[Federal Register Volume 82, Number 224 (Wednesday, November 22, 2017)]
[Notices]
[Pages 55699-55702]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-25241]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82105; File No. SR-NYSEArca-2017-69]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Amendment No. 2, and Order Instituting Proceedings To Determine 
Whether To Approve or Disapprove a Proposed Rule Change, as Modified by 
Amendment No. 2, To List and Trade Shares of ProShares QuadPro Funds 
Under NYSE Arca Rule 8.200-E

November 16, 2017.

I. Introduction

    On July 31, 2017, NYSE Arca, Inc. (``Exchange'' or ``NYSE Arca'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder, \2\ a proposed rule change to 
list and trade shares (``Shares'') of ProShares QuadPro U.S. Large Cap, 
ProShares QuadPro Short U.S. Large Cap, ProShares QuadPro U.S. Small 
Cap, and ProShares QuadPro Short U.S. Small Cap (collectively, 
``Funds'') under NYSE Arca Rule 8.200-E. The proposed rule change was 
published for comment in the Federal Register on August 18, 2017.\3\ On 
September 28, 2017, pursuant to Section 19(b)(2) of the Act,\4\ the 
Commission designated a longer period within which to approve the 
proposed rule change, disapprove the proposed rule change, or institute 
proceedings to determine whether to disapprove the proposed rule 
change.\5\ On September 29, 2017, the Exchange filed Amendment No. 1 to 
the proposed rule change, which amended and superseded the proposed 
rule change as originally filed. On November 14, 2017, the Exchange 
filed Amendment No. 2 to the proposed rule change, which amended and 
superseded the proposed rule change as modified by Amendment No. 1.\6\ 
The Commission has received no comments on the proposed rule change. 
The Commission is publishing this notice and order to solicit comments 
on the proposed rule change, as modified by Amendment No. 2, from 
interested persons and to institute proceedings pursuant to Section 
19(b)(2)(B) of the Act \7\ to determine whether to approve or 
disapprove the proposed rule change, as modified by Amendment No. 2.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 81388 (August 14, 
2017), 82 FR 39477.
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 81746, 82 FR 46315 
(October 4, 2017). The Commission designated November 16, 2017, as 
the date by which the Commission shall either approve or disapprove, 
or institute proceedings to determine whether to disapprove, the 
proposed rule change.
    \6\ In Amendment No. 2, the Exchange: (1) Changed the names of 
the Funds; (2) provided the trading hours of the Chicago Mercantile 
Exchange (``CME''); (3) amended the description of the Funds' 
holdings of options and cash; (4) revised the description of the 
rolling of futures contracts; (5) amended and supplemented the 
description of the Funds' Net Asset Value (``NAV'') and Indicative 
Optimized Portfolio Value; (6) amended and supplemented the 
description of the availability of information relating to the 
Funds; (7) decreased the creation unit size from 50,000 Shares to 
25,000 Shares; and (8) made other clarifications, corrections, and 
technical changes. Amendment No. 2 to the proposed rule change is 
available at https://www.sec.gov/comments/sr-nysearca-2017-69/nysearca201769-2688277-161489.pdf.
    \7\ 15 U.S.C. 78s(b)(2)(B).

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[[Page 55700]]

II. Description of the Proposed Rule Change, as Modified by Amendment 
No. 2 8
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    \8\ For more information regarding the Funds and the Shares, see 
Amendment No. 2, supra note 6.
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    The Exchange proposes to list and trade the Shares under Commentary 
.02 to NYSE Arca Rule 8.200-E, which governs the listing and trading of 
Trust Issued Receipts on the Exchange. Each Fund is a commodity pool 
that is a series of the ProShares Trust II (``Trust'').\9\ The Funds' 
sponsor and commodity pool operator is ProShare Capital Management LLC 
(``Sponsor''). Brown Brothers Harriman & Co. is the administrator, the 
custodian, and the transfer agent of each Fund and the Shares. SEI 
Investments Distribution Co. is the distributor for the Shares.
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    \9\ The Trust is registered under the Securities Act of 1933. On 
November 14, 2017, the Trust filed with the Commission Pre-Effective 
Amendment No. 1 to a registration statement on Form S-1 under the 
Securities Act of 1933 relating to the Funds (File No. 333-217767).
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ProShares QuadPro U.S. Large Cap and ProShares QuadPro Short U.S. Large 
Cap

