Document ID: SEC-2013-0861-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Depository Trust Co.
Posted Date: 2013-05-08T04:00Z

[Federal Register Volume 78, Number 89 (Wednesday, May 8, 2013)]
[Notices]
[Pages 26823-26826]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-10871]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69494; File No. SR-DTC-2013-03]

Self-Regulatory Organizations; the Depository Trust Company; 
Notice of Filing of Proposed Rule Change in Connection With the 
Implementation of the Foreign Account Tax Compliance Act (FATCA)

May 2, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby 
given that on April 22, 2013 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 substantially prepared by DTC. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change modifies DTC's Rules & Procedures 
(``Rules''), as described below, in connection with the implementation 
of sections 1471 through 1474 of the Internal Revenue Code of 1986, as 
amended, which sections were enacted as part of the Foreign Account Tax 
Compliance Act, and the Treasury Regulations or other official 
interpretations thereunder (collectively ``FATCA'').

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, DTC 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. DTC has prepared summaries, set forth in sections A, B 
and C below, of the most significant aspects of such statements.\3\
---------------------------------------------------------------------------

    \3\ The Commission has modified the text of the summaries 
prepared by the clearing agency.
---------------------------------------------------------------------------

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

Background
    FATCA was enacted on March 18, 2010, as part of the Hiring 
Incentives to

[[Page 26824]]

Restore Employment Act, and became effective, subject to transition 
rules, on January 1, 2013. The U.S. Treasury Department finalized and 
issued various implementing regulations (``FATCA Regulations'') on 
January 17, 2013. FATCA's intent is to curb tax evasion by U.S. 
citizens and residents through their use of offshore bank accounts. 
FATCA generally requires foreign financial institutions (``FFIs'') \4\ 
to become ``participating FFIs'' by entering into agreements with the 
Internal Revenue Service (``IRS''). Under these agreements, FFIs are 
required to report to the IRS information on U.S. persons and entities 
that have (directly or indirectly) accounts with these FFIs. If an FFI 
does not enter into such an agreement with the IRS, FATCA will impose a 
30% withholding tax on U.S.-source interest, dividends and other 
periodic amounts paid to such ``nonparticipating FFI'' (``Income 
Withholding''), as well as on the payment of gross proceeds arising 
from the sale, maturity or redemption of securities or any instrument 
yielding U.S.-source interest and dividends (``Gross Proceeds 
Withholding,'' and, together with Income Withholding, ``FATCA 
Withholding''). The 30% FATCA Withholding taxes will apply to payments 
made to a nonparticipating FFI acting in any capacity, including 
payments made to a nonparticipating FFI that is not the beneficial 
owner of the amount paid and acting only as a custodian or other 
intermediary with respect to such payment. To the extent that U.S.-
source interest, dividend, and other periodic amount or gross proceeds 
payments are due to a nonparticipating FFI in any capacity, a U.S. 
payor, such as DTC, transmitting such payments to the nonparticipating 
FFI will be liable to the IRS for any amounts of FATCA Withholding that 
the U.S. payor should, but does not, withhold and remit to the IRS with 
respect to those payments.
---------------------------------------------------------------------------

    \4\ Non-U.S. financial institutions are referred to as ``foreign 
financial institutions'' or ``FFIs'' in the FATCA Regulations.
---------------------------------------------------------------------------

    As an alternative to FFIs entering into individual agreements with 
the IRS, the U.S. Treasury Department provided another means of 
complying with FATCA for FFIs which are resident in jurisdictions that 
enter into intergovernmental agreements (``IGA'') with the United 
States.\5\ Generally, such a foreign jurisdiction (``FATCA Partner'') 
would pass laws to eliminate the conflicts of law issues that would 
otherwise make it difficult for FFIs in its jurisdiction to collect the 
information required under FATCA and transfer this information, 
directly or indirectly, to the United States. An FFI resident in a 
FATCA Partner jurisdiction would either transmit FATCA reporting to its 
local competent tax authority, which in turn would transmit the 
information to the IRS, or the FFI would be authorized/required by 
FATCA Partner law to enter into an FFI agreement and transmit FATCA 
reporting directly to the IRS. Under both IGA models, payments to such 
FFIs would not be subject to FATCA Withholding taxes so long as the FFI 
complies with the FATCA Partner's laws mandated in the IGA.
---------------------------------------------------------------------------

