Notice2021-20325
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Adopt Phlx Options 10, Section 5, Branch Office, and Options 10, Section 17, Profit Sharing Rules
Primary source
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Published
September 21, 2021
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 86 Issue 180 (Tuesday, September 21, 2021)</title>
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[Federal Register Volume 86, Number 180 (Tuesday, September 21, 2021)]
[Notices]
[Pages 52536-52539]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-20325]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-92986; File No. SR-Phlx-2021-52]
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Adopt Phlx
Options 10, Section 5, Branch Office, and Options 10, Section 17,
Profit Sharing Rules
September 15, 2021.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on September 3, 2021, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') filed
with the Securities and Exchange Commission (``SEC'' or ``Commission'')
the proposed rule change as described in Items I, II, and III, below,
which Items have been prepared by the Exchange. Phlx filed the proposal
as a ``non-controversial'' proposed rule change pursuant to Section
19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-4(f)(6) thereunder.\4\ The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A)(iii).
\4\ 17 CFR 204.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to adopt new Phlx Options 10, Section 5,
Branch Office, and Options 10, Section 17, Profit Sharing. The Exchange
also proposes to amend General 9, Section 58, and Options 10, Section
6, Opening of Accounts.
The text of the proposed rule change is available on the Exchange's
website at <a href="https://listingcenter.nasdaq.com/rulebook/phlx/rules">https://listingcenter.nasdaq.com/rulebook/phlx/rules</a>, at the
principal office of the Exchange, and at the Commission's Public
Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to adopt two new rules at Options 10, Section
5, Branch Office, and Options 10, Section 17, Profit Sharing. The
Exchange also proposes to amend General 9, Section 58 and Options 10,
Section 6, Opening of Accounts. Each change will be described below.
Options 10, Section 5
The Exchange proposes to adopt a new Options 10, Section 5, titled
``Branch Offices.'' Options 10, Section 5 is currently reserved. The
proposed rule would be similar to Nasdaq BX, Inc. (``BX'') and The
Nasdaq Options Market LLC (``NOM'') Options 10, Section 5. The proposed
rule text would provide,
(a) Every OEF approved to do options business with the public
under this Options 10 shall file with Phlx Regulation and keep
current a list of each of its branch offices showing the location of
each such office and the name of the manager of each such office.
(b) No branch office of an OEF shall transact options business
with the public unless the manager of such branch office has been
qualified as a Options Principal or General Securities Sales
Supervisor; provided, that this requirement shall not apply to
branch offices in which not more than three (3) representatives are
located so long as the OEF can demonstrate to the satisfaction of
Phlx Regulation that the options activities of such branch offices
are appropriately supervised by a Options Principal or General
Securities Sales Supervisor.
Similar to BX and NOM, Phlx would require every Order Entry Firm or
``OEF'' \5\ that is approved to do business with the public pursuant to
Options 10 to file with Phlx Regulation a list of each branch office.
The list must include the location of the branch office and the name of
the manager of the office. The OEF must keep this list current.
Further, an OEF must ensure that the branch office manager is qualified
prior to transacting business with the public in the branch office. A
manager must be registered as an Options Principal or General
Securities Sales Supervisor, unless there are not more than three
representatives in that branch office and the OEF can demonstrate to
the satisfaction of Phlx Regulation that the options activities of such
branch offices are appropriately supervised by an Options Principal or
General Securities Sales Supervisor.
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\5\ The term ``Order Entry Firm'' or ``OEF'' means a member
organization that submits orders, as agent or principal, on the
Exchange. See Phlx Options 1, Section 1(b)(32).
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Currently, Phlx General 4,\6\ Section 1220(a)(8) \7\ and
Supplementary Material .04 of that rule \8\ require the manager to be
registered as an Options Principal or General Securities Sales
Supervisor. In
[[Page 52537]]
2018, NOM's and BX's registration requirements \9\ were updated to
mirror a similar change by FINRA.\10\ At that time, Phlx Options 10,
Section 5 should have been amended to update the registrations
applicable to a branch office manager to conform to the new General 4
registration requirements. The Exchange is proposing to make those
amendments at this time.
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\6\ Phlx General 4 is incorporated by reference to the General 4
Rules of The Nasdaq Stock Market LLC.
\7\ General 4, Rule 1220(a)(8) provides, in part, ``Each member
that is engaged in transactions in options with the public shall
have at least one Registered Options Principal. In addition, each
principal as defined in paragraph (a)(1) of this Rule who is
responsible for supervising a member's options sales practices with
the public shall be required to register with the Exchange as a
Registered Options Principal, subject to the following exception. If
a principal's options activities are limited solely to those
activities that may be supervised by a General Securities Sales
Supervisor, then such person may register as a General Securities
Sales Supervisor pursuant to paragraph (a)(10) of this Rule in lieu
of registering as a Registered Options Principal.''