    ProShares QuadPro U.S. Large Cap and ProShares QuadPro Short U.S. 
Large Cap (collectively, ``Large Cap Funds'') will seek results that 
correspond (before fees and expenses) to four times (4X) or four times 
the inverse (-4X), respectively, of the return of lead month E-Mini S&P 
500 Stock Price Index Futures (``Large Cap Benchmark'') for a single 
day.\10\ More specifically, the Large Cap Benchmark is the last traded 
price of lead month (i.e., near-month or next-to-expire) E-Mini S&P 500 
Stock Price Index Futures Contracts on the CME prior to the calculation 
of the Funds' NAV, which is typically calculated as of 4:00 p.m. each 
day that NYSE Arca is open for trading.
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    \10\ A ``single day'' is measured from the time a Fund 
calculates its NAV to the time of the Fund's next NAV calculation.
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    Each Large Cap Fund will seek to engage in daily rebalancing to 
position its portfolio so that its leveraged or inverse exposure to the 
Large Cap Benchmark is consistent with the Fund's daily investment 
objective. Daily rebalancing and the compounding of each day's return 
over time means that the return of each Fund for a period longer than a 
single day will be the result of each day's returns compounded over the 
period, which will very likely differ from four times or four times the 
inverse, as applicable, of the return of the Fund's benchmark for the 
same period.
    Under normal market conditions,\11\ each Large Cap Fund will 
attempt to gain leveraged or inverse leveraged exposure, as applicable, 
to the Large Cap Benchmark primarily through investments in lead month 
E-Mini S&P 500 Stock Price Index Futures. Each Large Cap Fund may also 
take positions in standard futures contracts on the S&P 500 Index 
(together with lead month E-Mini S&P 500 Stock Price Index Futures, 
``Large Cap Futures Contracts''). In the event position, price, or 
accountability limits are reached with respect to Large Cap Futures 
Contracts, the Sponsor, in its commercially reasonable judgment, may 
cause each Large Cap Fund to obtain exposure to the Large Cap Benchmark 
through investment in swap transactions and forward contracts 
referencing the Large Cap Benchmark (``Large Cap Financial 
Instruments'' and, together with Large Cap Futures Contracts, ``S&P 500 
Interests''). The Large Cap Funds may also invest in Large Cap 
Financial Instruments if the market for a specific Large Cap Futures 
Contract experiences an emergency (e.g., natural disaster, terrorist 
attack or an act of God) or a disruption (e.g., a trading halt or a 
flash crash) that prevents or makes it impractical for a Fund to obtain 
the appropriate amount of investment exposure using Large Cap Futures 
Contracts (i.e., conditions other than normal market conditions). The 
Large Cap Funds do not intend to invest more than 25% of their 
respective net assets in Large Cap Financial Instruments.
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    \11\ The term ``normal market conditions'' includes, but is not 
limited to, the absence of trading halts in the applicable financial 
markets generally; operational issues (e.g., systems failure) 
causing dissemination of inaccurate market information; or force 
majeure type events such as natural or manmade disaster, act of God, 
armed conflict, act of terrorism, riot or labor disruption or any 
similar intervening circumstance.
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    Additionally, because an adverse Large Cap Benchmark move of 25% or 
more in a single day could cause the NAV of a Large Cap Fund to decline 
to zero and investors in the Fund to lose the full value of their 
investment, each Large Cap Fund will invest a limited portion of its 
assets (typically less than 5% of its net assets at the time of 
purchase) in listed option contracts that are designed to prevent a 
Large Cap Fund's NAV from going to zero and allow a Fund to recoup a 
small portion of the substantial losses that may result from 
significant adverse movements in the Large Cap Benchmark. Specifically, 
ProShares QuadPro U.S. Large Cap will hold CME-listed put options on 
Large Cap Futures Contracts, and ProShares QuadPro Short U.S. Large Cap 
will hold CME-listed call options on Large Cap Futures Contracts 
(collectively, ``Large Cap Stop Options'').\12\ If it is not 
practicable for a Large Cap Fund to invest in Large Cap Stop Options, 
the Funds may invest in over-the-counter (``OTC'') options on Large Cap 
Future Contracts.
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    \12\ ProShares QuadPro U.S. Large Cap intends to hold Large Cap 
Stop Options with respect to all or substantially all of its S&P 500 
Interests with strike prices at approximately 75% of the value of 
the applicable underlying S&P 500 Interests as of the end of the 
preceding business day. ProShares QuadPro Short U.S. Large Cap 
intends to hold Large Cap Stop Options with respect to all or 
substantially all of its S&P 500 Interests with strike prices at 
approximately 125% of the value of the Fund's S&P Interests as of 
the end of the preceding business day.
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    Each Large Cap Fund will invest the remainder of its assets in 
high-quality, short-term debt instruments that have terms-to-maturity 
of less than 397 days, such as U.S. government securities and 
repurchase agreements (``Money Market Instruments''). Each Large Cap 
Fund also may hold cash in order to pay expenses and distributions, if 
any, and satisfy redemption requests.

