[Federal Register Volume 84, Number 243 (Wednesday, December 18, 2019)]
[Notices]
[Pages 69424-69428]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-27206]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87729; File No. SR-DTC-2019-011]
Self-Regulatory Organizations; The Depository Trust Company;
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change
To Amend the Distributions Guide and the Fee Guide Relating to Tax
Events
December 12, 2019.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on December 5, 2019, The Depository Trust Company (``DTC'') filed with
the Securities and Exchange Commission (``Commission'') the proposed
rule change as described in Items I, II and III below, which Items have
been prepared by the clearing agency. DTC filed the proposed rule
change pursuant to Section 19(b)(3)(A) of the Act \3\ and Rules 19b-
4(f)(2) and (f)(4) thereunder.\4\ The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A).
\4\ 17 CFR 240.19b-4(f)(2) and (f)(4).
---------------------------------------------------------------------------
I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
The proposed rule change \5\ of DTC would (i) revise the
Distributions Guide to enhance the DTC announcements
(``Announcements'') feature within the DTC distributions service
(``Distributions Service'') \6\ with respect
[[Page 69425]]
to corporate action events that do not involve the payment of funds or
distribution of Securities through DTC, but which may result in a
taxable event for holders (``Tax Events''), to accommodate the
announcement of Tax Events subject to provisions of Section 871(m) of
the Internal Revenue Code (``Section 871(m)''),\7\ and (ii) amend the
Guide to the DTC Fee Schedule (``Fee Guide'') \8\ to change the name
and amount of the fee relating to the announcement of Tax Events (``Tax
Event Fee''), as discussed below.
---------------------------------------------------------------------------
\5\ Each capitalized term not otherwise defined herein has its
respective meaning as set forth in the Rules, By-Laws and
Organization Certificate of The Depository Trust Company (the ``DTC
Rules''), available at http://www.dtcc.com/legal/rules-and-procedures.aspx, and the DTC Corporate Actions Distributions Service
Guide (``Distributions Guide''), available at http://www.dtcc.com/~/
media/Files/Downloads/legal/service-guides/
Service%20Guide%20Distributions.pdf.
\6\ The Distributions Service includes DTC's announcement,
collection, allocation and reporting of dividend, interest and
certain principal payments on behalf of Participants holding
Securities at DTC. See Distributions Guide, id., at 9.
\7\ 26 U.S.C. 871(m).
\8\ Available at http://www.dtcc.com/~/media/Files/Downloads/
legal/fee-guides/dtcfeeguide.pdf?la=en.
---------------------------------------------------------------------------
II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, the clearing agency included
statements concerning the purpose of and basis for the proposed rule
change and discussed any comments it received on the proposed rule
change. The text of these statements may be examined at the places
specified in Item IV below. The clearing agency has prepared summaries,
set forth in sections A, B, and C below, of the most significant
aspects of such statements.
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
1. Purpose
The proposed rule change would (i) revise the Distributions Guide
to enhance the Announcements feature within the Distributions Service
with respect to Tax Events, to accommodate the announcement of Tax
Events subject to provisions of Section 871(m), and (ii) amend the Fee
Guide to change the name and amount of the Tax Event Fee, as discussed
below.
Distributions Service Announcements Feature
The Distributions Service includes the announcement, collection,
allocation and reporting by DTC, on behalf of its Participants, of
dividend, interest and principal payments for Eligible Securities held
by Participants at DTC. This centralized processing provides efficiency
for Participants for their receipt of (i) payment information and (ii)
payments on distributions covered by Announcements (``Distribution
Event''),\9\ from multiple issuers and agents.\10\ In this regard,
Announcements provide Participants with information pertaining to their
record date (``Record Date'') \11\ positions for Distribution
Events.\12\ This information facilitates Participants' ability to
reconcile their records with DTC before the date DTC has been
instructed by the issuer or issuer's agent to allocate a distribution
(``Payable Date'').\13\
---------------------------------------------------------------------------
\9\ Distribution Events covered by Announcements include cash
dividends, interest, principal, capital gains, sale of rights on
American depositary receipts, return of capital, dividend with
option, stock splits, stock dividends, automatic dividend
reinvestments, spinoffs, rights distributions, pay in kind, and
liquidation. See Distributions Guide, supra note 5, at 12.
