[Federal Register Volume 79, Number 226 (Monday, November 24, 2014)]
[Notices]
[Pages 69958-69961]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-27706]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73628; File No. SR-CBOE-2014-085]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Relating to Professional Orders

November 18, 2014.
    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 November 10, 2014, Chicago Board Options Exchange, Incorporated 
(the ``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (the ``Commission'') the proposed rule change as described 
in Items I, II, and III below, which Items have been prepared by the 
Exchange. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend the definition of ``Professional'' 
in Rule 1.1(ggg) and adopt Interpretation and Policy .01 to Rule 
1.1(ggg) concerning the definition of an ``order'' for purposes of Rule 
1.1(ggg). The text of the proposed rule change is provided below and in 
Exhibit 1.
    (additions are italicized; deletions are [bracketed])
* * * * *

Chicago Board Options Exchange, Incorporated Rules

* * * * *

CHAPTER I

Definitions

] 2001 Definitions

    RULE 1.1 When used in these Rules, unless the context otherwise 
requires:
    (a) Any term defined in the Bylaws and not otherwise defined in 
this Chapter shall have the meaning assigned to such term in the 
Bylaws.
    (b)-(fff)

Professional

    (ggg) The term ``Professional'' means any person or entity that (i) 
is not a broker or dealer in securities, and (ii) places more than 390 
orders in listed options per day on average during a calendar month for 
its own beneficial account(s). A Professional will be treated in the 
same manner as a broker or dealer in securities for purposes of Rules 
6.2A, 6.2B, 6.8C, 6.9, 6.13A, 6.13B, 6.25, 6.45, 6.45A (except for 
Interpretation and Policy .02), 6.45B (except for Interpretation and 
Policy .02), 6.53C(c)(ii), 6.53C(d)(v), subparagraphs (b) and (c) under 
Interpretation and Policy .06 to Rule 6.53C, 6.74 (except Professional 
orders may be considered public customer orders subject to facilitation 
under paragraphs (b) and (d)), 6.74A, 6.74B, 8.13, 8.15B, 8.87, 24.19, 
43.1, 44.4, 44.14. The Professional designation is not available in 
Hybrid 3.0 classes. All Professional orders shall be marked with the 
appropriate origin code as determined by the Exchange.

. . . Interpretations And Policies

    .01 For purposes of this Rule 1.1(ggg), an order which is placed 
for the beneficial account(s) of a person or entity that is not a 
broker or dealer in securities that is broken into multiple parts by a 
broker or dealer or by an algorithm housed at a broker or dealer or by 
an algorithm licensed from a broker or dealer, but which is housed with 
the customer in order to achieve a specific execution strategy 
including, for example, a basket trade, program trade, portfolio trade, 
basis trade, or benchmark hedge, constitutes a single order and shall 
be counted as one order.
* * * * *
    The text of the proposed rule change is also available on the 
Exchange's Web site (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), 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 its definition of ``Professional'' 
to clarify how orders are computed under Rule 1.1(ggg). Specifically, 
the Exchange proposes to adopt Interpretation and Policy .01 to Rule 
1.1(ggg) to its definition of ``Professional'' in Rule 1.1(ggg) to 
provide that for purposes of Rule 1.1(ggg), an order which is placed 
for the beneficial account(s) of a person or entity that is not a 
broker or dealer in securities that is broken into multiple parts by a 
broker or dealer or by an algorithm housed at a broker or dealer or by 
an algorithm licensed from a broker or dealer, but which is housed with 
the customer in order to achieve a specific execution strategy 
including, for example, a basket trade, program trade, portfolio trade, 
basis trade, or benchmark hedge, constitutes a single order and shall 
be counted as one order. The Exchange also proposes to add a provision 
to Rule 1.1(ggg), which would provide that all Professional orders 
shall be marked with the appropriate origin code as determined by the 
Exchange.
    The Exchange believes that the proposed rule changes will add 
clarity and transparency to its current rules, which is in the 
interests of all market participants. The purpose of this rule filing 
is to codify the details of the Exchange's existing policies within the 
Rules. The Exchange is continuously

