Document ID: SEC-2023-0778-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Depository Trust Co.
Posted Date: 2023-07-25T04:00Z

[Federal Register Volume 88, Number 141 (Tuesday, July 25, 2023)]
[Notices]
[Pages 47927-47929]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-15658]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97948; File No. SR-DTC-2023-007]

Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
To Modify the Distributions Guide, Redemptions Guide, Reorganizations 
Guide, and Operational Arrangements, Relating to the Compensation 
Claims Process

July 19, 2023.
    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 July 12, 2023, 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 Rule 19b-4(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)(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\ consists of modifications to the DTC 
Distributions Service Guide (``Distributions Guide''),\6\ DTC 
Redemptions Service Guide (``Redemptions Guide''),\7\ DTC 
Reorganizations Service Guide (``Reorganizations Guide,'' \8\ and 
collectively with the Distributions Guide and Redemptions Guide, 
``Service Guides'') and the DTC Operational Arrangements (Necessary for 
Securities to Become and Remain Eligible for DTC Services) (``OA''),\9\ 
relating to the process under which DTC, on behalf of its Participants, 
claims compensation for payments due from the Paying Agent and/or 
Issuer if there is a failure to pay DTC principal and interest, or 
entitlements for a corporate actions event, on the scheduled payment 
date in immediately available funds (``Compensation Claims Process''), 
as described below.\10\
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    \5\ Each capitalized term not otherwise defined herein has its 
respective meaning as set forth the Rules, By-Laws and Organization 
Certificate of DTC (the ``Rules''), available at http://www.dtcc.com/legal/rules-and-procedures.aspx.
    \6\ Available at https://www.dtcc.com/-/media/Files/Downloads/legal/service-guides/Service-Guide-Distributions.pdf.
    \7\ Available at https://www.dtcc.com/-/media/Files/Downloads/legal/service-guides/Redemptions.pdf.
    \8\ Available at https://www.dtcc.com/-/media/Files/Downloads/legal/service-guides/Reorganizations.pdf.
    \9\ Available at https://www.dtcc.com/-/media/Files/Downloads/legal/issue-eligibility/eligibility/operational-arrangements.pdf.
    \10\ The respective Service Guides and OA are each a Procedure 
of DTC. Pursuant to the Rules, the term ``Procedures'' means the 
Procedures, service guides, and regulations of DTC adopted pursuant 
to Rule 27, as amended from time to time. See Rule 1, Section 1, 
supra note 5. They are binding on DTC and each Participant in the 
same manner that they are bound by the Rules. See Rule 27, supra 
note 5.
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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 consists of modifications to the Service 
Guides and the OA relating to the Compensation Claims Process, as 
described below.
Background
    As the holder of immobilized securities through its nominee, Cede & 
Co., DTC provides asset services that facilitate centralization, 
simplification, and automation in the processing of principal and 
income payments and corporate actions.\11\ In this regard, DTC receives 
from agents, on behalf of its Participants, funds payments representing 
scheduled payments of dividends on equity securities or interest or 
principal on debt securities. These payments may include payments of 
principal and, in certain cases, payments of interest accrued from the 
preceding interest payment date. These payments are credited to the 
Participants to whom they are due (as reflected in DTC's records). DTC 
also receives and allocates funds payments in connection with 
redemptions of debt

[[Page 47928]]