\10\ See Distributions Guide, supra note 5, at 9.
\11\ The Record Date is the date set by an issuer of a security
by which an investor must own the security in order to be eligible
to receive an upcoming distribution. See DTC Operational
Arrangements Necessary for Securities to Become and Remain Eligible
for DTC Services, available at http://www.dtcc.com/~/media/Files/
Downloads/legal/issue-eligibility/eligibility/operational-
arrangements.pdf, at 20.
\12\ See Distributions Guide, supra note 5, at 11-13.
\13\ See Distributions Guide, supra note 5, at 11.
---------------------------------------------------------------------------
Tax Events
Pursuant to a DTC rule change \14\ that became effective in October
2017, DTC implemented the Announcements feature for Tax Events and the
Tax Event Fee relating to the announcement of distributions subject to
Section 305(c) of the Internal Revenue Code (``Section 305(c)'').\15\
Section 305(c) states that holders of convertible Securities may be
deemed to have received a distribution because of a corporate action on
common stock into which the convertible Security may be converted.\16\
A lack of information relating to these deemed distributions and other
Tax Events may affect Participants' ability to comply with applicable
federal tax withholding requirements and applicable DTC Rules
requirements relating to the use of DTC services.\17\
---------------------------------------------------------------------------
\14\ See Securities Exchange Act Release No. 81871 (October 13,
2017), 82 FR 48734 (October 19, 2017) (SR-DTC-2017-018) (``Tax Event
Rule Filing'').
\15\ 26 U.S.C. 305(c).
\16\ Under Section 305(c), a change in the conversion ratio or
conversion price or a similar transaction is treated ``as a
distribution [by the issuer] with respect to any shareholder whose
proportionate interest in the earnings and profits or assets of the
corporation is increased by such change.'' Id.
\17\ In connection with their use of DTC's services,
Participants must comply with all applicable laws, including, but
not limited to, all applicable laws relating to taxation. See DTC
Rule 2, Section 8, supra note 5.
---------------------------------------------------------------------------
Pursuant to the Tax Event Rule Filing, the Distributions Guide was
revised to enable DTC to distribute to Participants the Tax Event
information for a deemed distribution in the same standardized manner
that DTC uses to announce distributions. The Tax Event Rule Filing also
added text to (a) describe and define Tax Events and Tax Event
announcements, and (b) describe the systemic data fields (``Fields'')
that DTC uses to provide relevant Tax Event information for a Security
to Participants, including: (1) ``Event Type'' shown as ``Tax Event,''
(2) ``Sub Event Type,'' which is used to classify the type of Tax
Event, (3) Payable Date, (4) Record Date, (5) ``Cash Rate,'' to provide
the amount of the deemed distribution, and (6) ``Comments,'' which is
used to provide any other pertinent information regarding the Tax
Event.\18\
---------------------------------------------------------------------------
\18\ See Tax Event Rule Filing, supra note 14.
---------------------------------------------------------------------------
Tax Event Fee
Fees are charged by DTC to Participants, pursuant to the Fee
Guide,\19\ to offset the cost of processing corporate action events,
including the announcement processing, the actual processing of
payments, and book-entries associated with the corporate action.
Pursuant to the Tax Event Rule Filing, the Fee Guide was revised so
that a Participant that holds Securities subject to a Tax Event would
be charged a flat Tax Event Fee of $40 per announcement for a Section
305(c) announcement.\20\ As indicated in the Tax Event Rule Filing, the
addition of the Tax Event Fee to the Fee Guide aligned DTC's revenue
with its costs for retrieval of Tax Event information from issuers and
announcing that information to Participants.\21\ The Tax Event Fee was
added to the Fee Guide underneath the section for U.S. tax withholding
services, which is a feature of the Distributions Service, for
reference purposes, and is in the Fee Guide in the same place as other
fees charged for tax-related processing performed by DTC.\22\
---------------------------------------------------------------------------
\19\ Supra note 8.
\20\ See Tax Event Rule Filing, supra note 14.
