[Federal Register Volume 65, Number 236 (Thursday, December 7, 2000)]
[Notices]
[Pages 76688-76690]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-31139]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43640; File No. SR-DTC-00-19]


Self Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of a Proposed Rule Change by the Depository Trust Company 
Relating to a New Tax Service Called DALI

November 29, 2000.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934,\1\ notice is hereby given that on November 20, 2000, 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 DTC. The Commission is publishing this notice to solicit comments on 
the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    DTC has filed a proposed rule change to implement a new tax service 
called ``DALI'' (an acronym for data link for intermediaries). DALI is 
a communications hub to be used by U.S. payors such as banks, broker-
dealers and foreign customers to exchange data in order to determine 
the proper withholding amount and to report U.S. withholding tax on 
payments such as dividends and interest made to a foreign payee.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, DTC included statements 
concerning the purpose of and basis for the

[[Page 76689]]

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. DTC has prepared summaries, set 
forth in sections A, B, and C below, of the most significant aspects of 
such statements. \2\
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    \2\ The Commission has modified the text of the summaries 
prepared by DTC.
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A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

    The proposed rule change consists of the addition of DALI to DTC's 
tax services. DALI is a communications hub that will allow financial 
institutions (typically, a U.S. paying institution and its foreign 
customer payee) to exchange the data necessary to determine correct 
withholding and reporting of U.S. tax on payments such as dividends and 
interest to a foreign payee. DALI will also provide a storage facility 
for payment allocation information necessary for tax reporting. At a 
later stage, DALI will be expanded to also serve as a document 
repository for payee tax documentation and a storage facility for 
payment allocation information necessary for tax reporting at a 
beneficial owner level.
Background
    Changes in U.S. tax regulations concerning U.S. withholding tax and 
reporting on payments of U.s. source income made to foreign payees will 
become effective on January 1, 2001.\3\ The new withholding regulations 
require U.S. withholding agents, such as banks and broker-dealers that 
pay dividends and interest to foreign customers, to determine the 
appropriate withholding tax rates for such payments based upon the tax 
status of the beneficial owner of the payment and to allocate the 
payments among each beneficial owner or classes of owners for annual 
reporting to the Internal Revenue Service. As a consequence, when the 
U.S. financial institution's foreign customer is not the beneficial 
owner (for example, a foreign intermediary holding securities on behalf 
of its customers), the U.S. financial institution, in its capacity as 
U.S. withholding agent, must obtain payment allocation information from 
its direct foreign intermediary customer, based upon the identity of 
tax status of the ultimate beneficial owners of each payment made by 
the U.S. financial institution to its foreign customer.
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    \3\ Sections 1441, et seq., of the Internal Revenue Code and 
regulations promulgated thereunder.
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Development of DALI
    DTC was asked to provide the DALI service by several of its 
participants (referred to here as the ``Consortium'') that sought a 
common solution to enable them to comply with the new withholding tax 
regulations. The Consortium also consulted with Price WaterhouseCoopers 
(``PWC'') concerning the feasibility of developing a centralized and 
standardized software system that could be shared among the Consortium. 
At the request of the Consortium and industry groups, DTC agreed to act 
as a project manager for the development of the DALI software system 
and to operate and maintain the completed system as a DTC service. DTC 
and the Consortium retained PWC to develop the core DALI software. The 
Consortium agreed to pay PWC's software development costs and DTC's 
out-of-pocket product development costs such as hardware and operating 
software. The Consortium expects to recoup these costs over time from 
the proceeds of excess user service fees.\4\
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    \4\ The proposed fee schedule for users of the DALI service is 
being developed and will be filed with the Commission shortly.
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Description of DALI System
    DALI is a communications hub that withholding agents and foreign 
payees can use to transmit and receive the information necessary for 
tax withholding and reporting under the new tax regulations. DALI will 
be available to participants and non-participant customers for use with 
respect to withholding on varying types of payments and not restricted 
to position in securities held at DTC. DALI may be accessed by File 
Transfer Protocol and through the Internet at DTC's website.
    In its simplest form, a typical message flow through DALI would 
proceed as follows:
    (1) A U.S. financial institution notifies its foreign customer of a 
forthcoming payment and requests payment allocation information on the 
payment.
    (2) The foreign intermediary responds with allocation information 
based upon the characteristics of the beneficial owners of the payment; 
and
    (3) The U.S. financial institution confirms allocation 
instructions.
    DALI will later be used to also validate, track, and retain 
required payee tax documentation such as IRS Forms W-8 and W-9 and to 
aggregate information for recordkeeping and tax reporting.
    DTC believes that the proposed rule change is consistent with the 
requirements of Section 17A(b)(3) of the Act \5\ and the rules and 
regulations thereunder because it will promote foreign investments in 
U.S. securities by facilitating the exchange of information necessary 
for payors of U.S. income to determine the correct withholding tax 
treatment of payments made to foreign payees. DTC also believes that 
the proposed rule change will be implemented consistently with the 
safeguarding of securities and funds in its custody or control or for 
which it is responsible.
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    \5\ 15 U.S.C. 78q-1(b)(3).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    DTC does not believe that the proposed rule change will impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    Representatives of several of DTC's participants that comprise 
DTC's Foreign Taxes Legal Working Group requested at a meeting held on 
January 24, 2000, that DTC provide a service to facilitate compliance 
with the new U.S. tax withholding regulations effective January 1, 
2001. This request was made in writing by memorandum to DTC dated 
February 1, 2000, from the group of financial institutions then 
comprising the DALI Consortium (Morgan Stanley, Dean Witter, Goldman 
Sachs, Merrill Lynch, Prudential Securities, Salomon Smith Barney/
Citibank, Pershing/DLJ, Chase Manhattan Bank, Brown Brothers Harriman, 
and Bear Stearns). Except as set forth above, DTC has not solicited nor 
received written comments on the proposed rule change.

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)(iii) of the Act \6\ and Rule 19b-4(f)(4) \7\ thereunder 
because the rule change (1) effects a change in an existing service of 
EMCC that does not adversely affect the safeguarding of securities or 
funds in the DTC's custody or control or for which it is responsible 
and (2) does not significantly affect DTC's respective rights or 
obligations or persons using the service. At any time within sixty days 
of the filing of such proposed rule change, the Commission may 
summarily abrogate such rule

[[Page 76690]]

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.
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    \6\ 15 U.S.C. 78s(B)(3)(A)(iii).
    \7\ 17 CFR 19b-4(f)(4).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposal is 
consistent with the Act. Persons making written submissions should file 
six copies thereof with the Secretary, Securities and Exchange 
Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 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 inspection and copying in the Commission's 
Public Reference Room, 450 Fifth Street, NW., Washington, DC. Copies of 
such filing will also be available for inspection and copying at DTC's 
principal office. All submissions should refer to File No. SR-DTC-00-19 
and should be submitted by December 28, 2000.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-31139 Filed 12-6-00; 8:45 am]
BILLING CODE 8010-01-M