[Federal Register Volume 86, Number 31 (Thursday, February 18, 2021)]
[Notices]
[Pages 10149-10151]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-03216]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91112; File No. SR-PEARL-2020-30]


Self-Regulatory Organizations; MIAX PEARL, LLC; Order Granting 
Approval of a Proposed Rule Change To Amend the Exchange's By-Laws in 
Connection With an Equity Rights Program

February 11, 2021.

I. Introduction

    On November 24, 2020, MIAX PEARL, LLC (the ``Exchange'' or ``MIAX 
PEARL'') 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 amend the Amended and Restated By-Laws of MIAX 
PEARL (as amended, the ``MIAX PEARL Amended and Restated By-Laws'') to 
correspond with an Equity Rights Program recently established by the 
Exchange. The proposed rule change was published for comment in the 
Federal Register on December 9, 2020.\3\ On January 21, 2021, pursuant 
to Section 19(b)(2) of the Act,\4\ the Commission designated a longer 
period within which to either approve the proposed rule change, 
disapprove the proposed rule changes, or institute proceedings to 
determine whether to disapprove the proposed rule changes.\5\ The 
Commission received no comments on the proposal. This order approves 
the proposed rule change.
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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. 90563 (December 3, 
2020), 85 FR 79252 (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 90962, 86 FR 7317 
(January 27, 2021). The Commission designated March 9, 2021, as the 
date by which it should approve, disapprove, or institute 
proceedings to determine whether to disapprove the proposed rule 
changes.
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II. Background and Description of the Proposed Rule Change

