[Federal Register Volume 78, Number 89 (Wednesday, May 8, 2013)]
[Notices]
[Pages 26823-26826]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-10871]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-69494; File No. SR-DTC-2013-03]
Self-Regulatory Organizations; the Depository Trust Company;
Notice of Filing of Proposed Rule Change in Connection With the
Implementation of the Foreign Account Tax Compliance Act (FATCA)
May 2, 2013.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby
given that on April 22, 2013 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 substantially prepared by DTC. 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.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
The proposed rule change modifies DTC's Rules & Procedures
(``Rules''), as described below, in connection with the implementation
of sections 1471 through 1474 of the Internal Revenue Code of 1986, as
amended, which sections were enacted as part of the Foreign Account Tax
Compliance Act, and the Treasury Regulations or other official
interpretations thereunder (collectively ``FATCA'').
II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, DTC 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. DTC has prepared summaries, set forth in sections A, B
and C below, of the most significant aspects of such statements.\3\
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\3\ The Commission has modified the text of the summaries
prepared by the clearing agency.
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(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
Background
FATCA was enacted on March 18, 2010, as part of the Hiring
Incentives to
[[Page 26824]]
Restore Employment Act, and became effective, subject to transition
rules, on January 1, 2013. The U.S. Treasury Department finalized and
issued various implementing regulations (``FATCA Regulations'') on
January 17, 2013. FATCA's intent is to curb tax evasion by U.S.
citizens and residents through their use of offshore bank accounts.
FATCA generally requires foreign financial institutions (``FFIs'') \4\
to become ``participating FFIs'' by entering into agreements with the
Internal Revenue Service (``IRS''). Under these agreements, FFIs are
required to report to the IRS information on U.S. persons and entities
that have (directly or indirectly) accounts with these FFIs. If an FFI
does not enter into such an agreement with the IRS, FATCA will impose a
30% withholding tax on U.S.-source interest, dividends and other
periodic amounts paid to such ``nonparticipating FFI'' (``Income
Withholding''), as well as on the payment of gross proceeds arising
from the sale, maturity or redemption of securities or any instrument
yielding U.S.-source interest and dividends (``Gross Proceeds
Withholding,'' and, together with Income Withholding, ``FATCA
Withholding''). The 30% FATCA Withholding taxes will apply to payments
made to a nonparticipating FFI acting in any capacity, including
payments made to a nonparticipating FFI that is not the beneficial
owner of the amount paid and acting only as a custodian or other
intermediary with respect to such payment. To the extent that U.S.-
source interest, dividend, and other periodic amount or gross proceeds
payments are due to a nonparticipating FFI in any capacity, a U.S.
payor, such as DTC, transmitting such payments to the nonparticipating
FFI will be liable to the IRS for any amounts of FATCA Withholding that
the U.S. payor should, but does not, withhold and remit to the IRS with
respect to those payments.
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\4\ Non-U.S. financial institutions are referred to as ``foreign
financial institutions'' or ``FFIs'' in the FATCA Regulations.
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As an alternative to FFIs entering into individual agreements with
the IRS, the U.S. Treasury Department provided another means of
complying with FATCA for FFIs which are resident in jurisdictions that
enter into intergovernmental agreements (``IGA'') with the United
States.\5\ Generally, such a foreign jurisdiction (``FATCA Partner'')
would pass laws to eliminate the conflicts of law issues that would
otherwise make it difficult for FFIs in its jurisdiction to collect the
information required under FATCA and transfer this information,
directly or indirectly, to the United States. An FFI resident in a
FATCA Partner jurisdiction would either transmit FATCA reporting to its
local competent tax authority, which in turn would transmit the
information to the IRS, or the FFI would be authorized/required by
FATCA Partner law to enter into an FFI agreement and transmit FATCA
reporting directly to the IRS. Under both IGA models, payments to such
FFIs would not be subject to FATCA Withholding taxes so long as the FFI
complies with the FATCA Partner's laws mandated in the IGA.
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\5\ As of the date of this proposed rule change filing, the
United Kingdom, Mexico, Ireland, Switzerland, Spain, Norway,
Denmark, Italy and Germany have signed or initialed an IGA with the
United States. The U.S. Treasury Department has announced that it is
engaged in negotiations with more than 50 countries and
jurisdictions regarding entering into an IGA.
