Document ID: SEC-2020-2110-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Depository Trust Co.
Posted Date: 2020-12-29T05:00Z

[Federal Register Volume 85, Number 249 (Tuesday, December 29, 2020)]
[Notices]
[Pages 85765-85769]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-28667]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90747; File No. SR-DTC-2020-019]

Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing of Proposed Rule Change To Update the Distributions 
Service Guide

December 21, 2020.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

[[Page 85766]]

(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on December 9, 2020, 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. 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.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change \3\ consists of amendments to the DTC 
Corporate Actions Distributions Service Guide (``Distributions Guide'') 
\4\ to (i) more clearly explain the interim accounting process, 
generally; (ii) provide an explanation for the interim accounting 
process for a security being delisted; (iii) change how DTC manages 
interim accounting when an ex-date \5\ is changed due to an unscheduled 
closure of a stock exchange; (iv) remove the statements that (A) DTC's 
U.S. Tax Withholding (``UTW'') service is available to subaccounts of 
U.S. Participants, and (B) users of the UTW service must enter into a 
Withholding Agent Agreement; (v) update the copyright date in the 
Important Legal Information section; and (vi) make certain conforming 
and technical changes, as described in greater detail below.
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    \3\ Capitalized terms not defined herein are defined in the 
Rules, By-Laws and Organization Certificate of DTC (``Rules'') 
available at http://www.dtcc.com/~/media/Files/Downloads/legal/
rules/dtc_rules.pdf.
    \4\ Available at http://www.dtcc.com/~/media/Files/Downloads/
legal/service-guides/Service%20Guide%20Distributions.pdf.
    \5\ The ``ex-date'' or ``ex-dividend date'' is the day the stock 
starts trading without the value of its next dividend payment.
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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 purpose of the proposed rule change is to update the 
Distributions Guide to (i) more clearly explain the interim accounting 
process, generally; (ii) provide an explanation for the interim 
accounting process for a security being delisted; (iii) change how DTC 
manages interim accounting when an ex-date is changed due to an 
unscheduled closure of a stock exchange; (iv) remove the statements 
that (A) the UTW service is available to subaccounts of U.S. 
Participants, and (B) users of the UTW service must enter into a 
Withholding Agent Agreement; (v) update the copyright date in the 
Important Legal Information section; and (vi) make certain conforming 
and technical changes.
Interim Accounting
    Interim accounting is an important part of the entitlements and 
allocations process for distributions. The interim period (also 
referred to as the due bill period) is the period during which a 
settling trade has due bills attached to it. A due bill is an 
indication of a seller's obligation to deliver a pending distribution 
(e.g., cash dividend, stock dividend, interest payment, etc.) to the 
buyer in a securities transaction. For distributions that are the 
subject of a due bill, the interim period extends from the Interim 
Accounting Start Date (i.e., record date +1) \6\ up to the Due Bill 
Redemption Date (which is typically ex-date +1 for equities and payable 
date -1 for debt).\7\
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    \6\ The record date is the cut-off date used to determine which 
shareholders are entitled to a corporate dividend. The record date 
will usually be the day following the ex-date.
    \7\ The payable date refers to the date that any declared stock 
dividends are due to be paid out. Investors who purchased their 
stock before the ex-date are eligible to receive dividends on the 
payable date.
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    Normally, the registered holder of a security on the close of 
business on the record date is entitled to the distribution. There are 
times, however, when that is not the case. Such times generally fall 
into two categories. First, for equity issues, there are times when the 
listed exchange will declare an ex-date that is not one business day 
prior to the record date (e.g., an ex-date that equals payable date 
+1). At such times, a buyer is entitled to the distribution when the 
registered holder of an equity issue sells the security prior to the 
ex-date. Second, for most bonds, the buyer of the security is entitled 
to the interest payment (i.e., the distribution) on trades that settle 
up to and including the day before the payable date, even though the 
buyer is not the record date holder.
    Without DTC's interim accounting process, due-bill processing can 
be more cumbersome. For example, trades that settle after the record 
date ``with distribution,'' thus entitling the buyer to the 
distribution, will have a due bill attached to them (i.e., the seller 
owes the buyer the distribution). Without DTC's interim accounting 
process, the distribution will need to be handled between the seller 
and the buyer outside of DTC's distribution processing service, 
potentially in the form of a payment order, wire or postdated check 
equal to the amount of the distribution.
    With DTC's interim accounting process, during a due bill period, 
DTC will track all settled activity, where the receiver (typically a 
buyer) is entitled to a distribution, and adjust Participants' record-
date positions, crediting the receiver (typically a buyer) and debiting 
the deliverer (typically a seller) the distribution amount.\8\ This 
process helps ensure accurate payment on the payable date and eliminate 
time-consuming, costly paper processing.
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    \8\ It is important to note that the physical movement of 
securities (such as, deposits, withdrawals-by-transfer, and 
certificates-on-demand) are not transactions that are included in 
the interim accounting process; thus, they do not result in 
adjustments between Participants.
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    In order to provide a clearer understanding of the interim 
accounting process, generally, DTC proposes to update the Distributions 
Guide to better reflect the description provided here.
Interim Accounting on a Security Being Delisted
    Listed exchanges are often unable to announce an ex-date that is on 
or after the date the corresponding security is being delisted. In 
these instances, if the listed exchange does not declare an ex-date, 
but it provides direction that trades in that security up to a 
specified date include the distribution, then DTC will capture interim 
accounting based on the exchange's direction.\9\
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    \9\ Please note that on the rare occasion that a corporate 
action event (e.g., a merger) would occur during an interim period, 
special processing arrangements with the industry may be required.
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    Following an exchange's direction in such circumstances has been a 
longstanding DTC practice; however, that practice is not clearly 
described in the Distributions Guide. As such, DTC proposes to update 
the Distributions Guide to reflect the description provided here.