    On August 14, 2020, the Commission approved a proposed rule change 
to adopt rules governing the trading of equity securities on the 
Exchange and establish a platform for the trading of equity securities 
referred to as MIAX PEARL Equities.\6\ On August 20, 2020, the Exchange 
filed an immediately effective proposed rule change to establish an 
Equity Rights Program (``ERP''),\7\ pursuant to which Units 
representing the right to acquire equity in the Exchange's parent 
holding company, Miami International Holdings, Inc. (``MIH''), were 
issued to participating Exchange Members in exchange for the prepayment 
of certain Exchange fees and the achievement of certain liquidity 
volume thresholds on MIAX PEARL Equities over a 42-month period.\8\ In 
that August 2020 filing to implement the ERP, the Exchange stated that 
``[w]hen a participating Member acquires a certain number of [U]nits, 
the Member can appoint one director to the MIAX PEARL Board [of 
Directors].'' \9\ In this filing, the Exchange proposes to amend its 
By-Laws to provide for the right of such Exchange Members \10\ 
participating in the ERP to nominate or appoint a representative to the 
MIAX PEARL Board of Directors (``PEARL Board'' or ``Board''), as well 
as to make other changes, including certain non-substantive 
changes.\11\
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    \6\ See Securities Exchange Act Release Nos. 88132 (February 6, 
2020), 85 FR 8053 (February 12, 2020) (SR-PEARL-2020-03) (Notice of 
Filing of a Proposed Rule Change to Adopt Rules Governing the 
Trading of Equity Securities); and 89563 (August 14, 2020), 85 FR 
51510 (August 20, 2020) (Order Approving Proposed Rule Change to 
Establish Rules Governing the Trading of Equity Securities).
    \7\ See Securities Exchange Act Release No. 89730 (September 1, 
2020), 85 FR 55530 (September 8, 2020) (SR-PEARL-2020-10) (Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To 
Implement a Second Equity Rights Program) (``ERP Notice'').
    \8\ See ERP Notice, supra note 7, 85 FR at 55530-31. In the ERP 
Notice, the Commission noted that MIAX PEARL would need to submit a 
separate proposed rule change to make changes to its corporate 
governance documents to accommodate aspects of the proposal that 
involve or affect the MIAX PEARL Board of Directors. See ERP Notice, 
supra note 7, 85 FR at 55532, n.16.
    \9\ See ERP Notice, supra note 7, 85 FR at 55532.
    \10\ See Article I(p) of the MIAX PEARL Amended and Restated By-
Laws, defining ``Exchange Member'' as ``any registered broker or 
dealer that has been admitted to membership in the national 
securities exchange operated by [MIAX PEARL].''
    \11\ See Notice, supra note 3, 85 FR at 79255. The non-
substantive changes include deletion from the current by-laws of 
provisions that specifically referenced past deadlines and events 
that have since occurred and deletion of the definition of the term 
``Exchange Contract'' in Article I(m) of the current By-Laws because 
the term is not used therein or in the MIAX PEARL Amended and 
Restated By-Laws.
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    Specifically, the Exchange proposes to amend its By-Laws to provide 
that an ERP Member \12\ (either by itself or with its affiliates) that 
is not otherwise represented on the PEARL Board may have the right to 
nominate one ERP Director \13\ or appoint an Observer \14\ to the 
Board, as applicable.\15\ As proposed, ERP Directors will be classified 
as ``Industry Directors'' \16\ with attendant voting rights, while 
Observers will be invited to attend meetings of the Board in a non-
voting Observer capacity.\17\
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    \12\ See Article I(n) of the MIAX PEARL Amended and Restated By-
Laws, defining ``ERP Member'' as ``an Exchange Member who acquired 
Units pursuant to an ERP Agreement sufficient to acquire an ERP 
Director or an Observer position.'' See also Article I(l) of the 
MIAX PEARL Amended and Restated By-Laws, defining ``ERP Agreement'' 
as ``the agreement between the Exchange's parent holding company, 
MIH, and ERP Members dated September 11, 2020 pursuant to which 
Units were issued;'' and Article I(pp) of the MIAX PEARL Amended and 
Restated By-Laws, defining ``Unit'' as ``the securities issued 