securities prior to their scheduled maturity. DTC also processes the 
allocation of cash and stock entitlements it receives in connection 
with reorganizations.
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    \11\ These services, including distributions, redemptions, and 
reorganizations, among others, are further described in applicable 
DTC service guides, available at https://www.dtcc.com/legal/rules-and-procedures.
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    To the extent funds and identifying information are received, these 
entitlements pass through DTC and are credited to the accounts of 
Participants on the same day that they are paid to DTC, in accordance 
with the OA. Occasionally, DTC has received late payments of such 
entitlements, and Participants may not realize interest or other 
returns that they would have if the entitlements were timely paid by 
the agent.
    Pursuant to the OA, DTC may, on behalf of Participants, elect to 
claim interest compensation for payments due from the Paying Agent and/
or Issuer if there is a failure to pay DTC for an event on the 
scheduled payment date in immediately available funds.\12\ The 
Distributions Guide and Redemptions Guide provide that DTC will make 
such claims on behalf of Participants for interest relating to late 
payments by agents. As such, DTC automatically and proactively claims 
interest compensation from agents who pay DTC after the payable date. 
Collected compensation is passed on to Participants that had a position 
in the late-paying issue.
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    \12\ See OA, supra note 9, at 5.
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    Historically, the percentage and value of claims paid by agents is 
low relative to the amounts claimed despite considerable resources 
dedicated by DTC to this process.\13\ This outcome may be due to 
factors arising away from DTC (e.g., unavailability of issuer funds to 
pay such claims, an agent paying a Participant interest outside of DTC, 
terms of a particular security, etc.). DTC believes it would be more 
efficient for Participants to manage their claims directly with agents, 
instead of via DTC, as they may have information relating to the terms 
of their investments and the underlying terms of the securities to 
determine whether a claim should be made and whether the pursuit of a 
claim is worth the use of their time and resources in relation to the 
value of the claim. Since Participants are better situated to make 
claims on their own, without DTC's intervention, DTC believes that the 
resources it uses to perform the Compensation Claims Process would be 
better used on other DTC processing functions. Therefore, DTC proposes 
to no longer automatically and proactively claim agents for late 
compensation on behalf of Participants. However, DTC would maintain 
discretion to submit compensations claims to an agent on behalf of a 
Participant, in the event the Participant is unsuccessful in making its 
own direct claims for compensation to an issuer or agent, and so 
notifies DTC.
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    \13\ For example, for the two months of December 2022 and 
January 2023 combined, DTC made 51 claims to agents in a total 
amount of $1,139,092.98. Of these claims, a total of 6 claims, or 12 
percent were paid by the agents. The total dollar amount recovered 
was $99,145.41, or less than 9 percent of the total claimed. For the 
months from August 2021 to September 2022, for more than half of the 
months DTC received payment in a value of less than 5 percent of the 
amount claimed. For each of three months during this period where 
the value recovered was over 50 percent of the amount claimed, the 
highest total number of claims in a month was 6, and the amount 
highest total dollar amount claimed in a month was less than $5,200.
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    In addition, the proposed rule change would clarify the 
circumstances under which DTC may make claims relating to late payments 
of entitlements for reorganization events. Unlike distributions or 
redemptions, reorganization events do not necessarily have a scheduled 
or announced payment date across all our various event types. In this 
regard, DTC would clarify the OA that it may claim an agent or issuer 
on any of these dates, or any time entitlements are available to 
holders and DTC was not paid timely.
Proposed Rule Change
    Pursuant to the proposed rule change, the Compensation Claims 
Process language in the Distributions Guide and Redemptions Guide would 
be revised to state that if a Participant is unsuccessful in making its 
own direct claims for compensation to an issuer or agent, and so 
notifies DTC, DTC may, rather than will, make claims on behalf of 
Participants for interest against agents and/or issuers relating to 
late payments by agents.
    The text of the OA that provides that DTC may elect to claim 
compensation for payments due from the Paying Agent and/or Issuer if 
there is a failure to pay DTC for an event on the scheduled payment 
date in immediately available funds would be clarified with respect to 
when DTC may make claims relating to reorganizations events. In this 
regard, text would be added to state that in the case of certain 
reorganization transactions, DTC may claim the agent and/or issuer if 
there is a failure to pay DTC in immediately available funds on the 
scheduled payment date or on the effective date (as it applies to the 
Reorganizations transaction), or on the first day funds are made 
available for payment. Consistent with the proposed text for the 
Distributions Guide and Redemptions Guide described above, the revised 
text would preface any election by DTC to pursue such a claim on a 
Participant notifying DTC that it was unsuccessful in making its own 
direct claims for compensation to an issuer or agent.
    The text of the Reorganizations Guide, which currently does not 
address compensation claims, also would be amended to add similar 
language as that proposed for the OA, above. Specifically, the 
Reorganizations Guide would state that in the case of reorganization 
transactions, if a Participant is unsuccessful in making its own direct 
claims for compensation to an issuer or agent, and so notifies DTC, DTC 
may claim the agent and/or issuer if there is a failure to pay DTC in 
immediately available funds on the scheduled payment date or on the 
effective date, or the first day funds are made available for payment.
Effective Date
    The proposed rule change is to become immediately effective upon 
filing.
2. Statutory Basis
    Section 17A(b)(3)(F) of the Act \14\ requires, in part, that the 
rules of a clearing agency be designed to promote the prompt and 
accurate clearance and settlement of securities transactions. As 
described above, the proposed rule change would revise the OA and 
Service Guides such that DTC would no longer automatically and 
proactively engage in the Compensation Claims Process on behalf of 
Participants; rather DTC may make such claims to the extent a 
Participant is unsuccessful in making its own direct claims for 
compensation to an issuer or agent. As described above, (i) 
Participants are better situated than DTC to determine when and how to 
make compensation claims in accordance with their own priorities, and 
(ii) the proposal would enable the reallocation of DTC's resources that 
are currently used for the Compensation Claims Process, to other 
functions that support DTC services, thus helping to promote prompt and 
accurate clearance and settlement. Therefore, DTC believes the proposed 
rule change is consistent with the requirements of Section 17A(b)(3)(F) 
of the Act.
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    \14\ 15 U.S.C. 78q-1(b)(3)(F).
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    Rule 17Ad-22(e)(21) \15\ promulgated under the Act requires, inter 
alia, that DTC, a covered clearing agency, establish, implement, 
maintain, and enforce written policies and procedures reasonably 
designed to, as applicable, be efficient and effective in meeting the 
requirements of its participants and the markets it serves. As 
described above, the proposed rule change would revise

