In October 2016, The Depository Trust Company ("DTC") announced that it is adjusting its eligibility procedures to comply with Section 871(m) of the Internal Revenue Code of 1986, as amended (the "Code"). Beginning on January 1, 2017, for securities to become and remain DTC "eligible securities," issuers will need to comply with DTC's new procedures. DTC's announcement may be found at the following link: The new procedures will apply to any securities, including structured notes, that are treated as a "Section 871(m) transaction" under the Code and U.S. Treasury Regulations.


Section 871(m) of the Code generally treats "dividend equivalents" paid under securities lending transactions, salerepurchase transactions and certain notional principal contracts as dividends from sources within the United States and therefore subject to U.S. withholding tax. The dividend equivalent rules are meant to prevent foreign investors from avoiding U.S. federal withholding taxes typically applicable to investments in U.S. securities by investing instead in derivatives linked to U.S. securities. In December 2013, the Internal Revenue Service (the "IRS") issued proposed

Treasury Regulations under Section 871(m) (the "Proposed Regulations"), designed to broaden Section 871(m)'s scope beyond transactions specifically described in the statute.1 In September 2015, the IRS finalized the Proposed Regulations, with significant changes (the "Final Regulations").2 The Final Regulations generally adopt the "delta" approach introduced in the Proposed Regulations, which treats payments on notional principal contracts ("NPCs") and equity-linked instruments ("ELIs") as dividend equivalents if they have a delta meeting a threshold.3 However, the delta approach is limited to "simple" NPCs and ELIs, and a new framework has been designed for "complex" NPCs and ELIs. Originally, the Final Regulations had an effective date that was graduated over 2015, 2016 and 2017, but the IRS extended the effective date so that the Final Regulations would only apply to payments made on or after January 1, 2017, for any transaction issued on or after January 1, 2017. Recently, on December 2, 2016, the IRS released Notice 2016-76, which announced that the effective dates of the Final Regulations would be further staggered. The notice, discussed in the prior article in this issue, announces that the IRS intends the effective date for the application of the Final Regulations to be on January 1, 2017 for delta-one instruments and January 1, 2018 for non-delta-one instruments.

Initial Eligibility

For a security to qualify as DTC eligible, an officer of the issuer will be required to attest to the applicability of compliance with Section 871(m). The officer will be required to certify if the security is treated as a "Section 871(m) transaction"; if it is such a transaction, the officer must then certify whether it is a "simple contract" or a "complex contract."4 If the security is treated as a "simple contract," then the applicable "delta" will also be required to be provided. In connection with the initial qualification, the officer must also agree that the issuer will provide DTC with dividend equivalent payments as they occur. (See "Maintaining Eligibility," below.) These certifications will be made by completing a template form of "Representations for Internal Revenue Code Section 871(m)" provided by DTC, which will be submitted with the eligibility request. DTC has warned market participants that the failure to timely comply with this new attestation requirement may result in a delay in DTC approval. Of course, a delayed approval could result in delayed settlements, and issuers and underwriters will want to update their procedures to be in compliance at the beginning of 2017.

Maintaining Eligibility

For securities that are considered "Section 871(m) transactions," issuers will be required to provide DTC Dividend Equivalent Payments ("DEPs") as they occur during the term of the security. DTC has created an "871(m) Dividend Equivalent Payment" template that sets forth the data that is required for the processing of these payments. As the DEPs occur, issuers will need to send this information to a designated DTC e-mail address.

Getting Ready for January 2017

Historically, the DTC eligibility process was completed by the relevant distributors, without significant participation from the applicable issuers. The new required procedures, especially for frequent issuers, will require ongoing involvement from the relevant officer or officers from the issuers who make the required certifications, and accordingly, will want to establish a means to reliably verify their accuracy. Together with their tax advisors and underwriters, these issuers will need to establish procedures to ensure that the certifications can be accurately completed on a timely basis, and that any required periodic notifications can be made to DTC.