pursuant to the ERP Agreement.''
    \13\ See Article I(m) of the MIAX PEARL Amended and Restated By-
Laws, defining ``ERP Director'' as ``a MIAX PEARL Equities Industry 
Director who has been nominated by an ERP Member and appointed to 
the Board of Directors.''
    \14\ See Article I(gg) of the MIAX PEARL Amended and Restated 
By-Laws, providing that ``Observer'' has the meaning set forth in 
Article II, Section 2.2 of the [MIAX PEARL Amended and Restated] By-
Laws. As described further below, an ``Observer'' is a person, 
appointed pursuant to Section 2.2 of the MIAX PEARL Amended and 
Restated By-Laws that ``may be invited to attend meetings of the 
Board in a non-voting observer capacity.''
    \15\ See Article II, Section 2.2(e) of the MIAX PEARL Amended 
and Restated By-Laws. The ERP Member's right to nominate a Director 
or appoint an Observer pursuant to amended Section 2.2(e) will be 
perpetual, subject to the certain conditions discussed below. See 
Notice, supra note 3, 85 FR at 79254.
    \16\ See Article I(t) of the MIAX PEARL Amended and Restated By-
Laws, defining ``Industry Director'' to mean ``a Director who (i) is 
or has served in the prior three years as an officer, director, or 
employee of a broker or dealer, excluding an outside director or a 
director not engaged in the day-to-day management of a broker or 
dealer; (ii) is an officer, director (excluding an outside 
director), or employee of an entity that owns more than 10% of the 
equity of a broker or dealer, and the broker or dealer accounts for 
more than 5% of the gross revenues received by the consolidated 
entity; (iii) owns more than 5% of the equity securities of any 
broker or dealer, whose investments in brokers or dealers exceed 10% 
of his or her net worth, or whose ownership interest otherwise 
permits him or her to be engaged in the day-to-day management of a 
broker or dealer; (iv) provides professional services to brokers or 
dealers, and such services constitute 20% or more of the 
professional revenues received by the Director or 20% or more of the 
gross revenues received by the Director's firm or partnership; (v) 
provides professional services to a director, officer, or employee 
of a broker, dealer, or corporation that owns 50% or more of the 
voting stock of a broker or dealer, and such services relate to the 
director's, officer's, or employee's professional capacity and 
constitute 20% or more of the professional revenues received by the 
Director or member or 20% or more of the gross revenues received by 
the Director's or member's firm or partnership; or (vi) has a 
consulting or employment relationship with or provides professional 
services to the Company or any affiliate thereof or has had any such 
relationship or provided any such services at any time within the 
prior three years.''
    \17\ See Article II, Section 2.2(g)(iii) of the MIAX PEARL 
Amended and Restated By-Laws, providing that Observers will have the 
right to attend all meetings of the Board of Directors in a 
nonvoting observer capacity and, in this respect, the Exchange shall 
give such representative copies of all notices, minutes, consents, 
and other materials that it provides to its Directors at the same 
time and in the same manner as provided to such Directors; provided, 
however, that such representative shall agree to hold in confidence 
and trust and to act in a fiduciary manner with respect to all 
information so provided. See also Article X, Section 10.3 of the 
MIAX PEARL Amended and Restated By-Laws further providing that the 
Exchange reserves the right, however, to withhold any information 
and to exclude Observers from any meeting or portion thereof if 
access to such information or attendance at such meeting could 
adversely affect the attorney-client privilege between the Exchange 
and its counsel or result in disclosure of trade secrets or a 
conflict of interest, and Section 10.4 of the MIAX PEARL Amended and 
Restated By-Laws, in which the Exchange has proposed to provide that 
Observers will be subject to the same requirements to maintain the 
confidentiality of all books and records of the Exchange reflecting 
confidential information pertaining to the self-regulatory function 
of the Exchange.

