[Federal Register Volume 83, Number 38 (Monday, February 26, 2018)]
[Notices]
[Pages 8309-8312]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-03785]



[[Page 8309]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82739; File No. SR-BatsBZX-2017-72]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order 
Instituting Proceedings To Determine Whether To Approve or Disapprove a 
Proposed Rule Change to List and Trade Shares of the Innovator S&P 500 
15% Shield Strategy ETF Series, Innovator S&P 500 -5% to -35% Shield 
Strategy ETF Series, Innovator S&P 500 Enhance and 10% Shield Strategy 
ETF Series, and Innovator S&P 500 Ultra Strategy ETF Series Under Rule 
14.11(i)

February 20, 2018.

I. Introduction

    On November 7, 2017, Cboe BZX Exchange, Inc. (``Exchange'' or 
``BZX'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) \1\ of the Securities 
Exchange Act of 1934 (``Exchange Act'') \2\ and Rule 19b-4 
thereunder,\3\ a proposed rule change to list and trade shares 
(``Shares'') of the Innovator S&P 500 15% Shield Strategy ETF Series 
(``Shield Funds''), Innovator S&P 500 -5% to -35% Shield Strategy ETF 
Series (``Ultra Shield Funds''), Innovator S&P 500 Enhance and 10% 
Shield Strategy ETF Series (``Enhance and Shield Funds''), and 
Innovator S&P 500 Ultra Strategy ETF Series (``Ultra Funds,'' and 
together with the Shield Funds, Ultra Shield Funds, and Enhance and 
Shield Funds, the ``Funds'') under BZX Rule 14.11(i). The proposed rule 
change was published for comment in the Federal Register on November 
22, 2017.\4\ On December 21, 2017, the Commission extended the time 
period within which to approve the proposed rule change, disapprove the 
proposed rule change, or institute proceedings to determine whether to 
approve or disapprove the proposed rule change to February 20, 2018.\5\ 
The Commission received no comments on the proposed rule change. This 
order institutes proceedings under Section 19(b)(2)(B) of the Exchange 
Act to determine whether to disapprove the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
    \4\ See Securities Exchange Act Release No. 82097 (November 16, 
2017), 82 FR 55689 (``Notice'').
    \5\ See Securities Exchange Act Release No. 82387, 82 FR 61613 
(December 28, 2017).
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II. Description of the Proposed Rule Change 6
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    \6\ A more detailed description of the Trust, the Funds, and the 
Shares, as well as the availability of price information values and 
other information regarding the Funds' portfolio holdings, is 
included in the Registration Statement (defined below). See infra 
note 7.
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    The Exchange proposes to list and trade the Shares under BZX Rule 
14.11(i), which governs the listing and trading of Managed Fund Shares 
on the Exchange. In total, the Exchange is proposing to list and trade 
Shares of up to twelve monthly series of each of the Funds. The Shares 
would be offered by Innovator ETFs Trust (``Trust''), a Delaware 
statutory trust.\7\ The investment adviser to the Funds is Innovator 
Capital Management LLC (``Adviser''), and the sub-adviser to the Funds 
is Milliman Financial Risk Management LLC (``Sub-Adviser'').
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    \7\ The Trust is registered with the Commission as an investment 
company and has filed a registration statement with the Commission 
on Form N-1A (File Nos. 333-146827 and 811-22135) (``Registration 
Statement'') under the Securities Act of 1933 (15 U.S.C. 77a), dated 
October 19, 2017. The description of the operation of the Funds and 
the Shares herein is based, in part, on the Registration Statement.
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A. Innovator S&P 500 15% Shield Strategy ETF Series

    The Shield Funds are actively managed funds that seek to outperform 
the Cboe S&P 500 15% Buffer Protect Index Series (``Shield Index'') 
before expenses are taken into account. The Shield Index is designed to 
provide investment returns that, over a period of approximately one 
year, match those of the S&P 500 Index, up to a maximized annual return 
(``Shield Cap Level''),\8\ while guarding against a decline in the S&P 
500 Index for the first 15%. Specifically, the Shield Index is designed 
to provide the following results during the outcome period:
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    \8\ The Exchange states that the Shield Cap Level would be 
determined with respect to each Shield Fund on the inception date of 
the Shield Fund and at the beginning of each outcome period. See 
Notice, supra note 4, 82 FR at 55691.
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     If the S&P 500 Index appreciates over the outcome period: 
The Shield Index is designed to provide a total return that matches the 
percentage increase of the S&P 500 Index, up to the Shield Cap Level;
     If the S&P 500 Index decreases over the outcome period by 
15% or less: The Shield Index is designed to provide a total return of 
zero; and
     If the S&P 500 Index depreciates over the outcome period 
by greater than 15%: The Shield Index is designed to provide a total 
return loss that is 15% less than the percentage loss on the S&P 500 
Index with a maximum loss of approximately 85%.\9\

