Notice2024-16551
Self-Regulatory Organizations; The Depository Trust Company; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the DTC Corporate Actions Distributions Service Guide
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
July 29, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 145 (Monday, July 29, 2024)</title>
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[Federal Register Volume 89, Number 145 (Monday, July 29, 2024)]
[Notices]
[Pages 60941-60944]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-16551]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-100581; File No. SR-DTC-2024-006]
Self-Regulatory Organizations; The Depository Trust Company;
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change
To Amend the DTC Corporate Actions Distributions Service Guide
July 23, 2024.
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 July 17, 2024, 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 Rule 19b-4(f)(4)
[[Page 60942]]
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)(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\ consists of amendments to The Tax
Event Announcement Feature section \6\ of the Distributions Guide.\7\
The proposed change would modify a requirement relating to the Sub-
Event Type \8\ known as ``1042-S Classifications,'' as described 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 (``DTC
Rules''), available at <a href="https://www.dtcc.com/-/media/Files/Downloads/legal/rules/dtc_rules.pdf">https://www.dtcc.com/-/media/Files/Downloads/legal/rules/dtc_rules.pdf</a>, or the DTC Corporate Actions
Distributions Service Guide (``Distributions Guide''), available at
https://www.dtcc.com/~/media/Files/Downloads/legal/service-guides/
Service-Guide-Distributions.pdf.
\6\ Tax Event Announcements provide Participants with
information-only announcements regarding taxable events that may
give rise to tax-related information and/or withholding obligations
that occur, even in the absence of an actual distribution of
dividend and interest payments (``Tax Events''). See Distributions
Guide, supra note 5, at 13-15.
\7\ The Distributions Guide, supra note 5, is a Procedure of
DTC. Pursuant to the DTC Rules, the term ``Procedures'' means the
Procedures, service guides, and regulations of DTC adopted pursuant
to DTC Rule 27, as amended from time to time. See DTC Rule 1,
Section 1, supra note 5. They are binding on DTC and each
Participant in the same manner that they are bound by the DTC Rules.
See DTC Rule 27, supra note 5.
\8\ Tax Event Announcements are classified by ``Event Type'' and
``Sub-Event Type.'' See Distributions Guide, supra note 5, at 13-15.
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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 amend The Tax Event Announcement
Feature section of the Distributions Guide. The proposed change would
modify a requirement relating to the Sub-Event Type known as ``1042-S
Classifications,'' as described below.
1042-S Classifications--Background
Pursuant to Rule 1.1446-4(b)(4) under the Internal Revenue Code of
1986, as amended (``Code''),\9\ issuers of publicly traded partnerships
\10\ are, in effect, required to provide DTC with ``qualified
notices,'' for the issuer's applicable Eligible Securities held by
DTC,\11\ that classify a distribution for such securities into multiple
components for tax withholding and Internal Revenue Service Form 1042-S
\12\ reporting purposes (``1042-S Classifications''). For example, on a
$1.00 distribution, the qualified notice may state that $0.60 is
considered dividend income and $0.40 is income effectively connected
with the conduct of a trade or business in the United States. DTC
forwards such qualified notices to Participants, as discussed below.
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\9\ 26 CFR 1.1446-4(b)(4).
\10\ Id. (providing definition of publicly traded partnership).
\11\ Such issuers are required to provide such notices to DTC as
the registered holder of the subject Eligible Securities via DTC's
nominee, Cede & Co.
\12\ See Form 1042-S, available at <a href="https://www.irs.gov/pub/irs-pdf/f1042s.pdf">https://www.irs.gov/pub/irs-pdf/f1042s.pdf</a>.
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Meanwhile, other issuers may not be required under applicable tax
law to provide DTC with 1042-S Classifications. For example, a
regulated investment company may classify a portion of a distribution
as representing interest-related dividends or as a short-term capital
gain dividend, but it would not be required to provide a qualified
notice to DTC pursuant to Rule 1.1446-4(b)(4) under the Code.\13\
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\13\ 26 CFR 1.1446-4(b)(4).
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However, DTC accepts 1042-S Classifications voluntarily submitted
to DTC by issuers using a template provided by DTC.\14\ Regardless of
whether DTC receives 1042-S Classifications voluntarily or otherwise,
it will distribute that information to Participants that hold the
applicable securities.
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\14\ See Distributions Guide, supra note 5, at 15.
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The Distributions Guide currently provides that the breakdown of
the 1042-S Classifications must be provided to DTC prior to the record
date \15\ of the distribution and should not be subject to change.\16\
The information is currently required prior to record date to help
ensure that DTC has sufficient time to then deliver the corresponding
information to the Participants in advance of payment of the
distribution, which may trigger a tax withholding and/or reporting
obligation for the receiving Participant.