[[Page 47929]]

the OA and Service Guides such that DTC would no longer automatically 
and proactively submit compensation claims to agents and/or issuers, 
except DTC may make such claims at its discretion. As noted above, the 
percentage of claims paid in both actual and dollar value amounts are 
historically low, which does not warrant DTC expending resources to 
recover the funds. Instead, DTC believes it could more effectively and 
efficiently apply the resources allocated to the Compensation Claims 
Process to other core DTC processing functions. Therefore, DTC believes 
that the proposed rule change would help promote efficiency and 
effectiveness in DTC meeting the requirements of its participants and 
the markets it serves, consistent with Rule 17Ad-22(e)(21).
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    \15\ 17 CFR 240.17Ad-22(e)(21).
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(B) Clearing Agency's Statement on Burden on Competition

    DTC does not believe that the proposed rule change would have any 
impact, or impose any burden, on competition.
    As described above, the proposed rule change consists of changes to 
the OA and Service Guides to clarify DTC's Compensation Claims Process 
and changes this process so that DTC would no longer automatically and 
proactively makes claims for interest on late payments. As described 
above, the amount, both in actual and dollar amounts, of claims 
recovered is low relative the amount and value of claims DTC makes to 
agents, and the value Participants receive in return is minimal. In 
addition, DTC believes that Participants can more efficiently make 
compensation claims directly to an agent and/or issuer, away from DTC, 
by pursuing claims they believe are worth pursuing. Therefore, given 
the minimal benefit realized by Participants from the current 
Compensation Claims Process, and that Participants may engage agents 
more efficiently on their own to make such claims, DTC believes that 
the proposed rule change would not have any impact or impose any 
burden, on competition.

(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. If any written comments are received, they would be 
publicly filed as an Exhibit 2 to this filing, as required by Form 19b-
4 and the General Instructions thereto.
    Persons submitting comments are cautioned that, according to 
Section IV (Solicitation of Comments) of the Exhibit 1A in the General 
Instructions to Form 19b-4, the Commission does not edit personal 
identifying information from comment submissions. Commenters should 
submit only information that they wish to make available publicly, 
including their name, email address, and any other identifying 
information.
    All prospective commenters should follow the Commission's 
instructions on how to submit comments, available at https://www.sec.gov/regulatory-actions/how-to-submitcomments. General questions 
regarding the rule filing process or logistical questions regarding 
this filing should be directed to the Main Office of the Commission's 
Division of Trading and Markets at [email protected] or 202-
551-5777.
    DTC reserves the right to not respond to any comments received.

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) \16\ of the Act and paragraph (f) \17\ of Rule 19b-4 
thereunder. 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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    \16\ 15 U.S.C. 78s(b)(3)(A).
    \17\ 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 (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number SR-DTC-2023-007 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-2023-007. 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 (https://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 
a.m. and 3 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). Do not include 
personal identifiable information in submissions; you should submit 
only information that you wish to make available publicly. We may 
redact in part or withhold entirely from publication submitted material 
that is obscene or subject to copyright protection. All submissions 
should refer to File Number SR-DTC-2023-007 and should be submitted on 
or before August 15, 2023.
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    \18\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
Sherry Haywood,
Assistant Secretary.
[FR Doc. 2023-15658 Filed 7-24-23; 8:45 am]
BILLING CODE 8011-01-P