    \5\ As of the date of this proposed rule change filing, the 
United Kingdom, Mexico, Ireland, Switzerland, Spain, Norway, 
Denmark, Italy and Germany have signed or initialed an IGA with the 
United States. The U.S. Treasury Department has announced that it is 
engaged in negotiations with more than 50 countries and 
jurisdictions regarding entering into an IGA.
---------------------------------------------------------------------------

    Under the FATCA Regulations, (A) beginning January 1, 2014, DTC 
will be required to do Income Withholding on any payments made to any 
nonparticipating FFI approved for membership by DTC as of such date or 
thereafter, (B) beginning July 1, 2014, DTC will be required to do 
Income Withholding on any payments made to any nonparticipating FFI 
approved for membership by DTC prior to January 1, 2014 and (C) 
beginning January 1, 2017, DTC will be required to do Gross Proceeds 
Withholding on all nonparticipating FFIs, regardless when any such 
FFI's membership was approved.
    DTC already has established tax services that are currently 
available to its Participants in which DTC, in accordance with sections 
1441 through 1446 of the Code, withholds on certain payments of income 
made to certain of its Participants. Thus, DTC can and intends to 
support certain FATCA Income Withholding as part of such established 
tax services. However, for the reasons described below, DTC is not in a 
position to accept any liability that would result from Gross Proceeds 
Withholding and, by making the proposed rule changes set forth herein, 
is implementing preventive measures to protect itself against the 
obligation for any such Gross Proceeds Withholding and any resulting 
liability.
Preparing for Implementation of FATCA
    In preparation for FATCA's implementation, FFIs are being asked to 
identify their expected FATCA status as a condition of continuing to do 
business. Customary legal agreements in the financial services industry 
already contain provisions allocating the risk of any FATCA Withholding 
tax that will need to be collected, and requiring that, upon FATCA's 
effectiveness, foreign counterparties must certify (and periodically 
recertify) their FATCA status using the relevant tax forms that the IRS 
has announced it will provide.\3\ Advance disclosure by an FFI client 
or counterparty would permit a withholding agent to readily determine 
whether it must, under FATCA, withhold on payments it makes to the FFI. 
If an FFI fails to provide appropriate compliance documentation to a 
withholding agent, such FFI would be presumed to be a nonparticipating 
FFI and the withholding agent will be obligated to withhold on certain 
payments.
    As it applies to DTC specifically, FATCA will require DTC to deduct 
FATCA Withholding on payments to certain of its Participants arising 
from certain transactions processed by DTC on behalf of such 
Participants.\6\ Because FATCA treats any entity holding financial 
assets for the account of others as a ``financial institution,'' and 
almost all Participants hold financial assets for the account of 
others, new and existing Participants which are treated as non-U.S. 
entities for federal income tax purposes, including those members and 
limited members that are U.S. branches of non-U.S. entities 
(collectively, ``FFI Participants'') \7\ will likely be FFIs under 
FATCA. As such, DTC will be liable to the IRS for the amounts 
associated with any failures to withhold correctly under FATCA on 
payments made to its FFI Participants.
---------------------------------------------------------------------------

    \6\ FFI participants resident in IGA countries, that are 
compliant with the terms of applicable IGAs, should not be subject 
to FATCA Withholding.
    \7\ Currently, only a small percentage of the Corporation's 
Participants are treated as non-U.S. entities for federal income tax 
purposes.
---------------------------------------------------------------------------

    In light of this, DTC has evaluated its existing systems and 
services to determine whether and how it may comply with its FATCA 
obligations. As a result of this evaluation, DTC has determined that 
its existing systems are incapable of processing and accounting for 
Gross Proceeds Withholding with regard to the securities transactions 
processed by it, as no similar withholding obligation of this magnitude 
has ever been imposed on it to date and DTC has therefore not built 
systems to support such an obligation.
    Additionally, DTC nets credits and debits per Participant for end 
of day net funds settlement. There is further netting with DTC's 
affiliated central counterparty, National Securities Clearing 
Corporation (``NSCC'') and further netting on a settling bank basis; 
the effect of this netting is to significantly reduce the number and 
magnitude of payments made via the NSS System of the Federal Reserve. 
Gross Proceeds Withholding would

