[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