\21\ Id.
\22\ See Fee Guide, supra note 8, at 15-16.
---------------------------------------------------------------------------
Section 871(m) of the Internal Revenue Code
Like a Section 305(c) Tax Event, an event subject to the provisions
of Section 871(m) is also a corporate action event in which no cash or
security entitlement is allocated to a Participant but may trigger a
taxable event for DTC to perform tax withholding and reporting.
Section 871(m), which was enacted in 2010, imposes a 30 percent
withholding tax on ``dividend equivalent'' payments that are made or
deemed to be made to non-U.S. persons with respect to certain
derivative Securities that reference equity (``Equity Derivative'') of
a U.S. issuer. In enacting Section 871(m),
[[Page 69426]]
Congress was attempting to address the ability of foreign persons to
obtain the economics of owning dividend-paying stock through an Equity
Derivative while avoiding the withholding tax that would apply to
dividends paid on the stock if the foreign person owned the stock
directly.\23\
---------------------------------------------------------------------------
\23\ See 26 U.S.C. 871(a)(1)(A) (30 percent tax on dividends
paid to non-resident aliens).
---------------------------------------------------------------------------
In September 2015, the U.S. Treasury Department adopted final
regulations (the ``Final Section 871(m) Regulations'') \24\ based on a
proposal issued in December 2013 that implemented and enforced Section
871(m) with an effective date of January 1, 2017. The Final Section
871(m) Regulations introduced various new tax-related obligations for
Participants and DTC.
---------------------------------------------------------------------------
\24\ See T.D. 9734, 80 FR 56866 (Sept. 18, 2015).
---------------------------------------------------------------------------
Under the Final Section 871(m) Regulations, an Equity Derivative
held by a non-U.S. person may be considered a ``Section 871(m)
Transaction'' and can potentially give rise to a dividend equivalent
subject to withholding tax.\25\ A complex set of rules and exceptions
in the Final Section 871(m) Regulations must be followed in order for
the withholding agent to determine if the withholding tax in fact
applies, and, if so, the amount of the dividend equivalent subject to
withholding tax.\26\
---------------------------------------------------------------------------
\25\ See 26 CFR 1.871-15(g)(1).
\26\ See id.
---------------------------------------------------------------------------
Proposed Rule Change
Distributions Guide
Distributions that occur with respect to Securities subject to the
provisions of Section 871(m) are Tax Events as defined in the
Distributions Guide.\27\ Therefore, pursuant to the proposed rule
change, DTC would provide announcements relating to these Securities to
Participants in accordance with the provisions of the Distributions
Guide relating to Tax Events, as discussed above. As a result,
Participants would receive Tax Event announcements relating to
Securities subject Section 871(m), as they do to with respect to
Securities subject to Section 305(c), and they would be able to use the
data provided via the announcements to help them meet their tax
withholding and reporting obligations.
---------------------------------------------------------------------------
\27\ Pursuant to the Distributions Guide, Tax Events
announcements are information only announcements regarding taxable
events that may give rise to information and/or withholding
obligations which occur even in the absence of an actual
distribution of dividend and interest payments. See Distributions
Guide, supra note 5, at 9. Announcements of Distribution Events for
Securities subject to Section 871(m) meet the definition of Tax
Event as defined in the Distributions Guide because under the Final
Section 871(m) Regulations, an Equity Derivative held by a non-U.S.
person may be considered a ``Section 871(m) Transaction'' and can
potentially give rise to a dividend equivalent subject to
withholding tax even in the absence of an actual distribution
payment. See supra note 25.
---------------------------------------------------------------------------
In addition, DTC proposes to update the Distributions Guide to
update the Payable Date Field to provide for an enhanced description
for Payable Date information to be provided by DTC for Section 305(c)
announcements versus Section 871(m) announcements. In this regard, the
existing Payable Date Field description would be updated from stating
it is the ``field used for the date of the deemed distribution'' to
instead state it is a ``field used for the date of deemed distributions
for sub event types of 305(c) Deemed Dividends'' or a ``field used to
provide the payable date of the underlying security for sub event type
of 871(m) Dividend Equivalent Amount.''
