[Federal Register Volume 82, Number 14 (Tuesday, January 24, 2017)]
[Notices]
[Pages 8241-8244]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-01460]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-79805; File No. SR-Phlx-2016-82]
Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing
of Amendment No. 1, and Order Granting Accelerated Approval of a
Proposed Rule Change, as Modified by Amendment No. 1, To Adopt a New
Exception in Phlx Rule 1000(f) for Sub-MPV Split-Price Orders
January 17, 2017.
I. Introduction
On August 3, 2016, NASDAQ PHLX LLC (the ``Exchange'' or ``Phlx'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
provide an additional exception to the mandatory use of the Exchange's
Floor Broker Management System (``FBMS'') pursuant to Rule 1000(f)(iii)
to permit Floor Brokers to execute certain sub-minimum price variation
(``sub-MPV'') split-price orders in the trading crowd. The proposed
rule change was published for comment in the Federal Register on August
22, 2016.\3\ On October 3, 2016, the Commission extended the time
period within which to 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 November 20, 2016.\4\
On November 17, 2016, the Commission instituted proceedings under
Section 19(b)(2)(B) of the Act to determine whether to approve or
disapprove the proposed rule change.\5\ On December 9, 2016, the
Exchange filed Amendment No. 1 to the proposed rule change.\6\ The
Commission received no comments on the proposed rule change. This order
provides notice of filing of Amendment No. 1 and approves the proposal,
as modified by Amendment No. 1, on an accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 78593 (August 16,
2016), 81 FR 56724 (``Notice'').
\4\ See Securities Exchange Act Release No. 79023 (October 3,
2016), 81 FR 69877 (October 7, 2016).
\5\ See Securities Exchange Act Release No. 79345 (November 17,
2016), 81 FR 84629 (November 23, 2016).
\6\ Amendment No. 1 updated the original filing to: (1) Reflect
the implementation of the Exchange's new Floor Broker Management
System (``FBMS 3'') on November 3, 2016; (2) modify proposed Rule
1000(f)(iii)(D) to provide additional detail regarding how certain
split-price orders will be rounded; and (3) offer three examples to
illustrate how split-price orders will be handled pursuant to the
proposed exception. Amendment No. 1 replaced the original proposed
rule change in its entirety. To promote transparency of its proposed
amendment, when Phlx filed Amendment No. 1 with the Commission, it
also submitted Amendment No. 1 as a comment letter to the file,
which the Commission posted on its Web site and placed in the public
comment file for SR-Phlx-2016-82 (available at https://www.sec.gov/comments/sr=phlx-2016-82/phlx201682-1.pdf https://www.sec.gov/comments/sr-cboe-2016-071/cboe2016071.shtml). The Exchange also
posted a copy of its Amendment No. 1 on its Web site (http://nasdaqphlx.cchwallstreet.com/NASDAQPHLX/pdf/phlx-filings/2016/SR-Phlx-2016-82_Amendment_1.pdf) when it filed Amendment No.1 with the
Commission.
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II. Description of the Proposal \7\
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\7\ A more detailed description of the proposal appears in the
Notice and in Amendment No. 1.
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A. Background
Currently, Phlx Rule 1000(f) requires that all Exchange options
transactions be executed in one of the following three ways: ``(i)
[a]utomatically by the Exchange Trading System pursuant to Rule 1080
and other applicable options rules; (ii) by and among members in the
Exchange's options trading crowd none of whom is a Floor Broker; or
(iii) through the Options [FBMS] for trades involving at least one
Floor Broker.'' \8\ Although a Floor Broker may represent orders in the
trading crowd, a Floor Broker is not permitted to execute an order in
the trading crowd unless one of three exceptions applies.\9\ The
exceptions to the mandatory use of the FBMS \10\ are set forth in Phlx
Rule 1000(f)(iii). These exceptions allow a Floor Broker to execute a
transaction in the trading crowd (rather than through the FBMS) if: (i)
There is a problem with Exchange's systems; (ii) the Floor Broker is
executing the trade pursuant to Phlx Rule 1059 (``Accommodation
Transactions'') or Phlx Rule 1079 (``Flex Index, Equity and Currency
Options''); or (iii) the transaction involves a multi-leg order with
more than 15 legs.\11\
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\8\ See Phlx Rule 1000(f).
