Document ID: SEC-2021-0194-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Depository Trust Co.
Posted Date: 2021-02-10T05:00Z

[Federal Register Volume 86, Number 26 (Wednesday, February 10, 2021)]
[Notices]
[Pages 8953-8955]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-02712]

[[Page 8953]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91063; File No. SR-DTC-2020-019]

Self-Regulatory Organizations; The Depository Trust Company; 
Order Approving a Proposed Rule Change To Update the Distributions 
Service Guide

February 4, 2021.

I. Introduction

    On December 21, 2020, The Depository Trust Company (``DTC'') 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-DTC-2020-019. 
The proposed rule change was published for comment in the Federal 
Register on December 29, 2020.\3\ The Commission did not receive any 
comment letters on 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\ Securities Exchange Act Release No. 3490747 (December 21, 
2020), 85 FR 85765 (December 29, 2020) (File No. SR-DTC-2020-019) 
(``Notice'').
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II. Description of the Proposed Rule Change

    DTC proposes to amend its Corporate Actions Distributions Service 
Guide (``Distributions Guide'') \4\ to (1) more clearly explain the 
interim accounting process, generally, (2) provide an explanation for 
the interim accounting process for a security being delisted, (3) 
change how DTC manages interim accounting when an ex-date \5\ is 
changed due to an unscheduled closure of a stock exchange, (4) remove 
the statements that DTC's U.S. Tax Withholding (``UTW'') service is 
available to subaccounts of U.S. Participants and that users of the UTW 
service must enter into a Withholding Agent Agreement, and (v) make 
certain conforming and technical changes, including updating the 
copyright date, each described in greater detail below.
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    \4\ DTC's Distributions Guide is available at http://
www.dtcc.com/~/media/Files/Downloads/legal/service-guides/
Service%20Guide%20Distributions.pdf. Capitalized terms not defined 
herein are defined in the Rules, By-Laws, and Organization 
Certification of DTC (``Rules''), available at http://www.dtcc.com/
~/media/Files/Downloads/legal/rules/dtc_rules.pdf.
    \5\ The ``ex-date'' or ``ex-dividend date'' is the day the stock 
starts trading without the value of an already-declared dividend.
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A. Changes to the General Description of Interim Accounting

    Interim accounting is an important part of the entitlements and 
allocations process for distributions for DTC. The interim period (also 
referred to in the Distributions Guide 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. Typically, the 
ex-date is the day before the record 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.
    With DTC's interim accounting process, during a due bill period, 
DTC tracks all settled activity, where the receiver (typically a buyer) 
is entitled to a distribution, and adjusts Participants' record-date 
positions, crediting the receiver and debiting the deliverer (typically 
a seller) the distribution amount.\8\ DTC states that this process 
helps ensure accurate payment on the payable date and eliminate time-
consuming and costly paper processing.\9\
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    \8\ 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. See 
Notice, 85 FR at 85766.
    \9\ Id.
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    DTC proposes to amend the Distributions Guide to provide greater 
clarity and transparency regarding the foregoing description of the 
interim accounting process.

B. Interim Accounting on a Security Being Delisted

    In certain scenarios, listed exchanges might not announce an ex-
date that is on or after the date the corresponding security is being 
delisted. In such instances, if the listed exchange does not declare an 
ex-date, but instead provides direction that trades in a particular 
security up to a specified date include the distribution, then DTC 
captures interim accounting based on the exchange's direction.\10\ The 
current Distributions Guide does not clearly describe the foregoing 
process. DTC proposes to update the Distributions Guide to clearly 
describe the process. DTC also proposes to update the copyright date of 
the Distributions Guide.
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    \10\ DTC states that on the rare occasions, a corporate action 
event (e.g., a merger) would occur during an interim period that 
would require DTC to make special processing arrangements. See id.
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C. 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 (due to, e.g., a national day of mourning, an event causing 
significant market disruption or regional impact, etc.). During an 
unscheduled closing, a listed exchange typically moves ex-dates that 
were scheduled for that date to the next open business day, 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.\11\
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    \11\ 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 an exchange moves ex-dates due to unscheduled 
closing of the exchange, DTC continues to apply the interim accounting 
process described above.\12\ According to DTC, when there is an 
unscheduled closure, the intent of the exchange is for the final day of 
trading with a due bill to fall on the business day prior to the 
unscheduled closure, so that there would be no executed trades in the 
security on the day of closure.\13\ However, because this scenario 
causes ex-dates and record dates to coincide,

[[Page 8954]]

and because the interim accounting process is based on a two-day 
settlement cycle, an unintended consequence is the application of due 
bills to activity one day after record date.\14\ Since DTC continues to 
apply its standard interim accounting process, Participants are 
required to perform adjustments to reverse the interim accounting on 
activity to which the interim accounting should not have applied, 
creating unnecessary work for the Participants.\15\ In order to avoid 
the need for such adjustments, DTC proposes to no longer apply the 
interim accounting process when an exchange moves an ex-date due to an 
unexpected closure of the exchange.
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    \12\ Notice, 85 FR at 85767.
    \13\ DTC has participated in various conversations with 
exchanges, industry representatives, and Participants to better 
understand and help address this issue. See id.
    \14\ Id.
    \15\ Id.
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D. UTW Service

