Notice2024-02415
Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Its Rules Regarding Early Termination of Complex Order Auctions
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
February 7, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 26 (Wednesday, February 7, 2024)</title>
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[Federal Register Volume 89, Number 26 (Wednesday, February 7, 2024)]
[Notices]
[Pages 8469-8472]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-02415]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-99457; File No. SR-CboeEDGX-2024-010]
Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice
of Filing and Immediate Effectiveness of a Proposed Rule Change To
Amend Its Rules Regarding Early Termination of Complex Order Auctions
February 1, 2024.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on January 25, 2024, Cboe EDGX Exchange, Inc. (the ``Exchange'' or
``EDGX'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I and II
below, which Items have been prepared by the Exchange. The Exchange
filed the proposal 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 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
Cboe EDGX Exchange, Inc. (the ``Exchange'' or ``EDGX Options'')
proposes to amend its rules regarding early termination of complex
order auctions. The text of the proposed rule change is provided in
Exhibit 5.
The text of the proposed rule change is also available on the
Exchange's website (<a href="http://markets.cboe.com/us/options/regulation/rule_filings/edgx/">http://markets.cboe.com/us/options/regulation/rule_filings/edgx/</a>), at the Exchange's Office of the Secretary, 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 amend certain of its rules regarding the
early termination of complex order auctions. The Exchange offers
several auction mechanisms for complex orders, including the Complex
Order Auction (``COA''),\5\ the Complex Automated Improvement Mechanism
(``C-AIM''),\6\ and the Complex Solicitation Auction Mechanism (``C-
SAM'').\7\ The Rules regarding each of these complex order auction
mechanisms contain provisions that describe what events may cause the
applicable auction to terminate prior to the end of the auction
timer.\8\ These provisions generally correspond to the pricing
requirements to begin an auction. Terminating the auction if one of
these events occurs ensures that the auction will not continue if the
market changes in a manner that would create a situation in which the
auction would not have been permitted to begin.
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\5\ See Rule 21.20(d).
\6\ See Rule 21.22.
\7\ See Rule 21.23.
\8\ See Rules 21.20(d)(3), 21.22(d)(1), and 21.23(d)(1).
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COA
COA is a single-sided auction in which an eligible order will be
exposed for price improvement. Specifically, upon receipt of a COA-
eligible order,\9\ the System sends a COA auction message to
subscribers of data feeds that deliver COA auction messages, which
message identifies certain terms of the COA-eligible order. To be COA-
eligible, a buy (sell) order must, among other things, have a price
equal to or higher (lower) than the synthetic best offer (bid) (``SBO
(SBB)''), provided that if any of the bids or offers on the simple book
that comprise the SBB (SBO) is represented by a Priority Customer
order,\10\ the price must be at least $0.01
[[Page 8470]]
higher (lower) than the SBB (SBO).\11\ Corresponding to this
requirement, current Rule 21.20(d)(3)(B) and (C) provide, respectively,
that a COA will terminate prior to the end of the COA auction timer:
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\9\ See Rule 21.20(b) (definition of COA-eligible order).
\10\ A ``Priority Customer'' means a person or entity that is
not: (a) a broker or dealer in securities or (b) a Professional. A
``Public Customer'' means a person that is not a broker or dealer in
securities, and a ``Professional'' means any person or entity that
(a) is not a broker or dealer in securities and (b) places more than
390 orders in listed options per day on average during a calendar
month for its own beneficial account(s). See Rule 16.1 (definitions
of Priority Customer, Public Customer, and Professional).
\11\ See Rule 21.20(b) (definition of COA-eligible order).
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<bullet> when the System receives an order in a leg of the complex
order that would improve the SBBO on the same side as the COA-eligible
order that initiated the COA to a price equal to or better than the COA
price, in which case the System terminates the COA and processes the
COA-eligible order pursuant to subparagraph (5) below, posts the new
order in the simple book, and updates the SBBO; or
<bullet> if the System receives a Priority Customer Order that
would join or improve the SBBO on the same side as the COA in progress
to a price equal to or better than the COA price, in which case the
System terminates the COA and processes the COA-eligible order pursuant
to subparagraph (5) below, posts the new order in the simple book, and
updates the SBBO.