[[Page 69959]]

evaluating clarifying additions to the Rules, particularly with respect 
to order handling. The Exchange believes that the proposed rule change 
and adoption of proposed Interpretation and Policy .01 to Rule 1.1(ggg) 
is consistent with this effort.
Background
    Under the Exchange's Rules, ``public customers'' are granted 
certain marketplace advantages over non-customers. In particular, 
public customer orders receive priority over non-customer orders and 
Market-Maker quotes at the same price. Subject to certain exceptions, 
public customer orders also do not incur transaction charges. These 
marketplace advantages are intended to promote various business and 
regulatory objectives including, but not limited to the Exchange's 
goals of providing competitive pricing and attracting retail order 
flow.
    Prior to 2009, the Exchange designated all orders as either 
customer orders or non-customer orders based on whether an order was 
placed for the account of a registered securities broker or dealer. In 
general, order priority and transaction fees were determined solely on 
this distinguishing criterion. As investors' access to technology and 
information increased, however, the Exchange's distinction between 
public customers and non-customers became less effective in promoting 
the intended purpose of the Rules. As the Exchange noted at the time, 
it did not believe that the definitions of public customer and non-
customer properly distinguished between the kind of non-professional 
retail investors that the order priority rules and transaction fees 
exceptions were intended to benefit.\3\ Furthermore, the Exchange 
believed that distinguishing solely between registered broker-dealers 
and non-broker-dealers with respect to these advantages was no longer 
appropriate in the marketplace because some non-broker-dealer 
individuals and entities have access to information and technology that 
enables them to trade listed options in the same manner as a broker or 
dealer in securities.\4\ The Exchange therefore did not believe that it 
was consistent with fair competition for these professional account 
holders to continue to receive the same marketplace advantages that 
retail investors have over broker-dealers trading on the Exchange.\5\ 
Accordingly, in 2009, the Exchange adopted a definition of 
``Professional'' under Rule 1.1(ggg) to further distinguish different 
types of orders placed on the Exchange.\6\
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    \3\ See Securities Exchange Act Release No. 34-61198 (December 
17, 2009), 74 FR 248 (December 29, 2009) (Order Granting Approval of 
the Proposed Rule Change, as Modified by Amendment No. 1, Related to 
Professional Orders) (SR-CBOE-2009-078).
    \4\ See id.
    \5\ See id.
    \6\ See Rule 1.1(ggg).
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    Under Rule 1.1(ggg), a person or entity that is not a securities 
broker or dealer that places more than 390 listed options orders per 
day on average during a calendar month for its own beneficial 
account(s) is considered a ``Professional.'' Furthermore, under Rule 
1.1(ggg), a person or entity that is not a securities broker or dealer 
that places more than 390 listed options orders per day on average 
during a calendar month for its own beneficial account(s) is considered 
a ``Professional'' and treated in the same manner as a broker or dealer 
in securities with respect to order priority and transaction fees.\7\ 
In general, ``Professionals'' are treated as broker-dealers with 
respect to priority of order and transaction fees under the current 
Rules of the Exchange. Rule 1.1(ggg) is based on and substantially 
similar to International Securities Exchange (``ISE'') Rule 100(a)(31A) 
as well as NASDAQ OMX BX Chapter I, Section I(a)(49), BATS Exchange 
Rule 16.1(a)(45), NASDAQ OMX Phlx Rule 1000(b)(14), BOX Options 
Exchange Rule 100(a)(50), and NYSE Amex Exchange Rule 900.2NY(18A).\8\ 
Notably, several of these exchanges cited uniform application of 
Professional Order rules and discouraging regulatory arbitrage as 
primary reasons for adopting a Professional Order rule.\9\
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    \7\ Under Rule 1.1(ggg), ``Professionals'' are treated in the 
same manner as a broker or dealer in securities for purposes of 
Rules 6.2A (Rapid Opening System), 6.2B (Hybrid Opening System), 
6.8C (Prohibition Against Members Functioning as Market-Makers), 6.9 
