[Federal Register Volume 84, Number 193 (Friday, October 4, 2019)]
[Notices]
[Pages 53183-53186]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-21597]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87154; File No. SR CboeBYX-2019-014]


Self-Regulatory Organizations; Cboe BYX Exchange, Inc.; Order 
Approving a Proposed Rule Change To Make Permanent the Exchange's Pilot 
Retail Price Improvement Program, Rule 11.24, Which is Set To Expire on 
September 30, 2019, and Order Granting Limited Exemption Pursuant to 
Rule 612(c) of Regulation NMS

September 30, 2019.

I. Introduction

    On August 22, 2019, Cboe BYX Exchange, Inc. (the ``Exchange'' or 
``BYX'') filed with the Securities and Exchange Commission (the 
``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (the ``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to make permanent Exchange Rule 
11.24, which sets forth the Exchange's Pilot Retail Price Improvement 
(``RPI'') Program (``Program'').\3\ The proposed rule change was 
published for comment in the Federal Register on August 29, 2019.\4\ 
The Commission received no comment letters on the proposed rule change. 
In connection with the proposed rule change, the Exchange requests 
exemptive relief from Rule 612 of Regulation NMS,\5\ which, among other 
things, prohibits a national securities exchange from accepting or 
ranking orders priced greater than $1.00 per share in an increment 
smaller than $0.01 (``Sub-Penny Rule'').\6\ The Commission is issuing 
this order approving the proposed rule change and granting the Exchange 
limited exemptive relief pursuant to Rule 612(c) of Regulation NMS.
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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. 68303 (November 27, 
2012), 77 FR 71652 (December 3, 2012) (``RPI Approval Order'') (SR-
BYX-2012-019).
    \4\ See Securities Exchange Act Release No. 86742 (August 23, 
2019), 84 FR 45575 (``Notice'').
    \5\ 17 CFR 242.612(c).
    \6\ See note 11 infra.
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II. Description of the Proposed Rule Change

    The Exchange proposes to make the Program permanent. In the Notice, 
the Exchange sets forth and discusses its analysis of the Program and 
basis for permanent approval.

Overview of the Program

    The Program is designed to attract retail order flow to the 
Exchange, and allow such order flow to receive potential price 
improvement.\7\ All Regulation NMS securities traded on the Exchange 
are eligible for the RPI Program. The Program is limited to trades 
occurring at prices equal to or greater than $1.00 per share.\8\
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    \7\ See Notice, supra note 4, at 45575.
    \8\ Exchange Rule 11.24(h).
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    Exchange Rule 11.24 sets forth the rules governing the Program. 
Exchange Rule 11.24(a) contains the defined terms for the Program. It 
defines a ``Retail Member Organization'' (or ``RMO'') as a Member (or a 
division thereof) that has been approved by the Exchange to submit 
Retail Orders. Under Exchange Rule 11.24(b)(1), to qualify as an RMO, a 
Member of the Exchange must conduct a retail business or route retail 
orders on behalf of another broker-dealer. Exchange Rule 11.24(b)(2) 
sets forth the process for a Member to apply to become an RMO, which 
includes an attestation from the Member that substantially all orders 
that it submits as Retail Orders will qualify as such. Exchange Rule 
11.24(c) sets forth when and how the Exchange would remove a Member's 
RMO Status (i.e., disqualification), and Exchange Rule 11.24(d) sets 
forth the process for a Member to appeal a disapproval of its RMO 
application or an RMO disqualification under Exchange Rule 11.24(c).
    Exchange Rule 11.24(a) defines the terms ``Retail Order'' \9\ and 
``Retail Price Improvement Order'' (``RPI Order'' or collectively, 
``RPI Interest'').\10\ Both

[[Page 53184]]

