Notice2021-20333
Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Extend the Effectiveness of Temporary Supplementary Material .17 (Temporary Relief To Allow Remote Inspections for Calendar Year 2020 and Calendar Year 2021) Under FINRA Rule 3110 (Supervision)
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 52508-52511]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-20333]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-93002; File No. SR-FINRA-2021-023]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change To Extend the Effectiveness of Temporary
Supplementary Material .17 (Temporary Relief To Allow Remote
Inspections for Calendar Year 2020 and Calendar Year 2021) Under FINRA
Rule 3110 (Supervision)
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 14, 2021, the Financial Industry Regulatory Authority,
Inc. (``FINRA'') 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 FINRA.
FINRA has designated the proposed rule change as constituting a ``non-
controversial'' rule change under paragraph (f)(6) of Rule 19b-4 under
the Act,\3\ which renders the proposal effective upon receipt of this
filing by the Commission. 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\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to extend temporary Supplementary Material .17
(Temporary Relief to Allow Remote Inspections for Calendar Year 2020
and Calendar Year 2021) under FINRA Rule 3110 (Supervision) to include
calendar year 2022 inspection obligations through June 30, 2022 within
the scope of the supplementary material.\4\ The proposed extension of
Rule 3110.17 is necessary to address the continuing operational
challenges resulting from the COVID-19 pandemic many member firms face
in planning for and timely conducting, during the first half of
calendar year 2022, the on-site inspection component of Rule 3110(c)
(Internal Inspections) at locations requiring inspection in calendar
year 2022.
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\4\ The proposed rule change will automatically sunset on June
30, 2022. FINRA will submit a separate rule filing if it seeks to
extend the duration of the temporary proposed rule beyond June 30,
2022.
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Below is the text of the proposed rule change. Proposed new
language is in italics; proposed deletions are in brackets.
* * * * *
3100. SUPERVISORY RESPONSIBILITIES
3110. Supervision
(a) through (f) No Change.
* * * Supplementary Material: ----------
.01 through .16 No Change.
.17 Temporary Relief to Allow Remote Inspections for Calendar Years
2020 and [Calendar Year] 2021, and Through June 30 of Calendar Year
2022.
(a) Use of Remote Inspections. Each member obligated to conduct
an inspection of an office of supervisory jurisdiction, branch
office or non-branch location in calendar years 2020, [and calendar
year] 2021 and 2022 pursuant to, as applicable, paragraphs
(c)(1)(A), (B) and (C) under Rule 3110 may, subject to the
requirements of this Rule 3110.17, satisfy such obligation by
conducting the applicable inspection remotely, without an on-site
visit to the office or location. In accordance with Rule 3110.16,
inspections for calendar year 2020 must be completed on or before
March 31, 2021 and inspections for calendar year 2021 must be
completed on or before December 31, 2021. With respect to a member's
obligation to conduct an inspection of an office or location in
calendar year 2022, a member has the option to conduct those
inspections remotely only through June 30, 2022. Notwithstanding
Rule 3110.17, a member shall remain subject to the other
requirements of Rule 3110(c).
(b) Written Supervisory Procedures for Remote Inspections.
Consistent with a member's obligation under Rule 3110(b)(1), a
member that elects to conduct [each of] its [calendar year 2020 or
calendar year 2021] inspections remotely for any of the calendar
years specified in this supplementary material must amend or
supplement its written supervisory procedures to provide for remote
inspections that are reasonably designed to assist in detecting and
preventing violations of and achieving compliance with applicable
securities laws and regulations, and with applicable FINRA rules.
Reasonably designed procedures for conducting remote inspections of
offices or locations should include, among other things: (1) A
description of the methodology, including technologies permitted by
the member, that may be used to conduct remote inspections; and (2)
the use of other risk-based systems employed generally by the member
firm to identify and prioritize for review those areas that pose the
greatest risk of potential violations of applicable securities laws
and regulations, and of applicable FINRA rules.
(c) Effective Supervisory System. The requirement to conduct
inspections of offices and locations is one part of the member's
overall obligation to have an effective supervisory system and
therefore, the member must continue with its ongoing review of the
activities and functions occurring at all offices and locations,
whether or not the member conducts inspections remotely. A member's
use of a remote inspection of an office or location will be held to
the same standards for review as set forth under Rule 3110.12. Where
a member's remote inspection of an office or location identifies any
indicators of irregularities or misconduct (i.e., ``red flags''),
the member may need to impose additional supervisory procedures for
that office or location or may need to provide for more frequent
monitoring of that office or location, including potentially a
subsequent physical, on-site visit on an announced or unannounced
basis when the member's operational difficulties associated with
COVID-19 abate, nationally or locally as relevant, and the
challenges a member is facing in light of the public health and
safety concerns make such on-site visits feasible using reasonable
best efforts. The temporary relief provided by this Rule 3110.17
does not extend to a member's inspection requirements beyond
[calendar year 2021] June 30, 2022 and such inspections must be
conducted in compliance with Rule 3110(c).