\8\ Supplementary Material .04 to General 4, Rule 1220 provides,
in part, ``Any person required to be registered as a principal who
supervises sales activities in corporate, municipal and option
securities, investment company products, variable contracts, direct
participation program securities and security futures may be
registered solely as a General Securities Sales Supervisor. In
addition to branch office managers, other persons such as regional
and national sales managers may also be registered solely as General
Securities Sales Supervisors as long as they supervise only sales
activities.''
\9\ See Securities Exchange Act Nos. 84386 (October 9, 2018), 83
FR 51988 (October 15, 2018) (SR-NASDAQ-2018-078) (Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend,
Reorganize and Enhance Its Membership, Registration and
Qualification Rules); and 84353 (October 3, 2018), 83 FR 50999
(October 10, 2018) (SR-BX-2018-047) (Notice of Filing and Immediate
Effectiveness of Proposed Rule Change To Amend, Reorganize and
Enhance Membership, Registration and Qualification Rules, and To
Make Conforming Changes to Certain Other Rules).
\10\ See Securities Exchange Act Release No. 81098 (July 7,
2017), 82 FR 32419 (July 13, 2017) (SR-FINRA-2017-007) (Order
Approving Proposed Rule Change To Adopt Consolidated Registration
Rules, Restructure the Representative-Level Qualification
Examination Program, Allow Permissive Registration, Establish Exam
Waiver Process for Persons Working for Financial Services Affiliate
of Member, and Amend the Continuing Education Requirements).
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The Exchange proposes to relocate Supplementary Material .08 to
Options 10, Section 6 to proposed Supplementary Material .01 to Options
10, Section 5 and amend a citation within proposed Supplementary
Material .01(vi) of Options 10, Section 5 from ``(1)-(vii)'' to ``(i)
to (vii)'' to conform the numbering.
The proposed rule would permit Phlx to better regulate branch
offices of member organizations \11\ by making clear within proposed
Options 10, Section 5, related to doing business with the public, that
an OEF that transacts business with the public must be qualified as a
Registered Options Principal or General Securities Sales Supervisor.
Further, the proposed rule explains that the requirement to be
qualified as a Registered Options Principal or General Securities Sales
Supervisor shall not apply to branch offices in which not more than
three representatives are located so long as the OEF can demonstrate to
the satisfaction of Phlx Regulation that the options activities of such
branch offices are appropriately supervised by a Registered Options
Principal or General Securities Sales Supervisor. This additional
specificity will assist member organizations in complying with branch
office requirements. Today, the Exchange has other rules to regulate
supervision of branch office such as General 9, Section 20,
Supervision. The addition of this rule, similar to NOM and BX, will
permit Phlx to enforce the rule in a manner similar to NOM and BX by
specifically requiring that members and member organizations that are
doing business with the public maintain certain qualifications similar
to NOM and BX. Members and member organizations that are required to
comply with Options 10, Section 5 now have transparent information to
determine if they have the appropriate manager qualifications. Also,
the proposed rule makes clear when the requirement to be qualified as a
Registered Options Principal or General Securities Sales Supervisor
does not apply. The specified qualifications for branch managers will
ensure branch offices are properly supervised by qualified individuals.
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\11\ The term ``member organization'' means a corporation,
partnership (general or limited), limited liability partnership,
limited liability company, business trust or similar organization,
transacting business as a broker or a dealer in securities and which
has the status of a member organization by virtue of (i) admission
to membership given to it by the Membership Department pursuant to
the provisions of General 3, Sections 5 and 10 or the By-Laws or
(ii) the transitional rules adopted by the Exchange pursuant to
Section 6-4 of the By-Laws. References herein to officer or partner,
when used in the context of a member organization, shall include any
person holding a similar position in any organization other than a
corporation or partnership that has the status of a member
organization. See General 1, Section 1(17).
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Options 10, Section 17
The Exchange proposes to adopt a new Options 10, Section 17, Profit
Sharing. Options 10, Section 17 is currently reserved. The Exchange's
rule is similar to FINRA Rule 2150(c),\12\ Sharing in Accounts; Extent
Permissible.\13\ For purposes of comparing Phlx's proposed rule to
FINRA's Rule 2150, the Exchange notes that the term ``member'' within
FINRA Rule 2150 is equivalent to Phlx's defined term ``member
organization.'' Phlx also utilizes an additional term, ``member'',\14\
to define its floor membership. Each ``member'' on Phlx's trading floor
is required to obtain a permit to conduct business on the trading
floor.\15\ FINRA does not have a similar trading floor concept.
