
[Federal Register Volume 80, Number 190 (Thursday, October 1, 2015)]
[Notices]
[Pages 59210-59213]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-24884]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75987; File No. SR-NASDAQ-2015-112]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Amend Rule 4758

September 25, 2015.
    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 September 21, 2015, The NASDAQ Stock Market LLC (``NASDAQ'' or 
``Exchange'') 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 Exchange. 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. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend NASDAQ Rule 4758 (Order Routing) to 
adopt a new routing option, the Retail Order Process (``RTFY'').
    The text of the proposed rule change is available at http://nasdaq.cchwallstreet.com/, at the Exchange's principal office, and at 
the Commission's Public Reference Room.

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

    In its filing with the Commission, the Exchange 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 Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant aspects of such 
statements.

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

1. Purpose
    NASDAQ is amending Rule 4758, which describes its order routing 
processes, to add the new RTFY order routing option under NASDAQ Rule 
4758(a)(1)(A)(v) for Designated Retail Orders (``DROs'').\3\ Retail 
order firms often send non-marketable order flow, that is--orders that 
are not executable against the best prices available in the market 
place based on their limit price--to post and display on exchanges. 
Some of the orders that have been deemed to be non-marketable by the 
entering firm become marketable by the time the exchange receives them 
and ultimately remove liquidity from the exchange order book. As 
discussed more fully below, the RTFY order routing option is designed 
to enhance execution quality and benefit retail investors by providing 
price improvement opportunities to retail order flow.
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    \3\ See NASDAQ Rule 7018.
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    The Exchange is proposing RTFY, which is similar to TFTY,\4\ as an 
alternative method for posting non-marketable order flow on the 
Exchange order book. Rather than allowing the marketable DROs to 
immediately remove liquidity from the Exchange order book (unless 
explicitly instructed to do so), the order will be routed to 
destinations in the System routing table \5\ to increase price 
improvement opportunities for the DROs. RTFY may remove liquidity from 
the Exchange book after routing to other destinations. Any non-
marketable RTFY orders will post on the Exchange book. In this regard, 
the RTFY routing option does not differ from the TFTY routing option. 
Specifically, members using TFTY will not check the NASDAQ book (unless 
so instructed by the entering firm) for available shares and will 
instead route to the destination with lower transaction fees.\6\
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    \4\ See NASDAQ Rule 4758(a)(1)(A)(v).
    \5\ The term ``System routing table'' refers to the proprietary 
process for determining the specific trading venues to which the 
System routes orders and the order in which it routes them. NASDAQ 
reserves the right to maintain a different System routing table for 
different routing options and to modify the System routing table at 
any time without notice. See NASDAQ Rule 4758(a)(1)(A).
    \6\ See Securities Exchange Act Release No. 61460 (Feb. 1, 
2010), 75 FR 66183 (Feb. 5, 2010) (SR-NASDAQ-2010-018).
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    The destinations in the System routing table for RTFY will include 
OTC market makers,\7\ which may also be registered NASDAQ market makers 
\8\ (``Market Makers''). The Exchange believes Market Makers will 
likely provide the greatest opportunity for price improvement for the 
DROs. The Exchange believes the RTFY routing option will benefit DROs 
by providing additional price improvement opportunities for retail 
investors that they do not otherwise enjoy today.
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    \7\ An ``OTC market maker'' in a stock is defined in Rule 
600(b)(52) of Regulation NMS as, in general, a dealer that holds 
itself out as willing to buy and sell the stock, otherwise than on a 
national securities exchange, in amounts of less than block size 
(less than 10,000 shares).
    \8\ See NASDAQ Rule 4612.
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    If a RTFY order is posted on the Exchange, either because it was 
non-marketable when it was received or it has exhausted all available 
liquidity within its limit price--including the Exchange, Reg NMS 
protected quotations and other destinations in the System routing 
table--and the order is subsequently locked or crossed by another 
market center, the System will not route to the locking or crossing 
market center.

[[Page 59211]]

