Document ID: SEC-2019-1900-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Depository Trust Co.
Posted Date: 2019-12-18T05:00Z

[Federal Register Volume 84, Number 243 (Wednesday, December 18, 2019)]
[Notices]
[Pages 69424-69428]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-27206]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87729; File No. SR-DTC-2019-011]

Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
To Amend the Distributions Guide and the Fee Guide Relating to Tax 
Events

December 12, 2019.
    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 December 5, 2019, 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 Rules 19b-
4(f)(2) and (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)(2) and (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\ of DTC would (i) revise the 
Distributions Guide to enhance the DTC announcements 
(``Announcements'') feature within the DTC distributions service 
(``Distributions Service'') \6\ with respect

[[Page 69425]]

to corporate action events that do not involve the payment of funds or 
distribution of Securities through DTC, but which may result in a 
taxable event for holders (``Tax Events''), to accommodate the 
announcement of Tax Events subject to provisions of Section 871(m) of 
the Internal Revenue Code (``Section 871(m)''),\7\ and (ii) amend the 
Guide to the DTC Fee Schedule (``Fee Guide'') \8\ to change the name 
and amount of the fee relating to the announcement of Tax Events (``Tax 
Event Fee''), as discussed below.
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    \5\ Each capitalized term not otherwise defined herein has its 
respective meaning as set forth in the Rules, By-Laws and 
Organization Certificate of The Depository Trust Company (the ``DTC 
Rules''), available at http://www.dtcc.com/legal/rules-and-procedures.aspx, and the DTC Corporate Actions Distributions Service 
Guide (``Distributions Guide''), available at http://www.dtcc.com/~/
media/Files/Downloads/legal/service-guides/
Service%20Guide%20Distributions.pdf.
    \6\ The Distributions Service includes DTC's announcement, 
collection, allocation and reporting of dividend, interest and 
certain principal payments on behalf of Participants holding 
Securities at DTC. See Distributions Guide, id., at 9.
    \7\ 26 U.S.C. 871(m).
    \8\ Available at http://www.dtcc.com/~/media/Files/Downloads/
legal/fee-guides/dtcfeeguide.pdf?la=en.
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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 would (i) revise the Distributions Guide 
to enhance the Announcements feature within the Distributions Service 
with respect to Tax Events, to accommodate the announcement of Tax 
Events subject to provisions of Section 871(m), and (ii) amend the Fee 
Guide to change the name and amount of the Tax Event Fee, as discussed 
below.
Distributions Service Announcements Feature
    The Distributions Service includes the announcement, collection, 
allocation and reporting by DTC, on behalf of its Participants, of 
dividend, interest and principal payments for Eligible Securities held 
by Participants at DTC. This centralized processing provides efficiency 
for Participants for their receipt of (i) payment information and (ii) 
payments on distributions covered by Announcements (``Distribution 
Event''),\9\ from multiple issuers and agents.\10\ In this regard, 
Announcements provide Participants with information pertaining to their 
record date (``Record Date'') \11\ positions for Distribution 
Events.\12\ This information facilitates Participants' ability to 
reconcile their records with DTC before the date DTC has been 
instructed by the issuer or issuer's agent to allocate a distribution 
(``Payable Date'').\13\
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    \9\ Distribution Events covered by Announcements include cash 
dividends, interest, principal, capital gains, sale of rights on 
American depositary receipts, return of capital, dividend with 
option, stock splits, stock dividends, automatic dividend 
reinvestments, spinoffs, rights distributions, pay in kind, and 
liquidation. See Distributions Guide, supra note 5, at 12.
    \10\ See Distributions Guide, supra note 5, at 9.
    \11\ The Record Date is the date set by an issuer of a security 
by which an investor must own the security in order to be eligible 
to receive an upcoming distribution. See DTC Operational 
Arrangements Necessary for Securities to Become and Remain Eligible 
for DTC Services, available at http://www.dtcc.com/~/media/Files/
Downloads/legal/issue-eligibility/eligibility/operational-
arrangements.pdf, at 20.