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\12\ FINRA and Phlx utilize different terminology to describe
members. Also, the rules are numbered differently and the rule
citations differ.
\13\ Phlx has rule text similar to FINRA Rule 2150(a) within
General 9, Section 2(a). Also, Phlx has rule text similar to FINRA
Rule 2150(b) within General 9, Section 54.
\14\ The term ``member'' means a permit holder which has not
been terminated in accordance with the By-Laws and these Rules of
the Exchange. A member is a natural person and must be a person
associated with a member organization. Any references in the rules
of the Exchange to the rights or obligations of an associated person
or person associated with a member organization also includes a
member. See General 1, Section 1(16).
\15\ See Phlx General 3, Section 11.
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Similar to FINRA Rule 2150(c), Phlx proposes to prohibit members,
member organizations, and associated persons from sharing directly or
indirectly in the profits or losses in any account of a customer,
however the rule does provide three circumstance within proposed
Options 10, Section 17(a)(1) through (3) wherein a member, member
organization, or person associated with a member organization may share
in the profits or losses in such an account.\16\ Specifically, proposed
Options 10, Section 17(a) permits a member, member organization, or
person associated with a member organization to share directly or
indirectly in the profits or losses in any account of a customer
carried by a member, member organization, or person associated with a
member organization, if prior written authorization is obtained as
described in proposed subparagraphs (1) and (2) and the member, member
organization, or person associated with a member organization shares in
the profits or losses in any account of such customer only in direct
proportion to the financial contributions made to such account by
either the member, member organization, or person associated with a
member organization as described in proposed subparagraph (3).
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\16\ Proposed Options 10, Section 17(a)(1) through (3) provides
that a member, member organization, or person associated with a
member organization may share in the profits or losses in such an
account if (1) such member or person associated with a member
organization obtains prior written authorization from the member
organization employing the associated person; (2) such member,
member organization, or person associated with a member organization
obtains prior written authorization from the customer; and (3) such
member, member organization, or person associated with a member
organization shares in the profits or losses in any account of such
customer only in direct proportion to the financial contributions
made to such account by either the member, member organization, or
person associated with a member organization.
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Proposed Options 10, Section 17(b) exempts from paragraph (a)(3)
the accounts of the immediate family of such member, member
organization, or person associated with a member organization. The rule
proposes to define ``immediate family'' to include parents, mother-in-
law or father-in-law, husband or wife, children or any relative to
whose support the member, member organization, or person associated
with a member organization otherwise contributes directly or
indirectly.
Proposed Options 10, Section 17(c) permits a member, member
organization, or person associated with a member organization that is
acting as an investment adviser to receive compensation based on a
share in
[[Page 52538]]
profits or gains in an account provided certain conditions are met.
Specifically, the member or person associated with a member
organization seeking such compensation obtains prior written
authorization from the member or member organization employing the
associated person; and such member, member organization, or person
associated with a member organization seeking such compensation obtains
prior written authorization from the customer; and all of the
conditions in Rule 205-3 of the Investment Advisers Act of 1940 (as the
same may be amended from time to time) are satisfied.
This proposal would enable Phlx to better regulate profit sharing
arrangements of member organizations, members, and persons associated
with member organizations by clearly specifying the manner in which a
member organization, member, or person associated with a member
organization may share in the profits or losses in such an account,
describing what activity is exempt from the direct proportionate share
limitation of proposed paragraph (a)(3), and delineating within
proposed paragraph (c) how a member organization, member, or person
associated with a member organization that is acting as an investment
adviser may receive compensation based on a share in profits or gains
in an account. Today, Phlx General 9, Section 7, Report of Financial
Arrangements, permits Phlx to learn of such arrangements. The proposed
rule would enable Phlx to restrict the ability to profit share to
certain limited circumstances, similar to FINRA.
General 9, Section 58
The Exchange proposes to amend General 9, Section 58,
Advertisements, Market Letters, Research Reports and Sales Literature,
to amend the heading ``Supplementary Material'' to ``Supplementary
Material to General 9, Section 58'' so the format of the heading is the
same as other General 9 rules.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with the provisions of Section 6 of the Act,\17\ in general, and with
Section 6(b)(5) of the Act,\18\ in particular, in that the proposal is
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in regulating, clearing,
settling, processing information with respect to, and facilitating
transactions in securities, 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.
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\17\ 15 U.S.C. 78f.