    \9\ The Exchange states that the Shield Funds would not offer 
any protection against declines in the S&P 500 Index exceeding 15% 
on an annualized basis. See id. at 55691. Shareholders would bear 
all S&P 500 Index losses exceeding 15% on a one-to-one basis. See 
id.
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The Shield Index is designed to produce these outcomes by including 
theoretically ``purchased'' and ``written'' FLexible EXchange Options 
(``FLEX Options'') that, when layered upon each other, are designed to 
buffer against losses of the S&P 500 Index and cap the level of 
possible gains.
    Under Normal Market Conditions,\10\ each Shield Fund would attempt 
to achieve its investment objective by taking positions that provide 
performance exposure substantially similar to the exposure provided by 
components of the Shield Index.\11\ Each Shield Fund would invest 
primarily in the FLEX Options included in the Shield Index or 
standardized options contracts listed on a U.S. exchange that reference 
either the S&P 500 Index or exchange traded funds (``ETFs'') that track 
the S&P 500 Index.\12\ Any FLEX Options written by a Shield Fund that 
create an obligation to sell or buy an asset would be offset with a 
position in FLEX Options purchased by the Shield Fund to create the 
right to buy or sell the same asset such that the Shield Fund would 
always be in a net long position. As the FLEX Options mature at the end 
of each outcome period, they would be replaced annually to ensure that 
investments made by the Shield Fund in a given month during the current 
year buffer against negative returns of the S&P 500 Index up to pre-
determined levels in that same month of the following year.
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    \10\ As defined in Rule 14.11(i)(3)(E), the term ``Normal Market 
Conditions'' includes, but is not limited to, the absence of trading 
halts in the applicable financial markets generally; operational 
issues causing dissemination of inaccurate market information or 
system failures; or force majeure type events such as natural or 
man-made disaster, act of God, armed conflict, act of terrorism, 
riot or labor disruption, or any similar intervening circumstance.
    \11\ The Shield Funds are not index tracking funds and are not 
required to invest in all components of the Shield Index. See 
Notice, supra note 4, 82 FR at 55691, n.10
    \12\ The FLEX Options owned by each of the Shield Funds would 
have the same terms (i.e., same strike price and expiration) for all 
investors of a Shield Fund within an outcome period. See id. at 
55691.
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B. Innovator S&P 500 -5% to -35% Shield Strategy ETF Series

    The Ultra Shield Funds are actively managed funds that seek to 
provide total returns that exceed that of the Cboe S&P 500 30% (-5% to 
-35%) Buffer Protect Index Series (``Ultra Shield

[[Page 8310]]

Index''), before expenses are taken into account. The Ultra Shield 
Index is designed to provide investment returns that, over a period of 
approximately one year, match those of the S&P 500 Index, up to a 
maximized annual return (``Ultra Shield Cap Level''),\13\ while 
guarding against a decline in the S&P 500 Index of between 5% and 35%. 
Specifically, the Ultra Shield Index is designed to produce the 
following results during outcome period:
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    \13\ The Ultra Shield Cap Level would be determined with respect 
to each Ultra Shield Fund on the inception date of the Ultra Shield 
Fund and at the beginning of each outcome period. See id. at 55692.
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     If the S&P 500 Index appreciates over the outcome period: 
The Ultra Shield Index is designed to provide a total return that 
matches the percentage increase of the S&P 500 Index, up to the Ultra 
Shield Cap Level;
     If the S&P 500 Index decreases over the outcome period by 
5% or less: The Ultra Shield Index is designed to provide a total 
return loss that is equal to the percentage loss on the S&P 500 Index;
     If the S&P 500 Index decreases over the outcome period by 
5%-35%: The Ultra Shield Index is designed to provide a total return 
loss of 5%; and
     If the S&P 500 Index decreases over the outcome period by 
more than 35%: The Ultra Shield Index is designed to provide a total 
return loss that is 30% less than the percentage loss on the S&P 500 
Index with a maximum loss of approximately 70%.\14\
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    \14\ The Exchange states that the Ultra Shield Funds would not 
offer any protection against declines in the S&P 500 Index exceeding 
35% on an annualized basis. See id. Shareholders would bear all S&P 
500 Index losses exceeding 35% on a one-to-one basis. See id.
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    The Ultra Shield Index is designed to produce these outcomes by 
including theoretically ``purchased'' and ``written'' FLEX Options 
that, when layered upon each other, are designed to buffer against 
losses of the S&P 500 Index.
    Under Normal Market Conditions, each Ultra Shield Fund would 
attempt to achieve its investment objective by taking positions that 
provide performance exposure substantially similar to the exposure 
provided by components of the Ultra Shield Index.\15\ Each Ultra Shield 
Fund would invest primarily in the FLEX Options included in the Ultra 
Shield Index or standardized options contracts listed on a U.S. 
exchange that reference either the S&P 500 Index or ETFs that track the 
S&P 500 Index.\16\ Any FLEX Options written by an Ultra Shield Fund 
that create an obligation to sell or buy an asset would be offset with 
a position in FLEX Options purchased by the Ultra Shield Fund to create 
the right to buy or sell the same asset such that the Ultra Shield Fund 
would always be in a net long position. As the FLEX Options mature at 
the end of each outcome period, they would be replaced annually to 
ensure that investments made in a given month during the current year 
buffer against negative returns of the S&P 500 Index up to pre-
determined levels in that same month of the following year.
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    \15\ The Exchange states that the Ultra Shield Funds are not 
index tracking funds and are not required to invest in all 
components of the Ultra Shield Index. See id. at 55692, n.11.
    \16\ The Exchange states that the FLEX Options owned by each of 
the Ultra Shield Funds would have the same terms (i.e., same strike 
price and expiration) for all investors of an Ultra Shield Fund 
within an outcome period. See id. at 55692.
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C. Innovator S&P 500 Enhance and 10% Shield Strategy ETF Series