The Exchange proposes to amend Rule 21.20(d)(3)(B) and (C) to
provide that any incoming order may cause the SBBO to change in a
manner that causes a COA auction to terminate early. Specifically, the
proposed rule change amends these subparagraphs (B) and (C) to provide
as follows:
<bullet> when the System receives an order in a leg of the complex
order that would improve the SBBO on the same side as the COA-eligible
order that initiated the COA to a price better than the COA price, in
which case the System terminates the COA and processes the COA-eligible
order pursuant to Rule 21.20(d)(5), posts the new order to the Simple
Book, and updates the SBBO; or
<bullet> if the System receives an order in a leg of the complex
order that would join or improve the SBBO on the same side as the COA-
eligible order that initiated the COA to a price equal to the COA price
and cause any component of the SBBO to be represented by a Priority
Customer, in which case the System terminates the COA and processes the
COA-eligible order pursuant to Rule 21.20(d)(5), posts the new order to
the Simple Book, and updates the SBBO.
Pursuant to the proposed change to subparagraph (B), a COA will
continue to terminate early if the Exchange receives any simple order
(Priority or non-Priority Customer) that would cause the SBBO to be
better than the auction price (as covered by current subparagraphs (B)
and (C)). Pursuant to the proposed change to subparagraph (C), a COA
will terminate early if the Exchange receives any simple order (not
just a Priority Customer order as set forth in current subparagraph
(C)) that would cause the SBBO to be equal to the auction price and
have the best bid or offer (``BBO'') of a leg represented by a Priority
Customer order.
C-AIM and C-SAM
C-AIM permits a Member to submit for execution a complex order it
represents as agent (``Agency Order'') against principal or solicited
interest (an ``Initiating Order'') that stops the entire Agency Order
at a price that satisfies specified criteria.\12\ Similarly, C-SAM
permits a Member to submit for execution an Agency Order against an
Initiating Order (that, unlike for C-AIM, may only be solicited) that
stops the entire Agency Order at a price that satisfies specified
criteria.\13\ With respect to both C-AIM and C-SAM, the stop price
(also referred to in this rule filing as the auction price) for the buy
(sell) Agency Order must, among other things:
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\12\ See generally Rule 21.22; see also Rule 21.22(a) (C-AIM
auction eligibility requirements) and (b) (C-AIM stop price
requirements).
\13\ See generally Rule 21.23; see also Rule 21.23(a) (C-SAM
auction eligibility requirements) and (b) (C-SAM stop price
requirements). The primary differences between C-AIM and C-SAM are
that (a) the minimum size (as determined by the Exchange) of an
order submitted into C-SAM cannot be smaller than 500 option
contracts on the smallest leg, while the minimum size of a C-AIM
order may not be smaller than one contract (compare Rules
21.22(a)(3) and 21.23(a)(3)) and (b) and that execution of orders
submitted into C-SAM are handled as all-or-none orders.
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<bullet> with respect to same-side simple orders, be (a) at least
one minimum increment better than the SBB (SBO) if the applicable side
of the BBO on any component of the complex strategy is represented by a
Priority Customer order on the simple book; or (b) at or better than
the SBB (SBO) if the applicable side of the BBO of each component of
the complex strategy is represented by a non-Priority Customer order or
quote on the simple book; and
<bullet> with respect to opposite-side simple orders, be (a) at
least one minimum increment better than the SBO (SBB) if the BBO of any
component of the complex strategy is represented by a Priority Customer
order on the simple book; or (b) at or better than the SBO (SBB) if the
BBO of each component of the complex strategy represents a non-Priority
Customer quote or order on the simple book.\14\
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\14\ See Rules 21.22(b)(1) and (3) and 21.23(b)(1) and (3).
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Corresponding to these requirements, current Rules 21.22(d)(1)(d),
(e), and (f) and 21.23(d)(1)(d), (e), and (f) \15\ provide that a C-AIM
or C-SAM auction, respectively, will terminate prior to the end of the
C-AIM or C-SAM, as applicable, auction timer:
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\15\ The proposed rule change capitalizes the lettering of the
subparagraphs in Rules 21.22(d)(1) and 21.23(d)(1) to conform to the
lettering used throughout the Rulebook.
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<bullet> upon receipt by the System of an unrelated non-Priority
Customer order or quote that would post to the simple book and cause
the SBBO on the same side as the Agency Order to be better than the
stop price;
<bullet> upon receipt by the System of an unrelated Priority
Customer order in any component of the complex strategy that would post
to the simple book and cause the SBBO on the same side as the Agency
Order to be equal to or better than the stop price; or
<bullet> upon receipt by the System of a simple non-Priority
Customer order that would cause the SBBO on the opposite side of the
Agency Order to be better than the stop price, or a Priority Customer
order that would cause the SBBO on the opposite side of the Agency
Order to be equal to or better than the stop price.