\18\ 15 U.S.C. 78f(b)(5).
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Options 10, Section 5
The adoption of a new Options 10, Section 5, titled ``Branch
Offices,'' is consistent with the Act and will protect investors and
the public interest because the proposed rule explains the requirement
to be qualified as a Registered Options Principal or General Securities
Sales Supervisor and also explains when the requirement to be
registered as such does not apply.\19\ General 9, Section 20,
Supervision, does not offer the same specificity as proposed within
Options 10, Section 5 with respect to branch offices, and General 9,
Section 20 does not specifically apply only to members doing business
with the public. The addition of this rule, similar to NOM and BX
Options 10, Section 5, will permit Phlx to enforce the rule in a manner
similar to NOM and BX by requiring certain qualifications for members
doing business with the public. These qualifications for branch
managers will protect investors and the public interest by ensuring
branch offices are properly supervised by qualified individuals who
will ensure compliance with the Exchange's rules. Today, Phlx General 4
requires member organizations, members, and persons associated with a
member organization to have certain qualifications when conducting
certain activity. These qualifications are designed to ensure that
individuals have the necessary knowledge and experience to supervise
persons employed by the member organization at a branch office.
Proposed Options 10, Section 5 specifically requires that members and
member organizations that are doing business with the public maintain
certain qualifications. Members and member organizations that are
required to comply with Options 10, Section 5 now have transparent
information to determine which of the qualifications apply to a manager
of a branch office and when those qualification apply.
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\19\ The qualification requirement shall not apply to branch
offices in which not more than three representatives are located so
long as the OEF can demonstrate to the satisfaction of Phlx
Regulation that the options activities of such branch offices are
appropriately supervised by a Registered Options Principal or
General Securities Sales Supervisor. See proposed Options 10,
Section 5(b).
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Options 10, Section 17
Adopting a new Options 10, Section 17, Profit Sharing, similar to
FINRA Rule 2150(c), Sharing in Accounts; Extent Permissible, is
consistent with the Act. This proposal will protect investors and the
public interest because it will clearly specify the way a member,
member organization, or person associated with a member organization
may share in the profits or losses in such an account. The proposal
also will describe what activity is exempt from the direct
proportionate share limitation of proposed paragraph (a)(3). Finally,
the proposal will delineate within proposed paragraph (c) how a member,
member organization, or person associated with a member organization
that is acting as an investment adviser may receive compensation based
on a share in profits or gains in an account. Members, member
organizations, and persons associated with a member organization will
have clear guidance on when profit sharing is permissible. Today, Phlx
General 9, Section 7, Report of Financial Arrangements, permits Phlx to
learn of such arrangements, and Phlx General 1, Section 1(c) does not
permit members, member organizations, and persons associated with a
member organization to engage in conduct inconsistent with just and
equitable principles of trade. The proposed rule would enable Phlx to
further restrict the ability to profit share in certain limited
circumstances, similar to FINRA.
General 9, Section 58
The Exchange's proposal to amend a heading within General 9,
Section 58, Advertisements, Market Letters, Research Reports and Sales
Literature, is a non-substantive rule change.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
result in any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act, as amended.
Options 10, Section 5
The Exchange's proposal to adopt a new Options 10, Section 5,
titled ``Branch Offices,'' does not impose an undue burden on
competition as all member organizations that conduct business with the
public would be subject to the proposed rule.
Options 10, Section 17
The Exchange's proposal to adopt a new Options 10, Section 17,
Profit Sharing, similar to FINRA Rule 2150(c), Sharing in Accounts;
Extent
[[Page 52539]]
Permissible, does not impose an undue burden on competition as all
members, member organizations, and persons associated with member
organizations that conduct business with the public would be subject to
the proposed rule.
General 9, Section 58
The Exchange's proposal to amend a heading within General 9,
Section 58, Advertisements, Market Letters, Research Reports and Sales
Literature, is a non-substantive rule change.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \20\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\21\
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\20\ 15 U.S.C. 78s(b)(3)(A)(iii).
\21\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#7d0f081118501e1210101813090e3d0e181e531a120b"><span class="__cf_email__" data-cfemail="c7b5b2aba2eaa4a8aaaaa2a9b3b487b4a2a4e9a0a8b1">[email protected]</span></a>. Please include
File Number SR-Phlx-2021-52 on the subject line.
Paper Comments
<bullet> 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-Phlx-2021-52. 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 (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
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-Phlx-2021-52 and should be submitted on
or before October 12, 2021.
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\22\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\22\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-20325 Filed 9-20-21; 8:45 am]
BILLING CODE 8011-01-P
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