(Solicited Transactions), 6.13A (Simple Auction Liaison), 6.13B 
(Penny Price Improvement), 6.45 (Priority of bids and Offers--
Allocation of Trades), 6.45A (Priority and Allocation of Equity 
Option Trades on the CBOE Hybrid System) (except that Professional 
orders may be considered public customer orders, and therefore not 
be subject to the exposure requirements for solicited broker-dealer 
orders, under Interpretation and Policy .02), 6.45B (Priority and 
Allocation of Trades in Index Options and Options on ETFs on the 
CBOE Hybrid System) (except that Professional orders may be 
considered public customer orders, and therefore not be subject to 
the exposure requirements for solicited broker-dealer orders, under 
Interpretation and Policy .02), 6.53C(c)(ii) and (d)(v) and 
6.53C.06(b) and (c) (Complex Orders on the Hybrid System), 6.74 
(Crossing Orders) (except that Professional orders may be considered 
public customer orders subject to facilitation under paragraphs (b) 
and (d)), 6.74A (Automated Improvement Mechanism) (except 
Professional orders may be considered customer Agency Orders or 
solicited orders eligible for customer-to-customer immediate crosses 
under Interpretation and Policy .09), 6.74B (Solicitation Auction 
Mechanism), 8.13 (Preferred Market-Maker Program), 8.15B 
(Participation Entitlement of LMMs), 8.87 (Participation Entitlement 
of DPMs and e-DPMs), 24.19 (Multi-Class Broad-Based Index Option 
Spread Orders), 43.1 (Matching Algorithm/Priority), 44.4 
(Obligations of SBT Market-Makers), and 44.14 (SBT DPM Obligations). 
See Securities and Exchange Act Release No. 34-61198 (December 17, 
2009), 74 FR 68880 (December 29, 2009) (Order Granting Approval of 
the Proposed Rule Change, as Modified by Amendment No. 1, Related to 
Professional Orders) (SR-CBOE-2009-078).
    \8\ See Securities and Exchange Act Release No. 34-61198 
(December 17, 2009), 74 FR 68880 (December 29, 2009) (Order Granting 
Approval of the Proposed Rule Change, as Modified by Amendment No. 
1, Related to Professional Orders) (SR-CBOE-2009-078).
    \9\ See, e.g.; Securities and Exchange Act Release No. 34-62724 
(August 16, 2010), 75 FR 51509 (August 20, 2010) (Notice of Filing 
of a Proposed Rule Change by the NASDAQ Stock Market LLC To Adopt a 
Definition of Professional and Require That All Professional Orders 
Be Appropriately Marked) SR-NASDAQ-2010-099;Securities and Exchange 
Act Release No. 34-65500 (October 6, 2011), 76 FR 63686 (October 13, 
2011) (Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change To Adopt a Definition of Professional and Require That All 
Professional Orders Be Appropriately Marked) SR-BATS-2011-041.
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    Upon adopting Rule 1.1(ggg), the Exchange issued a Regulatory 
Circular, interpreting Rule 1.1(ggg).\10\ With respect the counting of 
single original orders that are then broken up into multiple orders to 
achieve a specific execution strategy, the Exchange followed ISE's 
interpretation of its Rule 100(a)(31A).\11\ Under ISE Rule 100(a)(31A), 
if a customer places a ``parent'' order that is then broken up by an 
executing firm into multiple ``child'' orders to achieve a specific 
execution strategy, the original order is counted as one order for 
professional order purposes.\12\ ISE recently clarified this 
interpretation further, providing that original orders that are placed 
on behalf of the beneficial account of a non-broker-dealer, which are 
then broken up by a broker-dealer (or pursuant to an algorithm licensed 
from a broker-dealer) in order to achieve a specific execution 
strategy, such original orders will be counted as one order for 
professional order purposes.\13\ In order to clarify the Rules and 
ensure uniformity with Professional Order rules in place throughout the 
industry, the Exchange is proposing to codify this interpretation in 
the Rules.
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    \10\ See CBOE RG09-148 (Professional Orders).
    \11\ See ISE Regulatory Information Circular 2009-179 (Priority 
Customer Orders and Professional Orders (FAQ)).
    \12\ Id.
    \13\ See ISE Regulatory Information Circular 2014-007 (Priority 
Customer Orders and Professional Orders (FAQ)).
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Proposal
    The Exchange proposes to adopt Interpretation .01 to Rule 1.1(ggg) 
to clarify the Rules and help ensure uniform compliance. Specifically, 
the

