Document ID: SEC-2021-1133-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: National Securities Clearing Corp.
Posted Date: 2021-08-23T04:00Z

[Federal Register Volume 86, Number 160 (Monday, August 23, 2021)]
[Notices]
[Pages 47172-47173]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-17963]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-92682; File No. SR-NSCC-2021-009]

Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Approving a Proposed Rule Change To Modify the Rules 
& Procedures of National Securities Clearing Corporation in Connection 
With the Implementation of Section 1446(f) of the Internal Revenue Code 
of 1986

August 17, 2021.
    On July 14, 2021, National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ 
proposed rule change SR-NSCC-2021-009 to modify NSCC's Rules & 
Procedures (``Rules'') \3\ in connection with the implementation of 
Section 1446(f) of the Internal Revenue Code of 1986.\4\ The proposed 
rule change was published for comment in the Federal Register on July 
23, 2021,\5\ and the Commission received no comment letters regarding 
the changes proposed in the proposed rule change. For the reasons 
discussed below, the Commission is approving the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Capitalized terms not defined herein are defined in the 
Rules, available at http://www.dtcc.com/~/media/Files/Downloads/
legal/rules/nscc_rules.pdf.
    \4\ 26 U.S.C. 1446(f).
    \5\ Securities Exchange Act Release No. 92437 (July 19, 2021), 
86 FR 39092 (July 23, 2021) (``Notice of Filing'').
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I. Description of the Proposed Rule Change

A. Background

    Section 1446(f) generally imposes a ten percent withholding tax on 
the payment of gross proceeds arising from the sale or other 
disposition by a non-U.S. person of an interest in a publicly traded 
partnership (``Section 1446(f) Withholding'') that is engaged in a U.S. 
trade or business.\6\ A tax withholding obligation is imposed on the 
buyer of the partnership interest, who is required to remit the 
withheld tax amount to the U.S. Internal Revenue Service (``IRS''), 
unless or to the extent an applicable exception applies. The buyer 
obligated to withhold the ten percent tax is liable for any amount that 
it underwithheld, plus associated interest and penalties. Further, 
partnerships that are publicly traded on exchanges (``PTPs'') in 
respect of transfers that occur on or after January 1, 2022 will be 
subject to Section 1446(f) Withholding. The U.S. Treasury Department 
(``Treasury Department'') and the IRS implemented a tax withholding 
requirement pursuant to Treasury Regulation Section 1.1446(f)-4(a).\7\
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    \6\ 26 U.S.C. 1446(f)(1); Withholding of Tax and Information 
Reporting With Respect to Interests in Partnerships Engaged in a 
U.S. Trade or Business, 85 FR 76910 (Nov. 30, 2020) (``Final 
Regulations'').
    \7\ Id.; 26 CFR 1.1446(f)-4(a).
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    Section 1.1446(f)-4(b) provides certain exceptions to 1.1446(f)-
4(a). Under one of the exceptions, U.S. clearing organizations, which, 
under its definition, would include NSCC, are discharged from 
fulfilling Section 1446(f) Withholding at this time. The Treasury 
Department and the IRS provided this exception because they understood 
that there are no nonqualified intermediary Members that participate 
directly in the net settlement system at a U.S. clearing organization 
at the present time.\8\
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    \8\ Final Regulations, supra note 6, at 76922.
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    NSCC represents that, all of NSCC's non-U.S. Members are currently 
of the types of entities permitted to perform the Section 1446(f) 
Withholding themselves either because (i) they are the types of 
entities allowed to perform U.S. tax withholdings pursuant to 
applicable Treasury Regulations, or (ii) they have entered into the 
requisite agreements with the IRS that allow them to perform U.S. tax 
withholdings (commonly known as the Qualified Intermediary 
Agreements).\9\ NSCC further represents that nearly all such Members 
have historically accepted the responsibility to perform all U.S. tax 
withholdings in respect of their NSCC accounts, and it is NSCC's 
understanding that they would continue do the same for Section 1446(f) 
Withholding.\10\
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    \9\ Notice of Filing, supra note 5, at 39093.
    \10\ Id.
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B. Proposed Rule Changes

    NSCC proposes to amend its Rules to ensure that all NSCC's FFI 
Members \11\ that are Members would accept the responsibility to 
perform the Section 1446(f) Withholding.\12\
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    \11\ The term ``FFI Member'' means any Member or Limited Member 
that is treated as a non-U.S. entity for U.S. federal income tax 
purposes. See Rules, supra note 3.
    \12\ NSCC states that, based on the types of services that NSCC 
provides to Limited Members, notwithstanding any exception, NSCC 
would not need to perform Section 1446(f) Withholding with respect 
to Limited Members' activities at NSCC. Notice of Filing, supra note 
5, at 39093.
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    First, NSCC proposes to add new definitions: Section 1446(f), 
Section 1446(f) Withholding, Section 1446(f)

[[Page 47173]]