The Exchange proposes to amend Rules 21.22(d)(1)(d), (e), and (f)
((D) and (E) as proposed) and 21.23(d)(1)(d), (e), and (f) ((D) and (E)
as proposed) to provide that any incoming order may cause the SBBO to
change in a manner that causes a C-AIM or C-SAM auction, respectively,
to terminate early. Specifically, the proposed rule change amends these
Rule provisions to state the following:
(D) upon receipt by the System of an unrelated order or quote
that would post to the Simple Book and cause the SBBO on the same
side as the Agency Order to be (i) better than the stop price, or
(ii) equal to the stop price if any component of the SBBO is then
represented by a Priority Customer;
(E) upon receipt by the System of an unrelated order that would
post to the Simple Book and cause the SBBO on the opposite side of
the Agency Order to be (i) better than the stop price, or (ii) equal
to the stop price if any component of the SBBO is then represented
by a Priority Customer;
Pursuant to the proposed subparagraph (D)(i) of each of Rules
21.22(d)(1) and 21.23(d)(1), a C-AIM or C-SAM will continue to
terminate early if the Exchange receives any simple order (Priority or
non-Priority Customer) that would cause the SBBO on the same
[[Page 8471]]
side as the Agency Order to be better than the auction price (as
covered by current subparagraphs (d) and (e)). Additionally, pursuant
to the proposed subparagraph (D)(ii) of each of Rules 21.22(d)(1) and
21.23(d)(1), a C-AIM or C-SAM will terminate early if the Exchange
receives any simple order (not just a Priority Customer order as set
forth in current subparagraph (e)) that would cause the SBBO on the
same side as the Agency Order to be equal to the auction price if any
component of the SBBO is then represented by a Priority Customer order.
Similarly, pursuant to proposed subparagraph (E)(i) of each of Rules
21.22(d)(1) and 21.23(d)(1), a C-AIM or C-SAM will continue to
terminate early if the Exchange receives any simple order (Priority or
non-Priority Customer) that would cause the SBBO on the opposite side
of the Agency Order to be better than the auction price (as covered by
current subparagraph (f)). Additionally, pursuant to proposed
subparagraph (E)(ii) of each of Rules 21.22(d)(1) and 21.23(d)(1), a C-
AIM or C-SAM will terminate early if the Exchange receives any simple
order (not just a Priority Customer order as set forth in current
subparagraph (f)) that would cause the SBBO on the opposite side of the
Agency Order to be equal to the auction price if any component of the
SBBO is then represented by a Priority Customer order.
Purpose of Proposed Rule Changes
One purpose of the COA, C-AIM, and C-SAM auction price requirements
is to protect interest on the simple book, including Priority Customer
interest, as execution of the auction or Agency order, as applicable,
could not occur at a price outside the SBBO or at the same price as the
SBBO if it includes simple Priority Customer interest on any leg. The
purpose of early termination provisions corresponding to those auction
price requirements is to terminate an auction if the market changes in
a manner that would create a situation in which the auction would not
have been permitted to begin. The current early termination provisions
for COA provide that a COA will terminate early if the Exchange system
receives (1) a simple order that would cause the SBBO on the same side
as the auctioned order to be equal to or better than the auction price
or (2) a simple Priority Customer order on the same side that would
cause the SBBO on the same side as the auctioned order to be equal to
or better than the auction price.\16\ Similarly, the current early
termination provisions for C-AIM and C-SAM provide that a C-AIM or C-
SAM auction will terminate early if the Exchange system receives (1) a
simple non-Priority Customer order that would cause the SBBO on the
same side as the auctioned order to be better than the auction price,
(2) a simple Priority Customer order that would cause the SBBO on the
same side as the auctioned order to be equal to or better than the
auction price, or (3) a simple non-Priority Customer order that would
cause the SBBO on the opposite side of the auctioned order to be better
than the auction price, or a simple Priority Customer Order that would
cause the SBBO on the opposite side of the auctioned order to be equal
to or better than the auction price. Ultimately, all of these
provisions cover the scenarios in which the applicable auction would
terminate early if the System receives any simple order that would
cause the SBBO to be better than the auction price or a simple Priority
Customer order that would cause the SBBO to equal the auction price.