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\15\ The record date is the date set by an issuer of a security
by which an investor must own the security to be eligible to receive
an upcoming distribution. See DTC Operational Arrangements Necessary
for Securities to Become and Remain Eligible for DTC Services
(``OA''), available at http://www.dtcc.com/~/media/Files/Downloads/
legal/issue-eligibility/eligibility/operational-arrangements.pdf, at
26.
\16\ See Distributions Guide, supra note 5, at 15.
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The Distributions Guide also currently provides that by providing
DTC a completed template or qualified notice, the issuer certifies that
the information provided in the template is not subject to change, but
that DTC will accept and distribute updated information to Participants
to the extent an issuer notifies DTC that the issuer made an error in
the information provided and provides DTC with a corrected template or
qualified notice, as applicable.\17\
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\17\ Id.
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Proposed Rule Change
Time Frame for Submission of 1042-S Classification Information
As mentioned above, to promote timeliness and accuracy of issuer
information provided to DTC, the Distributions Guide requires the
breakdown of the 1042-S Classifications be provided prior to the record
date. However, even if an issuer can provide the information prior to
record date, it is DTC's understanding that due to the timing of the
availability of income source information to issuers, issuers may be
unable to report such information before ex-date,\18\ which, with
certain exceptions, was set to occur one business day before record
date in a settlement cycle where settlement occurred two days after
trade (``T+2'').\19\
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\18\ The ex-date is the date on which a stock starts trading
without the benefit of corporate action (i.e., ex-benefit).
\19\ The ex-date is determined in accordance with the applicable
market procedures. E.g., NYSE Listed Company Manual, Section 703.02
(part 2) (Stock Split/Stock Rights/Stock Dividend Listing Process),
available at <a href="https://nyseguide.srorules.com/listed-company-manual/09013e2c855788a0">https://nyseguide.srorules.com/listed-company-manual/09013e2c855788a0</a>.
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However, with the recent shortening of the U.S. settlement cycle
from T+2 to one-day following trade date (``T+1''),\20\ that timeline
is compressed such that ex-date and record date now will be the same
date, normally. Therefore, issuers may not be able to submit 1042-S
Classifications prior to record date.
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\20\ See Securities Exchange Act Release No. 96930 (Feb. 15,
2023), 88 FR 13872 (Mar. 6, 2023) (S7-05-22) (Shortening the
Securities Transaction Settlement Cycle).
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Since issuers may not be able to submit 1042-S Classification
information prior to record date given that ex-date and record date now
will occur on the same date in a T+1 settlement cycle, DTC proposes to
[[Page 60943]]
amend the Distributions Guide to state that the breakdown of these
classifications must be provided to DTC ``on or before'' record date.
1042-S Classification Changes and Related Certification
As described above, the Distributions Guide currently provides that
the breakdown of the 1042-S Classifications information ``should not be
subject to change'' \21\ and that information provided in a complete
and ``certified'' template ``is not subject to change;'' however, the
Distributions Guide also provides that DTC will accept and distribute
updated information if updated information is provided to correct an
error.\22\ DTC proposes to revise these provisions to make technical
changes, provide more clarity, and better align the language to
practices, as described below.
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\21\ See Distributions Guide, supra note 5, at 15.
\22\ Id.
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First, DTC would make a technical change for conciseness. In this
regard, the text that states that 1042-S Classifications provided by
the issuer ``should not be subject to change'' will be revised to state
that the classifications ``should be final.''
Second, text that provides that an issuer ``certifies'' that the
information provided to DTC in a template ``is not subject to change''
would be revised to replace (a) ``certifies'' with ``confirms'' and (b)
``is not subject to change'' to ``should be final.'' With respect to
(a), it is DTC's understanding that issuers may not be able to certify
that information is final until they complete their year-end tax
filings. The revision of the reference from ``certifies'' to
``confirms'' would continue to provide DTC with comfort that the issuer
believes that the 1042-S Classification information is final, without
requiring a certification with respect to information that could
change.
Third, text stating ``DTC will accept and distribute updated
information to Participants to the extent an Issuer notifies DTC that
the Issuer entered an error in the applicable template or qualified
notice provided by it to DTC and the Issuer provides DTC with a
corrected template or qualified notice, as applicable'' will be revised
(x) so that the text stating ``notifies DTC that the Issuer entered an
error in the applicable template or qualified notices provided by it to
DTC'' will be replaced with ``notifies DTC that the information has
changed'' and (y) to make a technical change to replace ``a corrected
template or qualified notice, as applicable'' with ``corrected
classification information in compliance with applicable tax
regulations.'' The change described in (x) would account for the
possibility that information submitted by an issuer may change for a
reason other than an error, such as a change realized as part of a
year-end tax process. The change described in (y) reflects that
reporting requirements relating to1042-S Classifications, and any
corrections thereto, provided by issuers to DTC stem from issuers'
reporting obligations under applicable tax regulations.