[[Page 85767]]

Interim Accounting for an Ex-Date Change Due to Unscheduled Closing of 
a Stock Exchange
    Occasionally, there is an unscheduled closing of one or more stock 
exchanges (e.g., a national day of mourning, an event causing 
significant market disruption or regional impact, etc.). During an 
unscheduled closing, a listed exchange will typically move ex-dates 
that were scheduled for that date to the next business day that the 
exchange is open, which is usually the record date. Such a move is 
necessary because ex-dates must occur on a business day that the listed 
exchange is open.\10\
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    \10\ See, e.g., FINRA Rule 11140--Transactions in Securities 
``Ex-Dividend,'' ``Ex-Rights'' or ``Ex-Warrants'' available at 
https://www.finra.org/rules-guidance/rulebooks/finra-rules/11140.
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    Currently, when there is an unscheduled closing of a stock exchange 
and an ex-date is moved, DTC continues to apply the interim accounting 
process described above. However, because ex-date and record date now 
would be the same date (due to the exchange moving the ex-date to 
account for the unscheduled closure) and because the interim accounting 
process is based on a two-day settlement cycle, this results in due 
bills being applied to activity one day after record date. This, 
however, is not the intended result of the exchanges moving the ex-
date. It is DTC's general understanding that when there is an 
unscheduled closure, the intent is for the last day of trading with a 
due bill to be the business day prior to the unscheduled closure 
because there should not be any executed trades in the security on the 
day of closure.\11\
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    \11\ DTC has participated in various conversations with 
exchanges, industry representatives, and Participants to better 
understand and help address this issue.
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    As a result of DTC continuing to apply its standard interim 
accounting process under such circumstances, Participants must then 
perform adjustments to reverse the interim accounting on activity to 
which the interim accounting should not have applied, creating 
unnecessary work for the Participants. Therefore, to avoid the need for 
such adjustments, DTC proposes to no longer let the moving of an ex-
date impact the interim accounting process when the change is the 
result of an unexpected closure of a stock exchange.
UTW Service
    DTC's UTW service helps ensure that the appropriate non-resident 
alien withholding tax is applied to U.S.-sourced income paid to DTC's 
direct non-U.S. Participants. The applicable withholding tax is 
determined based on the type of income being paid along with the tax 
forms provided by the Participant.
    The Distributions Guide currently states that the UTW service is 
available to non-U.S. Participants, ``including subaccounts of U.S. 
participants'' and that ``Users [of the UTW service] must enter into a 
Withholding Agent Agreement'' (emphasis added).\12\ However, after 
performing a periodic review of the Distributions Guide, DTC determined 
that these two statements need to be removed.
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    \12\ Distributions Guide, U.S. Tax Withholding, supra note 4.
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    Pursuant to U.S. tax regulations,\13\ DTC, as a withholding agent, 
is obligated to withhold U.S. tax on payments it makes to its non-U.S. 
Participants. This obligation does not apply to U.S. Participants, only 
non-U.S. Participants. It is DTC's understanding that U.S. tax 
regulations do not contemplate a process under which DTC would withhold 
tax obligations of its U.S. Participants. However, DTC's obligation 
does apply regardless of whether there is or is not an agreement 