\9\ See Phlx Rule 1000(f)(iii).
\10\ The original FBMS (``FBMS 1'') began operating in 2005. The
Exchange retired FBMS 1 on March 31, 2016 after operating it
concurrently with the Exchange's enhanced FBMS (``FBMS 2''), which
was made available on March 7, 2014. As of April 1, 2016, the
Exchange only operated FBMS 2. See Notice, supra note 3, at 56725.
On November 3, 2016, the Exchange implemented FBMS 3 and retired
FBMS 2. According to the Exchange, FBMS 3 is currently the sole
operating version of FBMS on the Exchange. See Amendment No. 1,
supra note 6, at 3 and 8-10. References throughout this Order to
``FBMS'' refer to FBMS 3.
\11\ See Notice, supra note 3, at 56726. See also Phlx Rule
1000(f)(iii)(A)-(C). According to the Exchange, each time a Floor
Broker uses one of the current exceptions to Phlx Rule 1000(f)(iii),
the Floor Broker is required by Phlx Rule 1063(e)(ii), to record the
information required by Phlx Rule 1063(e)(i) on paper trade tickets.
The Exchange further represents that a Floor Broker may only
represent an order for execution that has been timestamped with the
time of entry on the trading floor. In addition, according to the
Exchange, once an execution occurs, the trade ticket must be stamped
with the time of execution of such order. See Notice, supra note 3,
at 56726 and Amendment No. 1, supra note 6, at 11.
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B. Split-Price Order Exception Proposal
Phlx Rule 1014(g)(i)(B) provides a priority rule regarding open
outcry split-price transactions in equity options and options overlying
ETFs to permit a member who is responding to an order for at least 100
contracts who buys (sells) at least 50 contracts at a particular price
to have priority over all others in purchasing (selling) up to an
equivalent number of contracts of the same order at the next lower
(higher) price without being required to yield to existing customer
interest in the limit order book.\12\ Absent Phlx Rule 1014(g)(i)(B),
such orders would be required to yield priority. The Exchange states
that ``[t]he purpose behind the split-price priority exception was `to
bring about the execution of large orders, which by virtue of their
size and the need to execute them at multiple
[[Page 8242]]
prices may be difficult to execute without a limited exception to the
priority rules.' '' \13\
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\12\ See Notice, supra note 3, at 56726 (citing Securities
Exchange Act Release No. 51820 (June 10, 2005), 70 FR 35759 (June
21, 2005) (SR-Phlx-2005-28)) (approving pilot). See also Securities
Exchange Act Release No. 55993 (June 29, 2007), 72 FR 37301 (July 9,
2007) (SR-Phlx-2007-44) (permanent approval)).
\13\ See Notice, supra note 3, at 56726. Floor Brokers that
avail themselves of the split-price priority rule are obligated to
ensure compliance with Section 11(a) of the Exchange Act. See
Amendment No. 1, supra note 6, at 12.
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According to the Exchange, split-price orders are currently
processed using either FBMS or paper tickets. The use of FBMS or paper
tickets depends on whether the split-price order can be evenly split
using simple calculations or whether the split-price order involves
non-even integers and sub-MPV price points, which requires a more
complicated computation to determine the number of contracts to trade
at two different price points.\14\ The Exchange represents that FBMS
does not have the capability to calculate specific volumes at two
different MPV prices for split-price orders placed in a sub-MPV
price.\15\ To compensate for this system limitation, the Exchange is
proposing to amend Phlx Rule 1000(f)(iii) to add a new exception from
the mandatory use of the FBMS that would allow Floor Brokers to execute
certain split-price orders in the trading crowd that would be validated
by Phlx surveillance staff for compliance with applicable priority and
trade-through rules.
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\14\ See Notice, supra note 3, at 56726. Today, when the
computation is more complicated, surveillance staff allows a Floor
Broker to execute split-price orders involving non-even integers and
sub-MPV price points in open outcry using paper tickets pursuant to
Phlx Rule 1000(f)(iii)(A). See id.