ProShares QuadPro U.S. Small Cap and ProShares QuadPro Short U.S. Small 
Cap

    ProShares QuadPro U.S. Small Cap and ProShares QuadPro Short U.S. 
Small Cap (collectively, ``Small Cap Funds'') will seek results that 
correspond (before fees and expenses) to four times (4X) or four times 
the inverse (-4X), respectively, of the return of lead month E-Mini 
Russell 2000 Index Futures (``Small Cap Benchmark'') for a single 
day.\13\ The Small Cap Benchmark is the last traded price of lead month 
(i.e., near-month or next-to-expire) E-Mini Russell 2000 Index Futures 
Contracts on the CME prior to the calculation of the Funds' NAV, which 
is typically calculated as of 4:00 p.m. each day NYSE Arca is open for 
trading.
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    \13\ See supra note 10.
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    Each Small Cap Fund will seek to engage in daily rebalancing to 
position its portfolio so that its leveraged or inverse exposure to the 
Small Cap Benchmark is consistent with the Fund's daily investment 
objective. Daily rebalancing and the compounding of each day's return 
over time means that the return of each Fund for a period longer than a 
single day will be the result of each day's returns compounded over the 
period, which will very likely differ from four times or four times the 
inverse, as applicable, of the return of the Fund's benchmark for the 
same period.

[[Page 55701]]