between DTC and its Participants to do so. Therefore, DTC proposes to 
remove (A) the ``including subaccounts of U.S. participants'' statement 
because DTC is not able to do so, and (B) the Withholding Agent 
Agreement statement because such an agreement is unnecessary.
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    \13\ See 26 CFR 1.1441-7(a).
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Changes to the Rules
    To effectuate the proposed changes to the Distributions Guide 
described above, (i) the following subsections of the ``Interim 
Accounting'' section would be updated to provide a clearer description 
of the interim accounting process, generally, including conforming and 
technical changes: ``Overview,'' ``Reasons for Interim Accounting,'' 
``Without DTC's Interim Accounting,'' ``With DTC's Interim 
Accounting,'' and ``Interim Accounting Usage;'' (ii) a new ``Interim 
Accounting for an Ex-Date Change Due to Unscheduled Closing of a Stock 
Exchange'' subsection would be added; (iii) a new ``Interim Accounting 
on a Security being Delisted'' subsection would be added; and (iv) the 
``U.S. Tax Withholding'' section would be updated to remove the 
statements that (A) the UTW service is available to subaccounts of U.S. 
Participants, and (B) users of the UTW service must enter into a 
Withholding Agent Agreement. Finally, the Important Legal Information 
section would be updated to change the copyright date from 2019 to 
2020.
Implementation Timeframe
    The proposed changes described above would take effect upon 
approval by the U.S. Securities and Exchange Commission.
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, as a registered clearing agency. Specifically, DTC 
believes the proposed rule change is consistent with Section 
17A(b)(3)(F) of the Act \14\ and Rule 17Ad-22(e)(21) promulgated under 
the Act,\15\ for the reasons described below.
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    \14\ 15 U.S.C. 78q-1(b)(3)(F).
    \15\ 17 CFR 240.17Ad-22(e)(21).
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    Section 17A(b)(3)(F) of the Act requires, in part, that the rules 
of a clearing agency be designed, in general, to protect investors and 
the public interest.\16\ As described above, the proposal would update 
the Distributions Guide to more clearly explain the interim accounting 
process and, more specifically, provide an explanation of the interim 
accounting process for a security being delisted, as well as update the 
copyright date. By providing greater clarity and information about how 
the interim accounting process works, both generally and for delisted 
securities specifically, as well as updating the copyright date, DTC is 
better informing Participants, investors, and the general public about 
how DTC manages due bill activity associated with Participants' 
securities transactions and its copyright information.
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    \16\ 15 U.S.C. 78q-1(b)(3)(F).
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    The proposal also would remove statements in the Distributions 
Guide that the UTW service is available to subaccounts of U.S. 
Participants and that users of the UTW service must enter into a 
Withholding Agent Agreement, as described above. Because DTC cannot 
offer the UTW service to such subaccounts and because requiring such an 
agreement is not necessary, removing the statements would clarify which 
Participants may use the UTW service and what is required to do so, all 
of which helps to better inform Participants, investors, and the 
general public.
    Section 17A(b)(3)(F) of the Act also requires, in part, that the 
rules of a clearing agency be designed to remove impediments to and 
perfect the mechanism of a national system for the prompt and accurate 
clearance and settlement of securities transactions.\17\ As described 
above, the proposal would change how DTC manages interim

