, which starts asserting rights that should belong to the artists.” If the label is paying a third-party buyer directly, the arrangement raises messy legal questions regarding audit rights and reporting requirements — which, a label source says, cannot be transferred to a buyer — in the absence of defined terms.
Synchronization approval is also a concern. “We’re looking out for the artists’ best interests, which is why we’d never try to hinder their rights to sell,” says the executive, “but at the same time, we’re running our own business.”
Even when labels, publishers and performance rights organizations accommodate LODs, they typically do not treat it as a legally binding contract, and the paperwork says as much. Most companies won’t countersign the letters or acknowledge in writing that they are aware of the sale of the income stream.
“And therein lies the problem,” says one longtime industry music asset trader. “If I buy an income stream and the artist subsequently goes belly up and files for Chapter 11, his creditors can come after the income stream I bought because I am not in the first position. Some other creditor could have seniority.” A similar issue could arise if the artist dies and the heirs try to claim the income stream as part of their inheritance, he adds. Such uncertainty could make a bank less likely to help finance a buyer’s deal, sources say. So the buyer needs a clean chain of title for an income stream like any asset; and if the label or ASCAP won’t acknowledge in their system who the new owner is, that means the artist might still be viewed as the title holder.
Label sources dismiss such worries because the buyer will have a contract signed by the creator who sold the income stream. They say reliance on a countersigned LOD means nothing because the documents are, by design, not legally binding. “It’s an accommodation that can be revoked at any time by the label,” says the label executive. “It is fairly meaningless.”
For UMG, even if its stance on how it handles LODs isn’t as crucial as it was made out to be, traders are paying attention. While approval for an LOD was long assumed, and still may be the most common outcome, UMG is now sending a signal that it has the right to reject such requests. It remains to be seen whether it, or other rights holders, will choose to do so.