However, they do not cover the scenario in which the applicable auction
would terminate early if the System receives a simple non-Priority
Customer order that would cause the SBBO to equal the auction price and
any component of the SBBO includes Priority Customer interest. The
proposed changes to each of the COA, C-AIM, and C-SAM early termination
provisions add this scenario. This situation addressed by the proposed
changes could occur, for example, if there was a Priority Customer
order representing the BBO of one leg of the component strategy at the
beginning of the auction but the auction price was better than the SBBO
(and thus the auction was able to begin), and an incoming order
(Priority or non-Priority Customer) that arrives during the auction
causes the SBBO to change such that the SBBO equals the auction price.
The Exchange believes these proposed changes will further protect
Priority Customer orders on the simple book by ensuring that no
execution within COA, C-AIM, or C-SAM will occur at a price that equals
the SBBO (on the applicable side) if the SBBO includes Priority
Customer interest, regardless of what type of incoming order (Priority
Customer or non-Priority Customer) updates the SBBO to equal the
auction price.
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\16\ See current Rule 21.20(d)(3)(B) and (C).
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2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Securities Exchange Act of 1934 (the ``Act'') and the rules and
regulations thereunder applicable to the Exchange and, in particular,
the requirements of Section 6(b) of the Act.\17\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \18\ requirements that the rules of an exchange be
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. Additionally,
the Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \19\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\17\ 15 U.S.C. 78f(b).
\18\ 15 U.S.C. 78f(b)(5).
\19\ Id.
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In particular, the Exchange believes the proposed rule change will
remove impediments to and perfect the mechanism of a free and open
market and protect investors, because it will update scenarios that
will cause complex auctions to terminate early in a manner that
protects interest resting on the simple book, including Priority
Customer interest. The proposed changes to each of the COA, C-AIM, and
C-SAM early termination provisions add the scenario in which the
applicable auction will terminate early if the Exchange receives a non-
Priority Customer order that would cause the SBBO to be equal to the
auction price and any component of the SBBO is represented by a
Priority Customer order. These proposed changes will eliminate a
current gap in current Rules, which contemplate only that an incoming
Priority Customer order could cause the SBBO to improve to a price
equal to the auction price. These proposed rule changes increase
consistency among the auction price requirement and early termination
provisions, thus removing impediments to a free and open market. As a
result, the Exchange believes the proposed rule change will further
protect Priority Customer orders on the simple book by ensuring that no
execution within a COA, C-AIM, or C-SAM auction will occur at a price
that equals the SBBO (on the applicable side) if any component of the
SBBO is represented by a Priority Customer, regardless of what type of
incoming order (Priority Customer or non-Priority Customer)
[[Page 8472]]
updates the SBBO, which ultimately protects investors and the public
interest.
The Exchange believes the proposed nonsubstantive changes to
capitalize the lettering of the subparagraphs in Rules 21.22(d)(1) and
21.23(d)(1) will benefit investors, as it will conform to the lettering
used throughout the Rulebook and thus eliminate potential investor
confusion.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange does not
believe that the proposed rule change will impose any burden on
intramarket competition that is not necessary or appropriate in
furtherance of the purposes of the Act, as the proposed changes will
apply to all Members in the same manner. The Exchange does not believe
that the proposed rule change will impose any burden on intermarket
competition that is not necessary or appropriate in furtherance of the
purposes of the Act, as it relates solely to provisions regarding when
complex auctions occurring on the Exchange may terminate early. The
proposed rule changes are not intended to be competitive.
Additionally, the proposed nonsubstantive changes are not
competitive and merely conform subparagraph lettering to the lettering
used throughout the Rulebook.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
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 Rule
19b-4(f)(6) thereunder.\21\ 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 will
institute proceedings to determine whether the proposed rule change
should be approved or disapproved.
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\20\ 15 U.S.C. 78s(b)(3)(A).
\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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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="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#86f4f3eae3abe5e9ebebe3e8f2f5c6f5e3e5a8e1e9f0"><span class="__cf_email__" data-cfemail="2f5d5a434a024c4042424a415b5c6f5c4a4c01484059">[email protected]</span></a>. Please include
File Number SR-CboeEDGX-2024-010 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-CboeEDGX-2024-010.
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="https://www.sec.gov/rules/sro.shtml">https://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 the filing also will be available
for inspection and copying at the principal office of the Exchange. Do
not include personal identifiable information in submissions; you
should submit only information that you wish to make available
publicly. We may redact in part or withhold entirely from publication
submitted material that is obscene or subject to copyright protection.
All submissions should refer to file number SR-CboeEDGX-2024-010 and
should be submitted on or before February 28, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\22\
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\22\ 17 CFR 200.30-3(a)(12).
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-02415 Filed 2-6-24; 8:45 am]
BILLING CODE 8011-01-P
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