Retail Orders and RPI Orders are non-display orders. A Retail Order 
must be submitted by an RMO, and an RPI Order must provide price 
improvement of at least $0.001 to Retail Orders. RPI Orders may only 
execute against Retail Orders, and an RPI Order may only execute 
against a Retail Order if it provides price improvement of at least 
$0.001 better than the national best bid or offer (NBBO).\11\
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    \9\ Under Exchange Rule 11.24(a)(2), a ``Retail Order'' is 
defined as an agency order or riskless principal that meets the 
criteria of FINRA Rule 5320.03 that originates from a natural person 
and is submitted to the Exchange by a Retail Member Organization, 
provided that no change is made to the terms of the order with 
respect to price or side of market and the order does not originate 
from a trading algorithm or any other computerized methodology. A 
Retail Order is an Immediate or Cancel (``IOC'') Order and shall 
operate in accordance with Rule 11.24(f). A Retail Order may be an 
odd lot, round lot, or mixed lot.
    \10\ Under Exchange Rule 11.24(a)(3), an RPI Order is consists 
of non-displayed interest on the Exchange that is priced better than 
the Protected NBB or Protected NBO by at least $0.001 and that is 
identified as such (``RPI interest''). The System will monitor 
whether RPI buy or sell interest, adjusted by any offset and subject 
to the ceiling or floor price, is eligible to interact with incoming 
Retail Orders. An RPI Order remains non-displayed in its entirety 
(the buy or sell interest, the offset, and the ceiling or floor). An 
RPI Order may also be entered in a sub-penny increment with an 
explicit limit price. Any User is permitted, but not required, to 
submit RPI Orders. An RPI Order may be an odd lot, round lot or 
mixed lot.
    \11\ In the RPI Approval Order, the Commission also granted the 
Exchange's request for exemptive relief from the Sub-Penny Rule. See 
RPI Approval Order, supra note 3, at 71658. In conjunction with this 
proposal to make the Program Permanent, the Exchange has submitted a 
separate written request for exemptive relief from the Sub-Penny 
Rule. See Letter from Adrian Griffith, Assistant General Counsel, 
Cboe, to Vanessa Countryman, Secretary, Securities and Exchange 
Commission dated September 23, 2019.
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    Under Exchange Rule 11.24(e), the Exchange disseminates an 
identifier when RPI interest priced at least $0.001 better than the 
Exchange's Protected Bid or Protected Offer for a particular security 
is available in the System (``Retail Liquidity Identifier''). The 
Retail Liquidity Identifier is disseminated through consolidated data 
streams (i.e., pursuant to the Consolidated Tape Association Plan/
Consolidated Quotation System, or CTA/CQS, for Tape A and Tape B 
securities, and The Nasdaq Stock Market, LLC (``Nasdaq'') UTP Plan for 
Tape C securities) as well as through proprietary Exchange data feeds. 
The Retail Liquidity Identifier reflects the symbol and the side (buy 
or sell) of the RPI interest, but does not include the price or size of 
the RPI interest.
    Under Exchange Rule 11.24(f), an RMO can designate how a Retail 
Order interacts with available contra-side interest. Under Exchange 
Rule 11.24(f), Retail Orders can be designated as either Type-1 or 
Type-2. A Type 1-designated Retail Order interact with available 
contra-side RPI Orders and any other price improving contra-side 
interest but will not interact with other available contra-side 
interest in the System that is not offering price improvement or route 
to other markets. The portion of a Type-1 Retail Order that does not 
execute against contra-side RPI Orders or other price improving 
liquidity will be immediately and automatically cancelled. A Type 2-
designated Retail Order will interact first with available contra-side 
RPI Orders and other price improving liquidity and them any remaining 
portion of the Retail Order will be executed as an Immediate-or-Cancel 
(``IOC'') Order pursuant to Rule 11.9(b)(1). A Type2-designated Order 
can either be submitted as a BYX Only Order or as an order eligible for 
routing pursuant to Rule 11.13(a)(2).
    Exchange Rule11.24(g) sets forth the priority and order allocation 
rules for how RPI Orders are ranked against both RPI and non-RPI orders 
when the Exchange receives a contra-side Retail Order. Competing RPI 
Orders in the same security are ranked and allocated according to price 
then time of entry into the Exchange's System. Executions occur in 
price/time priority in accordance with Exchange Rule 11.12. When an RPI 
executes against a Retail Order, any remaining unexecuted RPI interest 
will be available to interact with other incoming Retail Orders if such 
interest is at an eligible price, but any remaining unexecuted portion 
of the Retail Order will cancel or execute in accordance with its 
Retail Order designation under Exchange Rule 11.24(f).
    Exchange Rule 11.24(h) currently provides that the program is a 
pilot set to expire the earlier of approval of this proposal or 
September 30, 2019. The Exchange proposes to eliminate this provision 
of the rule and make the Program permanent based on its analysis of the 
Program.