    An order using the RTFY option will be sent to the primary listing 
exchange for opening, reopening, and closing auctions. Orders received 
in non-NASDAQ listed securities prior to market open that are not 
eligible for the pre-market session will be submitted to the primary 
listing market for inclusion in that market's opening process. Orders 
received in NASDAQ-listed securities prior to market open that are not 
eligible for the pre-market session will follow normal pre-market 
processing.\9\ Orders received prior to the market open that are 
eligible for the pre-market session will be posted (and routed if 
marketable) for potential execution. Approximately two minutes prior to 
market open, active pre-market session orders in the Exchange's 
possession will be routed to the primary listing exchange. When a 
security that is listed on an exchange other than NASDAQ is halted, 
RTFY orders (including RTFY orders received during the halt) will be 
sent to the primary listing exchange for inclusion in that exchange's 
reopening process. All RTFY orders will be sent to the primary listing 
exchange approximately two minutes prior to that exchange's closing 
process.
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    \9\ See NASDAQ Rule 4752.
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    This additional RTFY order routing option under NASDAQ Rule 
4758(a)(1)(A)(v) is substantially similar to the current TFTY routing 
option under the same rule. The proposed new RTFY routing option 
differs from TFTY in three ways: (i) RTFY is only available to DROs; 
(ii) RTFY uses a separate and distinct routing table, as permitted 
under NASDAQ Rule 4758(a)(1)(A); and (iii) RTFY orders will be sent to 
the primary listing exchange for opening, reopening, and closing 
auctions. Additionally, RTFY is also not unlike other exchange order 
routing options. TRIM \10\ is an example of a BATS Exchange, Inc. 
(``BATS'') order routing option under which an order checks the system 
for available shares only if so instructed by the entering firm and 
then is sent to destinations on the system routing table.
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    \10\ See Securities Exchange Act Release No. 63147 (Oct. 21, 
2010), 75 FR 66183 (Oct. 27, 2010) (SR-BATS-2010-029). More 
recently, BATS reaffirmed that they offer several routing strategies 
(e.g., TRIM, TRIM2, TRIM3 and SLIM) under which an order checks the 
BATS system for available shares if so instructed by the entering 
member and then is sent to destinations on the applicable BATS 
system routing table. See Securities Exchange Act Release No. 73412 
(Oct. 23, 2014), 79 FR 64431 (Oct. 29, 2014) (SR-BATS-2014-052).
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    The Exchange proposes to offer RTFY to firms that send DROs because 
the needs of a retail order firm are unique when compared to 
institutional or proprietary trading firms. As retail orders are 
generally smaller on average, they are often able to receive better 
prices than the prevailing national best bid and offer (``NBBO''). 
Primarily, this is achieved through a process whereby retail order 
firms \11\ send their orders to OTC market makers that provide some 
level of price improvement to the orders they receive. DROs may also 
participate in exchange mechanisms geared towards DROs such as the BX 
Retail Price Improvement (``RPI'') program.\12\ The Exchange is 
proposing to offer another mechanism through which DROs will seek price 
improvement. The Exchange anticipates that the RTFY order routing 
option will route to trading centers in the System routing table that 
have experience executing and providing price improvement to DROs.
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    \11\ As used in this proposal, the term ``retail order firms'' 
refers to NASDAQ member firms that provide orders that qualify as 
Designated Retail Orders under NASDAQ Rule 7018.
    \12\ See BX Rule 4780.
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    When a participant chooses to use a particular routing strategy, 
various trade-offs need to be weighed against each other. First and 
foremost is a decision as to whether to use an exchange routing 
strategy at all. There are many broker-dealers and vendors that provide 
customized routing strategies and order execution algorithms. Further, 
an order flow firm may choose to make its own routing decisions based 
on proprietary routing processes. Many retail order firms use other 
firms to enhance their routing capabilities. As mentioned above, retail 
order firms often route orders to OTC market makers who provide price 
improvement, routing, and other services. Additionally, retail order 
firms often also post non-marketable orders on exchanges. In 
conjunction with the posted order flow, the retail order firm may also 
employ one of the exchanges order routing strategies to assist in 
achieving best execution for the retail investors they represent.
    NASDAQ offers multiple routing options and each has its own set of 
strengths and trade-offs. STGY,\13\ one of the most used routing 
options, aggressively searches for executions without taking 
transaction fees into account. Also, once it is posted, if it is locked 
or crossed it will route to the locking or crossing market. SCAN \14\ 
is a slightly less aggressive strategy that will not route once it is 
posted on the Exchange book, even if locked or crossed by an away 
market. TFTY is a less aggressive strategy and takes fees into account. 
The TFTY strategy does not access the NASDAQ book before routing 
(unless specified to do so by the entering party) and instead focuses 
on low-cost trading destinations. Only after routing to the 
destinations specific to TFTY does it access the NASDAQ book. The user 
of TFTY is giving the transaction cost more weight when deciding which 
routing option to use, recognizing that it may miss an execution on 
NASDAQ in its attempt to access other destinations first. The reason 
the Exchange offers various routing options is because each market 
participant's view of how to achieve best execution is different and 
thus the submitting firm makes its own decision based on its view as to 
which routing option best meets its needs.
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    \13\ See NASDAQ Rule 4758(a)(1)(A)(iii).
    \14\ See NASDAQ Rule 4758(a)(1)(A)(iv).
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    NASDAQ aims to offer functionality and order options that meet the 
needs of its diverse membership. In particular, the Exchange believes 
the new RTFY routing option will meet the needs of the retail order 
flow firms that opt to use it based on their routing technology, 
business model or level of retail order flow. Based on NASDAQ's 
analysis, as well as information provided by potential users of the 
RTFY routing option, approximately 96% of the DROs that use this new 
routing option once it is available will add liquidity on the Exchange. 
The remainder will be routed to destinations on the System routing 
table for potential price improvement, including to OTC market makers 
who are also NASDAQ market makers. NASDAQ also believes this latter 
feature will provide additional price improvement opportunities to 
retail order flow, which ultimately benefits the retail investors whose 
individual orders are included in that order flow.
    To illustrate how the RTFY routing option would work, consider the 
following:
    NASDAQ Quote: $50.00 x $50.02 (100 x 100)