[[Page 69960]]

Exchange proposes to codify its current practice of counting ``parent'' 
orders, placed on a single ticket for the beneficial account(s) of a 
person or entity that is not a broker or dealer in securities and which 
are broken into multiple parts by a broker or dealer or by an algorithm 
housed at a broker or dealer or by an algorithm licensed from a broker 
or dealer, but which is housed with the customer in order to achieve a 
specific execution strategy as one order for Professional Order 
purposes. The Exchange believes that the proposed rule will add 
transparency to and completeness to the Rules, which is in the best 
interests of all market participants.
    The Exchange notes that the proposed rule is in-line with current 
Exchange practices and interpretations of nearly identical rules of 
other exchanges.\14\ The Exchange believes that disparate rules with 
respect to Professional order designation, and lack of uniform 
application of such rules, do not promote the best regulation and may, 
in fact, encourage regulatory arbitrage. The Exchange believes that the 
risk of regulatory arbitrage is heightened in an environment where 
similar rules are interpreted differently amongst different exchanges 
and there is a lack of uniformity in marking Professional Orders when 
routing such orders away. The Exchange also proposes to amend Rule 
1.1(ggg) to provide that all Professional orders shall be marked with 
the appropriate origin code as determined by the Exchange in order to 
bring the Exchange's rules in-line with the Professional Order rules of 
other exchanges. The Exchange believes that it is necessary to have 
uniform interpretations of Professional Order designations throughout 
the industry.
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    \14\ See ISE Regulatory Information Circular 2014-007 (Priority 
Customer Orders and Professional Orders (FAQ)).
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    The Exchange also believes that counting basket trades, program 
trades, portfolio trades, basis trades, and benchmark hedges placed for 
the beneficial account(s) of a person or entity that is not a broker or 
dealer in securities and which are broken into multiple parts by a 
broker or dealer or by an algorithm housed at a broker or dealer or by 
an algorithm licensed from a broker or dealer, but which is housed with 
the customer as one order for Professional Order purposes is in-line 
with the purpose of its Professional customer rule and serves the best 
interests of investors. The types of trades cited above are often used 
by money managers, pension fund managers, and others to gain exposure 
to a particular set of securities at exactly the same time on behalf of 
retail customers and investors. These strategies are singular 
strategies, placed on a single ticket, that are used to avoid front-
running and maintain privacy on behalf of customers. These trades are 
essentially one trade from a strategic standpoint in that all the terms 
of the trade are entered at one point in time on a single ticket.\15\ 
Accordingly, the Exchange believes that such trades should be treated 
as one trade for Professional order purposes.
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    \15\ Although a change in a parent order's terms, price, or size 
would cause the order to be considered an additional order under the 
Rules, changes to child orders, which are initiated to keep an 
overall execution strategy in place, would not cause a parent order 
to refresh or result in multiple orders.
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations thereunder applicable to the 
Exchange and, in particular, the requirements of Section 6(b) of the 
Act.\16\ Specifically, the Exchange believes the proposed rule change 
is consistent with the Section 6(b)(5) \17\ 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) \18\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(5).
    \18\ Id.
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    In particular, the Exchange believes that the proposed rules is 
consistent with Section 6(b)(5) of the Act \19\ with respect to removal 
of impediments to, and perfection of the mechanism of, a free and open 
market and national market system. The Exchange believes that disparate 
rules regarding Professional order designations, and a lack of uniform 
application of such rules, do not promote the best regulation and may, 
in fact, encourage regulatory arbitrage. Accordingly, the Exchange 
believes that disparate application of similar Professional Order rules 
is inconsistent with the goals of a national market system. The 
Exchange believes that it is therefore prudent and necessary to have a 
Professional designation rule that is in-line with the rules of other 
exchanges. The Exchange believes that the disparate application of 
Professional Order designations would result in the different treatment 
of similar orders, thwarting the principles underlying order protection 
rules and the national market system. The Exchange believes that an 
alternative interpretation of Rule 1.1(ggg) would result in the 
disparate treatment retail investors who the Rules are designed to 
grant priority and who might otherwise be treated as Professionals 
under the Rules. As such, the Exchange believes that the proposed rule 
changes are consistent with the Act.
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    \19\ Id.
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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. Rather, the Exchange 
believes that the proposed rule will promote both intramarket and 
intermarket competition by allowing retail investors to take advantage 
of the priority rules that are intended to benefit them and placing all 
investors on equal footing as a result of uniform rules amongst the 
various exchanges. The Exchange believes that disparate rules with 
respect to Professional order designation, and lack of uniform 
application of such rules, do not promote the best regulation and may, 
in fact, encourage regulatory arbitrage. The Exchange believes that 
regulatory arbitrage contravenes the notion of fair competition and is 
not in the best interests of investors.

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 written comments on the 
proposed rule changes submitted in this filing.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \20\ and Rule 19b-4(f)(6) thereunder.\21\ 
Because the foregoing proposed rule change does

[[Page 69961]]

not: (1) significantly affect the protection of investors or the public 
interest; (2) impose any significant burden on competition; and (3) 
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 \22\ and Rule 19b-
4(f)(6) \23\ thereunder. 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).
    \22\ 15 U.S.C. 78s(b)(3)(A).
    \23\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires the Exchange to give the Commission written notice of the 
Exchange's intent to file the proposed rule change, along with a 
brief description and text of 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

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-CBOE-2014-085 on the subject line.

Paper Comments

     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-CBOE-2014-085. 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 Web site (http://www.sec.gov/rules/sro.shtml). 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 Web site 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; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-CBOE-2014-085 and should be 
submitted on or before December 15, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-27706 Filed 11-21-14; 8:45 am]
BILLING CODE 8011-01-P