Notice2026-08182
Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change To Amend FINRA Rules 5110 (Corporate Financing Rule-Underwriting Terms and Arrangements) and 5123 (Private Placements of Securities)
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Published
April 28, 2026
Issuing agencies
Securities and Exchange Commission
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<title>Federal Register, Volume 91 Issue 81 (Tuesday, April 28, 2026)</title>
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[Federal Register Volume 91, Number 81 (Tuesday, April 28, 2026)]
[Notices]
[Pages 22902-22905]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2026-08182]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-105296; File No. SR-FINRA-2026-002]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Instituting Proceedings To Determine Whether To
Approve or Disapprove a Proposed Rule Change To Amend FINRA Rules 5110
(Corporate Financing Rule--Underwriting Terms and Arrangements) and
5123 (Private Placements of Securities)
April 23, 2026.
I. Introduction
On January 22, 2026, the Financial Industry Regulatory Authority,
Inc. (``FINRA'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend FINRA Rules 5110
(Corporate Financing Rule--Underwriting Terms and Arrangements) and
5123 (Private Placements of Securities).\3\ Specifically, the proposed
rule changes would, among other things, amend provisions of Rule 5110
to: (1) change the valuation method for securities acquisitions
considered underwriting compensation; (2) add new exclusions from
underwriting compensation for certain securities acquisitions; (3)
amend the rule to treat non-convertible preferred securities the same
as non-convertible debt securities; and (4) make other minor
modifications for clarity and to improve the operation of the rule. The
proposed amendments to Rule 5123 would expand available exemptions
under the rule to include offerings sold to investors meeting the
categories of accredited investor for certain family offices and
certain entities with assets under management in excess of $5,000,000,
consistent with the Commission's treatment of those categories in the
accredited investor definition.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Exchange Act Release No. 34-104695 (Jan. 27, 2026), 91
FR 4121 (Jan. 30, 2026) (File No. SR-FINRA-2026-002) (``Notice'').
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The proposed rule change was published for public comment in the
Federal Register on January 30, 2026.\4\ The public comment period
closed on February 20, 2026. The Commission received comment letters in
response to the Notice.\5\ On March 12, 2026, FINRA consented to an
extension of the time period in which the Commission must approve the
proposed rule change, disapprove the proposed rule change, or institute
proceedings to determine whether to approve or disapprove the proposed
rule change to April 30, 2026.\6\
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\4\ See id.
\5\ The comment letters are available at <a href="https://www.sec.gov/rules-regulations/public-comments/sr-finra-2026-002">https://www.sec.gov/rules-regulations/public-comments/sr-finra-2026-002</a>.
\6\ See letter from Joseph Savage, Vice President and Associate
General Counsel, Office of General Counsel, FINRA (Mar. 12, 2026),
<a href="https://www.finra.org/sites/default/files/2026-03/SR-FINRA-2026-002-Extension-1.pdf">https://www.finra.org/sites/default/files/2026-03/SR-FINRA-2026-002-Extension-1.pdf</a>.
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The Commission is publishing this order pursuant to Section
19(b)(2)(B) of the Exchange Act \7\ to institute proceedings to
determine whether to approve or disapprove the proposed rule change.
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\7\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposed Rule Change
A. Background
FINRA Rule 5110 requires any broker-dealer that is a member of
FINRA (``member'') that participates in a public offering to file
documents and information with FINRA about underwriting terms and
arrangements.\8\ Among other things, the rule contains provisions
relating to how underwriting compensation is valued,\9\ as well as
providing examples of payments that are not deemed to be underwriting
compensation.\10\ FINRA's Corporate Financing Department reviews this
information prior to the commencement of the offering to determine
whether the underwriting compensation and other terms and arrangements
meet the requirements of applicable FINRA rules.\11\
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\8\ See FINRA Rule 5110. FINRA states that the following are
examples of public offerings that are routinely filed: (1) initial
public offerings (``IPOs''); (2) follow-on offerings; (3) shelf
offerings; (4) rights offerings; (5) offerings by direct
participation programs as defined in FINRA Rule 2310(a)(4) (Direct
Participation Programs); (6) exchange offers; (7) offerings pursuant
to SEC Regulation A; and (8) offerings by closed-end funds. See
Notice at 4122 n.3.
\9\ See Rule 5110(c).
\10\ See Rule 5110.01(b).
\11\ See Notice at 4122. A member may proceed with a public
offering only if FINRA has provided an opinion that it has no
objection to the proposed underwriting terms and arrangements. See
Rule 5110(a)(1)(C)(ii).