[[Page 85768]]

accounting when an ex-date is changed due to an unscheduled closure of 
a stock exchange, so that DTC would no longer capture interim activity 
that results from a stock exchange moving ex-dates due to an unexpected 
closure. With this change, Participants would no longer need to spend 
time and energy performing adjustments to reverse the interim 
accounting on activity to which the interim accounting should not have 
otherwise applied. By freeing Participants of this need, the proposal 
would help perfect DTC's interim accounting process for tracking due 
bills associated with Participants' securities transactions.
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    \17\ Id.
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    For these reasons, DTC believes that the proposed rule change is 
consistent with Section 17A(b)(3)(F) of the Act.\18\
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    \18\ Id.
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    Rule 17Ad-22(e)(21) under the Act requires that DTC establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to, in part, be efficient and effective in meeting 
the requirements of its Participants and the markets it serves.\19\ As 
described above, the proposal would update the Distributions Guide to 
(i) more clearly explain the interim accounting process, generally; 
(ii) provide an explanation for the interim accounting process for a 
security being delisted; (iii) no longer apply interim accounting when 
an ex-date is changed due to an unscheduled closure of a stock 
exchange; and (iv) remove the statements that the UTW service is 
available to subaccounts of U.S. Participants, and (B) users of the UTW 
service must enter into a Withholding Agent Agreement.
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    \19\ 17 CFR 240.17Ad-22(e)(21).
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    Collectively these proposed changes are designed to more 
efficiently and effectively describe DTC's interim accounting 
practices, as well as the application and requirements of the UTW 
service, so that Participants are better informed about the practices, 
generally. With respect to the proposed change to no longer apply 
interim accounting when there is an unscheduled closure of an exchange, 
specifically, that proposed change is designed to more efficiently and 
effectively meet the needs of DTC's Participants, based on discussions 
with Participants.
    Therefore, for the above reasons, DTC believes that the proposed 
rule change is designed to help DTC be more efficient and effective in 
meeting the requirements of its Participants and the markets it serves, 
consistent with Rule 17Ad-22(e)(21) under the Act.\20\
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    \20\ Id.
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(B) Clearing Agency's Statement on Burden on Competition

    DTC does not believe that the proposed changes to the Distributions 
Guide to (i) clarify the interim accounting process, generally, (ii) 
add a description regarding DTC's interim accounting process for a 
security being delisted, or (iii) update the copyright date, as 
described above, will have any impact on competition because none of 
these changes will alter DTC's current practices. Rather, the changes 
are simply intended to provide more clarity and information for 
Participants.
    Similarly, DTC does not believe the proposed changes to the 
Distributions Guide to remove the statements that (A) the UTW service 
is available to subaccounts of U.S. Participants, and (B) users of the 
UTW service must enter into a Withholding Agent Agreement, as described 
above, will impact competition because DTC is not able to provide the 
UTW service to subaccounts of U.S. Participants, anyway, and DTC will 
remain obligated to withhold U.S. tax on payments it makes to its non-
U.S. Participants even without an agreement. As such, these changes 
should not have any practical implications on Participants or DTC's 
practices.
    As for the proposed change to the Distributions Guide regarding how 
DTC manages interim accounting when an ex-date is changed due to an 
unscheduled closure of a stock exchange, as described above, DTC 
believes the change may impact competition. Specifically, the change 
could promote competition because Participants could redirect resources 
that would otherwise have been used to reverse the interim accounting 
to more competitive-focused activities.

(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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

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-2020-019 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-2020-019. 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-

[[Page 85769]]

2020-019 and should be submitted on or before January 19, 2021.
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    \21\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-28667 Filed 12-28-20; 8:45 am]
BILLING CODE 8011-01-P