(d) Documentation Requirement. A member must maintain and
preserve a centralized record for each of calendar years 2020 and
[calendar year] 2021, and for calendar year 2022 through June 30,
2022 only that separately identifies: (1) All offices or locations
that had inspections that were conducted remotely; and (2) any
offices or locations for which the member determined to impose
additional supervisory procedures or more frequent monitoring, as
provided in Rule 3110.17(c). A member's documentation of the results
of a remote inspection for an office or location must identify any
additional supervisory procedures or more frequent monitoring for
that office or location that were imposed as a result of the remote
inspection.
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, FINRA 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. FINRA has prepared
[[Page 52509]]
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 COVID-19 pandemic has caused a host of operational disruptions
to the securities industry and impacted member firms, regulators,
investors and other stakeholders. In response to the pandemic, FINRA
began providing temporary relief to member firms from specified FINRA
rules and requirements, including Rule 3110. In June 2020, FINRA
adopted Rule 3110.16 (Temporary Extension of Time to Complete Office
Inspections), which has expired by its terms, that extended the time by
which member firms must complete their calendar year 2020 inspection
obligations under Rule 3110(c) to March 31, 2021, but with the
expectation that firms would conduct their inspections on-site.\5\
FINRA subsequently adopted Rule 3110.17, which automatically sunsets on
December 31, 2021, to provide firms the option of satisfying their
inspection obligations under Rule 3110(c) remotely for calendar years
2020 and 2021, subject to specified conditions,\6\ due to the
logistical challenges of going on-site while public health and safety
concerns related to COVID-19 persisted. While there are signs of
improvement, much uncertainty remains. The emergence of the Delta
variant,\7\ dissimilar vaccination rates throughout the United States,
and the uptick in transmissions in many locations indicate that COVID-
19 remains an active and real public health concern.\8\
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\5\ See Securities Exchange Act Release No. 89188 (June 30,
2020), 85 FR 40713 (July 7, 2020) (Notice of Filing and Immediate
Effectiveness of File No. SR-FINRA-2020-019).
\6\ See Securities Exchange Act Release No. 90454 (November 18,
2020), 85 FR 75097 (November 24, 2020) (Notice of Filing and
Immediate Effectiveness of File No. SR-FINRA-2020-040).
\7\ See The Centers for Disease Control and Prevention
(``CDC''), What You Need to Know about Variants (stating, in part,
that ``the Delta variant causes more infections and spreads faster
than earlier forms of the virus that causes COVID-19.''), <a href="https://www.cdc.gov/coronavirus/2019-ncov/variants/variant.html">https://www.cdc.gov/coronavirus/2019-ncov/variants/variant.html</a> (updated
September 3, 2021). See also CDC, The Possibility of COVID-19
Illness after Vaccination: Breakthrough Infections (stating, in
part, that ``COVID-19 vaccines are effective at preventing
infection, serious illness, and death. Most people who get COVID-19
are unvaccinated. However, since vaccines are not 100% effective at
preventing infection, some people who are fully vaccinated will
still get COVID-19 . . . People who get vaccine breakthrough
infections can be contagious.''), <a href="https://www.cdc.gov/coronavirus/2019-ncov/vaccines/effectiveness/why-measure-effectiveness/breakthrough-cases.html">https://www.cdc.gov/coronavirus/2019-ncov/vaccines/effectiveness/why-measure-effectiveness/breakthrough-cases.html</a> (updated August 23, 2021).
\8\ For example, President Joe Biden on July 29, 2021, announced
several measures to increase the number of people vaccinated against
COVID-19 and to slow the spread of the Delta variant, including
strengthening safety protocols for federal government employees and
contractors. See <a href="https://www.whitehouse.gov/briefing-room/statements-releases/2021/07/29/fact-sheet-president-biden-to-announce-new-actions-to-get-more-americans-vaccinated-and-slow-the-spread-of-the-delta-variant/">https://www.whitehouse.gov/briefing-room/statements-releases/2021/07/29/fact-sheet-president-biden-to-announce-new-actions-to-get-more-americans-vaccinated-and-slow-the-spread-of-the-delta-variant/</a>. More recently, President Joe Biden on
August 31, 2021, briefed the press on, among other things, the
government's response to the COVID-19 surge, noting the government's
continuing efforts to help states with Delta variant outbreaks. See
<a href="https://www.whitehouse.gov/briefing-room/press-briefings/2021/08/31/press-briefing-by-white-house-covid-19-response-team-and-public-health-officials-53/">https://www.whitehouse.gov/briefing-room/press-briefings/2021/08/31/press-briefing-by-white-house-covid-19-response-team-and-public-health-officials-53/</a>.