[[Page 26825]]

foreclose such netting, greatly reducing liquidity available to the 
system and Participants, increasing systemic risk. Furthermore, given 
DTC's netting, undertaking Gross Proceeds Withholding could require DTC 
in certain circumstances to apply its Participants Fund in order to 
fund FATCA Withholding taxes with regard to nonparticipating FFI 
Participants in non-FATCA Partner jurisdictions whenever the net credit 
owed to such FFI Participant is less than the 30% FATCA tax. In the 
view of DTC, this would not be the best application of such funds which 
are required to support liquidity and satisfy losses attributable to 
the settlement activities of DTC, inter alia. For example, if a 
nonparticipating FFI is owed a $100M gross payment from the sale or 
maturity of U.S. securities, but such nonparticipating FFI is in a net 
debit settlement position at the end of that day because of DTC's end 
of day net crediting and debiting, and the other netting described 
above, there would be no payment to this FFI Participant from which DTC 
could withhold. In this example, DTC would likely need to fund the $30M 
FATCA Withholding tax until such time as the FFI Participant can 
reimburse DTC.\6\ In that case, DTC would need to consider an increase 
in the amount of cash required to be deposited into the Participants 
Fund, either by FFI Participants or all Participants, which would 
reduce liquidity resources of Participants and could have significant 
systemic effects. The amount of the FATCA Gross Proceeds Withholding 
taxes would be removed from market liquidity, which could lead to 
increased risk of Participant failure and increased financial 
instability.
    For the reasons explained above and the following additional 
reasons, DTC is proposing amendments to its Rules (detailed below) to 
implement preventive measures that would generally require all of DTC's 
FFI Participants not to cause a Gross Proceeds Withholding obligation 
on DTC:
     Undertaking Gross Proceeds Withholding by DTC (even if 
possible) would make it economically discouraging for affected FFI 
Participants to engage in transactions involving U.S. securities. It 
would likely also quickly cause a significant negative impact on 
liquidity because such withholding taxes would be imposed on the very 
large gross amounts due to such FFI Participants. Furthermore, 
Participants would be burdened with extra costs and the negative impact 
on liquidity caused by the likely need to substantially increase the 
amount of cash required to be deposited into the Participants Fund.
     The cost of implementing a Gross Proceeds Withholding 
system for a small number of nonparticipating FFI Participants would be 
substantial and disproportionate to the related benefit. Under the 
Model I IGA form and its executed versions with various FATCA Partners, 
DTC would not be required to withhold with regard to FFI residents in 
such FATCA Partner jurisdictions. Accordingly, DTC's withholding 
obligations under FATCA would effectively be limited to 
nonparticipating FFI Participants in non-FATCA Partner jurisdictions. 
Since the cost of developing and maintaining a complex Gross Proceeds 
Withholding system would be passed on to DTC's Participants at large, 
it may burden Participants that otherwise comply with, or are not 
subject to, FATCA Withholding.
     As briefly noted above, if the proposed rule changes were 
not to take effect, in order to avoid counterparty credit risk, DTC 
would likely require each of the nonparticipating FFI Participants in 
non-FATCA Partner jurisdictions to make initial or additional cash 
deposits to the Participants Fund as liquidity for the approximate 
potential FATCA tax liability of such nonparticipating FFI Participant 
or otherwise adjust required deposits to the Participants Fund. The 
amount of such deposits, which could amount to billions of dollars, 
would be removed from market liquidity.
     From the nonparticipating FFI Participant's perspective, 
having 30% of its payments withheld and sent to the IRS would have a 
severe negative impact on such nonparticipating FFI Participants' 
financial stability. In most cases, the gross receipts are for client 
accounts, and the nonparticipating FFI Participant would need to make 
such accounts whole. Without receipt of full payment for its 
dispositions, the nonparticipating FFI Participant would not have 
sufficient assets to fund its client accounts.
     The proposed rule changes set forth herein will not create 
an undue burden for Participants because requiring FFIs to certify (and 
to periodically recertify) their FATCA status, and imposing the costs 
of non-compliance on them, are becoming standard market practice in the 
United States, separate and apart from being a Participant of DTC.
Proposed Rule Changes
    In line with its risk management focus, DTC has determined that 
compliance with FATCA, such that DTC shall not be responsible for Gross 
Proceeds Withholding, should be a general membership requirement (A) 
for all applicants that are treated as non-U.S. entities for U.S. 
federal income tax purposes, and (B) for all existing FFI 
Participants.\8\ In connection therewith, DTC proposes to amend its 
Rules as follows:
---------------------------------------------------------------------------

    \8\ DTC may grant a waiver under certain circumstances, 
provided, however, that DTC will not grant a waiver if it causes DTC 
to be obligated to withhold under FATCA on gross proceeds from the 
sale or other disposition of any property.
---------------------------------------------------------------------------