Withholding Agent, Section 1446(f) Withholding Compliance Date, and Tax 
Certification.\13\ Second, NSCC proposes to revise the FATCA compliance 
rule to add that, generally, each FFI Member that is a Member must 
agree not to conduct any transaction or activity through NSCC if such 
FFI Member is not a Section 1446(f) Withholding Agent.\14\ Third, NSCC 
proposes to require FFI Members to be Section 1446(f) Withholding 
Agents and to notify NSCC when they have reason to know that they are 
not, or will not be, Section 1446(f) Withholding Agents.\15\ Fourth, 
NSCC proposes to require a Member who is a non-U.S. entity and is not a 
Section 1446(f) Withholding Agent to not transact through NSCC, and a 
Member who is a non-U.S. entity to provide Tax Certification to certify 
that it is FATCA Compliant or a Section 1446(f) Withholding Agent.\16\ 
Fifth, NSCC proposes to make certain other technical changes to its 
Rules.\17\
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    \13\ Notice of Filing, supra note 5, at 39093.
    \14\ The term ``Section 1446(f) Withholding Agent'' would mean 
an FFI Member that is a Member and has certified to NSCC that 
Section 1446(f) Withholding would not apply to any Gross Credit 
Balance of such FFI Member by providing to NSCC a Tax Certification 
(as defined below and in the proposed rule text). Id.
    \15\ Id.
    \16\ Notice of Filing, supra note 5, at 39094.
    \17\ Notice of Filing, supra note 5, at 39093-94.
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II. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \18\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that such proposed rule change is consistent with the 
requirements of the Act and rules and regulations thereunder applicable 
to such organization. After carefully considering the proposed rule 
change, the Commission finds that the proposed rule change is 
consistent with the requirements of the Act. In particular, the 
Commission finds that the proposed rule change is consistent with 
Section 17A(b)(3)(F) of the Act.\19\
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    \18\ 15 U.S.C. 78s(b)(2)(C).
    \19\ 15 U.S.C. 78q-1(b)(3)(F).
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A. Consistency With Section 17A(b)(3)(F)

    Section 17A(b)(3)(F) of the Act requires, in part, that the rules 
of a clearing agency, such as NSCC, be designed to promote the prompt 
and accurate clearance and settlement of securities transactions.\20\
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    \20\ Id.
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    As described above, Section 1446(f) provides NSCC an exception from 
the obligation to perform Section 1446(f) Withholding at this time. 
However, if a direct clearing member of a U.S. clearing organization is 
not a type of entity permitted to perform Section 1446(f) Withholding, 
the Treasury Department and the IRS will issue proposed guidance that 
would remove the current exception to require Section 1446(f) 
Withholding by U.S. clearing organizations, such as NSCC, on that 
direct clearing member.\21\ If the Treasury Department and the IRS were 
to revise Section 1446(f) and revoke NSCC's exception, NSCC would be 
required to clear and settle each transfer of PTP interest on a gross 
basis in order to perform Section 1446(f) Withholding on such transfer. 
Given that NSCC currently clears and settles all transactions on a 
netted basis, NSCC represents that any obligation imposed on NSCC to 
clear and settle transfers of PTP interest on a gross basis may be 
disruptive to the efficiency and liquidity of the trading of PTP 
interests in the capital markets.\22\
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    \21\ Final Regulations, supra note 6, at 76922.
    \22\ Notice of Filing, supra note 5, at 39094.
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    NSCC is proposing that, unless waived by NSCC, beginning on the 
Section 1446(f) Withholding Compliance Date, each FFI Member that is a 
Member would be required to agree not to conduct any transaction or 
activity through NSCC if such FFI Member is not a Section 1446(f) 
Withholding Agent. In addition, each FFI Member that is a Member would 
be required to provide periodic certifications to NSCC regarding its 
Section 1446(f) Withholding Agent status. Taken together, these 
membership requirements would help to ensure that all NSCC FFI Members 
that are Members would accept their responsibility to perform the 
Section 1446(f) Withholding and to be a Section 1446(f) Withholding 
Agent.
    By ensuring that all NSCC FFI Members that are Members would accept 
their responsibility to perform the Section 1446(f) Withholding, the 
Commission believes the current exception for NSCC with respect to 
Section 1446(f) would continue to operate as intended. Therefore, NSCC 
would be able to continue to clear and settle all transactions 
(including transfers of PTP interest) on a netted basis and avoid any 
potential disruption to the efficiency and liquidity of the trading of 
PTP interests in the capital market. By avoiding any potential 
disruption to the efficiency and liquidity of the trading of PTP 
interest in the capital market, the Commission believes that the 
proposal would help to promote the prompt and accurate clearance and 
settlement of transactions, consistent with Section 17A(b)(3)(F) of the 
Act.\23\
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    \23\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Commission believes the proposal to make technical changes to 
the Rules is also consistent with Section 17A(b)(3)(F) of the Act. The 
proposed technical changes to the Rules would help ensure that the 
Rules remain accurate and clear to Members. Having accurate and clear 
Rules would help Members to better understand their rights and 
obligations regarding NSCC's clearance and settlement services. The 
Commission believes that when Members better understand their rights 
and obligations regarding NSCC's clearance and settlement services, 
they can act in accordance with the Rules. The Commission believes that 
better enabling Members to comply with the Rules would promote prompt 
and accurate clearance and settlement of transactions, consistent with 
Section 17A(b)(3)(F) of the Act.\24\
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    \24\ Id.
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III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
in particular with the requirements of Section 17A of the Act \25\ and 
the rules and regulations promulgated thereunder.
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    \25\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\26\ that proposed rule change SR-NSCC-2021-009, be, and hereby is, 
APPROVED.\27\
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    \26\ 15 U.S.C. 78s(b)(2).
    \27\ In approving the proposed rule change, the Commission 
considered the proposals' impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).
    \28\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2021-17963 Filed 8-20-21; 8:45 am]
BILLING CODE 8011-01-P