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Under the FATCA Regulations, (A) beginning January 1, 2014, DTC
will be required to do Income Withholding on any payments made to any
nonparticipating FFI approved for membership by DTC as of such date or
thereafter, (B) beginning July 1, 2014, DTC will be required to do
Income Withholding on any payments made to any nonparticipating FFI
approved for membership by DTC prior to January 1, 2014 and (C)
beginning January 1, 2017, DTC will be required to do Gross Proceeds
Withholding on all nonparticipating FFIs, regardless when any such
FFI's membership was approved.
DTC already has established tax services that are currently
available to its Participants in which DTC, in accordance with sections
1441 through 1446 of the Code, withholds on certain payments of income
made to certain of its Participants. Thus, DTC can and intends to
support certain FATCA Income Withholding as part of such established
tax services. However, for the reasons described below, DTC is not in a
position to accept any liability that would result from Gross Proceeds
Withholding and, by making the proposed rule changes set forth herein,
is implementing preventive measures to protect itself against the
obligation for any such Gross Proceeds Withholding and any resulting
liability.
Preparing for Implementation of FATCA
In preparation for FATCA's implementation, FFIs are being asked to
identify their expected FATCA status as a condition of continuing to do
business. Customary legal agreements in the financial services industry
already contain provisions allocating the risk of any FATCA Withholding
tax that will need to be collected, and requiring that, upon FATCA's
effectiveness, foreign counterparties must certify (and periodically
recertify) their FATCA status using the relevant tax forms that the IRS
has announced it will provide.\3\ Advance disclosure by an FFI client
or counterparty would permit a withholding agent to readily determine
whether it must, under FATCA, withhold on payments it makes to the FFI.
If an FFI fails to provide appropriate compliance documentation to a
withholding agent, such FFI would be presumed to be a nonparticipating
FFI and the withholding agent will be obligated to withhold on certain
payments.
As it applies to DTC specifically, FATCA will require DTC to deduct
FATCA Withholding on payments to certain of its Participants arising
from certain transactions processed by DTC on behalf of such
Participants.\6\ Because FATCA treats any entity holding financial
assets for the account of others as a ``financial institution,'' and
almost all Participants hold financial assets for the account of
others, new and existing Participants which are treated as non-U.S.
entities for federal income tax purposes, including those members and
limited members that are U.S. branches of non-U.S. entities
(collectively, ``FFI Participants'') \7\ will likely be FFIs under
FATCA. As such, DTC will be liable to the IRS for the amounts
associated with any failures to withhold correctly under FATCA on
payments made to its FFI Participants.
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\6\ FFI participants resident in IGA countries, that are
compliant with the terms of applicable IGAs, should not be subject
to FATCA Withholding.
\7\ Currently, only a small percentage of the Corporation's
Participants are treated as non-U.S. entities for federal income tax
purposes.
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In light of this, DTC has evaluated its existing systems and
services to determine whether and how it may comply with its FATCA
obligations. As a result of this evaluation, DTC has determined that
its existing systems are incapable of processing and accounting for
Gross Proceeds Withholding with regard to the securities transactions
processed by it, as no similar withholding obligation of this magnitude
has ever been imposed on it to date and DTC has therefore not built
systems to support such an obligation.
Additionally, DTC nets credits and debits per Participant for end
of day net funds settlement. There is further netting with DTC's
affiliated central counterparty, National Securities Clearing
Corporation (``NSCC'') and further netting on a settling bank basis;
the effect of this netting is to significantly reduce the number and
magnitude of payments made via the NSS System of the Federal Reserve.