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[[Page 10150]]

    The Exchange proposes to amend Article II, Section 2.4(a) of its 
By-Laws to provide that the Nominating Committee shall nominate to ERP 
Director positions only those persons whose names have been approved 
and submitted by the applicable ERP Members having the right to 
nominate such person pursuant to Article II, Section 2.2.\18\ If an ERP 
Member is otherwise able to nominate an ERP Director but cannot 
because, for example, the ERP Member already is represented on the 
PEARL Board, e.g., as a Member Representative Director,\19\ the ERP 
Member will have the right to appoint an Observer in lieu of such ERP 
Director nomination.\20\
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    \18\ The Exchange states that MIH, as the sole member of MIAX 
PEARL, will then be obligated to vote for the nominated ERP 
Director. See Notice, supra note 3, 85 FR at 79254.
    \19\ See Article II, Section 2.2(g) of the MIAX PEARL Amended 
and Restated By-Laws.
    \20\ See Notice, supra note 3, 85 FR at 79254. See also note 32 
and accompanying text infra.
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    In addition, MIAX PEARL proposes to specify that an ERP Member's 
right to continued representation on the Board in the form of an ERP 
Director or Observer will be contingent upon the ERP Member meeting 
certain ``Performance Criteria'' \21\ (i.e., achievement of certain 
specified liquidity volume thresholds on MIAX PEARL Equities \22\) over 
a specified ``Measurement Period.'' \23\ Thus, ERP Members with the 
right to nominate an ERP Director or appoint an Observer may lose that 
right if the ERP Member fails to meet the requisite Performance 
Criteria.\24\ In the event of such occurrence, if the ERP Member later 
satisfies the requisite Performance Criteria for a subsequent 
Measurement Period, the ERP Member may regain its right to nominate or 
appoint such ERP Member or Observer.\25\ Further, an ERP Director or 
Observer position will terminate if the nominating or appointing ERP 
Member effects a transfer of common stock or warrants that results in 
such ERP Member holding less than 25% of the aggregate number of shares 
of common stock issued (or issuable pursuant to Units acquired) 
pursuant to the ERP Agreement.\26\
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    \21\ See MIAX PEARL Amended and Restated By-Laws, Article I(hh), 
defining ``Performance Criteria.''
    \22\ See MIAX PEARL Amended and Restated By-Laws, Article I(cc), 
defining MIAX PEARL Equities as ``the market of the Exchange on 
which equity securities are traded.''
    \23\ See MIAX PEARL Amended and Restated By-Laws, Article I(y), 
defining ``Measurement Period.''
    \24\ See MIAX PEARL Amended and Restated By-Laws, Article II, 
Section 2.3(c) and (d).
    \25\ See MIAX PEARL Amended and Restated By-Laws, Article II, 
Section 2.3(c) and (d).
    \26\ See MIAX PEARL Amended and Restated By-Laws, Article II, 
Section 2.3(d).
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    The Exchange proposes to amend Article II, Section 2.2(b)(i) to 
provide that ERP Directors will be included in the number of Industry 
Directors for purposes of calculating the composition of the Board,\27\ 
and Article II, Section 2.2(b)(ii) to provide that Member 
Representative Directors will not include ERP Directors.\28\ 
Accordingly, the Exchange states in its proposal that there will be no 
substantive changes to the Board's composition, and that although the 
Board size will increase, its composition will remain the same.\29\
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    \27\ See MIAX PEARL Amended and Restated By-Laws, Article II, 
Section 2.2(b)(i), and Notice, supra note 3, 85 FR at 79254.
    \28\ See MIAX PEARL Amended and Restated By-Laws, Article II, 
Section 2.2(b)(ii), and Notice, supra note 3, 85 FR at 79254.
    \29\ See Notice, supra note 3, 85 FR at 79254.
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    In addition, MIAX PEARL proposes to amend the By-Law provisions 
that currently provide for the removal and resignation of directors and 
the filling of vacancies to address ERP Directors. The Exchange 
proposes to adopt paragraph (c) under Article II, Section 2.8 to 
provide that if an ERP Director position becomes vacant for reasons 
other than failure by an ERP Member to meet its Performance Criteria as 
discussed above, the applicable ERP Member will retain the ability to 
nominate a person to fill the vacant ERP Director position.\30\ The 
Exchange also proposes to amend Article II, Section 2.9(a) to provide 
that, ERP Directors may only be removed for cause, which shall include, 
without limitation, such Director being subject to a statutory 
disqualification.\31\ Further, if at any time such ERP Member is 
otherwise able to nominate an ERP Director, but is unable to fill such 
position as a result of such ERP Member already having a representative 
on the Board, such ERP Member will have the right to nominate such 
Director in accordance with amended Article II, Section 2.2(e) upon the 
resignation or removal of such Director already serving on the 
Board.\32\
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    \30\ See MIAX PEARL Amended and Restated By-Laws, Article II, 
Section 2.8 and Notice, supra note 3, 85 FR at 79254. The Exchange 
also proposes to adopt paragraph (f) under Article II, Section 2.2 
to provide that if an ERP Director position needs to be added 
pursuant to amended Article II, Section 2.2(e), such ERP Director 
shall be nominated by the applicable ERP Member and elected by the 
LLC Member and additional Director positions shall be added and 
filled at the same time as the election of the new ERP Director, as 
required to comply with the requirements set forth in Article II, 
Section 2.2(a) and (b). See MIAX PEARL Amended and Restated By-Laws, 
Article II, Section 2.2(f).
    \31\ An Observer, likewise, may not be subject to a statutory 
disqualification. See MIAX PEARL Amended and Restated By-Laws, 
Article II, Section 2.2(g)(ii).
    \32\ See Notice, supra note 3, 85 FR at 79253. The Exchange 
states that an ERP Member that is represented by a Member 
Representative Director may also have an Observer; however, an ERP 
Member that is represented by an ERP Director may not also have an 
Observer. See Notice, supra note 3, 85 FR at 79253, n.7.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act,\33\ and the 
rules and regulations thereunder applicable to a national securities 
exchange.\34\ In particular, the Commission finds that the proposed 
rule change is consistent with Sections 6(b)(1) and (3) of the Act,\35\ 
which requires, among other things, that the Exchange be organized and 
have the capacity to be able to carry out the purposes of the Act and 
to comply, and to enforce compliance by its Members and persons 
associated with its Members, with the provisions of the Act, the rules 
and regulations thereunder, and the rules of the Exchange; and assure 
the fair representation of its members in the selection of its 
directors and administration of its affairs, and provide that one or 
more directors shall be representative of issuers and investors and not 
be associated with a member of the Exchange, broker, or dealer.
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    \33\ 15 U.S.C. 78f.
    \34\ 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).
    \35\ 15 U.S.C. 78f(b)(3).
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A. Addition of ERP Directors and Related Provisions