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In general, Rule 5123 requires members to file with FINRA any
private placement memorandum, term sheet or other offering document,
and any retail communication that promotes or recommends a private
placement, including any material amended versions thereof, used in
connection with a private placement of securities
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within 15 calendar days of the date of first sale, unless the member
can rely on an applicable exemption from the rule.\12\ Rule 5123
contains an exemption from filing for offerings sold to certain types
of sophisticated institutional investors that qualify as ``accredited
investors'' under Rule 501 of the Securities Act of 1933 (``Securities
Act'').\13\
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\12\ See Rule 5123.
\13\ See Rule 5123(b).
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B. The Proposed Rule Change
FINRA's proposed rule change would, among other things, amend
provisions of Rule 5110 to: (1) change the valuation method for
securities acquisitions considered underwriting compensation; (2) add
new exclusions from underwriting compensation for certain securities
acquisitions; (3) amend the rule to treat non-convertible preferred
securities the same as non-convertible debt securities; and (4) make
other minor modifications for clarity and to improve the operation of
the rule. The proposed amendments to Rule 5123 would expand the
available exemptions under the rule to include offerings sold to
investors meeting the categories of accredited investor for certain
family offices and certain entities with assets under management in
excess of $5,000,000, consistent with the Commission's treatment of
those categories in the accredited investor definition.\14\
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\14\ In 2020, the SEC amended the definition of accredited
investor to include two additional types of institutional entities.
See Accredited Investor Definition, Securities Exchange Act Release
89669 (Aug. 26, 2020), 85 FR 64234 (Oct. 9, 2020), including new
categories of accredited investor under Rule 501(a)(9) and (a)(12).
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1. Rule 5110 Proposed Amendments
a. Valuation Method for Securities Acquisitions Considered Underwriting
Compensation
FINRA stated that, when participating members \15\ acquire
securities that are deemed underwriting compensation, the value of the
securities is currently based on either the public offering price per
security or the price paid per security on the date of acquisition if a
``bona fide public market'' exists for the security.\16\ The proposed
rule change would amend Rule 5110(c)(2) and (3) by replacing ``bona
fide public market'' with a valuation method based on the closing
market price of a security traded on a registered national securities
exchange or a ``designated offshore securities market'' \17\ on the
date of acquisition.\18\
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\15\ The term ``participating member'' means any FINRA member
that is participating in a public offering, any affiliate or
associated person of the member, and any immediate family, but does
not include the issuer. See Rule 5110(j)(15).
\16\ See Rule 5110(c). The definition of ``bona fide public
market'' requires that the securities be traded on a national
securities exchange and relies on SEC Regulation M's definitions of
average daily trading volume and public float. See Rule 5121(f)(3).
\17\ See Securities Act Rule 902(b).
\18\ See Notice at 4122-23.
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b. Exclusions From Underwriting Compensation for Certain Securities
Acquisitions
Currently, Rule 5110 provides for certain exclusions from
underwriting compensation.\19\ The proposed rule change would expand
the categories of exclusions from underwriting compensation for certain
types of investments by participating members in anticipation of, or
concurrently with, a public offering. These proposed amendments cover:
(1) debt-for-equity exchanges; (2) capital investments for direct
participation programs (``DPPs'') \20\ and unlisted real estate
investment trusts (``REITs''); \21\ and (3) non-convertible preferred
securities. Each proposed amendment is discussed below.
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\19\ See generally Rule 5110.
\20\ See Rule 2310(a)(4).
\21\ See Rule 2231(d)(4).
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i. Debt-For-Equity Exchanges
Currently, Rule 5110 does not provide an exclusion from
underwriting compensation for securities acquired by affiliates of
underwriters in connection with debt-for-equity exchange
transactions.\22\ A debt-for-equity exchange is composed of a series of
transactions in which a lender acquires equity securities of the
issuer, often referred to as exchange shares, in return for a cash
loan.\23\ The exchange shares are subsequently or concurrently
registered and offered by underwriters in a public offering. The
offering proceeds are used, in whole or part, as repayment of the loan.
When the lender is an affiliate of an underwriter, it falls within the
definition of participating member, and the equity securities acquired
by the affiliated lender for making the loan fall within the definition
of underwriting compensation.\24\
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\22\ See Rule 5110.01.
\23\ See Notice at 4123.
\24\ See id.
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The proposed rule change would add new Supplementary Material
.01(b)(23) to provide relief from such exchanges being deemed
underwriting compensation if the equity acquired is part of a
transaction that provides economic and tax benefits to the issuer and
meets the following conditions:
<bullet> the affiliated member subsequently offered all of the
equity securities the lender acquired in a firm commitment offering
following the debt exchange; \25\
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\25\ See id. FINRA states that typically, lenders and affiliated
members coordinate to satisfy this condition. However, even if they
do not coordinate, the affiliated member can satisfy the condition
with the subsequent offering. See id.