    The Enhance and Shield Funds are actively managed funds that would 
seek to provide investment returns during the outcome period that 
exceed the gains of the S&P 500 Index, up to a maximized annual return 
(``Enhance and Shield Cap Level''),\17\ while guarding against a 
decline in the S&P 500 Index of the first 10%.\18\ Pursuant to the 
Enhance and Shield Strategy, each Enhance and Shield Fund would seek to 
produce the following outcomes for shareholders holding its shares 
during the outcome period:
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    \17\ The Enhance and Shield Cap Level would be determined with 
respect to each Enhance and Shield Fund on the inception date of the 
Enhance and Shield Fund and at the beginning of each outcome period. 
See id. at 55693.
    \18\ Unlike the Shield Funds and Ultra Shield Funds, the Enhance 
and Shield Funds would not utilize benchmark indexes.
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     If the S&P 500 Index appreciates over the outcome period: 
The Enhance and Shield Fund would seek to provide shareholders with a 
total return that exceeds that of the S&P 500 Index, up to and 
including the Enhance and Shield Cap Level;
     If the S&P 500 Index depreciates over the outcome period 
by 10% or less: The Enhance and Shield Fund would seek to provide a 
total return of zero;
     If the S&P 500 Index decreases over the outcome period by 
more than 10%: The Enhance and Shield Fund would seek to provide a 
total return loss that is 10% less than the percentage loss on the S&P 
500 Index with a maximum loss of approximately 90%.
    The portfolio managers of the Enhance and Shield Funds would seek 
to produce those results by investing primarily in FLEX Options or 
standardized options contracts listed on a U.S. exchange that reference 
either the S&P 500 Index or ETFs that track the S&P 500 Index.\19\ The 
portfolio managers would purchase and write FLEX Options that, when 
layered upon each other, are designed to buffer against losses of the 
S&P 500 Index or cap the level of possible gains. Any FLEX Options 
written that create an obligation to sell or buy an asset would be 
offset with a position in FLEX Options purchased by the Enhance and 
Shield Fund to create the right to buy or sell the same asset such that 
the Enhance and Shield Fund would always be in a net long position. As 
the FLEX Options mature at the end of each outcome period, they would 
be replaced annually to ensure that investments made in a given month 
during the current year buffer against negative returns of the S&P 500 
Index up to pre-determined levels in that same month of the following 
year.
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    \19\ The FLEX Options owned by each of the Enhance and Shield 
Funds would have the same terms (i.e., same strike price and 
expiration) for all investors of an Enhance and Shield Fund within 
an outcome period. See Notice, supra note 4, 82 FR at 55693.
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D. Innovator S&P 500 Ultra Strategy ETF Series

