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Self Regulatory Organizations; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change by the Depository Trust Company Relating to a New Tax Service Called DALI

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Start Preamble November 29, 2000.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934,[1] notice is hereby given that on November 20, 2000, 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 DTC. 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

DTC has filed a proposed rule change to implement a new tax service called “DALI” (an acronym for data link for intermediaries). DALI is a communications hub to be used by U.S. payors such as banks, broker-dealers and foreign customers to exchange data in order to determine the proper withholding amount and to report U.S. withholding tax on payments such as dividends and interest made to a foreign payee.

II. Self-Regulatory Organization'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 Start Printed Page 76689proposed 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. [2]

A. Self-Regulatory Organization's Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change

The proposed rule change consists of the addition of DALI to DTC's tax services. DALI is a communications hub that will allow financial institutions (typically, a U.S. paying institution and its foreign customer payee) to exchange the data necessary to determine correct withholding and reporting of U.S. tax on payments such as dividends and interest to a foreign payee. DALI will also provide a storage facility for payment allocation information necessary for tax reporting. At a later stage, DALI will be expanded to also serve as a document repository for payee tax documentation and a storage facility for payment allocation information necessary for tax reporting at a beneficial owner level.


Changes in U.S. tax regulations concerning U.S. withholding tax and reporting on payments of U.s. source income made to foreign payees will become effective on January 1, 2001.[3] The new withholding regulations require U.S. withholding agents, such as banks and broker-dealers that pay dividends and interest to foreign customers, to determine the appropriate withholding tax rates for such payments based upon the tax status of the beneficial owner of the payment and to allocate the payments among each beneficial owner or classes of owners for annual reporting to the Internal Revenue Service. As a consequence, when the U.S. financial institution's foreign customer is not the beneficial owner (for example, a foreign intermediary holding securities on behalf of its customers), the U.S. financial institution, in its capacity as U.S. withholding agent, must obtain payment allocation information from its direct foreign intermediary customer, based upon the identity of tax status of the ultimate beneficial owners of each payment made by the U.S. financial institution to its foreign customer.

Development of DALI

DTC was asked to provide the DALI service by several of its participants (referred to here as the “Consortium”) that sought a common solution to enable them to comply with the new withholding tax regulations. The Consortium also consulted with Price WaterhouseCoopers (“PWC”) concerning the feasibility of developing a centralized and standardized software system that could be shared among the Consortium. At the request of the Consortium and industry groups, DTC agreed to act as a project manager for the development of the DALI software system and to operate and maintain the completed system as a DTC service. DTC and the Consortium retained PWC to develop the core DALI software. The Consortium agreed to pay PWC's software development costs and DTC's out-of-pocket product development costs such as hardware and operating software. The Consortium expects to recoup these costs over time from the proceeds of excess user service fees.[4]

Description of DALI System

DALI is a communications hub that withholding agents and foreign payees can use to transmit and receive the information necessary for tax withholding and reporting under the new tax regulations. DALI will be available to participants and non-participant customers for use with respect to withholding on varying types of payments and not restricted to position in securities held at DTC. DALI may be accessed by File Transfer Protocol and through the Internet at DTC's website.

In its simplest form, a typical message flow through DALI would proceed as follows:

(1) A U.S. financial institution notifies its foreign customer of a forthcoming payment and requests payment allocation information on the payment.

(2) The foreign intermediary responds with allocation information based upon the characteristics of the beneficial owners of the payment; and

(3) The U.S. financial institution confirms allocation instructions.

DALI will later be used to also validate, track, and retain required payee tax documentation such as IRS Forms W-8 and W-9 and to aggregate information for recordkeeping and tax reporting.

DTC believes that the proposed rule change is consistent with the requirements of Section 17A(b)(3) of the Act [5] and the rules and regulations thereunder because it will promote foreign investments in U.S. securities by facilitating the exchange of information necessary for payors of U.S. income to determine the correct withholding tax treatment of payments made to foreign payees. DTC also believes that the proposed rule change will be implemented consistently with the safeguarding of securities and funds in its custody or control or for which it is responsible.

B. Self-Regulatory Organization's Statement on Burden on Competition

DTC does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others

Representatives of several of DTC's participants that comprise DTC's Foreign Taxes Legal Working Group requested at a meeting held on January 24, 2000, that DTC provide a service to facilitate compliance with the new U.S. tax withholding regulations effective January 1, 2001. This request was made in writing by memorandum to DTC dated February 1, 2000, from the group of financial institutions then comprising the DALI Consortium (Morgan Stanley, Dean Witter, Goldman Sachs, Merrill Lynch, Prudential Securities, Salomon Smith Barney/Citibank, Pershing/DLJ, Chase Manhattan Bank, Brown Brothers Harriman, and Bear Stearns). Except as set forth above, DTC has not solicited nor received written comments on the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action

The foregoing rule change has become effective pursuant to Section 19(b)(3)(A)(iii) of the Act [6] and Rule 19b-4(f)(4) [7] thereunder because the rule change (1) effects a change in an existing service of EMCC that does not adversely affect the safeguarding of securities or funds in the DTC's custody or control or for which it is responsible and (2) does not significantly affect DTC's respective rights or obligations or persons using the service. At any time within sixty days of the filing of such proposed rule change, the Commission may summarily abrogate such rule Start Printed Page 76690change 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.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposal is consistent with the Act. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 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 inspection and copying in the Commission's Public Reference Room, 450 Fifth Street, NW., Washington, DC. Copies of such filing will also be available for inspection and copying at DTC's principal office. All submissions should refer to File No. SR-DTC-00-19 and should be submitted by December 28, 2000.

Start Signature

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.[8]

Margaret H. McFarland,

Deputy Secretary.

End Signature End Preamble


2.  The Commission has modified the text of the summaries prepared by DTC.

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3.  Sections 1441, et seq., of the Internal Revenue Code and regulations promulgated thereunder.

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4.  The proposed fee schedule for users of the DALI service is being developed and will be filed with the Commission shortly.

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6.  15 U.S.C. 78s(B)(3)(A)(iii).

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[FR Doc. 00-31139 Filed 12-6-00; 8:45 am]