     Order 1 is received to buy 100 shares at $50.02 RTFY
     Order 1 does not check the NASDAQ book
     Order 1 is routed and receives an execution for 100 shares 
at $50.01--$1.00 in price improvement.

    [cir] Order 2 is received to buy 100 shares at $50.02 RTFY
    [cir] Order 2 does not check the NASDAQ book
    [cir] Order 2 is routed but receives no execution
    [cir] The NASDAQ quote updates to $50.00 x $50.03 (100 x 100) while 
Order 2 is routing
    [cir] Order 2 is posted on the NASDAQ book at $50.02
    [cir] The NASDAQ quote now reflects Order 2 $50.02 x $50.03 (100 x 
100)


[[Page 59212]]


    [ssquf] Order 3 is received to buy 100 shares at $50.03 RTFY
    [ssquf] Order 3 does not check the NASDAQ book
    [ssquf] Order 3 is routed and receives an execution for 100 shares 
at $50.03 (its limit price)

    [sdiam4] Order 4 is received to sell 100 shares at $50.02 (non-
routable order)
    [sdiam4] Order 4 executes against Order 2 at $50.02

    [rtarr8] RTFY Order 1 received $1.00 price improvement
    [rtarr8] RTFY Order 2 executed at its limit price
    [rtarr8] RTFY Order 3 executed at its limit price

    [rtarr8] The average price improvement per order is $0.33
    [rtarr8] The average price improvement per share across the three 
orders is $0.0033
    [rtarr8] Although Order 2 missed an execution on NASDAQ at its 
limit price, all three orders taken together are better off, on 
average, by $0.33.

    As with all routing options (other than Directed Orders),\15\ the 
RTFY routing table will be monitored and approved by a best execution 
committee (the ``Committee'').\16\ The Committee determines how to 
organize the System routing table and which trading destinations are 
included in the routing table. The Committee considers best execution 
by reviewing various parameters, such as price improvement, fill rate, 
latency, interaction rate, experience of the execution venue operator, 
and the volume the execution venue handles on a daily basis. As 
execution quality is dynamic, the parameters considered by the 
Committee evolve over time; often resulting in new parameters being 
considered.
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    \15\ See NASDAQ Rule 4758(a)(1)(A)(ix).
    \16\ The best execution committee consists of several internal 
NASDAQ participants representing product management, internal audit, 
economic research, broker-dealer compliance, and market operations.
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    In order to maximize price improvement and execution quality for 
the retail investor, the Exchange (or any of its affiliates) will not 
accept payment for order flow from any OTC market maker to which an 
RTFY order is sent. If the trading venue pays a standard rebate for 
DROs to all of its subscribers or another exchange pays a rebate to 
remove liquidity, the Exchange will accept and retain those rebates. 
However, the Exchange expects and believes that most, if not all, 
orders routed using the RTFY routing option will be sent to and 
executed by an OTC market maker that may also be a registered NASDAQ 
market maker.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations thereunder, including the 
requirements of Section 6(b) of the Act.\17\ In particular, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \18\ requirements that the rules of an exchange be 
designed to promote just and equitable principles of trade, to prevent 
fraudulent and manipulative acts and practices, to foster cooperation 
and coordination with persons engaged in facilitating transactions in 
securities, to remove impediments to and to perfect the mechanism for a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest.
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    \17\ 15 U.S.C. 78f(b).
    \18\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed rule change is consistent 
with these principles for several reasons. First, it would increase 
competition among execution venues since this routing option would 
allow the Exchange to compete more aggressively for retail order flow. 
Competition results in innovation and better services provided at lower 
prices. RTFY is an innovation born from competition and will encourage 
additional liquidity on the Exchange as more DRO liquidity will be 
posted on NASDAQ resulting in improved price discovery for all market 
participants. Additionally, this routing option provides a means for 
retail investors to receive potential price improvement in a manner 
that is not today offered by an exchange. The Exchange notes that a 
significant percentage of the orders from individual investors are 
executed over-the-counter.\19\ The Exchange believes that this new 
Exchange functionality will enhance coordination and cooperation with 
market participants and produce a more efficient market because the 
Exchange believes more retail investor orders will be sent to the 
Exchange to add liquidity or to obtain price improvement. Price 
improvement for retail orders has been a hallmark and goal of U.S. 
equity markets. Marketable retail orders that are sent to an OTC market 
maker using RTFY for potential price improvement is an example of an 
Exchange proposal to create another way for a DRO to receive such price 
improvement.
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    \19\ See Concept Release on Equity Market Structure, Securities 
Exchange Act Release No. 61358 (January 14, 2010), 75 FR 3594 
(January 21, 2010) (noting that dark pools and internalizing broker-
dealers executed approximately 25.4% of share volume in September 
2009). See also Mary L. Schapiro, Strengthening Our Equity Market 
Structure (Speech at the Economic Club of New York, Sept. 7, 2010) 
(available on the Commission's Web site). In her speech, Chairman 
Schapiro noted that nearly 30 percent of volume in U.S.-listed 
equities was executed in venues that do not display their liquidity 
or make it generally available to the public and the percentage was 
increasing nearly every month.
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    NASDAQ believes that the proposed rule change promotes just and 
equitable principles of trade, as well as serves to remove impediments 
to and to perfect the mechanism for a free and open market and a 
national market system, and, in general, to protect investors and the 
public interest because the Exchange is creating a new routing option 
for processing orders that are meant to be posted passively on the 
Exchange book but are nonetheless marketable orders. The creation of 
different approaches to market challenges is what drives innovation, 
market quality, and ultimately competition. The Exchange competes 
vigorously for order flow in a marketplace where participants have many 
trading venue choices. The Exchange believes the RTFY routing option 
will increase competition by providing value to retail order firms and 
their retail investor customers, which will in turn result in more 
order flow being sent to the Exchange.