Pursuant to the proposed rule change DTC would also add a new Field
titled ``Timing of the Dividend Equivalent Amount'' with a description
that it is a ``field used for the timing of dividend equivalents under
1.871-15 of Treasury regulations.''
The proposed rule change would also make a technical change for
enhanced readability and clarity by changing the opening text of the
subsection titled ``The Tax Event Announcement Feature'' from stating
``The Tax Event announcement feature leverages the following data
fields from other event types to provide relevant information to
participants:'' to instead state ``The Tax Event announcement feature
uses the following data fields to provide relevant information to
participants:''.
Fee Guide
Pursuant to the proposed rule change, because all Tax Events would
be announced pursuant to the same Procedures and processes, including
using similar Fields, as described above, DTC would charge the same Tax
Event Fee amount to Participants for all Tax Event Announcements,
regardless of whether they relate to Securities subject to Section
305(c) or Section 871(m). In this regard, DTC would change the name for
the Tax Event Fee in the Fee Guide from ``Tax Event Announcement--
305c'' to ``Tax Event Announcement,'' so there would be one fee item in
the Fee Guide applicable to Tax Events.
DTC believes that the proposed rule change, as described above,
would significantly increase the volume of Tax Event announcements
processed by DTC and therefore increase the volume of Tax Event Fees
charged to Participants. After reviewing the costs of providing Tax
Event announcements, and the revenue necessary for DTC to recover
development costs and operating expenses relating to providing Tax
Event announcements as proposed above, DTC has determined that due to
anticipated increasing economies of scale, the increased volumes in Tax
Event announcements at the current amount of the Tax Event Fee would
result in the collection of a total amount of Tax Events Fees that is
significantly more than would be necessary to offset DTC's costs
relating to retrieval of Tax Event information from issuers and
announcing that information to Participants. In this regard, DTC has
determined that it should reduce the Tax Event Fee from $40 per
announcement to $12 per announcement for consistency with its cost-
based plus markup \28\ fee model. Therefore, DTC proposes to amend the
Fee Guide to reduce the Tax Event Fee from $40 per announcement to $12
per announcement.
---------------------------------------------------------------------------
\28\ DTC has in place procedures to control costs and to
regularly review pricing levels against costs of operation. DTC's
fees are cost-based plus a markup as approved by its Board of
Directors. This markup is applied to recover development costs and
operating expenses, and to accumulate capital enough to meet
regulatory and economic requirements. See DTC Disclosure Framework
for Covered Clearing Agencies and Financial Market Infrastructures,
available at http://www.dtcc.com/~/media/Files/Downloads/legal/
policy-and-compliance/DTC_Disclosure_Framework.pdf, at 124.
---------------------------------------------------------------------------
Implementation Timeframe
The proposed rule change would be implemented on December 6, 2019.
2. Statutory Basis
DTC believes that the proposed rule change is consistent with the
requirements of the Act, and the rules and regulations thereunder
applicable to DTC, in particular Sections 17A(b)(3)(D) \29\ and
17A(b)(3)(F) \30\ of the Act.
---------------------------------------------------------------------------
\29\ 15 U.S.C. 78q-1(b)(3)(D).
\30\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
Section 17A(b)(3)(D) of the Act \31\ requires that the rules of the
clearing agency provide for the equitable allocation of reasonable
dues, fees, and other charges among its participants. DTC believes that
the proposed Tax Event Fee, as described above, would be equitably
allocated among Participants because each Participant holding
Securities subject to Tax Events would be charged the same Tax Event
Fee amount per Announcement. DTC believes that the proposed Tax Event
Fee amount would be reasonable because it would allow DTC to recover
[[Page 69427]]
its costs of retrieval of Tax Event information from issuers and
announcing that information to Participants holding the applicable
Securities, which information is needed by the Participants to
facilitate their compliance with applicable tax withholding
obligations, as described above. Therefore, DTC believes that the
proposed rule change is consistent with Section 17A(b)(3)(D) of the
Act, cited above.
---------------------------------------------------------------------------
\31\ 15 U.S.C. 78q-1(b)(3)(D).