     Amending Rule 1: adding ``FATCA,'' ``FATCA 
Certification,'' ``FATCA Compliance Date,'' \9\ ``FATCA Compliant,'' 
and ``FFI Participant'' to Section 2 as terms cross-referenced from 
Rule 2, Section 9;
---------------------------------------------------------------------------

    \9\ Although FATCA Withholding with regard to FFI Participants 
approved for membership by the Corporation prior to January 1, 2014 
is first required under FATCA beginning July 1, 2014, the proposed 
amendments to the Rules would require such existing FFI Participants 
to be FATCA compliant approximately 60 days prior to July 1, 2014 in 
order for the Corporation to comply with its disciplinary and notice 
processes as set forth in its Rules.
---------------------------------------------------------------------------

     Amending Section 1 of Rule 2: adding the requirements 
that, (i) with regard to any applicant that shall be an FFI 
Participant, such applicant must be FATCA Compliant, and (ii) as a 
qualification for activation of its membership that each applicant 
approved by DTC complete and deliver to DTC a FATCA Certification; and
     Adding new Section 9 of Rule 2: (i) Requiring all FFI 
Participants (both new and existing) to agree not to conduct any 
transaction or activity through DTC if such Participant is not FATCA 
Compliant, (ii) requiring all FFI Participants to certify and, as 
required under the timelines set forth under FATCA, periodically 
recertify, to DTC, in accordance with the timelines set out under 
FATCA, that they are FATCA Compliant, (iii) specifying that failure to 
be FATCA Compliant creates a duty upon an FFI Member (both new and 
existing) to inform DTC, (iv) providing that Participants that violate 
the provisions of Section 9 are subject to disciplinary sanction or 
other applicable actions by DTC in accordance with the Rules, 
including, but not limited to, a fine, as well as restrictions of 
services to the Participant and/or ceasing to act for the Participant 
in accordance with Rule 10, and (v) requiring all FFI Participants to 
indemnify DTC for any losses sustained by DTC resulting from such FFI 
Participants' failure to be FATCA Compliant. In addition, Rule 2, 
Section 9 will include the definitions for ``FATCA,'' ``FATCA 
Certification,'' ``FATCA Compliance Date,'' ``FATCA Compliant,'' and 
``FFI Participant''.

[[Page 26826]]

     In addition, DTC will modify its Policy Statement on the 
Admission of Non-U.S. Entities as Direct Depository Participants to 
reference the Rules requirements of foreign entities which are treated 
as non-U.S. entities for tax purposes.
     Sections 17A(b)(3)(F) \10\ and 17A(b)(3)(D) \11\ of the 
Exchange Act require that registered clearing agencies be designed to 
promote the prompt and accurate clearance and settlement of securities 
transactions, and the safeguarding of funds related thereto, and that 
the rules of such clearing agencies provide for the equitable 
allocation of reasonable dues, fees, and other charges among their 
participants. DTC believes the proposed rule changes are designed to 
promote the prompt and accurate clearance and settlement of securities 
transactions by eliminating any uncertainty in funds settlement that 
would arise if DTC were subject to Gross Proceeds Withholding 
obligations under FATCA. The proposed rule changes are also designed to 
maintain fairness in the allocation of costs among Participants of DTC 
because these proposed rule changes allow DTC to comply with FATCA 
Regulations without developing and maintaining a complex Gross Proceeds 
Withholding system, the cost of which, as discussed above, would be 
passed on to DTC's Participants at large for the benefit of a small 
number of nonparticipating FFI Members.
---------------------------------------------------------------------------

    \10\ 12 U.S.C. 78q-1(b)(3)(F).
    \11\ 12 U.S.C. 78q-1(b)(3)(D).
---------------------------------------------------------------------------

(B) Clearing Agency's Statement on Burden on Competition

    DTC does not believe that the proposed rule change will 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 solicited, and does not intend to solicit, comments 
regarding the proposed rule changes. DTC has not received any 
unsolicited written comments from interested parties. To the extent DTC 
receives written comments on the proposed rule changes, DTC will 
forward such comments to the Commission.

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 Exchange 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-2013-03 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-DTC-2013-03. 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 DTC's 
Web site: http://www.dtcc.com/legal/rule_filings/dtc/2013.php. All 
comments received will be posted without change; the 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-2013-03 and should be 
submitted on or before May 29, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
---------------------------------------------------------------------------

    \12\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-10871 Filed 5-7-13; 8:45 am]
BILLING CODE 8011-01-P