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

    The Exchange 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. The proposed rule change is 
designed to attract greater retail order flow to NASDAQ, which will 
benefit both retail investors by providing potential price improvement 
and market participants in general by making the market more efficient. 
If the proposed routing option is successful in attracting retails 
order flow, the proposal will likely increase competition among 
exchanges and other trading venues for such order flow.
    Moreover, the proposed rule change is not designed to place the 
Exchange in competition with broker-dealers since it provides this new 
routing process option to assist broker-dealers not affiliated with the 
Exchange to conduct their order execution business and provides them 
with greater choice of services available and enhanced opportunities 
all of which are hallmarks of a highly-functioning, efficient and 
competitive marketplace. As proposed, RTFY will offer NASDAQ members 
another means to seek price improvement opportunities for retail orders 
and it is designed to complement, not compete against, their

[[Page 59213]]

existing best execution processes. If a member believes that RTFY will 
not complement their best execution efforts, the member can simply 
choose not to use RTFY.
    The Exchange does not believe the proposed rule change will impact 
non-exchange affiliated broker-dealers negatively and will not provide 
any advantages to exchange affiliated broker-dealers because of the 
following reasons: NASDAQ's affiliated broker-dealer \20\ offers a very 
limited service to retail orders that complement the activities of non-
exchange affiliated broker-dealers by providing another novel way to 
seek price improvement opportunities for retail orders. Additionally, 
NES will act only on behalf of a NASDAQ member, through NASDAQ's 
direction, if and only if requested by the member to do so via the use 
of the RFTY order routing option and other NASDAQ order routing 
options.\21\ In short, there is no obligation for a NASDAQ member to 
use RTFY, as is the case today with TFTY and all other routing options 
offered by NASDAQ.
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    \20\ NASDAQ sends routable orders entered into the System to a 
broker-dealer that it owns and operates, NASDAQ Execution Services, 
LLC (``NES''). NES is a broker-dealer registered with the Commission 
pursuant to Section 15 of the Act, and is considered a facility and 
an affiliate of NASDAQ. NES's sole function is to provide outbound 
routing services to NASDAQ.
    \21\ When NASDAQ routes an order to other venues it does not do 
so directly but rather uses NES, which is a member of other 
exchanges and market venues. A member's routable Order will be sent 
by NASDAQ to NES for routing consistent with the member-selected 
routing option.
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    The proposed rule change is a result of a dialogue initiated by 
NASDAQ more than a year ago with members and non-members regarding 
various ways the Exchange can help improve execution quality for retail 
investors and provide services that complement their existing routing 
technology and related services. Based upon these discussions, NASDAQ 
believes that neither members nor non-members would feel as though RTFY 
provides NES with an advantage over non-exchange affiliated broker-
dealers or will compete with non-exchange affiliated broker-dealers in 
any way.

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

    Written comments were neither solicited nor received.

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 (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission shall: (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 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 rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2015-112 on the subject line.

Paper comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2015-112. 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 such filing will also be available 
for inspection and copying at the principal office of the Exchange. 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-NASDAQ-2015-112 and should 
be submitted on or before October 22, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-24884 Filed 9-30-15; 8:45 am]
BILLING CODE 8011-01-P