    \12\ See Distributions Guide, supra note 5, at 11-13.
    \13\ See Distributions Guide, supra note 5, at 11.
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Tax Events
    Pursuant to a DTC rule change \14\ that became effective in October 
2017, DTC implemented the Announcements feature for Tax Events and the 
Tax Event Fee relating to the announcement of distributions subject to 
Section 305(c) of the Internal Revenue Code (``Section 305(c)'').\15\ 
Section 305(c) states that holders of convertible Securities may be 
deemed to have received a distribution because of a corporate action on 
common stock into which the convertible Security may be converted.\16\ 
A lack of information relating to these deemed distributions and other 
Tax Events may affect Participants' ability to comply with applicable 
federal tax withholding requirements and applicable DTC Rules 
requirements relating to the use of DTC services.\17\
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    \14\ See Securities Exchange Act Release No. 81871 (October 13, 
2017), 82 FR 48734 (October 19, 2017) (SR-DTC-2017-018) (``Tax Event 
Rule Filing'').
    \15\ 26 U.S.C. 305(c).
    \16\ Under Section 305(c), a change in the conversion ratio or 
conversion price or a similar transaction is treated ``as a 
distribution [by the issuer] with respect to any shareholder whose 
proportionate interest in the earnings and profits or assets of the 
corporation is increased by such change.'' Id.
    \17\ In connection with their use of DTC's services, 
Participants must comply with all applicable laws, including, but 
not limited to, all applicable laws relating to taxation. See DTC 
Rule 2, Section 8, supra note 5.
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    Pursuant to the Tax Event Rule Filing, the Distributions Guide was 
revised to enable DTC to distribute to Participants the Tax Event 
information for a deemed distribution in the same standardized manner 
that DTC uses to announce distributions. The Tax Event Rule Filing also 
added text to (a) describe and define Tax Events and Tax Event 
announcements, and (b) describe the systemic data fields (``Fields'') 
that DTC uses to provide relevant Tax Event information for a Security 
to Participants, including: (1) ``Event Type'' shown as ``Tax Event,'' 
(2) ``Sub Event Type,'' which is used to classify the type of Tax 
Event, (3) Payable Date, (4) Record Date, (5) ``Cash Rate,'' to provide 
the amount of the deemed distribution, and (6) ``Comments,'' which is 
used to provide any other pertinent information regarding the Tax 
Event.\18\
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    \18\ See Tax Event Rule Filing, supra note 14.
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Tax Event Fee
    Fees are charged by DTC to Participants, pursuant to the Fee 
Guide,\19\ to offset the cost of processing corporate action events, 
including the announcement processing, the actual processing of 
payments, and book-entries associated with the corporate action. 
Pursuant to the Tax Event Rule Filing, the Fee Guide was revised so 
that a Participant that holds Securities subject to a Tax Event would 
be charged a flat Tax Event Fee of $40 per announcement for a Section 
305(c) announcement.\20\ As indicated in the Tax Event Rule Filing, the 
addition of the Tax Event Fee to the Fee Guide aligned DTC's revenue 
with its costs for retrieval of Tax Event information from issuers and 
announcing that information to Participants.\21\ The Tax Event Fee was 
added to the Fee Guide underneath the section for U.S. tax withholding 
services, which is a feature of the Distributions Service, for 
reference purposes, and is in the Fee Guide in the same place as other 
fees charged for tax-related processing performed by DTC.\22\
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    \19\ Supra note 8.
    \20\ See Tax Event Rule Filing, supra note 14.
    \21\ Id.
    \22\ See Fee Guide, supra note 8, at 15-16.
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Section 871(m) of the Internal Revenue Code
    Like a Section 305(c) Tax Event, an event subject to the provisions 
of Section 871(m) is also a corporate action event in which no cash or 
security entitlement is allocated to a Participant but may trigger a 
taxable event for DTC to perform tax withholding and reporting.
    Section 871(m), which was enacted in 2010, imposes a 30 percent 
withholding tax on ``dividend equivalent'' payments that are made or 
deemed to be made to non-U.S. persons with respect to certain 
derivative Securities that reference equity (``Equity Derivative'') of 
a U.S. issuer. In enacting Section 871(m),