    The Commission finds that the Exchange's proposal to amend the By-
Laws to provide for the inclusion of ERP Directors on the PEARL Board,

[[Page 10151]]

including related amendments to add various definitions and provisions 
for terms of office, nomination and election, filling of vacancies, and 
removal and resignation, are consistent with the Act.\36\ The 
Commission finds that although the Board may become larger if ERP 
Directors are added, the composition previously approved by the 
Commission in connection with MIAX PEARL's registration as a national 
securities exchange \37\ will remain the same.\38\ ERP Directors will 
be Industry Directors,\39\ and the Board will continue to be comprised 
of a number of Non-Industry Directors,\40\ including at least one 
Independent Director,\41\ that equals or exceeds the sum of the number 
of Industry Directors and Member Representative Directors.\42\ The 
number of Member Representative Directors will not include ERP 
Directors, and shall continue to comprise at least 20% of the PEARL 
Board.\43\ Additionally, the process for nomination and election of 
Member Representative Directors is not impacted by the Exchange's 
proposal.\44\ Accordingly, the Commission finds that the provisions 
reflecting the possible addition of ERP Directors to the PEARL Board 
are consistent with the Act, and in particular with Section 6(b)(3) of 
the Act,\45\ in that the Exchange's By-Laws will continue to provide 
for the fair representation of members in the selection of directors 
and the administration of MIAX PEARL, as well as representation of 
issuers and investors.
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    \36\ See Article II, Sections 2.2, 2.3, 2.4, 2.8, and 2.9 of the 
MIAX PEARL Amended and Restated By-Laws.
    \37\ See Securities Exchange Act Release No. 79543 (December 13, 
2016), 81 FR 92901 (December 20, 2016) (File No. 10-277) (In the 
Matter of the Application of MIAX PEARL, LLC for Registration as a 
National Securities Exchange; Findings, Opinion, and Order of the 
Commission) (``PEARL Approval Order'').
    \38\ See supra note 29 and accompanying text.
    \39\ See supra note 16.
    \40\ See Article I(aa) of the MIAX PEARL Amended and Restated 
By-Laws, defining ``Non-Industry Directors'' to mean ``a Director 
who is (i) an Independent Director; or (ii) any other individual who 
would not be an Industry Director.''
    \41\ See Article I(p) of the By-Laws, defining ``Independent 
Director'' to mean ``a Director who has no material relationship 
with the Company or any affiliate of the Company, or any Exchange 
Member or any affiliate of any such Exchange Member; provided, 
however, that an individual who otherwise qualifies as an 
Independent Director shall not be disqualified from serving in such 
capacity solely because such Director is a Director of the Company 
or its LLC Member.''
    \42\ See Article II, Section 2.2(b)(i) of the MIAX PEARL Amended 
and Restated By-Laws.
    \43\ See Article II, Section 2.2(b)(ii) of the MIAX PEARL 
Amended and Restated By-Laws.
    \44\ See Article V, Section 5.3 of the MIAX PEARL Amended and 
Restated By-Laws.
    \45\ 15 U.S.C. 78f(b)(3).
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    The Commission also notes that ERP Directors will be subject to the 
same duties and obligations as any other member of the PEARL Board, 
including provisions that are designed to help maintain the 
independence of the regulatory functions of the Exchange and help 
facilitate MIAX PEARL's ability to carry out its responsibilities and 
operate in a manner consistent with the Act.\46\ For example, ERP 
Directors will be subject to By-Law provisions requiring the PEARL 
Board, in connection with managing the business and affairs of MIAX 
PEARL, to consider applicable requirements under Section 6(b) of the 
Act governing conflicts of interest; requiring the PEARL Board, when 
evaluating any proposal, to take into account MIAX PEARL's status as a 
self-regulatory organization (``SRO''); and protecting the 
confidentiality of information and records related to the Exchange's 
SRO function.\47\ In this regard, the Commission finds that the 
provisions reflecting the addition of ERP Directors to the PEARL Board 
are consistent with the Act, and in particular with Section 6(b)(1), 
which requires an exchange to be so organized and have the capacity to 
carry out the purposes of the Act.\48\
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    \46\ See PEARL Approval Order, supra note 37, 81 FR at 92906.
    \47\ See Article 2.1(d) and (e) and Section 2.20, and Article X, 
Section 10.4 of the MIAX PEARL Amended and Restated By-Laws. The 
Exchange represents that the ERP Directors will be subject to the 
same restrictions as current directors, including the provisions 
noted above. See Notice, supra note 3, 85 FR at 79266.
    \48\ 15 U.S.C. 78f(b)(1).
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B. Addition of Observer Positions and Related Provisions

