Notice2021-17963
Self-Regulatory Organizations; National Securities Clearing Corporation; Order Approving a Proposed Rule Change To Modify the Rules & Procedures of National Securities Clearing Corporation in Connection With the Implementation of Section 1446(f) of the Internal Revenue Code of 1986
Primary source
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Published
August 23, 2021
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 86 Issue 160 (Monday, August 23, 2021)</title>
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[Federal Register Volume 86, Number 160 (Monday, August 23, 2021)]
[Notices]
[Pages 47172-47173]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-17963]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-92682; File No. SR-NSCC-2021-009]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Order Approving a Proposed Rule Change To Modify the Rules
& Procedures of National Securities Clearing Corporation in Connection
With the Implementation of Section 1446(f) of the Internal Revenue Code
of 1986
August 17, 2021.
On July 14, 2021, National Securities Clearing Corporation
(``NSCC'') 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-NSCC-2021-009 to modify NSCC's Rules &
Procedures (``Rules'') \3\ in connection with the implementation of
Section 1446(f) of the Internal Revenue Code of 1986.\4\ The proposed
rule change was published for comment in the Federal Register on July
23, 2021,\5\ and the Commission received no comment letters regarding
the changes proposed in 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\ Capitalized terms not defined herein are defined in the
Rules, available at http://www.dtcc.com/~/media/Files/Downloads/
legal/rules/nscc_rules.pdf.
\4\ 26 U.S.C. 1446(f).
\5\ Securities Exchange Act Release No. 92437 (July 19, 2021),
86 FR 39092 (July 23, 2021) (``Notice of Filing'').
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I. Description of the Proposed Rule Change
A. Background
Section 1446(f) generally imposes a ten percent withholding tax on
the payment of gross proceeds arising from the sale or other
disposition by a non-U.S. person of an interest in a publicly traded
partnership (``Section 1446(f) Withholding'') that is engaged in a U.S.
trade or business.\6\ A tax withholding obligation is imposed on the
buyer of the partnership interest, who is required to remit the
withheld tax amount to the U.S. Internal Revenue Service (``IRS''),
unless or to the extent an applicable exception applies. The buyer
obligated to withhold the ten percent tax is liable for any amount that
it underwithheld, plus associated interest and penalties. Further,
partnerships that are publicly traded on exchanges (``PTPs'') in
respect of transfers that occur on or after January 1, 2022 will be
subject to Section 1446(f) Withholding. The U.S. Treasury Department
(``Treasury Department'') and the IRS implemented a tax withholding
requirement pursuant to Treasury Regulation Section 1.1446(f)-4(a).\7\
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\6\ 26 U.S.C. 1446(f)(1); Withholding of Tax and Information
Reporting With Respect to Interests in Partnerships Engaged in a
U.S. Trade or Business, 85 FR 76910 (Nov. 30, 2020) (``Final
Regulations'').
\7\ Id.; 26 CFR 1.1446(f)-4(a).
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Section 1.1446(f)-4(b) provides certain exceptions to 1.1446(f)-
4(a). Under one of the exceptions, U.S. clearing organizations, which,
under its definition, would include NSCC, are discharged from
fulfilling Section 1446(f) Withholding at this time. The Treasury
Department and the IRS provided this exception because they understood
that there are no nonqualified intermediary Members that participate
directly in the net settlement system at a U.S. clearing organization
at the present time.\8\
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\8\ Final Regulations, supra note 6, at 76922.
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NSCC represents that, all of NSCC's non-U.S. Members are currently
of the types of entities permitted to perform the Section 1446(f)
Withholding themselves either because (i) they are the types of
entities allowed to perform U.S. tax withholdings pursuant to
applicable Treasury Regulations, or (ii) they have entered into the
requisite agreements with the IRS that allow them to perform U.S. tax
withholdings (commonly known as the Qualified Intermediary
Agreements).\9\ NSCC further represents that nearly all such Members
have historically accepted the responsibility to perform all U.S. tax
withholdings in respect of their NSCC accounts, and it is NSCC's
understanding that they would continue do the same for Section 1446(f)
Withholding.\10\
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\9\ Notice of Filing, supra note 5, at 39093.
\10\ Id.
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B. Proposed Rule Changes
NSCC proposes to amend its Rules to ensure that all NSCC's FFI
Members \11\ that are Members would accept the responsibility to
perform the Section 1446(f) Withholding.\12\
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\11\ The term ``FFI Member'' means any Member or Limited Member
that is treated as a non-U.S. entity for U.S. federal income tax
purposes. See Rules, supra note 3.
\12\ NSCC states that, based on the types of services that NSCC
provides to Limited Members, notwithstanding any exception, NSCC
would not need to perform Section 1446(f) Withholding with respect
to Limited Members' activities at NSCC. Notice of Filing, supra note
5, at 39093.
