From: Vivian Lewis
Sent: June 8, 2007
Subject: File No. SR-DTC-2006-21

Nancy M. Morris, Secretary
Securities and Exchange Commission
100 F Street, N.E.
Washington D.C. 20549-1090

To defend against the charge that it was imposing illegitimate fees on my account, Fidelity has sent me more documentation on the SEC's authorization of ADR custody fees by the Depository Trust Co. (DTC). The DTC is what our SEC considers to be a "self-regulatory organization". Fidelity is merely acting as an enthusiastic agent for DTC "ADR pass-through fees". They are charged by the DTC to stockbrokers who pass them on to the public clients of the brokerages.

The fees are being charged by other brokers too, including Schwab according to a reader. Officially they go into effect on July 10 of this year, but Fidelity, whose main business is mutual funds, has begun passing them through a few weeks early.

As of end-May, in addition to the Fido fees I already reported on, they have been imposed for the following dividend-paying ADRs in my personal account: Italcementi; Volvo; ABN; Eisai. I reported earlier about the bite for Hongkong Electric and Orkla. The shares now include both listed (NYSE and Nasdaq) and pink sheet stocks.

As reported earlier, the SEC officially under its release no. 34-55306 regarding SR-DTC-2006-21 gave permission to the DTC to charge fees on ADRs which do not pay dividends. All the stocks on which Fidelity charge the fee, however, do pay dividends.

The new rules spell out for shareholders fees which the DTC charged on dividend-paying ADR stocks in the past. Unfortunately, the impact of this "transparency" is to increase the taxes imposed on ADR-holders, since the separately notated fees are not tax deductible from dividends received. Before the rule change, the fees were deducted on the sly from dividends, and taxes only had to be paid on net dividends after fees and taxes. Fees along with taxes were deductible from other taxes owing. Now you will pay taxes on the money you did not receive, because it was a fee. The IRS still wants to tax the dividend even if you did not receive it in full.

Brokerage statements now include ADR pass-through fees for shares which pay dividends, the amount of which is no longer deductible from taxes the owner pays to the IRS. Transparency is in the interest of the tax authorities rather than the investor.

The DTC managed to get through a set of new SEC rules on custody fees last year by claiming that "the costs incurred in providing the collection function have decreased". Ostensibly to change the rules of its fee schedule "to align fees for services with the associated cost", in has succeeded in imposing new fees which are not tax deductible.

No fewer than three SEC committees signed off on the DTC's new collection system: the Securities Industry Association; the Corporate Actions Division, Dividends Division; and the Securities Operations Division. This is required under the Securities Exchange Act of 1934 which created the SEC to protect U.S. shareholders.

The fees charged me were linked to payments of dividends, but came in a bunch at the end of the month. I have no idea if the SEC has authorized these payments to be taken by DTC from shareholder dividends every time they are received, or if only once per year. I fear that every dividend will be subject to the fees.

Lest you think buying in foreign markets directly is the way to avoid this new bite, note that custody fees are imposed abroad too and tend to be much higher abroad than here. But depending on how often the fees bite into your brokerage account, there is a risk that U.S. fees are moving toward the levels imposed by foreign exchanges or banks. If the fees imposed at the rate of $2 to $8 per share turn out to be imposed quarterly, we are talking about real money.

I urge all U.S. readers to write to the SEC. Refer to File Number SR-DTC-2006-21. Send your letter in triplicate (ah, bureaucracy) to:

Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington DC 20549-1090. You should also send copies to your senators and congressional representatives. E-mail is not as likely to work, I think.