    Under normal market conditions,\14\ each Small Cap Fund will 
attempt to gain leveraged or inverse exposure, as applicable, to the 
Small Cap Benchmark primarily through investments in lead month E-Mini 
Russell 2000 Index Futures (``Small Cap Futures Contracts''). In the 
event position, price, or accountability limits are reached with 
respect to Small Cap Futures Contracts, the Sponsor, in its 
commercially reasonable judgment, may cause each Small Cap Fund to 
obtain exposure to the Small Cap Benchmark through investment in swap 
transactions and forward contracts referencing the Small Cap Benchmark 
(``Small Cap Financial Instruments'' and, together with Small Cap 
Futures Contracts, ``Russell 2000 Interests''). The Small Cap Funds may 
also invest in Small Cap Financial Instruments if the market for a 
specific Small Cap Futures Contract experiences an emergency (e.g., 
natural disaster, terrorist attack or an act of God) or disruption 
(e.g., a trading halt or a flash crash) that prevents or makes it 
impractical for a Fund to obtain the appropriate amount of investment 
exposure using Small Cap Futures Contracts (i.e., conditions other than 
normal market conditions). The Small Cap Funds do not intend to invest 
more than 25% of their respective net assets in Small Cap Financial 
Instruments.
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    \14\ See supra note 11.
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    Additionally, because an adverse Small Cap Benchmark move of 25% or 
more in a single day could cause the NAV of a Small Cap Fund to decline 
to zero and investors in the Fund to lose the full value of their 
investment, each Small Cap Fund will invest a limited portion of its 
assets (typically less than 5% of its net assets at the time of 
purchase) in listed option contracts that are designed to prevent a 
Small Cap Fund's NAV from going to zero and allow a Fund to recoup a 
small portion of the substantial losses that may result from 
significant adverse movements in the Small Cap Benchmark. Specifically, 
ProShares QuadPro U.S. Small Cap will hold CME-listed put options on 
Small Cap Futures Contracts and ProShares QuadPro Short U.S. Small Cap 
will hold CME-listed call options on Small Cap Futures Contracts 
(collectively, ``Small Cap Stop Options'').\15\ If it is not 
practicable for a Small Cap Fund to invest in Small Cap Stop Options, 
the Funds may invest in OTC options on Small Cap Future Contracts.
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    \15\ ProShares QuadPro U.S. Small Cap intends to hold Small Cap 
Stop Options with respect to all or substantially all of its Russell 
2000 Interests with strike prices at approximately 75% of the value 
of the applicable underlying Russell 2000 Interests as of the end of 
the preceding business day. ProShares QuadPro Short U.S. Small Cap 
intends to hold Small Cap Stop Options with respect to all or 
substantially all of its Russell 2000 Interests with strike prices 
at approximately 125% of the value of the Fund's Russell 2000 
Interests as of the end of the preceding business day.
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    Each Small Cap Fund will invest the remainder of its assets in 
Money Market Instruments. Each Small Cap Fund also may hold cash in 
order to pay expenses and distributions, if any, and satisfy redemption 
requests.

III. Proceedings To Determine Whether To Approve or Disapprove SR-
NYSEArca-2017-69, as Modified by Amendment No. 2, and Grounds for 
Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \16\ to determine whether the proposed rule 
change, as modified by Amendment No. 2, should be approved or 
disapproved. Institution of such proceedings is appropriate at this 
time in view of the legal and policy issues raised by the proposed rule 
change. Institution of proceedings does not indicate that the 
Commission has reached any conclusions with respect to any of the 
issues involved. Rather, as described below, the Commission seeks and 
encourages interested persons to provide comments on the proposed rule 
change, as modified by Amendment No. 2.
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    \16\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\17\ the Commission is 
providing notice of the grounds for disapproval under consideration. As 
discussed above, the Exchange proposes to list and trade Shares of: (1) 
The Large Cap Funds, which will seek results that correspond (before 
fees and expenses) to four times and four times the inverse of the 
return of the Large Cap Benchmark for a single day, where the Large Cap 
Benchmark is the last traded price of lead month E-Mini S&P 500 Stock 
Price Index Futures Contracts on the CME prior to the calculation of 
the Funds' NAV; and (2) the Small Cap Funds, which will seek results 
that correspond (before fees and expenses) to four times and four times 
the inverse of the return of the Small Cap Benchmark for a single day, 
where the Small Cap Benchmark is the last traded price of lead month E-
Mini Russell 2000 Index Futures Contracts on the CME prior to the 
calculation of the Funds' NAV. The Commission is instituting 
proceedings to allow for additional analysis of the proposal's 
consistency with Section 6(b)(5) of the Act, which requires, among 
other things, that the rules of a national securities exchange be 
``designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade,'' and ``to protect 
investors and the public interest.'' \18\
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    \17\ Id.
    \18\ 15 U.S.C. 78f(b)(5).
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IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposal is 
consistent with Section 6(b)(5) or any other provision of the Act, or 
the rules and regulations thereunder. Although there do not appear to 
be any issues relevant to approval or disapproval that would be 
facilitated by an oral presentation of views, data, and arguments, the 
Commission will consider, pursuant to Rule 19b-4, any request for an 
opportunity to make an oral presentation.\19\
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    \19\ Section 19(b)(2) of the Act, as amended by the Securities 
Acts Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Acts Amendments of 1975, Senate Comm. 
on Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by December 13, 2017. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
December 27, 2017. The Commission asks that commenters address the 
sufficiency of the Exchange's statements in support of the proposal, 
which are set forth in Amendment No. 2, in addition to any other 
comments they may wish to submit about the proposed rule change. In 
particular, the Commission seeks comment, including, where relevant, 
any specific data, statistics, or studies, on the following:
    1. Would the proposed Funds impact daily volatility on the 
underlying indexes, or the underlying names comprising those indexes? 
Would any such impact be more or less than other leveraged or inverse 
leveraged exchange-traded products (``leveraged ETPs'') (such as 2X and 
3X)? Would the addition of the proposed Funds change