Fourth, also to reflect that the requirements for issuers reporting
1042-S Classifications stem from obligations under applicable tax
regulations, the sentence stating, ``DTC reserves the right not to
accept classification information from Issuers that do not abide by
these requirements'' would be extended to add ``and/or applicable tax
regulations.''
Fifth, references to ``Record Date'' and ``Issuer'' would be
updated to lowercase because they are not defined terms.
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 Section 17A(b)(3)(F) \23\ of the Act.
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\23\ 15 U.S.C. 78q-1(b)(3)(F).
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Section 17A(b)(3)(F) of the Act requires, inter alia, that the
rules of the clearing agency be designed to promote the prompt and
accurate clearance and settlement of securities transactions.\24\ As
described above, in addition to certain clarifying and technical
changes, the proposed rule change would update the Distributions Guide
to provide that (i) the breakdown of 1042-S Classifications must be
provided to DTC ``on or before'' record date, instead of ``prior to''
record date given the new, shortened settlement cycle of T+1; (ii) the
information provided ``should be final,'' even if provided via a DTC
template; and (iii) changed information provided to DTC is not limited
to just erroneous entries.
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\24\ Id.
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By revising provisions in the Distributions Guide relating to The
Tax Event Announcement Feature in this regard, DTC believes that the
proposed rule change would help facilitate Participants' compliance
with DTC's time frames for submission of 1042-S Classifications in a
T+1 settlement cycle and, thus, compliance with U.S. federal tax
withholding obligations for the subject securities, while also
continuing to provide DTC with comfort that the 1042-S Classification
information received is near, if not, final.
Therefore, by helping to facilitate Participant's ability to
continue to use DTC's book-entry transfer and settlement services with
respect to Eligible Securities that are subject to 1042-S
Classifications, the proposed rule change would help 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.
(B) Clearing Agency's Statement on Burden on Competition
DTC believes that the proposed rule change will not impact
competition. As described above, the proposed rule change merely
facilitates issuers' and Participants' ability to continue to make use
of 1042-S Classification reporting through DTC without materially
altering requirements for submission or use of 1042-S Classification
information.
(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants, or Others
DTC has not received or solicited any written comments relating to
this proposal. If any written comments are received, they would be
publicly filed as an Exhibit 2 to this filing, as required by Form 19b-
4 and the General Instructions thereto.
Persons submitting comments are cautioned that, according to
Section IV (Solicitation of Comments) of the Exhibit 1A in the General
Instructions to Form 19b-4, the Commission does not edit personal
identifying information from comment submissions. Commenters should
submit only information that they wish to make available publicly,
including their name, email address, and any other identifying
information.
All prospective commenters should follow the Commission's
instructions on how to submit comments, available at <a href="http://www.sec.gov/regulatory-actions/how-to-submit-comments">www.sec.gov/regulatory-actions/how-to-submit-comments</a>. General questions regarding
the rule filing process or logistical questions regarding this filing
should be directed to the Main Office of the Commission's Division of
Trading and Markets at <a href="/cdn-cgi/l/email-protection#1c686e7d7875727b7d7278717d6e7779686f5c6f797f327b736a"><span class="__cf_email__" data-cfemail="b1c5c3d0d5d8dfd6d0dfd5dcd0c3dad4c5c2f1c2d4d29fd6dec7">[email protected]</span></a> or 202-551-5777.
DTC reserves the right to not respond to any comments received.
III. Date of Effectiveness of the Proposed Rule Change, and Timing for
Commission Action
The foregoing rule change has become effective pursuant to Section
[[Page 60944]]
19(b)(3)(A) \25\ of the Act and paragraph (f) \26\ of Rule 19b-4
thereunder. 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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\25\ 15 U.S.C. 78s(b)(3)(A).
\26\ 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
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules-regulations/self-regulatory-organization-rulemaking">https://www.sec.gov/rules-regulations/self-regulatory-organization-rulemaking</a>);
or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#a7d5d2cbc28ac4c8cacac2c9d3d4e7d4c2c489c0c8d1"><span class="__cf_email__" data-cfemail="3e4c4b525b135d5153535b504a4d7e4d5b5d10595148">[email protected]</span></a>. Please include
file number SR-DTC-2024-006 on the subject line.
Paper Comments
<bullet> 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-2024-006. 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 (<a href="https://www.sec.gov/rules-regulations/self-regulatory-organization-rulemaking">https://www.sec.gov/rules-regulations/self-regulatory-organization-rulemaking</a>). 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 a.m. and 3 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 (<a href="http://dtcc.com/legal/sec-rule-filings">dtcc.com/legal/sec-rule-filings</a>). Do not include personal identifiable information in
submissions; you should submit only information that you wish to make
available publicly. We may redact in part or withhold entirely from
publication submitted material that is obscene or subject to copyright
protection. All submissions should refer to file number SR-DTC-2024-006
and should be submitted on or before August 19, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\27\
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\27\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-16551 Filed 7-26-24; 8:45 am]
BILLING CODE 8011-01-P
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