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Through recent discussions with FINRA's advisory committees and
other industry representatives, FINRA understands that while some firms
have taken affirmative steps to develop and implement phased-in office
re-entry plans based on local conditions, there are many other member
firms that have not. Those firms continue to assess the complexity of
when and how to effectively and safely recall their employees back into
offices alongside fashioning permanent telework arrangements or a
hybrid workforce model in which some employees may work on-site in a
commercial office space and other employees may work off-site in an
alternative location (e.g., personal residence).\9\ Many member firms,
like other employers across the U.S., still maintain telework
arrangements with their employees and have not resumed travel schedules
at pre-pandemic levels as travel remains a risk, particularly for the
segment of the U.S. population that is not fully vaccinated and for
their families.\10\ Continuing health and safety protocols and policies
regarding the opening of mass transit systems and schools in many areas
also are key factors being considered by firms in developing their
plans.
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\9\ Even FINRA staff, with limited exceptions, continue to work
remotely to protect their health and safety. As indicated in its
previous filings concerning other pandemic-related temporary relief
from specified FINRA rules and requirements, FINRA has established a
COVID-19 task force to develop a data-driven, staged plan for FINRA
staff to safely return to working in FINRA office locations and
resume other in-person activities. See Securities Exchange Act
Release No. 92685 (August 17, 2021), 86 FR 47169, 47170 (August 23,
2021) (Notice of Filing and Immediate Effectiveness of File No. SR-
FINRA-2021-019).
\10\ The CDC counts people as being ``fully vaccinated'' if they
received two doses on different days (regardless of time interval)
of a two-dose vaccine or received one dose of a single-dose vaccine.
See CDC, COVID-19 Vaccinations in the United States, <a href="https://covid.cdc.gov/covid-data-tracker/#vaccinations">https://covid.cdc.gov/covid-data-tracker/#vaccinations</a> (last visited
September 13, 2021).
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Against this setting, firms are trying to plan for calendar year
2022 inspections of their offices of supervisory jurisdiction, branch
offices, and non-branch locations to comply with Rule 3110(c). The need
for firms to establish inspection schedules for the coming year and
ensure there is adequate, experienced staff available to travel and
conduct on-site inspections within the context of fluid work locations
presents a unique complexity for many firms in terms of planning and
deploying resources. Even with increased availability of vaccines and
other promising signs that the pandemic is receding in the U.S., FINRA
understands that many firm personnel are still working from alternative
work locations, and have not resumed traveling or are reluctant to do
so at pre-pandemic levels amid persistent significant health and safety
concerns.\11\ For unvaccinated persons in particular, health and safety
risks in connection with returning to the office with other personnel
still remain worrisome and travel still poses a risk of contracting and
spreading COVID-19.\12\
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\11\ See Emily Cadman, Stephan Kahl, et al., Surging Delta Cases
Reverse the World's March Back to the Office (stating, in part,
``The spread of the delta variant has forced many U.S. employers
that had been hoping to get staff back to their desks after Labor
Day to delay those plans until at least October--or even next
year.''), Bloomberg (August 20, 2021), <a href="https://www.bloomberg.com/graphics/2021-return-to-office/">https://www.bloomberg.com/graphics/2021-return-to-office/</a>; see also Rob Stein & Selena
Simmons-Duffin, The Delta Variant Will Drive A Steep Rise In U.S.
COVID Deaths, A New Model Shows, NPR (July 22, 2021), <a href="https://www.npr.org/sections/health-shots/2021/07/22/1019475669/delta-variant-will-drive-a-steep-rise-in-covid-deaths-model-shows">https://www.npr.org/sections/health-shots/2021/07/22/1019475669/delta-variant-will-drive-a-steep-rise-in-covid-deaths-model-shows</a>.
\12\ See CDC, Workplaces and Businesses, <a href="https://www.cdc.gov/coronavirus/2019-ncov/community/workplaces-businesses/index.html">https://www.cdc.gov/coronavirus/2019-ncov/community/workplaces-businesses/index.html</a>
(updated September 8, 2021); CDC, Domestic Travel During COVID-19,
<a href="https://www.cdc.gov/coronavirus/2019-ncov/travelers/travel-during-covid19.html">https://www.cdc.gov/coronavirus/2019-ncov/travelers/travel-during-covid19.html</a> (updated August 25, 2021); and CDC, When NOT to Travel:
Avoid Spreading COVID-19, <a href="https://www.cdc.gov/coronavirus/2019-ncov/travelers/when-to-delay-travel.html">https://www.cdc.gov/coronavirus/2019-ncov/travelers/when-to-delay-travel.html</a> (updated August 20, 2021).