[[Page 55702]]

the current leveraged (inverse, 2X, and 3X) ETP market? If so, how?
    2. How much additional end-of-day volume in the underlying assets 
would the proposed Funds potentially add? How much volume do existing 
leveraged ETPs typically add to end-of-day trading in the underlying 
assets?
    3. What is the expected daily volume of trades for the proposed 
Funds? How much daily creation and redemption activity is expected in 
the proposed Funds? How much current daily creation and redemption 
activity is there for leveraged ETPs?
    4. Would the volume and activity increase during periods of 
downward market movement or high volatility, and exacerbate the 
downward movement or volatility? What type of hedging exposure is 
expected with these products, and during significant down market moves, 
how might related selling behavior be affected by such exposure?
    5. What types of investors would purchase Shares of the proposed 
Funds? Would they be different from investors in existing leveraged 
ETPs? If so, please explain why.
    6. Currently, are leveraged ETPs always accessed through a 
registered broker/dealer? If so, are transactions generally solicited 
or unsolicited? If not, how does an investor acquire a leveraged ETP? 
What is the proportion of volume from retail versus institutional 
trading?
    7. Do institutional investors buy and sell leveraged ETPs? If so, 
what is the purpose of institutional investments in leveraged ETPs? For 
example, are they used for hedging or are they ever held in mutual 
funds? Would institutional investors use the proposed Funds for a 
different purpose than with the existing leveraged ETPs? If so, please 
explain why. Do firms hold the securities on their books (for example, 
as trading securities or available-for-sale securities)? If so, how are 
they held? If the investors are not institutional investors, are there 
any restrictions placed on access to these investments, including 
accreditation or options eligibility?
    8. What exposures do retail investors seek when holding these ETPs? 
Would retail investors hold Shares of the proposed Funds to seek 
different types of exposures than with existing leveraged ETPs? If so, 
please explain why.
    9. What is the typical holding period of leveraged ETPs by retail 
investors? Are they holding the products in tax-advantaged accounts, 
such as Individual Retirement Accounts (IRAs), meant for long-term 
investment horizons?
    10. Do investors have access to information sufficient to fully 
understand the operation and risks of leveraged ETPs?
    11. Would the potential loss of investment be limited to the amount 
invested? For example, do investors frequently buy leveraged ETPs on 
margin?
    12. How does use of long positions versus short positions in 
leveraged ETPs differ across different types of investors?
    13. Which types of broker/dealers are active with leveraged ETP 
investments? Do they tend to also hold these investments in their own 
portfolio?
    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-NYSEArca-2017-69 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-NYSEArca-2017-69. 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 the Exchange. All 
comments received will be posted without change. Persons submitting 
comments are cautioned that we do not redact or edit personal 
identifying information from comment submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NYSEArca-2017-69 and should 
be submitted on or before December 13, 2017. Rebuttal comments should 
be submitted by December 27, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
Eduardo A. Aleman,
Assistant Secretary.
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    \20\ 17 CFR 200.30-3(a)(12); 17 CFR 200.30-3(a)(57).
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[FR Doc. 2017-25241 Filed 11-21-17; 8:45 am]
 BILLING CODE 8011-01-P