Gross Proceeds Withholding would
[[Page 26825]]
foreclose such netting, greatly reducing liquidity available to the
system and Participants, increasing systemic risk. Furthermore, given
DTC's netting, undertaking Gross Proceeds Withholding could require DTC
in certain circumstances to apply its Participants Fund in order to
fund FATCA Withholding taxes with regard to nonparticipating FFI
Participants in non-FATCA Partner jurisdictions whenever the net credit
owed to such FFI Participant is less than the 30% FATCA tax. In the
view of DTC, this would not be the best application of such funds which
are required to support liquidity and satisfy losses attributable to
the settlement activities of DTC, inter alia. For example, if a
nonparticipating FFI is owed a $100M gross payment from the sale or
maturity of U.S. securities, but such nonparticipating FFI is in a net
debit settlement position at the end of that day because of DTC's end
of day net crediting and debiting, and the other netting described
above, there would be no payment to this FFI Participant from which DTC
could withhold. In this example, DTC would likely need to fund the $30M
FATCA Withholding tax until such time as the FFI Participant can
reimburse DTC.\6\ In that case, DTC would need to consider an increase
in the amount of cash required to be deposited into the Participants
Fund, either by FFI Participants or all Participants, which would
reduce liquidity resources of Participants and could have significant
systemic effects. The amount of the FATCA Gross Proceeds Withholding
taxes would be removed from market liquidity, which could lead to
increased risk of Participant failure and increased financial
instability.
For the reasons explained above and the following additional
reasons, DTC is proposing amendments to its Rules (detailed below) to
implement preventive measures that would generally require all of DTC's
FFI Participants not to cause a Gross Proceeds Withholding obligation
on DTC:
Undertaking Gross Proceeds Withholding by DTC (even if
possible) would make it economically discouraging for affected FFI
Participants to engage in transactions involving U.S. securities. It
would likely also quickly cause a significant negative impact on
liquidity because such withholding taxes would be imposed on the very
large gross amounts due to such FFI Participants. Furthermore,
Participants would be burdened with extra costs and the negative impact
on liquidity caused by the likely need to substantially increase the
amount of cash required to be deposited into the Participants Fund.
The cost of implementing a Gross Proceeds Withholding
system for a small number of nonparticipating FFI Participants would be
substantial and disproportionate to the related benefit. Under the
Model I IGA form and its executed versions with various FATCA Partners,
DTC would not be required to withhold with regard to FFI residents in
such FATCA Partner jurisdictions. Accordingly, DTC's withholding
obligations under FATCA would effectively be limited to
nonparticipating FFI Participants in non-FATCA Partner jurisdictions.
Since the cost of developing and maintaining a complex Gross Proceeds
Withholding system would be passed on to DTC's Participants at large,
it may burden Participants that otherwise comply with, or are not
subject to, FATCA Withholding.
As briefly noted above, if the proposed rule changes were
not to take effect, in order to avoid counterparty credit risk, DTC
would likely require each of the nonparticipating FFI Participants in
non-FATCA Partner jurisdictions to make initial or additional cash
deposits to the Participants Fund as liquidity for the approximate
potential FATCA tax liability of such nonparticipating FFI Participant
or otherwise adjust required deposits to the Participants Fund. The
amount of such deposits, which could amount to billions of dollars,
would be removed from market liquidity.
From the nonparticipating FFI Participant's perspective,
having 30% of its payments withheld and sent to the IRS would have a
severe negative impact on such nonparticipating FFI Participants'
financial stability. In most cases, the gross receipts are for client
accounts, and the nonparticipating FFI Participant would need to make
such accounts whole. Without receipt of full payment for its
dispositions, the nonparticipating FFI Participant would not have
sufficient assets to fund its client accounts.
The proposed rule changes set forth herein will not create
an undue burden for Participants because requiring FFIs to certify (and
to periodically recertify) their FATCA status, and imposing the costs
of non-compliance on them, are becoming standard market practice in the
United States, separate and apart from being a Participant of DTC.
Proposed Rule Changes
In line with its risk management focus, DTC has determined that
compliance with FATCA, such that DTC shall not be responsible for Gross
Proceeds Withholding, should be a general membership requirement (A)
for all applicants that are treated as non-U.S. entities for U.S.
federal income tax purposes, and (B) for all existing FFI
Participants.\8\ In connection therewith, DTC proposes to amend its
Rules as follows:
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\8\ DTC may grant a waiver under certain circumstances,
provided, however, that DTC will not grant a waiver if it causes DTC
to be obligated to withhold under FATCA on gross proceeds from the
sale or other disposition of any property.