\15\ See id. at 56727. See Amendment No. 1, supra note 6, at 20.
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Accordingly, the Exchange is proposing in Phlx Rule 1000(f)(iii)(D)
to allow the following split-price orders to be executed in the trading
crowd: (1) Simple orders not expressed in the applicable sub-MPV and
that cannot be evenly split into two whole numbers to create a price at
the midpoint of the MPV; and (2) complex and multi-leg orders with at
least one option leg with an odd-numbered volume that must trade at a
sub-MPV price or one leg that qualifies under (1) above.\16\
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\16\ See Notice, supra note 3, at 56724.
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The Exchange represents that this exception ``is anticipated to be
implemented infrequently and in the following [three] ways.'' \17\
Under the first scenario, a Floor Broker knows that, due to a system
limitation, a sub-MPV split-price order cannot be handled by FBMS.\18\
In this case, the Floor Broker would comply with Phlx Rule 1063(e),
expose the order in the trading crowd, and request the use of the
proposed exception from the Options Exchange Official
(``Official'').\19\ The Official would confirm his or her understanding
of the order and the availability of the exemption, and if the Floor
Broker's request is determined to be valid based on the split-price
calculation, announce to application of the exemption to the Floor
Broker and the trading crowd.\20\ After the Floor Broker negotiates and
consummates the trade in the trading crowd, the Floor Broker would
timestamp the paper ticket at the time the trade is consummated in the
trading crowd, which would become the time of execution for the
trade.\21\ The consummated trade would then be submitted to the
Official to validate for compliance with priority and trade-through
rules. If compliant, the Official would permit the Floor Broker to
submit the manual split-price trade, via paper ticket, for trade
reporting.\22\
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\17\ See Amendment No. 1, supra note 6, at 13.
\18\ See id.
\19\ See id.
\20\ See id. at 13-14.
\21\ See id. at 14. The Exchange notes that, typically, the
Official captures a timestamp reflecting the time the Official
observed that the trade was consummated in the trading crowd and
may, in its discretion, substitute this timestamp for the timestamp
recorded by the Floor Broker at the time of consummation. See id.
\22\ See Amendment No. 1, supra note 6, at 14-15. According to
the Exchange, the paper ticket will reflect the timestamp captured
by the Floor Broker or (as described above) the Official, which will
reflect the time the trade was consummated in the trading crowd. See
id.
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The second scenario involves a situation in which a Floor Broker
submits a split-price order to FBMS, but the Floor Broker does not
realize that FBMS cannot handle the order because the price is outside
the MPV.\23\ In this case, the Floor Broker would comply with Phlx Rule
1063(e), expose the order in the trading crowd, and, upon consummation
of the transaction, submit the order to FBMS for execution. Because
FBMS cannot calculate the split-price for the order, FBMS would reject
the submission and the Floor Broker would receive a rejection
message.\24\ Upon the receipt of this message, the Floor Broker would
inform the Official that FBMS rejected the split-price order. The
Official would then review the terms of the consummated trade and,
using the timestamp captured by the Floor Broker or Official,\25\
validate the consummated trade for compliance with priority and trade-
through.\26\ If the consummated trade is compliant, the Official would
permit the Floor Broker to submit the manual split-price trade, via
paper ticket reflecting the timestamp captured by the Floor Broker (or
Official), for trade reporting.\27\
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\23\ See id. at 15.
\24\ See id. According to the Exchange, this might occur if the
order is not priced in the minimum price increment and consequently
FBMS would reject the trade. See id.
\25\ According to the Exchange, the Floor Broker captures a
timestamp for the time that the Floor Broker submitted the proposed
execution in FBMS. The Exchange further represents that, as in
scenario 1, the Official also would typically capture a timestamp
reflecting the time that the Official observed the Floor Broker's
attempt to execute the transaction in FBMS. Surveillance staff may,
in its discretion, substitute this timestamp for the timestamp
recorded by the Floor Broker as the time that the trade was
consummated. See Amendment No. 1, supra note 6, at 15. See also
supra note 21.