    DTC states that its UTW service is designed to help 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.\16\ DTC 
further states that the applicable withholding tax is determined based 
on the type of income being paid along with the tax forms provided by 
the Participant.\17\
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    \16\ Id.
    \17\ Id.
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    The Distributions Guide currently provides 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.\18\ DTC believes that U.S. tax regulations 
\19\ require DTC to withhold U.S. tax on payments it makes to its non-
U.S. Participants.\20\ However, according to DTC, U.S. tax regulations 
do not contemplate a process under which DTC would withhold tax 
obligations of its U.S. Participants.\21\ DTC also acknowledges its 
obligations apply regardless of whether there is or is not an agreement 
between DTC and its Participants to do so.\22\ DTC proposes to revise 
the Distributions Guide to reflect its understanding of the foregoing 
U.S. tax regulations.
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    \18\ Distributions Guide, U.S. Tax Withholding, pg 23, supra 
note 4.
    \19\ See 26 CFR 1.1441-7(a).
    \20\ See Notice, 85 FR at 85767.
    \21\ Id.
    \22\ Id.
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III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \23\ 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 and the rules and 
regulations thereunder applicable to DTC. In particular, the Commission 
finds that the proposed rule change is consistent with Section 
17A(b)(3)(F) of the Act \24\ and Rule 17Ad-22(e)(21) promulgated under 
the Act,\25\ for the reasons described below.
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    \23\ 15 U.S.C. 78s(b)(2)(C).
    \24\ 15 U.S.C. 78q-1(b)(3)(F).
    \25\ 17 CFR 240.17Ad-22(e)(21).
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A. Consistency With Section 17A(b)(3)(F)

    Section 17A(b)(3)(F) of the Act \26\ requires, in part, that the 
rules of a clearing agency be designed, in general, to protect 
investors and the public interest. As described above, the proposed 
rule change 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. Additionally, as 
described above, the proposed rule change would amend the Distributions 
Guide for consistency with DTC's understanding of relevant U.S. tax 
regulations. The Commission believes that these changes would provide 
DTC's Participants and the public with greater clarity and transparency 
regarding DTC's interim accounting process, which, in turn, is 
generally to the benefit of investors and the public. Accordingly, the 
Commission believes that the proposed rule change is designed, in 
general, to protect investors and the public interest, consistent with 
Section 17A(b)(3)(F) of the Act.\27\
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    \26\ 15 U.S.C. 78q-1(b)(3)(F).
    \27\ Id.
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    Section 17A(b)(3)(F) of the Act \28\ 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. As described 
above, the proposed rule change would change how DTC manages interim 
accounting when an exchange moves an ex-date due to an unscheduled 
closure of the exchange, so that DTC will no longer capture interim 
activity that results from such a scenario. As a result, Participants 
would no longer need to perform adjustments to reverse the interim 
accounting on activity to which the interim accounting should not have 
otherwise applied. By eliminating this need, the proposed rule change 
should help streamline DTC's interim accounting process for tracking 
due bills associated with Participants' securities transactions. 
Because interim accounting is part of DTC's broader mechanism for the 
clearance and settlement of securities transactions, the Commission 
believes that by streamlining DTC's interim accounting process, the 
proposed rule change is designed to remove impediments and perfect the 
mechanism of the system for the prompt and accurate clearance and 
settlement of securities transactions, consistent with Section 
17A(b)(3)(F) of the Act.\29\
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    \28\ Id.
    \29\ Id.
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B. Consistency With Rule 17Ad-22(e)(21)

    Rule 17Ad-22(e)(21) under the Act \30\ 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. As 
described above, the proposed rule change would amend the Distributions 
Guide to (1) provide greater general clarity and transparency regarding 
DTC's interim accounting process, (2) explain the interim accounting 
process for a security being delisted, (3) no longer apply interim 
accounting when an exchange changes an ex-date due to an unscheduled 
closure of the exchange, and (4) remove the statements 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.
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    \30\ 17 CFR 240.17Ad-22(e)(21).
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    The foregoing proposed changes would improve the Distributions 
Guide by clarifying DTC's interim accounting processes, as well as the 
application and requirements of the UTW service. As a result, the 
proposed changes would help better inform DTC's Participants regarding 
those matters. Moreover, as described above, the proposed change to no 
longer apply interim accounting when there is an unscheduled closure of 
an exchange would provide efficiencies to Participants by obviating the 
need for them to make unnecessary interim accounting adjustments.
    Accordingly, for the reasons stated above, the Commission believes 
that the proposed rule change is designed to enhance DTC's efficiency 
and effectiveness in meeting the requirements of its Participants and 
the

[[Page 8955]]

markets it serves, consistent with Rule 17Ad-22(e)(21) under the 
Act.\31\
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    \31\ Id.
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule changes are consistent with the requirements of the Act 
and in particular with the requirements of Section 17A of the Act \32\ 
and the rules and regulations promulgated thereunder.
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    \32\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\33\ that proposed rule change SR-DTC-2020-019, be, and hereby is, 
approved.\34\
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    \33\ 15 U.S.C. 78s(b)(2).
    \34\ In approving the proposed rule change, the Commission 
considered its impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\35\
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    \35\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-02712 Filed 2-9-21; 8:45 am]
BILLING CODE 8011-01-P