Analysis of the Program

    As more fully set forth in the Notice, the Exchange submitted data 
and analysis to support its proposal for making the Program 
permanent.\12\ The Exchange stated that the Program provided $4.5 
million in price improvement to retail investors during its review 
period, January 2016 and June 2018.\13\ The Exchange also asserted that 
it has achieved its goal of attracting retail order flow to the 
Exchange, noting there has been consistent retail investor interest in 
the Program, which has provided tangible price improvement to those 
retail investors through a competitive pricing process over the course 
of the pilot.\14\ The Exchange stated that it has not received any 
complaints or negative feedback concerning the Program.\15\
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    \12\ See Notice, supra note 4, at 45579-45599.
    \13\ See id. at 45575.
    \14\ See id. at 45579.
    \15\ See id.
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    In addition, the Exchange undertook a difference-in-difference 
(``DID'') analysis to also analyze the Program's impact on the broader 
market.\16\ The Exchange noted that the introduction of the Program 
applied to all stocks traded on the Exchange and, therefore, control 
stocks in the strict sense were not available. To account for this, the 
Exchange identified stocks with relatively high levels of participation 
in the Program for use as the ``treatment'' group, and used stocks with 
low participation in the Program as the ``control'' group.\17\ The 
Exchange sought to enhance the validity of the DID analysis by 
otherwise making the treatment group and the control group as similar 
as possible. The Exchange divided the analysis into two parts: Active 
securities and less active securities. The active securities consist of 
stocks with consolidated average daily volume (``CADV'') of 500,000 
shares or more. The less active securities consist of stocks with CADV 
of between 50,000 and 500,000 shares.\18\ Within each subgroup, the 
Exchange conducted what it describes as a ``matched pair'' process to 
identify a smaller set of treatment and control groups that are as 
similar as possible across three market quality statistics: (i) 
Consolidated average daily share volume; (ii) average price; and (iii) 
average BBO spread across exchanges.\19\ To conduct the analysis of the 
Program's effect on overall market quality, the Exchange compared those 
statistics during a pre-treatment period (October 2012 to December 
2012) against those statistics from January 2013 to December 2013 and 
January 2017 to December 2018, obtaining a set of four DID regression 
analyses.\20\
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    \16\ A DID statistical technique allows studying the 
differential effect of a treatment on data measured between a 
treatment group and a control group. The two groups are measured 
during two or more different time periods, usually a period before 
``treatment'' and at least one time period after ``treatment,'' that 
is, a time period after which the treatment group is impacted but 
the control group is not. For each group, the difference between a 
measure in the pre-treatment and the treatment period is computed. 
Those differences for a measure for the two groups are then compared 
to each other by taking the difference between them.
    \17\ See id. at 45585-86 for a full description of the 
Exchange's methodology.
    \18\ See id. at 45586.
    \19\ See id.
    \20\ See id.
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    Based on results for each sample group in the Exchange's regression 
analysis, the Exchange concluded that the overall results were not 
statistically significant to support a conclusion that the introduction 
of the Program caused spreads to widen.\21\ In fact, the Exchange's 
regressions suggested some narrowing of spreads between the 
pretreatment period and the post

[[Page 53185]]

treatment periods, however the Exchange stated that these observations 
could not necessarily be attributed to the Program, but did support a 
conclusion that the Program did not result in wider spreads.\22\
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    \21\ See id.
    \22\ See id. at 45588.
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    The Exchange also analyzed available size and found a decrease in 
the average bid and ask size on BYX in treatment securities observed 
from 2017-2018 with less liquid securities relative to the control 
group--6.54 round lots on the bid side and 13.22 round lots on the ask 
side.\23\ The Exchange stated that it believes these changes may have 
been caused by factors unrelated to the Program and noted that the 
average BYX bid and ask sizes materially increased during the course of 
the pilot for securities in both the treatment and control groups.\24\ 
The Exchange concluded that the regression results are consistent with 
a finding that the Program did not materially harm depth on BYX.\25\
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    \23\ See id.
    \24\ See id.
    \25\ See id.
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    Overall, the based on its analysis, including its DID analysis, as 
well as the small size of the Program, the Exchange concluded that the 
Program did not have a negative impact on market quality.