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Amending Rule 1: adding ``FATCA,'' ``FATCA
Certification,'' ``FATCA Compliance Date,'' \9\ ``FATCA Compliant,''
and ``FFI Participant'' to Section 2 as terms cross-referenced from
Rule 2, Section 9;
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\9\ Although FATCA Withholding with regard to FFI Participants
approved for membership by the Corporation prior to January 1, 2014
is first required under FATCA beginning July 1, 2014, the proposed
amendments to the Rules would require such existing FFI Participants
to be FATCA compliant approximately 60 days prior to July 1, 2014 in
order for the Corporation to comply with its disciplinary and notice
processes as set forth in its Rules.
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Amending Section 1 of Rule 2: adding the requirements
that, (i) with regard to any applicant that shall be an FFI
Participant, such applicant must be FATCA Compliant, and (ii) as a
qualification for activation of its membership that each applicant
approved by DTC complete and deliver to DTC a FATCA Certification; and
Adding new Section 9 of Rule 2: (i) Requiring all FFI
Participants (both new and existing) to agree not to conduct any
transaction or activity through DTC if such Participant is not FATCA
Compliant, (ii) requiring all FFI Participants to certify and, as
required under the timelines set forth under FATCA, periodically
recertify, to DTC, in accordance with the timelines set out under
FATCA, that they are FATCA Compliant, (iii) specifying that failure to
be FATCA Compliant creates a duty upon an FFI Member (both new and
existing) to inform DTC, (iv) providing that Participants that violate
the provisions of Section 9 are subject to disciplinary sanction or
other applicable actions by DTC in accordance with the Rules,
including, but not limited to, a fine, as well as restrictions of
services to the Participant and/or ceasing to act for the Participant
in accordance with Rule 10, and (v) requiring all FFI Participants to
indemnify DTC for any losses sustained by DTC resulting from such FFI
Participants' failure to be FATCA Compliant. In addition, Rule 2,
Section 9 will include the definitions for ``FATCA,'' ``FATCA
Certification,'' ``FATCA Compliance Date,'' ``FATCA Compliant,'' and
``FFI Participant''.
[[Page 26826]]
In addition, DTC will modify its Policy Statement on the
Admission of Non-U.S. Entities as Direct Depository Participants to
reference the Rules requirements of foreign entities which are treated
as non-U.S. entities for tax purposes.
Sections 17A(b)(3)(F) \10\ and 17A(b)(3)(D) \11\ of the
Exchange Act require that registered clearing agencies be designed to
promote the prompt and accurate clearance and settlement of securities
transactions, and the safeguarding of funds related thereto, and that
the rules of such clearing agencies provide for the equitable
allocation of reasonable dues, fees, and other charges among their
participants. DTC believes the proposed rule changes are designed to
promote the prompt and accurate clearance and settlement of securities
transactions by eliminating any uncertainty in funds settlement that
would arise if DTC were subject to Gross Proceeds Withholding
obligations under FATCA. The proposed rule changes are also designed to
maintain fairness in the allocation of costs among Participants of DTC
because these proposed rule changes allow DTC to comply with FATCA
Regulations without developing and maintaining a complex Gross Proceeds
Withholding system, the cost of which, as discussed above, would be
passed on to DTC's Participants at large for the benefit of a small
number of nonparticipating FFI Members.
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\10\ 12 U.S.C. 78q-1(b)(3)(F).
\11\ 12 U.S.C. 78q-1(b)(3)(D).
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(B) Clearing Agency's Statement on Burden on Competition
DTC does not believe that the proposed rule change will have any
impact, or impose any burden, on competition.
(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received from Members, Participants, or Others
DTC has not solicited, and does not intend to solicit, comments
regarding the proposed rule changes. DTC has not received any
unsolicited written comments from interested parties. To the extent DTC
receives written comments on the proposed rule changes, DTC will
forward such comments to the Commission.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
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 Exchange Act. Comments may be submitted
by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-DTC-2013-03 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-DTC-2013-03. 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 Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549 on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available
for inspection and copying at the principal office of DTC and on DTC's
Web site: http://www.dtcc.com/legal/rule_filings/dtc/2013.php. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-DTC-2013-03 and should be
submitted on or before May 29, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\12\
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\12\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-10871 Filed 5-7-13; 8:45 am]
BILLING CODE 8011-01-P