[[Page 69426]]

Congress was attempting to address the ability of foreign persons to 
obtain the economics of owning dividend-paying stock through an Equity 
Derivative while avoiding the withholding tax that would apply to 
dividends paid on the stock if the foreign person owned the stock 
directly.\23\
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    \23\ See 26 U.S.C. 871(a)(1)(A) (30 percent tax on dividends 
paid to non-resident aliens).
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    In September 2015, the U.S. Treasury Department adopted final 
regulations (the ``Final Section 871(m) Regulations'') \24\ based on a 
proposal issued in December 2013 that implemented and enforced Section 
871(m) with an effective date of January 1, 2017. The Final Section 
871(m) Regulations introduced various new tax-related obligations for 
Participants and DTC.
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    \24\ See T.D. 9734, 80 FR 56866 (Sept. 18, 2015).
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    Under the Final Section 871(m) Regulations, an Equity Derivative 
held by a non-U.S. person may be considered a ``Section 871(m) 
Transaction'' and can potentially give rise to a dividend equivalent 
subject to withholding tax.\25\ A complex set of rules and exceptions 
in the Final Section 871(m) Regulations must be followed in order for 
the withholding agent to determine if the withholding tax in fact 
applies, and, if so, the amount of the dividend equivalent subject to 
withholding tax.\26\
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    \25\ See 26 CFR 1.871-15(g)(1).
    \26\ See id.
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Proposed Rule Change
Distributions Guide
    Distributions that occur with respect to Securities subject to the 
provisions of Section 871(m) are Tax Events as defined in the 
Distributions Guide.\27\ Therefore, pursuant to the proposed rule 
change, DTC would provide announcements relating to these Securities to 
Participants in accordance with the provisions of the Distributions 
Guide relating to Tax Events, as discussed above. As a result, 
Participants would receive Tax Event announcements relating to 
Securities subject Section 871(m), as they do to with respect to 
Securities subject to Section 305(c), and they would be able to use the 
data provided via the announcements to help them meet their tax 
withholding and reporting obligations.
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    \27\ Pursuant to the Distributions Guide, Tax Events 
announcements are information only announcements regarding taxable 
events that may give rise to information and/or withholding 
obligations which occur even in the absence of an actual 
distribution of dividend and interest payments. See Distributions 
Guide, supra note 5, at 9. Announcements of Distribution Events for 
Securities subject to Section 871(m) meet the definition of Tax 
Event as defined in the Distributions Guide because under the Final 
Section 871(m) Regulations, an Equity Derivative held by a non-U.S. 
person may be considered a ``Section 871(m) Transaction'' and can 
potentially give rise to a dividend equivalent subject to 
withholding tax even in the absence of an actual distribution 
payment. See supra note 25.
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    In addition, DTC proposes to update the Distributions Guide to 
update the Payable Date Field to provide for an enhanced description 
for Payable Date information to be provided by DTC for Section 305(c) 
announcements versus Section 871(m) announcements. In this regard, the 
existing Payable Date Field description would be updated from stating 
it is the ``field used for the date of the deemed distribution'' to 
instead state it is a ``field used for the date of deemed distributions 
for sub event types of 305(c) Deemed Dividends'' or a ``field used to 
provide the payable date of the underlying security for sub event type 
of 871(m) Dividend Equivalent Amount.''
    Pursuant to the proposed rule change DTC would also add a new Field 
titled ``Timing of the Dividend Equivalent Amount'' with a description 
that it is a ``field used for the timing of dividend equivalents under 
1.871-15 of Treasury regulations.''
    The proposed rule change would also make a technical change for 
enhanced readability and clarity by changing the opening text of the 
subsection titled ``The Tax Event Announcement Feature'' from stating 
``The Tax Event announcement feature leverages the following data 
fields from other event types to provide relevant information to 
participants:'' to instead state ``The Tax Event announcement feature 
uses the following data fields to provide relevant information to 
participants:''.
Fee Guide
    Pursuant to the proposed rule change, because all Tax Events would 
be announced pursuant to the same Procedures and processes, including 
using similar Fields, as described above, DTC would charge the same Tax 
Event Fee amount to Participants for all Tax Event Announcements, 
regardless of whether they relate to Securities subject to Section 
305(c) or Section 871(m). In this regard, DTC would change the name for 
the Tax Event Fee in the Fee Guide from ``Tax Event Announcement--
305c'' to ``Tax Event Announcement,'' so there would be one fee item in 
the Fee Guide applicable to Tax Events.
    DTC believes that the proposed rule change, as described above, 
would significantly increase the volume of Tax Event announcements 
processed by DTC and therefore increase the volume of Tax Event Fees 
charged to Participants. After reviewing the costs of providing Tax 
Event announcements, and the revenue necessary for DTC to recover 
development costs and operating expenses relating to providing Tax 
Event announcements as proposed above, DTC has determined that due to 
anticipated increasing economies of scale, the increased volumes in Tax 
Event announcements at the current amount of the Tax Event Fee would 
result in the collection of a total amount of Tax Events Fees that is 
significantly more than would be necessary to offset DTC's costs 
relating to retrieval of Tax Event information from issuers and 
announcing that information to Participants. In this regard, DTC has 
determined that it should reduce the Tax Event Fee from $40 per 
announcement to $12 per announcement for consistency with its cost-
based plus markup \28\ fee model. Therefore, DTC proposes to amend the 
Fee Guide to reduce the Tax Event Fee from $40 per announcement to $12 
per announcement.
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    \28\ DTC has in place procedures to control costs and to 
regularly review pricing levels against costs of operation. DTC's 
fees are cost-based plus a markup as approved by its Board of 
Directors. This markup is applied to recover development costs and 
operating expenses, and to accumulate capital enough to meet 
regulatory and economic requirements. See DTC Disclosure Framework 
for Covered Clearing Agencies and Financial Market Infrastructures, 
available at http://www.dtcc.com/~/media/Files/Downloads/legal/
policy-and-compliance/DTC_Disclosure_Framework.pdf, at 124.
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Implementation Timeframe
    The proposed rule change would be implemented on December 6, 2019.
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, in particular Sections 17A(b)(3)(D) \29\ and 
17A(b)(3)(F) \30\ of the Act.
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    \29\ 15 U.S.C. 78q-1(b)(3)(D).
    \30\ 15 U.S.C. 78q-1(b)(3)(F).
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    Section 17A(b)(3)(D) of the Act \31\ requires that the rules of the 
clearing agency provide for the equitable allocation of reasonable 
dues, fees, and other charges among its participants. DTC believes that 
the proposed Tax Event Fee, as described above, would be equitably 
allocated among Participants because each Participant holding 
Securities subject to Tax Events would be charged the same Tax Event 
Fee amount per Announcement. DTC believes that the proposed Tax Event 
Fee amount would be reasonable because it would allow DTC to recover