\26\ See id. at 15-16.
\27\ See id. at 16.
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The third scenario is similar to the second scenario; however,
neither the Floor Broker nor the Official captures a reliable time that
the consummated trade was submitted to FBMS for execution.\28\ In this
case, the Official would require the Floor Broker to ``re-trade'' the
order using a paper ticket in the sequence described in the first
scenario above.\29\
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\28\ See id.
\29\ See id.
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The Exchange also proposes that, in addition to split-price orders
executed pursuant to proposed Phlx Rule 1000(f)(iii)(D), Phlx
surveillance staff would approve all executions submitted under Phlx
Rule 1000(f)(iii) to validate that such executions abide by applicable
priority and trade-through rules.\30\ The Exchange also proposes to
round prices if necessary to execute the trade at the MPV, but only to
the benefit of a customer order, or, where multiple customer orders are
involved, for the customer order that is earliest in time.\31\ Where no
customer order is involved, the rounding of prices will be applied to
the non-customer order that is earliest in time.\32\
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\30\ See proposed Phlx Rule 1000(f)(iii).
\31\ See proposed Phlx Rule 1000(f)(iii); see also Notice, supra
note 3, at 56727.
\32\ See Amendment No. 1, supra note 6, at 3 and 7.
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III. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change, as modified by Amendment No. 1, is consistent with the
requirements of Section 6 of the Act \33\ and the rules and regulations
thereunder applicable to a national securities exchange.\34\
Specifically, the Commission finds that the proposed rule change is
consistent with Section 6(b)(5) of the Act,\35\ which requires, among
other things, that the rules of a national securities exchange
[[Page 8243]]
be designed to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade, 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; and not be designed to permit unfair discrimination
between customers, issuers, brokers, or dealers.
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\33\ 15 U.S.C. 78f.
\34\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\35\ 15 U.S.C. 78f(b)(5).
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The Commission notes that the Exchange is proposing a new exception
in Phlx Rule 1000(f)(iii)(D) that is designed to enable Floor Brokers
to execute two types of split-price orders in the trading crowd that
cannot be processed by FBMS because of a system limitation.\36\ The
Exchange represents that its surveillance staff will oversee Floor
Brokers' use of the proposed Phlx Rule 1000(f)(iii)(D) exception, which
they do today for current exceptions provided under Phlx Rule
1000(f)(iii).\37\ The Exchange further represents that for each
execution pursuant to Phlx Rule 1000(f)(iii): (1) Exchange surveillance
staff will verify that the conditions of the exception under Phlx Rule
1000(f)(iii) are met and will ensure that the proposed exception for
split-price orders will be used only rarely; \38\ (2) Exchange
surveillance staff will approve executions pursuant to Phlx Rule
1000(f)(iii) and validate compliance with applicable priority rules of
the Exchange and trade-through rules of the Options Order Protection
and Locked/Crossed Market Plan; \39\ and (3) all relevant trade data
resulting from executions pursuant to Phlx Rule 1000(f)(iii) will be
recorded on both paper tickets and in FBMS to ensure a proper audit
trail for timely surveillance.\40\ The Commission notes that the
activities of Phlx Surveillance under Rule 1000(f)(iii), including the
substitution of timestamps, should be carried out in an objective
manner and with due regard to the Exchange's obligations under the
Act.\41\
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\36\ The Commission notes that the exception for split-price
orders is similar in purpose to the current exceptions provided in
Phlx Rule 1000(f)(iii)(B) and (C). See Securities Exchange Act
Release No. 68960 (February 20, 2013), 78 FR 13132 (February 26,
2013) (SR-Phlx-2013-09) (recognizing exceptions for certain
executions to occur manually in the trading crowd and not through
FBMS. ``[ ] FLEX orders will continue to be executable by Floor
Brokers in the trading crowd pursuant to Rule 1079 and 1079A, rather
than through FBMS. This is because FBMS will not be able to accept
FLEX orders, which have varied and complicated terms. Similarly,
accommodation transactions (also known as cabinet trades) will
continue to be executable by Floor Brokers in the trading crowd
pursuant to Rule 1059. Neither FLEX nor accommodation transactions
are executed through Exchange systems today. Floor Brokers will also
be permitted to execute orders in the trading crowd if they are
handling an order with more than 15 legs, because the Exchange
determined to limit the complexity of FBMS functionality and does
not believe that many orders fall into this category or that Floor
Brokers will be adversely affected.'').