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As we are now late into the third quarter of calendar year 2021,
FINRA believes extending Rule 3110.17 through June 30, 2022 represents
a prudent accommodation.\13\ The proposed extension would provide
clarity to firms on regulatory requirements and account for the time
needed for many firms to carefully assess when and how to have their
employees safely return to their offices in light of vaccination
coverage in the U.S. and transmission levels of the virus, including
any emergent variants throughout the country.
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\13\ See supra note 4.
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By extending Rule 3110.17 to cover part of calendar year 2022
inspection obligations through June 30, 2022 only, FINRA is not
proposing to amend the other conditions of the temporary rule.
[[Page 52510]]
The proposed amendments to Rule 3110.17 would simply provide that for
calendar year 2022, a member has the option to conduct those
inspections remotely through June 30, 2022. The current conditions of
the supplementary material for firms that elect to conduct remote
inspections would remain unchanged: Such firms must amend or supplement
their written supervisory procedures for remote inspections, use remote
inspections as part of an effective supervisory system, and maintain
the required documentation. The additional period of time would also
enable FINRA to further monitor the effectiveness of remote inspections
and their impacts--positive or negative--on firms' overall supervisory
systems in the evolving workplace.
FINRA continues to believe this temporary remote inspection option
is a reasonable alternative to provide to firms to fulfill their Rule
3110(c) obligations during the pandemic, and is designed to achieve the
investor protection objectives of the inspection requirements under
these unique circumstances. Firms should consider whether, under their
particular operating conditions, reliance on remote inspections would
be reasonable under the circumstances. For example, firms with offices
that are open to the public or that are otherwise doing business as
usual should consider whether some form of in-person inspections would
be feasible and appropriately contribute to a supervisory system that
is reasonably designed to achieve compliance with applicable securities
laws and regulations, and with applicable FINRA rules.
FINRA has filed the proposed rule change for immediate
effectiveness. FINRA is proposing to make the proposed rule change
operative on January 1, 2022.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\14\ which requires, among
other things, that FINRA rules must be designed to prevent fraudulent
and manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest. In recognition of the ongoing impact of COVID-19 on
performing the on-site inspection component of Rule 3110(c), the
proposed rule change is intended to provide firms a temporary
regulatory option to conduct inspections of offices and locations
remotely during the first half of calendar year 2022. This temporary
proposed supplementary material does not relieve firms from meeting the
core regulatory obligation to establish and maintain a system to
supervise the activities of each associated person that is reasonably
designed to achieve compliance with applicable securities laws and
regulations, and with applicable FINRA rules that directly serve
investor protection. In a time when faced with ongoing challenges
resulting from the COVID-19 pandemic, FINRA believes that the proposed
rule change provides sensibly tailored relief that will afford firms
the ability to assess when and how to implement their work re-entry
plans as measured against the health and safety of their personnel,
while continuing to serve and promote the protection of investors and
the public interest.
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\14\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition
FINRA 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. The potential economic impacts
of Rule 3110.17 as described in File No. SR-FINRA-2020-040 continue to
have applicability to the proposed rule change herein. The proposed
rule change would extend the temporary relief to include calendar year
2022 inspection obligations through June 30, 2022 within the scope of
the supplementary material without making substantive changes to the
other aspects of the provision. FINRA believes that the proposed
temporary extension would afford firms the time needed to determine
when and how to effectively and safely implement their work re-entry
plans, which must take into account multiple factors, including local
health and safety conditions, without diminishing investor protection.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor 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) of the Act \15\ and Rule 19b-
4(f)(6) thereunder.\16\
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\15\ 15 U.S.C. 78s(b)(3)(A).
\16\ 17 CFR 240.19b-4(f)(6).
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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#9eecebf2fbb3fdf1f3f3fbf0eaeddeedfbfdb0f9f1e8"><span class="__cf_email__" data-cfemail="7a080f161f57191517171f140e093a091f19541d150c">[email protected]</span></a>. Please include
File Number SR-FINRA-2021-023 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-FINRA-2021-023. 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 a.m. and 3
p.m. Copies of such filing
[[Page 52511]]
also will be available for inspection and copying at the principal
office of FINRA. 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-FINRA-2021-023 and
should be submitted on or before October 12, 2021.
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\17\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-20333 Filed 9-20-21; 8:45 am]
BILLING CODE 8011-01-P
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