Self-Regulatory Organizations; The Depository Trust Company; Order Approving a Proposed Rule Change To Update the Distributions Service Guide, 8953-8955 [2021-02712]
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Federal Register / Vol. 86, No. 26 / Wednesday, February 10, 2021 / Notices
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.
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.
1 15
U.S.C. 78s(b)(1).
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’’).
4 DTC’s Distributions Guide is available at https://
www.dtcc.com/∼/media/Files/Downloads/legal/
service-guides/Service%20Guide%20
Distributions.pdf. Capitalized terms not defined
herein are defined in the Rules, By-Laws, and
Organization Certification of DTC (‘‘Rules’’),
available at https://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.
2 17
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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 exdate +1 for equities and payable date –1
for debt).7
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 exdate 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 exdate. 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 timeconsuming and costly paper
processing.9
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 exdate are eligible to receive dividends on the payable
date.
8 The physical movement of securities (such as,
deposits, withdrawals-by-transfer, and certificateson-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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8953
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.
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
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,
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.
11 See, e.g., FINRA Rule 11140—Transactions in
Securities ‘‘Ex-Dividend,’’ ‘‘Ex-Rights’’ or ‘‘ExWarrants’’ available at https://www.finra.org/rulesguidance/rulebooks/finra-rules/11140.
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.
E:\FR\FM\10FEN1.SGM
10FEN1
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Federal Register / Vol. 86, No. 26 / Wednesday, February 10, 2021 / Notices
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.
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
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.
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 selfregulatory organization if it finds that
14 Id.
15 Id.
16 Id.
17 Id.
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.
23 15 U.S.C. 78s(b)(2)(C).
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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.
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
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
24 15
U.S.C. 78q–1(b)(3)(F).
CFR 240.17Ad–22(e)(21).
26 15 U.S.C. 78q–1(b)(3)(F).
27 Id.
28 Id.
25 17
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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
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.
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
29 Id.
30 17
E:\FR\FM\10FEN1.SGM
CFR 240.17Ad–22(e)(21).
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Federal Register / Vol. 86, No. 26 / Wednesday, February 10, 2021 / Notices
markets it serves, consistent with Rule
17Ad–22(e)(21) under the Act.31
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.
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
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.35
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–02712 Filed 2–9–21; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–91057; File No. SR–
NASDAQ–2020–026]
Self-Regulatory Organizations; The
Nasdaq Stock Market LLC; Notice of
Withdrawal of a Proposed Rule
Change, as Modified by Amendment
Nos. 1 and 2, To Adopt a New
Requirement Related to the
Qualification of Management for
Companies From Restrictive Markets
2020.3 On July 20, 2020, pursuant to
Section 19(b)(2) of the Act,4 the
Commission designated a longer period
within which to approve the proposed
rule change, disapprove the proposed
rule change, or institute proceedings to
determine whether to disapprove the
proposed rule change.5 On August 21,
2020, the Exchange filed Amendment
No. 1 to the proposed rule change,
which replaced and superseded the
proposed rule change as originally
filed.6 On September 9, 2020, the
Commission published notice of
Amendment No. 1 and instituted
proceedings under Section 19(b)(2)(B) of
the Act 7 to determine whether to
approve or disapprove the proposed
rule change, as modified by Amendment
No. 1.8 On November 17, 2020, the
Exchange filed Amendment No. 2 to the
proposed rule change.9 On December 2,
2020, the Commission extended the
period for consideration of the proposed
rule change to February 7, 2021.10 On
February 1, 2021, the Exchange
withdrew the proposed rule change
(SR–NASDAQ–2020–026).
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.11
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–02708 Filed 2–9–21; 8:45 am]
BILLING CODE 8011–01–P
February 4, 2021.
On May 29, 2020, The Nasdaq Stock
Market LLC (‘‘Exchange’’) 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 a proposed rule change to
adopt a new requirement related to the
qualification of management for
companies whose business is
principally administered in a
jurisdiction that has secrecy laws,
blocking statutes, national security laws,
or other laws or regulations restricting
access to information by regulators of
U.S.-listed companies. The proposed
rule change was published for comment
in the Federal Register on June 12,
31 Id.
32 15
U.S.C. 78q–1.
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).
35 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
33 15
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18:53 Feb 09, 2021
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3 See Securities Exchange Act Release No. 89028
(June 8, 2020), 85 FR 35967. Comments on the
proposed rule change can be found at: https://
www.sec.gov/comments/sr-nasdaq-2020-026/
srnasdaq2020026.htm.
4 15 U.S.C. 78s(b)(2).
5 See Securities Exchange Act Release No. 89342,
85 FR 44951 (July 24, 2020). The Commission
designated September 10, 2020 as the date by which
the Commission shall approve or disapprove, or
institute proceedings to determine whether to
approve or disapprove, the proposed rule change.
6 Amendment No. 1 is available at https://
www.sec.gov/comments/sr-nasdaq-2020-026/
srnasdaq2020026-7677529-222672.pdf.
7 15 U.S.C. 78s(b)(2)(B).
8 See Securities Exchange Act Release No. 89794,
85 FR 57260 (September 15, 2020).
9 Amendment No. 2 is available at: https://
www.sec.gov/comments/sr-nasdaq-2020-026/
srnasdaq2020026-8048419-225740.pdf.
10 See Securities Exchange Act Release No. 90553,
85 FR 79062 (December 8, 2020).
11 17 CFR 200.30–3(a)(12).
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8955
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–91060; File No. SR–Phlx–
2021–05]
Self-Regulatory Organizations; Nasdaq
PHLX LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Amend Phlx Rules
February 4, 2021.
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 January
26, 2021, Nasdaq PHLX LLC (‘‘Phlx’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission (‘‘SEC’’ or
‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
Phlx Rules at Options 1, Section 1,
‘‘Applicability, Definitions and
References’’; Options 2, Section 4,
‘‘Obligations of Market Makers’’;
Options 2, Section 6, ‘‘Market Maker
Orders’’; Options 3, Section 6, ‘‘Firm
Quotations’’; Options 3, Section 7,
‘‘Types of Orders and Order and Quote
Protocols’’; Options 3, Section 10,
‘‘Electronic Execution Priority and
Processing in the System’’; Options 3,
Section 13, ‘‘Price Improvement XL
(‘‘PIXL’’)’’; Options 3, Section 15,
‘‘Simple Order Risk Protections’’;
Options 3, Section 23, ‘‘Data Feeds and
Trade Information’’; Options 5, Section
4, ‘‘Order Routing’’; Options 8, Section
2, ‘‘Definitions’’; and Options 8, Section
32, ‘‘Types of Floor-Based (Non-System)
Orders’’.
The text of the proposed rule change
is available on the Exchange’s website at
https://listingcenter.nasdaq.com/
rulebook/phlx/rules, at the principal
office of the Exchange, and at the
Commission’s Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
1 15
2 17
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U.S.C. 78s(b)(1).
CFR 240.19b–4.
10FEN1
]]>Agencies
[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.
---------------------------------------------------------------------------
\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'').
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\4\ DTC's Distributions Guide is available at https://
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 https://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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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