    The Ultra Funds are actively managed funds that would seek to 
provide during the outcome period total returns that exceed those of 
the S&P 500 Index, up to a maximized annual return (``Ultra Cap 
Level'').\20\ Each Ultra Fund would seek to produce the following 
results for shareholders that hold its shares during the outcome 
period:
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    \20\ The Exchange states that the Ultra Cap Level would be 
determined with respect to each Ultra Fund on inception date of the 
Ultra Fund and at the beginning of each outcome period. See Notice, 
supra note 4, 82 FR at 55693. Similar to the Enhance and Shield 
Funds, the Ultra Funds would not utilize benchmark indexes.
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     If the S&P 500 Index appreciates over the outcome period: 
The Ultra Fund would seek to provide shareholders with a total return 
that exceeds that of the S&P 500 Index, up to the Ultra Cap Level; and
     If the S&P 500 Index decreases over the outcome period: 
The Ultra Fund would seek to provide a total return loss that is equal 
to the percentage loss of the S&P 500 Index.
    The portfolio managers of the Ultra Funds would seek to produce 
those results by investing primarily in FLEX Options or standardized 
options contracts listed on a U.S. exchange that reference either the 
S&P 500 Index or ETFs that track the S&P 500 Index. The portfolio 
managers would purchase and write FLEX Options that, when layered upon 
each other, are designed to exceed

[[Page 8311]]

the gains of the S&P 500 Index, subject to the Ultra Cap Level. Any 
FLEX Options that written by the Ultra Fund that create an obligation 
to sell or buy an asset would be offset with a position in FLEX Options 
purchased by the Ultra Fund to create the right to buy or sell the same 
asset such that the Ultra Fund would always be in a net long position. 
As the FLEX Options mature at the end of each outcome period, they 
would be replaced.

E. Investment Methodology for the Funds

    As mentioned above, under Normal Market Conditions, each Fund would 
seek to achieve its respective investment objective by investing 
primarily in U.S. exchange-listed FLEX Options on the S&P 500 Index. 
Each of the Funds might invest its net assets (in the aggregate) in 
other investments which the Adviser or Sub-Adviser believes would help 
each Fund meet its investment objective and that would be disclosed at 
the end of each trading day (``Other Assets'').\21\
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    \21\ Other Assets include only cash or cash equivalents, as 
defined in BZX Rule 14.11(i)(4)(C)(iii), and traditional U.S. 
exchange-traded options contracts that reference either the S&P 500 
Index or ETFs that track the S&P 500 Index. As defined in BZX Rule 
14.11(i)(4)(C)(iii), cash equivalents include short-term instruments 
with maturities of less than three months, including: (i) U.S. 
Government securities, including bills, notes, and bonds differing 
as to maturity and rates of interest, which are either issued or 
guaranteed by the U.S. Treasury or by U.S. Government agencies or 
instrumentalities; (ii) certificates of deposit issued against funds 
deposited in a bank or savings and loan association; (iii) bankers 
acceptances, which are short-term credit instruments used to finance 
commercial transactions; (iv) repurchase agreements and reverse 
repurchase agreements; (v) bank time deposits, which are monies kept 
on deposit with banks or savings and loan associations for a stated 
period of time at a fixed rate of interest; (vi) commercial paper, 
which are short-term unsecured promissory notes; and (vii) money 
market funds.
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III. Proceedings To Determine Whether To Disapprove SR-BatsBZX-2017-72 
and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Exchange Act \22\ to determine whether the proposed 
rule change 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.
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    \22\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Exchange Act,\23\ the 
Commission is providing notice of the grounds for disapproval under 
consideration. The Commission is instituting proceedings to allow for 
additional analysis of the proposal's consistency with Section 6(b)(5) 
of the Exchange 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.\24\
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    \23\ Id.
    \24\ 15 U.S.C. 78f(b)(5).
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    Under the proposal, the defined outcome strategies for each Fund 
are designed to participate in market gains and losses within pre-
determined ranges over a specified period. Specifically, these outcomes 
are predicated on the Shares being bought at the beginning and sold at 
the end of the designated outcome period. The Commission notes that 
market participants may buy and sell Shares of the Funds at any time. 
Accordingly, with respect to the performance of the Shares at any time 
other than the commencement of the applicable outcome period, the 
Commission seeks commenters' views on the sufficiency of the 
information provided in the proposed rule change to support a 
determination that the listing and trading of the Shares would be 
consistent with Section 6(b)(5) of the Exchange Act.

IV. Procedure: Request for Written Comments

    Interested persons are invited to submit written views, data, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with Section 6(b)(5) or any other provision of the 
Exchange 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.\25\
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    \25\ Section 19(b)(2) of the Exchange 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 March 19, 2018. Any person who wishes to file a rebuttal 
to any other person's submission must file that rebuttal by April 2, 
2018.
    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-BatsBZX-2017-72 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-BatsBZX-2017-72. 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 website (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 website 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-BatsBZX-2017-72 and should be submitted 
on or before March 19, 2018. Rebuttal comments should be submitted by 
April 2, 2018.


[[Page 8312]]


    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
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    \26\ 17 CFR 200.30-3(a)(57).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-03785 Filed 2-23-18; 8:45 am]
 BILLING CODE 8011-01-P


