Document ID: SEC-2017-1718-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Depository Trust Co.
Posted Date: 2017-10-19T04:00Z

[Federal Register Volume 82, Number 201 (Thursday, October 19, 2017)]
[Notices]
[Pages 48734-48737]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-22643]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81871; File No. SR-DTC-2017-018]

Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Amend the DTC Distributions Guide Relating to Announcements and Tax 
Treatment of Certain Corporate Action Events and To Amend the DTC Fee 
Schedule

October 13, 2017.
    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 October 2, 2017, 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.
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    \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).
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change \5\ would (i) revise the Distributions 
Guide to (A) enhance the DTC Announcements feature (``Announcements'') 
within the DTC Distributions Service (``Distributions Service'') \6\ by 
adding new 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 Event''), as a type of 
distribution covered by Announcements (``Distribution Event'') \7\ and 
(B) make technical and conforming changes relating to U.S. tax 
withholding and information reporting performed by DTC with respect to 
Tax Events; and (ii) add a fee relating to the announcement of Tax 
Events (``New Fee'') to the DTC Fee Schedule (``Fee Schedule''),\8\ as 
discussed below.
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    \5\ Each capitalized term not otherwise defined herein has its 
respective meaning as set forth in the Rules, By-Laws and 
Organization Certificate of DTC (the ``DTC Rules''), available at 
http://www.dtcc.com/legal/rules-and-procedures.aspx and the DTC 
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, supra note 1 at 9.
    \7\ 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. Distributions Guide, supra note 1 at 12.
    \8\ Available at http://www.dtcc.comn/media/Files/Downloads/legal/fee-guides/dtcfeeguide.pdf?la=en.
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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 (A) enhance Announcements by adding Tax Events as a Distribution 
Event and (B) make technical and conforming changes relating to U.S. 
tax withholding and information reporting performed by DTC with respect 
to Tax Events; and (ii) add the New Fee to the Fee Schedule, as 
discussed below.
A. 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 Distribution Events, from multiple issuers and agents.\9\ 
In this regard, Announcements provides Participants with information 
pertaining to their record date (``Record Date'') \10\ positions for 
Distribution Events.\11\ This

[[Page 48735]]

information facilitates Participants' ability to reconcile their 
records with DTC before the payable date (``Payable Date'').\12\
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    \9\ See Distributions Guide, supra note 5 at 9.
    \10\ 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.
    \11\ See Distributions Guide, supra note 5 at 11-13.
    \12\ The Payable Date is a date established by an issuer on 
which a distribution to holders will be paid by the issuer.
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B. Internal Revenue Code Section 305(c)
    Section 305(c) of the Internal Revenue Code \13\ (``Section 
305(c)'') states that holders of convertible securities may be deemed 
to have received a dividend because of a corporate action on common 
stock into which the convertible security may be converted.\14\
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    \13\ 26 U.S.C. 305(c).
    \14\ 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.
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    In the most frequent scenario relevant to Distribution Events, an 
issuer that pays a cash dividend to its shareholders may trigger an 
increase to the conversion rate (``Convertible Rate Adjustment'') \15\ 
on a convertible debt Security. Under Section 305(c), this Convertible 
Rate Adjustment is considered as a deemed distribution.\16\ This deemed 
distribution under Section 305(c) \17\ may be subject to tax reporting 
by Participants, and if the convertible debt Securities are held by 
non-U.S. persons, the appropriate tax withholding.
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    \15\ Such a convertible debt Security provides for a Conversion 
Rate Adjustment so that the conversion rate is changed if a 
distribution is made on the issuer's common stock. Generally, the 
primary purpose of a Convertible Rate Adjustment is to prevent the 
holder of a convertible debt Security from being diluted upon a 
distribution to the shareholders by adjusting the conversion rate on 
the stock to increase the number of shares that the debt holder can 
obtain in a conversion of the bond to shares of the issuer.
    \16\ Such a distribution based on dividend payments made to 
common shareholders will be considered to be deemed distribution to 
bondholders even before the bondholders convert the debt to equity.
    \17\ Supra note 14.
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    In April 2016, the U.S. Treasury released proposed regulations to 
provide guidance to financial institutions regarding their withholding 
and reporting obligations.\18\ The regulations also require issuers of 
convertible securities to provide the amount and the timing of deemed 
distributions under Section 305(c) to the holders of convertible 
securities, i.e., DTC. Despite this reporting requirement, holders may 
not be directly informed of changes that have occurred in the 
instrument's conversion ratio or the amount of the resulting ``deemed'' 
distribution that may result in a tax withholding obligation for them. 
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.\19\
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    \18\ IRS-2016-0016-0001. 81 FR 21795 (April 13, 2016) (REG-
133673-15).
    \19\ 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 Rule 2, 
Section 8, supra note 5.
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C. Proposed Enhancement to Announcements Feature
    Pursuant to the proposed rule change, in order to facilitate 
Participants' ability to comply with the requirements described above, 
DTC would revise the Distributions Guide to allow it to source 
information on Section 305(c) deemed distributions and other Tax Events 
for Securities on Deposit at DTC directly from issuers, and then 
provide the Tax Event information to Participants. DTC would distribute 
the Tax Event information for a deemed distribution in the same 
standardized manner that DTC uses to announce distributions. In this 
regard, DTC would revise the text of the Distributions Guide to (i) add 
Tax Events as a Distribution Event covered by the functionality 
described in the Distributions Guide and (ii) add a new section titled 
``Tax Event Announcements'' to (a) describe and define Tax Events and 
Tax Event Announcements and (b) describe the systemic data fields 
(``Fields'') that DTC would use to provide relevant Tax Event 
information for a Security to Participants, including: (1) ``Event 
Type'' to be shown as ``Tax Event,'' (2) ``Sub Event Type,'' which 
would be 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 would be used to provide any 
other pertinent information regarding the Tax Event.
D. Proposed New Fee
    Pursuant to the Fee Schedule, DTC charges fees to Participants for 
the processing of corporate action events. Fees are established to 
offset the cost of processing all aspects of the applicable corporate 
action event, including the announcement processing, the actual 
processing of payments, and book-entries associated with the corporate 
action. Pursuant to the proposed rule change, the Fee Schedule would be 
revised so that a Participant that holds Securities subject to a Tax 
Event would be charged flat fee of $40 per announcement. The proposed 
New Fee would align DTC's revenue with costs for retrieving Tax Event 
information from issuers and announcing that information to 
Participants, as proposed. The New Fee would be added to the Fee 
Schedule underneath the heading for U.S. Tax Withholding, which is a 
feature of the Distributions Service, for reference purposes so that it 
would be located on the Fee Schedule in the same place as other fees 
charged for tax-related processing performed by DTC.
E. Processing of Tax Withholding and Information Reporting
    DTC performs adjustments for entitlement and allocation activity 
that is outside of traditional pay date allocations. This includes 
activity tracking for stock loans, repos, and due bill fail 
tracking.\20\ With respect to tax treatment of such adjustments, 
currently the text of the Distributions Guide refers to DTC's 
performance of U.S. tax withholding and information reporting for 
credit adjustments that occur with respect to Participant positions in 
their DTC accounts.\21\ The proposed rule change would modify the 
applicable text with respect to the tax treatment described within the 
Due Bill Fail Tracking System, Stock Loan Income Tracking System and 
Repurchase Agreement (REPO) Tracking System subsections of the 
Adjustments Section of the Distributions Guide, to state that such 
withholding and reporting would also be performed related to Tax 
Events.
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    \20\ See Distributions Guide, supra note 5 at 32.
    \21\ Id. at 34, 36, and 37
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F. Implementation Timeframe
    The proposed rule change would be implemented on October 2, 2017.
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) \22\ and 
17A(b)(3)(F) \23\ of the Act.
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    \22\ 15 U.S.C. 78q-1(b)(3)(D).
    \23\ 15 U.S.C. 78q-1(b)(3)(F).
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    Section 17A(b)(3)(D) of the Act \24\ 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 New Fee would be equitably allocated among Participants 
because each Participant holding Securities subject to Tax Events would 
be charged the same New Fee