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First, NSCC proposes to add new definitions: Section 1446(f),
Section 1446(f) Withholding, Section 1446(f)
[[Page 47173]]
Withholding Agent, Section 1446(f) Withholding Compliance Date, and Tax
Certification.\13\ Second, NSCC proposes to revise the FATCA compliance
rule to add that, generally, each FFI Member that is a Member must
agree not to conduct any transaction or activity through NSCC if such
FFI Member is not a Section 1446(f) Withholding Agent.\14\ Third, NSCC
proposes to require FFI Members to be Section 1446(f) Withholding
Agents and to notify NSCC when they have reason to know that they are
not, or will not be, Section 1446(f) Withholding Agents.\15\ Fourth,
NSCC proposes to require a Member who is a non-U.S. entity and is not a
Section 1446(f) Withholding Agent to not transact through NSCC, and a
Member who is a non-U.S. entity to provide Tax Certification to certify
that it is FATCA Compliant or a Section 1446(f) Withholding Agent.\16\
Fifth, NSCC proposes to make certain other technical changes to its
Rules.\17\
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\13\ Notice of Filing, supra note 5, at 39093.
\14\ The term ``Section 1446(f) Withholding Agent'' would mean
an FFI Member that is a Member and has certified to NSCC that
Section 1446(f) Withholding would not apply to any Gross Credit
Balance of such FFI Member by providing to NSCC a Tax Certification
(as defined below and in the proposed rule text). Id.
\15\ Id.
\16\ Notice of Filing, supra note 5, at 39094.
\17\ Notice of Filing, supra note 5, at 39093-94.
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II. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act \18\ 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. In particular, the
Commission finds that the proposed rule change is consistent with
Section 17A(b)(3)(F) of the Act.\19\
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\18\ 15 U.S.C. 78s(b)(2)(C).
\19\ 15 U.S.C. 78q-1(b)(3)(F).
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A. Consistency With Section 17A(b)(3)(F)
Section 17A(b)(3)(F) of the Act requires, in part, that the rules
of a clearing agency, such as NSCC, be designed to promote the prompt
and accurate clearance and settlement of securities transactions.\20\
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\20\ Id.
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As described above, Section 1446(f) provides NSCC an exception from
the obligation to perform Section 1446(f) Withholding at this time.
However, if a direct clearing member of a U.S. clearing organization is
not a type of entity permitted to perform Section 1446(f) Withholding,
the Treasury Department and the IRS will issue proposed guidance that
would remove the current exception to require Section 1446(f)
Withholding by U.S. clearing organizations, such as NSCC, on that
direct clearing member.\21\ If the Treasury Department and the IRS were
to revise Section 1446(f) and revoke NSCC's exception, NSCC would be
required to clear and settle each transfer of PTP interest on a gross
basis in order to perform Section 1446(f) Withholding on such transfer.
Given that NSCC currently clears and settles all transactions on a
netted basis, NSCC represents that any obligation imposed on NSCC to
clear and settle transfers of PTP interest on a gross basis may be
disruptive to the efficiency and liquidity of the trading of PTP
interests in the capital markets.\22\
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\21\ Final Regulations, supra note 6, at 76922.
\22\ Notice of Filing, supra note 5, at 39094.
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NSCC is proposing that, unless waived by NSCC, beginning on the
Section 1446(f) Withholding Compliance Date, each FFI Member that is a
Member would be required to agree not to conduct any transaction or
activity through NSCC if such FFI Member is not a Section 1446(f)
Withholding Agent. In addition, each FFI Member that is a Member would
be required to provide periodic certifications to NSCC regarding its
Section 1446(f) Withholding Agent status. Taken together, these
membership requirements would help to ensure that all NSCC FFI Members
that are Members would accept their responsibility to perform the
Section 1446(f) Withholding and to be a Section 1446(f) Withholding
Agent.
By ensuring that all NSCC FFI Members that are Members would accept
their responsibility to perform the Section 1446(f) Withholding, the
Commission believes the current exception for NSCC with respect to
Section 1446(f) would continue to operate as intended. Therefore, NSCC
would be able to continue to clear and settle all transactions
(including transfers of PTP interest) on a netted basis and avoid any
potential disruption to the efficiency and liquidity of the trading of
PTP interests in the capital market. By avoiding any potential
disruption to the efficiency and liquidity of the trading of PTP
interest in the capital market, the Commission believes that the
proposal would help to promote the prompt and accurate clearance and
settlement of transactions, consistent with Section 17A(b)(3)(F) of the
Act.\23\
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\23\ 15 U.S.C. 78q-1(b)(3)(F).
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The Commission believes the proposal to make technical changes to
the Rules is also consistent with Section 17A(b)(3)(F) of the Act. The
proposed technical changes to the Rules would help ensure that the
Rules remain accurate and clear to Members. Having accurate and clear
Rules would help Members to better understand their rights and
obligations regarding NSCC's clearance and settlement services. The
Commission believes that when Members better understand their rights
and obligations regarding NSCC's clearance and settlement services,
they can act in accordance with the Rules. The Commission believes that
better enabling Members to comply with the Rules would promote prompt
and accurate clearance and settlement of transactions, consistent with
Section 17A(b)(3)(F) of the Act.\24\
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\24\ Id.
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III. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed rule change is consistent with the requirements of the Act and
in particular with the requirements of Section 17A of the Act \25\ and
the rules and regulations promulgated thereunder.
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\25\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\26\ that proposed rule change SR-NSCC-2021-009, be, and hereby is,
APPROVED.\27\
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\26\ 15 U.S.C. 78s(b)(2).
\27\ In approving the proposed rule change, the Commission
considered the proposals' impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
\28\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\28\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2021-17963 Filed 8-20-21; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on August 23, 2021.
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