    The Commission finds that the proposed amendments to the By-Laws 
that add provisions relating to the appointment of Observers, including 
related amendments that add various definitions and provisions for 
appointment and terms of office are consistent with the Act.\49\ The 
Commission also finds that the proposed amendments governing the rights 
and obligations of Observers are consistent with the Act. The 
Commission finds that although Observers will generally have the right 
to attend all meetings of the Board and receive materials provided to 
directors,\50\ they will have the right to attend those meetings only 
in a non-voting capacity and must agree to hold such information in 
confidence and trust and to act in a fiduciary manner with respect to 
such information.\51\ Additionally, the Exchange represents that 
Observers will be subject to the same requirements as members of the 
Board to maintain the confidentiality of all books and records of the 
Exchange reflecting confidential information pertaining to the SRO 
function of the Exchange.\52\ The Exchange also reserves the right to 
withhold any information from an Observer and to exclude an Observer 
from any meeting or portion thereof that could, among other things, 
result in the disclosure of trade secrets or a conflict of 
interest.\53\ The Commission finds that these restrictions on, and 
obligations of, Observers are consistent with the Act, particularly 
Section 6(b)(1),\54\ in that they are designed to ensure that MIAX 
PEARL will remain so organized as to have the capacity to carry out the 
purposes of the Act.
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    \49\ See Article II, Sections 2.2 and 2.3 of the MIAX PEARL 
Amended and Restated By-Laws.
    \50\ See supra note 17 and accompanying text.
    \51\ See Article II, Section 2.2(g)(iii), and Article X, 
Sections 10.3 and 10.4 of the MIAX PEARL Amended and Restated By-
Laws; see also supra note 17.
    \52\ See Notice, supra note 3, 85 FR at 79255.
    \53\ See Article II, Section 2.2(g)(iii) of the MIAX PEARL 
Amended and Restated By-Laws; see also supra note 17.
    \54\ 15 U.S.C. 78s(b)(1).
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IV. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule changes are consistent with the Act and the rules and regulations 
thereunder applicable to a national securities exchange.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\55\ that the proposed rule change (SR-PEARL-2020-30), be, and 
hereby is, approved.
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    \55\ Id.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\56\
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    \56\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-03216 Filed 2-17-21; 8:45 am]
BILLING CODE 8011-01-P