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<bullet> the parties determined the terms of the debt exchange and
the subsequent equity issued through arms' length negotiations based on
the market price of the equity; \26\ and
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\26\ See id. According to FINRA, past exemptions that have been
granted consistent with the conditions of this proposed
Supplementary Material involved operating companies with equity
listed on a national securities exchange with a market price and did
not involve an IPO or a spinoff. See id.
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<bullet> the affiliated member negotiated customary compensation
for the subsequent equity offering.
ii. Capital Investments for DPPs and REITs
Currently, Rule 5110 does not provide an exclusion from
underwriting compensation for capital investments in exchange for an
equity stake made by affiliates of underwriters concurrently with or in
advance of a public offering.\27\ The proposed rule change would add
new Supplementary Material .01(b)(24) to provide relief from such
transactions by setting out the conditions for excluding capital
investments from being deemed underwriting compensation. Supplementary
Material .01(b)(24) would work as a self-operating exclusion and would
not limit when the transactions could occur. The conditions for
Supplementary Material .01(b)(24) apply to securities acquired before
or during the distribution of an offering by a participating member in
the issuer or an affiliated entity and would require that:
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\27\ See Rule 5110.01. FINRA states that such investments are
common in DPP and REIT offerings to provide the initial or
subsequent equity capital or financing needed by an issuer. See
Notice at 4123.
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<bullet> the capital investments are disclosed in the prospectus;
<bullet> the offering and the securities acquired in the
capitalization transaction are valued and priced based on net asset
value (``NAV''); \28\
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\28\ Capitalization transactions occurring before the issuer has
material assets would be deemed to occur at or above NAV. See Notice
at 4123.
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<bullet> the offering is subject to the requirements of Rule 2310
(Direct Participation Programs); and
<bullet> the securities acquired are restricted for a period of 180
days following the commencement of sales.
iii. Non-Convertible Preferred Securities
Currently, Rule 5110 provides that non-convertible or non-
exchangeable
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debt securities and derivative instruments acquired by any
participating member in a transaction related to a public offering at a
fair price \29\ are considered underwriting compensation but have no
compensation value.\30\ However, at present, Rule 5110 does not have
specific provisions related to the valuation of non-convertible
preferred securities.\31\ Because both non-convertible debt and non-
convertible preferred securities cannot be converted to common stock
and provide predetermined payments to holders, resulting in fixed
sources of income, FINRA states that it views them as equivalent for
purposes of the Rule 5110 exclusion and, accordingly, the proposed rule
change would treat them in a comparable manner as long as non-
convertible preferred securities are acquired at a fair price.\32\
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\29\ See Rule 5110.06(b).
\30\ See Rules 5110(c)(5) and 5110.06. FINRA states that, as a
general rule, compensation that cannot be valued is prohibited. See
Rule 5110(g)(1). Under this exclusion, treating these transactions
as compensation without value permits the participating member to
receive the securities (as long as they are received at a fair
price) while still allowing FINRA the ability to review the
transactions to determine whether they were, indeed, received at a
fair price. If they were not, the value of underwriting compensation
that is attributed to these securities is the difference between
their fair price and their actual price. See Notice at 4123 n.18.
\31\ See id.
\32\ See Notice at 4123-24.
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c. Additional Minor Modifications to Rule 5110
The proposed rule change would make other minor modifications to
Rule 5110 that FINRA believes would improve the operation of the rule.
For example, Rule 5110 permits termination fees or the receipt of
compensation in the form of rights of first refusal in connection with
a public offering that is terminated when specific requirements are met
that protect the issuer (i.e., they are not deemed to be prohibited
unreasonable terms or arrangements).\33\ FINRA states that,
increasingly, members negotiate payments often described as ``tail
fees'' in engagement letters that are similar to the terms and
requirements for termination fees or rights of first refusal.\34\
Because tail fees provide compensation in the event of a subsequent
financing from investors introduced by a member following the
termination of an agreement, FINRA believes these payments are
comparable to termination fees for purposes of Rule 5110.\35\ The
proposed rule change would amend Rule 5110(g)(5)(B) to clarify that the
same requirements would apply to tail fees.\36\ If these requirements
are not met, tail fees would constitute unreasonable arrangements under
Rule 5110.
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\33\ See Rule 5110(g)(5)(B).
\34\ See Notice at 4124.
\35\ See id.