III. Discussion and Commission Findings

    After careful review, the Commission finds that the Exchange's 
proposal to make permanent the Program, Exchange Rule 11.24, is 
consistent with the requirements of the Exchange Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\26\ In particular, the Commission finds that the proposed 
rule change is consistent with Sections 6(b)(5) \27\ and 6(b)(8) \28\ 
of the Exchange Act. Section 6(b)(5) of the Exchange Act requires that 
the rules of a national securities exchange be designed, among other 
things, to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system and, in general, to protect investors and the 
public interest, and not be designed to permit unfair discrimination 
between customers, issuers, brokers, or dealers. Section 6(b)(8) of the 
Exchange Act requires that the rules of a national securities exchange 
not impose any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Exchange Act.
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    \26\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \27\ 15 U.S.C. 78f(b)(5).
    \28\ 15 U.S.C. 78f(b)(8).
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    The Commission approved the Program on a pilot basis to allow the 
Exchange and market participants to gain valuable practical experience 
with the Program during the pilot period, and to allow the Commission 
to determine whether modifications to the Program were necessary or 
appropriate prior to any Commission decision to approve or disapprove 
the Program on a permanent basis. The Program's pilot period was 
originally scheduled to end on January 11, 2014, and the Exchange filed 
to extend the operation of the pilot on several occasions.\29\ The 
pilot is now set to expire on September 30, 2019, and the Exchange 
proposes to make the Program permanent.
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    \29\ See Securities Exchange Act Release Nos. 71249 (January 7, 
2014), 79 FR 2229 (January 13, 2014) (SR-BYX-2014-001); 74111 
(January 22, 2015), 80 FR 4598 (January 28, 2015) (SR-BYX-2015-05); 
76965 (January 22, 2016), 81 FR 4682 (January 27, 2016) (SR-BYX-
2016-01); 78180 (June 28, 2016), 81 FR 43306 (July 1, 2016) (SR-
BatsBYX-2016-15); 81368 (August 10, 2017), 82 FR 38960 (August 16, 
2017) (SR-BatsBYX-2017-18); 84830 (December 17, 2018), 83 FR 65769 
(December 21, 2018) (SR-CboeBYX-2018-025); 86206 (June 26, 2019), 84 
FR 31650 (July 2, 2019) (SR-CboeBYX-2019-010).
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    As set forth in the RPI Approval Order, the Exchange agreed to 
provide the Commission with a significant amount of data to assist the 
Commission's evaluation of the Program prior to any permanent approval 
of the Program.\30\ Specifically, the Exchange represented that it 
would ``produce data throughout the pilot, which will include 
statistics about participation, the frequency and level of price 
improvement provided by the Program, and any effects on the broader 
market structure.'' \31\ The Commission expected the Exchange to 
monitor the scope and operation of the Program and study the data 
produced during that time with respect to such issues.\32\
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    \30\ See RPI Approval Order, supra note 3, at 71657.
    \31\ See id.
    \32\ See id.
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    After careful consideration, the Commission believes that the 
Exchange's Program data and analysis about price improvement for retail 
investors and the DID analysis support the Exchange's conclusion that 
the Program provides meaningful price improvement to retail investors 
on a regulated exchange venue and has not demonstrably caused harm to 
the broader market. As noted above, the Exchange demonstrated that 
during the operation of the Program, retail orders received price 
improvement on the Exchange. Furthermore, in undertaking the DID 
analysis, the Exchange examined whether spreads on the Exchange widened 
to the detriment of the broader market, and concluded that they did 
not.\33\ Based on the foregoing, and after careful consideration of the 
Exchange's analysis of the data generated by the Program, the 
Commission finds that the proposed rule change is consistent with the 
requirements of the Exchange Act.
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    \33\ See supra notes 21 and 22 and accompanying text. The 
Commission also notes that it recently approved on a permanent basis 
two other exchange's substantially similar retail price improvement 
program based on a similar type of DID analysis. See Securities 
Exchange Act Release Nos. 85160 (February 15, 2019), 84 FR 5754 
(February 22, 2019) (SR-NYSE-2018-28) (approving the New York Stock 
Exchange's Retail Liquidity Program on a permanent basis and 
granting a limited exemption to the Sub-Penny Rule); and 86194 (June 
25, 2019), 84 FR 31373 (July 1, 2019) (approving the Nasdaq BX's 
Retail Liquidity Program on a permanent basis and granting a limited 
exemption to the Sub-Penny Rule).
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IV. Limited Exemption from the Sub-Penny Rule