[[Page 48736]]

amount per Announcement. DTC believes that the proposed New Fee would 
be reasonable because it would allow DTC to align its revenue with its 
costs of providing important Tax Event information through 
Announcements to Participants, which information is needed by them 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.
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    \24\ Supra note 22.
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    Section 17A(b)(3)(F) of the Act \25\ requires, inter alia, that the 
rules of the clearing agency be designed to promote the prompt and 
accurate clearance and settlement of securities transactions.\26\ As 
described above, the proposed rule change would enhance the 
Distributions Service to include the distribution of Announcements for 
Tax Events 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 
Participant's 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.\27\ 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.
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    \25\ Supra note 23.
    \26\ 15 U.S.C. 78q-1(b)(3)(F).
    \27\ See supra note 19.
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    Section 17A(b)(3)(F) of the Act \28\ requires, inter alia, that the 
rules of the clearing agency be designed to promote the prompt and 
accurate clearance and settlement of securities transactions.\29\ As 
described above, the proposed rule change would enhance the 
Distributions Service to include the distribution of Announcements for 
Tax Events 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 
Participant's 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. Therefore, by facilitating Participant's ability 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.
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    \28\ Supra note 23.
    \29\ 15 U.S.C. 78q-1(b)(3)(F).
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(B) Clearing Agency's Statement on Burden on Competition

    DTC does not believe that the proposed rule change proposing to 
amend the Distributions Guide to provide for the announcement of Tax 
Events would have any impact, or impose any burden, on competition, 
because the information that would be provided to Participants in this 
regard is necessary for Participants to receive in order to be able to 
accurately perform tax accounting for their positions held at DTC, and 
maintain compliance with their tax withholding requirements, as 
described above. The addition of the New Fee could have an impact on 
competition because only those Participants that hold Securities 
subject to Tax Events would be charged the New Fee. To the extent the 
proposed rule change to add the New Fee to the Fee Schedule would 
provide for a burden on competition, DTC believes it would be necessary 
and appropriate under the Act because the New Fee is required to cover 
the cost of providing the Tax Event information to Participants, which 
information is necessary for Participants to receive in order to 
facilitate their compliance with their tax withholding obligations.

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants, or Others

    DTC has not received or solicited any written comments relating to 
this proposal. DTC will notify the Commission of any written comments 
received by DTC.

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 \30\ and paragraph (f) of Rule 19b-4 
thereunder.\31\ 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.
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    \30\ 15 U.S.C. 78s(b)(3)(A).
    \31\ 17 CFR 240.19b-4(f).
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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 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 rule-comments@sec.gov. Please include 
File Number SR-DTC-2017-018 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-2017-018. 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 Web site (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 Web site 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 
Web site (http://dtcc.com/legal/sec-rule-filings.aspx). All comments 
received will be posted without change; the

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Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-DTC-
2017-018 and should be submitted on or before November 9, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\32\
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    \32\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-22643 Filed 10-18-17; 8:45 am]
BILLING CODE 8011-01-P