SoundExchange, the music industry's digital-royalty collection agency, has been on a roll.

A federal appeals court recently rejected a plea from webcasters to postpone the deadline for a new royalty scheme that sets the stage for SoundExchange to begin levying billions of dollars from internet radio stations in the coming decades. It already collects a tidy sum from satellite radio and now it has set its sights on U.S. terrestrial radio stations, which currently pay no broadcast performance royalties. If it wins there, its power could grow exponentially.

This reflects a well-known law of any bureaucracy: Once authority is created, it works inevitably to expand its sphere of influence, grabbing for more power and bigger budgets. With each success, its appetite only grows.

Knowing well the dangers, legislators sought to restrict SoundExchange's ability to spend the money it collects on behalf of artists and labels. Section 114(g)(3) of the Copyright Act explicitly limits how the nonprofit can spend the money it collects, approving just three carefully circumscribed activities:

"(A) the administration of the collection, distribution, and calculation of the royalties; "(B) the settlement of disputes relating to the collection and calculation of the royalties; and

"(C) the licensing and enforcement of rights with respect to the making of ephemeral recordings and performances subject to licensing under section 112 and this section, including those incurred in participating in negotiations or arbitration proceedings under section 112 and this section, except that all costs incurred relating to the section 112 ephemeral recordings right may only be deducted from the royalties received pursuant to section 112."

So it came as quite a surprise when a source familiar with SoundExchange told me on condition of anonymity that the group is engaged in lobbying and public relations activities, in apparent violation of the law cited above.

A little fact-checking showed that SoundExchange registered the MusicFirstCoalition.org domain on May 9, 2007; that it is a member of the organization; and that SoundExchange supports musicFIRST financially, although it has not disclosed the extent of its spending. (When asked about it, SoundExchange spokesperson Richard Ades called that information "proprietary.")

Here's what's not proprietary: The musicFIRST Coalition (Fairness In Radio Starting Today) is a public relations group that launched on June 14, 2007 with the sole mission of implementing a sound recording performance royalty on terrestrial radio stations. It is comprised of labels, managers and artists, including Hall & Oates, Jay-Z, Celine Dion and various artists' and labels' organizations, including the RIAA. SoundExchange is listed as a sponsor on the homepage of the organization's web site.

Asked about the legality of the lobbying expenditures, SoundExchange Executive Director John Simson dodged the question. "Clearly the Broadcasters (CQ) will do or say anything so as not to pay artists for their work," he wrote in an e-mail. "We welcome a full and open debate before Congress on ending the unfair free ride given over-the-air radio and the granting to artists the long overdue right to be paid for their recordings when they are played."

Michael Huppe, general counsel for SoundExchange, was more helpful on the legal question. He said the funding was a legitimate use of its members' money. "Funding provided by SoundExchange to musicFIRST is authorized by copyright owners and performers who have chosen to become members of SoundExchange. These contributions come only from our members and not from non-member royalties, and were unanimously approved by the SoundExchange board," Huppe replied when asked about its support of musicFIRST.

In the end, however, SoundExchange could not point to a specific statute that allows them to contribute to musicFIRST.

Jessica Litman, a law professor at the University of Michigan, could not point to any legal grounds for SoundExchange's move, saying, "I'm not aware of any statute that authorizes the contribution."

Shoshana Zisk, a music attorney in San Francisco, said, "Upon reading Copyright Act Section 114(g)(3), it would appear that funding a lobbying or PR organization (such as musicFIRST) is a violation of this provision."

Whether or not SoundExchange's lobbying efforts prove to be illegal, its presence as an advocate in this debate undercuts its role as neutral administrator of royalty fees set and approved by the Copyright Royalty Board.

Artists and labels well deserve compensation for radio performance broadcasts. The United States is one of the few countries that exempts radio from these fees (music authors and publishers alone get paid), a tribute to the power and political muscle of the industry. That power is now fading, in part due to the rise of the internet, and so radio giants like Clear Channel seem vulnerable for the first time in decades.

Yet SoundExchange's interest in the outcome is as clear as the interest of the artists and labels it represents. If new fees are approved for terrestrial radio and SoundExchange is appointed to administer those fees, it will instantly become a much bigger player in the music industry. Given that it already has expertise in collecting similar fees for satellite and internet play, SoundExchange stands a good chance of winning this appointment.

With more power would come greater status and bigger paychecks for its officers and directors. Even if the agency were only acting in the interests of artists and labels, it would appear to have a direct stake in the fight. And that creates the appearance of a conflict of interest, whether or not there is in fact a conflict.

That's why Congress intended to keep SoundExchange out of the lobbying business. In keeping with the spirit of the law, SoundExchange should immediately sever its ties to musicFirst and any other lobbying group it funds or assists, and fulfill its role as a neutral administrator of fees.