    Pursuant to its authority under Rule 612(c) of Regulation NMS,\34\ 
the Commission hereby grants the Exchange a limited exemption from the 
Sub-Penny Rule to operate the Program. For the reasons discussed below, 
the Commission determines that such action is necessary or appropriate 
in the public interest, and is consistent with the protection of 
investors.
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    \34\ 17 CFR 242.612(c).
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    When the Commission adopted the Sub-Penny Rule in 2005, the 
Commission identified a variety of problems caused by sub-pennies that 
the Sub-Penny Rule was designed to address:
     If investors' limit orders lose execution priority for a 
nominal amount, investors may over time decline to use them, thus 
depriving the markets of liquidity.
     When market participants can gain execution priority for a 
nominal amount, important customer protection rules such as exchange 
priority rules and the Manning Rule \35\ could be undermined.
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    \35\ See Financial Industry Regulatory Authority Rule 5320 
(Prohibition Against Trading Ahead of Customer Orders).
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     Flickering quotations that can result from widespread sub-
penny pricing could make it more difficult for broker-dealers to 
satisfy their best execution obligations and other regulatory 
responsibilities.
     Widespread sub-penny quoting could decrease market depth 
and lead to higher transaction costs.

[[Page 53186]]

     Decreasing depth at the inside could cause institutions to 
rely more on execution alternatives away from the exchanges, 
potentially increasing fragmentation in the securities markets.\36\
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    \36\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496 (June 29, 2005) (Adopting Order for Regulation 
NMS).
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    The Commission believes that the limited exemption granted today 
should continue to promote competition between exchanges and OTC market 
makers in a manner that is reasonably designed to minimize the problems 
that the Commission identified when adopting the Sub-Penny Rule. Under 
the Program, sub-penny prices will not be disseminated through the 
consolidated quotation data stream, which should avoid quote flickering 
and its reduced depth at the inside quotation.
    Furthermore, the Commission does not believe that granting this 
limited exemption and approving the proposal would reduce incentives 
for market participants to display limit orders. As noted in the RPI 
Approval Order, market participants that displayed limit orders at the 
time were not able to interact with marketable retail order flow 
because that order flow was almost entirely routed to internalizing OTC 
market makers that offered sub-penny executions.\37\ The Program has 
attracted a small volume from the OTC market makers. As a result, 
enabling the Exchange to continue to compete for retail order flow 
through the Program should not materially detract from the current 
incentives to display limit orders, while potentially resulting in 
greater order interaction and price improvement for marketable retail 
orders on a public national securities exchange. To the extent that the 
Program may raise Manning and best execution issues for broker-dealers, 
these issues are already presented by the existing practices of OTC 
market makers.
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    \37\ See RPI Approval Order, supra note 3, at 71658.
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    This permanent and limited exemption from the Sub-Penny Rule is 
limited solely to the operation of the Program by the Exchange. This 
exemption does not extend beyond the scope of Exchange Rule 11.24. In 
addition, this exemption is conditioned on the Exchange continuing to 
conduct the Program, in accordance with Exchange Rule 11.24 and 
substantially as described in the Exchange's request for exemptive 
relief and the proposed rule change.\38\ Any changes in Exchange Rule 
11.24 may cause the Commission to reconsider this exemption.
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    \38\ See supra note 9.
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\39\ that the proposed rule change (SR-CboeBYX-2019-014) 
be, and it hereby is, approved.
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    \39\ 15 U.S.C. 78s(b)(2).
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    It is further ordered that, pursuant to Rule 612(c) under 
Regulation NMS, that the Exchange shall be exempt from Rule 612(a) of 
Regulation NMS with respect to the operation of the Program as set 
forth in Exchange Rule 11.24 as described herein.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\40\
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    \40\ 17 CFR 200.30-3(a)(12) and 17 CFR 200.30-3(a)(83).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-21597 Filed 10-3-19; 8:45 am]
 BILLING CODE 8011-01-P