\36\ See id. at 4124 n.19; see also Rule 5110(g)(5)(B).
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The proposed rule change would also amend Rule 5110 to make non-
substantive, technical changes. The proposed rule change would add
language to various cross-references throughout the rule in order to
clarify that the cross-references are related to the same rule.\37\ In
addition, the proposed rule change would also change the wording of the
definition of ``immediate family'' to replace ``the spouse or child''
with ``the spouse or children''.\38\
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\37\ See, e.g., proposed Rule 5110(g); 5110(j)(11); 5110
(j)(19); 5110(j)(21); 5110.01(a)(13); 5110.03; 5110.04; and 5110.07.
\38\ See proposed Rule 5110(j)(8)(A).
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2. Rule 5123 Proposed Amendments
The proposed rule change would add two types of entities to the
filing exemption under Rule 5123, consistent with the Commission's 2020
amendments to the accredited investor definition. As stated above, in
August 2020, the Commission adopted amendments to the definition of
``accredited investor'' under Rule 501.\39\ These changes included
adding to the definition of accredited investor:
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\39\ See SEC Accredited Investor Definition Release, supra note
14.
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<bullet> any entity, of a type not listed in paragraphs (a)(1),
(2), (3), (7), or (8) of Rule 501, not formed for the specific purpose
of acquiring the securities offered, owning investments in excess of
$5,000,000; \40\ and
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\40\ See 17 CFR 230.501(a)(9).
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<bullet> any ``family office'' with assets under management in
excess of $5,000,000, that is not formed for the specific purpose of
acquiring the securities offered and its prospective investment is
directed by a person who has such knowledge and experience in financial
and business matters that such family office is capable of evaluating
the merits and risks of the prospective investment.\41\
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\41\ See 17 CFR 230.501(a)(12).
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The proposed rule change would amend Rule 5123(b)(1) to include
these same two types of entities to the filing exemption under Rule
5123.
III. Proceedings To Determine Whether To Approve or Disapprove File No.
SR-FINRA-2026-002 and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Exchange Act to determine whether the proposed rule
change should be approved or disapproved.\42\ Institution of
proceedings is appropriate at this time in view of the legal and policy
issues raised by the proposed rule change. Institution of proceedings
does not indicate that the Commission has reached any conclusions with
respect to the proposed rule change.
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\42\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Exchange Act, the Commission
is providing notice of the grounds for disapproval under
consideration.\43\ The Commission is instituting proceedings to allow
for additional analysis and input concerning whether the proposed rule
change is consistent with the Exchange Act and the rules thereunder.
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\43\ Id.
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IV. Request for Written Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
issues identified above, as well as any other concerns they may have
with the proposed rule change. In particular, the Commission invites
the written views of interested persons concerning whether the proposed
rule change is consistent with the Exchange Act and the rules
thereunder.
Although there do not appear to be any issues relevant to approval
or disapproval that would be facilitated by an oral presentation of
views, data, and arguments, the Commission will consider, pursuant to
Rule 19b-4, any request for an opportunity to make an oral
presentation.\44\
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\44\ Section 19(b)(2) of the Exchange Act, as amended by the
Securities Acts Amendments of 1975, Public Law 94-29, 89 Stat. 97
(1975), grants the Commission flexibility to determine what type of
proceeding--either oral or notice and opportunity for written
comments--is appropriate for consideration of a particular proposal
by a self-regulatory organization. See Securities Acts Amendments of
1975, Report of the Senate Committee on Banking, Housing and Urban
Affairs to Accompany S. 249, S. Rep. No. 75, 94th Cong., 1st Sess.
30 (1975).
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Interested persons are invited to submit written data, views, and
arguments regarding whether the proposed rule change should be approved
or disapproved by May 19, 2026. Any person who wishes to file a
rebuttal to any other person's submission must file that rebuttal by
June 2, 2026.
Comments may be submitted by any of the following methods:
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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#f587809990d8969a9898909b8186b5869096db929a83"><span class="__cf_email__" data-cfemail="3d4f485158105e5250505853494e7d4e585e135a524b">[email protected]</span></a>. Please include
file number SR-FINRA-2026-002 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-2026-002. 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 such filing will be available for inspection and
copying at the principal office of FINRA. 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-FINRA-2026-002 and should be submitted on or
before May 19, 2026. If comments are received, any rebuttal comments
should be submitted on or before June 2, 2026.
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\45\ 17 CFR 200.30-3(a)(12); 17 CFR 200.30-3(a)(57).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\45\
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2026-08182 Filed 4-27-26; 8:45 am]
BILLING CODE 8011-01-P
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