---------------------------------------------------------------------------
Section 17A(b)(3)(F) of the Act \32\ requires, inter alia, that the
rules of the clearing agency be designed to promote the prompt and
accurate clearance and settlement of securities transactions. As
described above, the proposed rule change would enhance the
Distributions Service to include the distribution of announcements for
Tax Events for Securities subject to Section 871(m) to Participants. As
described above, by providing for the distribution of Tax Event
information to Participants, the proposed rule change would facilitate
Participants' ability to comply with their federal tax withholding
obligations. This would further facilitate Participants' ability to
continue to maintain Eligible Securities subject to Tax Events on
Deposit at DTC and make use of DTC's book-entry transfer and settlement
services with respect to those Securities, in accordance with DTC Rules
requirements relating to the use of DTC services by Participants.\33\
Therefore, by facilitating Participant's ability to continue to use
DTC's book-entry transfer and settlement services at DTC with respect
to Eligible Securities that are subject to Tax Events, the proposed
rule change would promote the prompt and accurate clearance and
settlement of securities transactions, consistent with the requirements
of the Act, in particular Section 17A(b)(3)(F) of the Act, cited above.
---------------------------------------------------------------------------
\32\ 15 U.S.C. 78q-1(b)(3)(F).
\33\ See supra note 17.
---------------------------------------------------------------------------
(B) Clearing Agency's Statement on Burden on Competition
DTC believes that the proposed rule change to amend the
Distributions Guide to update Fields used by DTC to report Tax Events
and make other technical and clarifying changes, as described above,
could impose a burden on competition, because by designating Section
871(m) announcements as Tax Events, and causing Participants that hold
Securities subject Section 871(m) to be subject to the Tax Event Fee,
it would subject Participants to a mandatory DTC Tax Event Fee that
they would not incur today.
To the extent the proposed rule change may impose a burden on
competition, DTC believes it would be necessary and appropriate in
furtherance of the purposes of the Act,\34\ because the proposed rule
change would provide for Participants to obtain the Tax Event
announcement information needed to facilitate their compliance with tax
withholding obligations and DTC's Rules relating to Participants'
compliance with applicable law, as described above. DTC has discussed
the proposal with Participants that hold Securities subject to Section
871(m), and issuers of those Securities, and DTC is not aware of either
(i) an alternative method available to Participants to obtain Section
871(m) announcement information in a centralized format or (ii)
established or planned arrangements by issuers to provide tax-related
information for Section 871(m) Securities directly to DTC Participants
and/or investors.
---------------------------------------------------------------------------
\34\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------
(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants, or Others
DTC has not solicited and does not intend to solicit written
comments regarding the proposed rule change. DTC has not received any
unsolicited written comments from interested parties. To the extent DTC
receives written comments on the proposed rule change, DTC will forward
such comments to the Commission.
Participants most likely to be affected by the proposed rule change
have indicated in discussions with DTC that receiving Section 871(m)
announcements through DTC would facilitate their ability to comply with
their tax withholding obligations.
III. Date of Effectiveness of the Proposed Rule Change, and Timing for
Commission Action
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A) of the Act \35\ and paragraph (f) of Rule 19b-4
thereunder.\36\ At any time within 60 days of the filing of the
proposed rule change, the Commission summarily may temporarily suspend
such rule change if it appears to the Commission that such action is
necessary or appropriate in the public interest, for the protection of
investors, or otherwise in furtherance of the purposes of the Act.
---------------------------------------------------------------------------
\35\ 15 U.S.C. 78s(b)(3)(A).
\36\ 17 CFR 240.19b-4(f).
---------------------------------------------------------------------------
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-DTC-2019-011 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549.
All submissions should refer to File Number SR-DTC-2019-011. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of DTC and on DTCC's website
(http://dtcc.com/legal/sec-rule-filings.aspx). All comments received
will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly.
All submissions should refer to File Number SR-DTC-2019-011 and
should be submitted on or before January 8, 2020.
---------------------------------------------------------------------------
\37\ 17 CFR 200.30-3(a)(12).
[[Page 69428]]
---------------------------------------------------------------------------
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\37\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-27206 Filed 12-17-19; 8:45 am]
BILLING CODE 8011-01-P