[[Page 69427]]

its costs of retrieval of Tax Event information from issuers and 
announcing that information to Participants holding the applicable 
Securities, which information is needed by the Participants to 
facilitate their compliance with applicable tax withholding 
obligations, as described above. Therefore, DTC believes that the 
proposed rule change is consistent with Section 17A(b)(3)(D) of the 
Act, cited above.
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    \31\ 15 U.S.C. 78q-1(b)(3)(D).
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    Section 17A(b)(3)(F) of the Act \32\ requires, inter alia, that the 
rules of the clearing agency be designed to promote the prompt and 
accurate clearance and settlement of securities transactions. As 
described above, the proposed rule change would enhance the 
Distributions Service to include the distribution of announcements for 
Tax Events for Securities subject to Section 871(m) to Participants. As 
described above, by providing for the distribution of Tax Event 
information to Participants, the proposed rule change would facilitate 
Participants' ability to comply with their federal tax withholding 
obligations. This would further facilitate Participants' ability to 
continue to maintain Eligible Securities subject to Tax Events on 
Deposit at DTC and make use of DTC's book-entry transfer and settlement 
services with respect to those Securities, in accordance with DTC Rules 
requirements relating to the use of DTC services by Participants.\33\ 
Therefore, by facilitating Participant's ability to continue to use 
DTC's book-entry transfer and settlement services at DTC with respect 
to Eligible Securities that are subject to Tax Events, the proposed 
rule change would promote the prompt and accurate clearance and 
settlement of securities transactions, consistent with the requirements 
of the Act, in particular Section 17A(b)(3)(F) of the Act, cited above.
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    \32\ 15 U.S.C. 78q-1(b)(3)(F).
    \33\ See supra note 17.
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(B) Clearing Agency's Statement on Burden on Competition

    DTC believes that the proposed rule change to amend the 
Distributions Guide to update Fields used by DTC to report Tax Events 
and make other technical and clarifying changes, as described above, 
could impose a burden on competition, because by designating Section 
871(m) announcements as Tax Events, and causing Participants that hold 
Securities subject Section 871(m) to be subject to the Tax Event Fee, 
it would subject Participants to a mandatory DTC Tax Event Fee that 
they would not incur today.
    To the extent the proposed rule change may impose a burden on 
competition, DTC believes it would be necessary and appropriate in 
furtherance of the purposes of the Act,\34\ because the proposed rule 
change would provide for Participants to obtain the Tax Event 
announcement information needed to facilitate their compliance with tax 
withholding obligations and DTC's Rules relating to Participants' 
compliance with applicable law, as described above. DTC has discussed 
the proposal with Participants that hold Securities subject to Section 
871(m), and issuers of those Securities, and DTC is not aware of either 
(i) an alternative method available to Participants to obtain Section 
871(m) announcement information in a centralized format or (ii) 
established or planned arrangements by issuers to provide tax-related 
information for Section 871(m) Securities directly to DTC Participants 
and/or investors.
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    \34\ 15 U.S.C. 78q-1(b)(3)(I).
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(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 written 
comments regarding the proposed rule change. DTC has not received any 
unsolicited written comments from interested parties. To the extent DTC 
receives written comments on the proposed rule change, DTC will forward 
such comments to the Commission.
    Participants most likely to be affected by the proposed rule change 
have indicated in discussions with DTC that receiving Section 871(m) 
announcements through DTC would facilitate their ability to comply with 
their tax withholding obligations.

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) of the Act \35\ and paragraph (f) of Rule 19b-4 
thereunder.\36\ 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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    \35\ 15 U.S.C. 78s(b)(3)(A).
    \36\ 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 (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-DTC-2019-011 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-2019-011. 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-2019-011 and 
should be submitted on or before January 8, 2020.
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    \37\ 17 CFR 200.30-3(a)(12).

[[Page 69428]]

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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\37\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-27206 Filed 12-17-19; 8:45 am]
 BILLING CODE 8011-01-P