\37\ See Notice, supra note 3, at 56726. See also Amendment No.
1, supra note 6, at 17. The Exchange notes its belief that it is
``necessary and appropriate for the surveillance Staff to exercise
independent judgment with respect to the proper timestamp for the
consummation of trades on the floor of the Exchange.'' See Amendment
No. 1, supra note 6, at 14, n.17. According to the Exchange, ``[t]he
surveillance Staff is trained to observe objectively the conduct of
floor participants, to detect conduct that improperly advantages
floor participants, and to enforce Exchange rules.'' Id. Finally,
the Exchange notes that it believes that ``[t]he absence of engaged
and empowered surveillance Staff would undermine the integrity of
the trading floor on the Exchange.'' Id.
\38\ See Notice, supra note 3, at 56728. See also Amendment No.
1, supra note 6, at 23.
\39\ See Notice, supra note 3, at 56727. See also Amendment No.
1, supra note 6, at 22. The Options Order Protection and Locked/
Crossed Market Plan is available at http://www.optionsclearing.com/components/docs/clearing/services/options_order_protection_plan.pdf.
\40\ See Notice, supra note 3, at 56727. See also Amendment No.
1, supra note 6, at 22.
\41\ The Commission notes that Phlx surveillance staff might
substitute the timestamp it captures for the timestamp captured by a
Floor Broker if necessary to prevent conduct that would improperly
advantage floor participants or to enforce compliance with the
Exchange's rules. It is the Commission's understanding that such a
substitution would happen only rarely and only if consistent with
the authority conferred upon surveillance staff by the Exchange's
rules. See Amendment No. 1., supra note 6, at 14, n.17.
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For the foregoing reasons, the Commission finds that the proposed
rule change, as modified by Amendment No. 1, is consistent with Section
6(b)(5) of the Act and the rules and regulations thereunder applicable
to national securities exchanges.
IV. Solicitation of Comments on Amendment No. 1 to the Proposed Rule
Change
Interested persons are invited to submit written data, views, and
arguments concerning whether Amendment No. 1 to 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 No. SR-Phlx-2016-82 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 No. SR-Phlx-2016-82. 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 such filing will also 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 No. SR-Phlx-2016-82 and should be
submitted on or before February 14, 2017.
V. Accelerated Approval of Proposed Rule Change, as Modified by
Amendment No. 1
The Commission finds good cause to approve the proposed rule
change, as modified by Amendment No. 1, prior to the thirtieth day
after the date of publication of notice of the amended proposal in the
Federal Register. As described above, in Amendment No. 1, Phlx updated
its proposal to reflect the implementation of FBMS 3 and the retirement
of FBMS 2; clarified how prices may be rounded for non-customer split-
price orders; and provided three examples that explain how split-price
orders will be handled by the Exchange under the proposed
exception.\42\ The Commission believes that Amendment No. 1 provided
additional specificity regarding the operation of the new proposed
exception in Phlx Rule 1000(f)(iii)(D). Accordingly, the Commission
finds good cause, pursuant to Section 19(b)(2) of the Act,\43\ to
approve the proposed rule change, as
[[Page 8244]]
modified by Amendment No. 1, on an accelerated basis.
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\42\ See Amendment No. 1, supra note 6, at 3-4.
\43\ 15 U.S.C. 78s(b)(2)
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VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\44\ that the proposed rule change (SR-Phlx-2016-82), as modified
by Amendment No. 1, be, and hereby is, approved on an accelerated
basis.
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\44\ See id.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\45\
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\45\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-01460 Filed 1-23-17; 8:45 am]
BILLING CODE 8011-01-P