[Federal Register Volume 84, Number 106 (Monday, June 3, 2019)]
[Notices]
[Pages 25599-25602]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-11446]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85946; File No. SR-NYSEArca-2019-04]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order Instituting 
Proceedings To Determine Whether To Approve or Disapprove a Proposed 
Rule Change To Amend NYSE Arca Rule 5.2-E(j)(3) and To Adopt Generic 
Listing Standards for Investment Company Units Based on an Index or 
Portfolio of Municipal Securities

May 28, 2019.

I. Introduction

    On February 8, 2019, NYSE Arca, Inc. (``Exchange'' or ``NYSE 
Arca'') 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 adopt generic listing standards for Investment 
Company Units (``Units'') based on an index or portfolio of municipal 
securities. The proposed rule change was published for comment in the 
Federal Register on February 27, 2019.\3\ On April 9, 2019, pursuant to 
Section 19(b)(2) of the Act,\4\ the Commission designated a longer 
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.\5\ The Commission has 
received no comments on the proposal. The Commission is publishing this 
order to institute proceedings pursuant to Section 19(b)(2)(B) of the 
Act \6\ to determine whether to approve or disapprove the proposed rule 
change.
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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. 85170 (Feb. 21, 
2019), 84 FR 6451 (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 85573, 84 FR 15239 
(Apr. 15, 2019). The Commission designated May 28, 2019 as the date 
by which the Commission shall approve or disapprove, or institute 
proceedings to determine whether to approve or disapprove, the 
proposed rule change.
    \6\ 15 U.S.C. 78s(b)(2)(B).
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II. Summary of the Proposed Rule Change 7
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    \7\ For a full description of the proposed rule change, see 
Notice, supra note 3.
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    NYSE Arca Rule 5.2-E(j)(3) permits the Exchange to list a series of 
Units based on an index or portfolio of underlying securities. 
Currently, NYSE Arca Rule 5.2-E(j)(3) includes generic listing 
standards for Units based on an index or portfolio of equity or fixed

[[Page 25600]]

income securities or a combination thereof. Municipal Securities \8\ 
are a type of fixed income security, and therefore currently the 
Exchange may generically list and trade securities overlying an index 
or portfolio of Municipal Securities provided the index or portfolio 
satisfies the criteria of Commentary .02 to NYSE Arca Rule 5.2-E(j)(3) 
(``Commentary .02''). According to the Exchange, however, indexes and 
portfolios of Municipal Securities typically do not satisfy the 
criterion that component securities in an index or portfolio that in 
aggregate account for at least 75% of the Fixed Income Securities 
portion of the weight of the index or portfolio each have a minimum 
original principal amount outstanding of $100 million or more.\9\ The 
Exchange states that generally Municipal Securities are issued with 
individual maturities of relatively small size, although they typically 
are constituents of a much larger municipal bond offering.\10\
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    \8\ The proposed rule defines the term ``Municipal Securities'' 
by incorporating the definition in Section 3(a)(29) of the Act.
    \9\ See Notice, supra note 3, 84 FR at 6452. ``Fixed Income 
Securities are debt securities that are notes, bonds, debentures or 
evidence of indebtedness that include, but are not limited to, U.S. 
Department of Treasury securities (``Treasury Securities''), 
government-sponsored entity securities (``GSE Securities''), 
municipal securities, trust preferred securities, supranational debt 
and debt of a foreign country or a subdivision thereof.'' NYSE Arca 
Rule 5.2-E(j)(3), Commentary .02.
    \10\ See id.
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A. Proposed Commentary .02A to NYSE Arca Rule 5.2-E(j)(3)

1. Applicability
    Proposed Commentary .02A to NYSE Arca Rule 5.2-E(j)(3) 
(``Commentary .02A'') provides generic listing standards for Units 
based on an index or portfolio of Municipal Securities. Because 
existing Commentary .02 also applies to Units based on an index or 
portfolio of Municipal Securities, the Exchange represents that it 
would apply existing Commentary .02 and proposed Commentary .02A in a 
``waterfall'' manner. Specifically, the Exchange would initially 
evaluate every series of Units based on an index or portfolio of 
Municipal Securities or Municipal Securities and cash against the 
generic listing standards of existing Commentary .02 and would apply 
proposed Commentary .02A only to Units whose index or portfolio does 
not meet the requirements of Commentary .02.
2. Proposed Generic Listing Criteria
    The Exchange asserts Commentary .02A includes many requirements 
that are more stringent than those applicable under Commentary .02. 
These heightened requirements, according to the Exchange, would deter 
potential manipulation of such Municipal Securities indices even though 
the index or portfolio may include securities that have smaller 
original principal amounts outstanding. The proposed quantitative 
requirements described below would apply on both an initial and 
continued basis to a Municipal Securities index or portfolio underlying 
a series of Units.
a. Original Principal Amount Outstanding
    According to the Exchange, Municipal Securities are typically 
issued with individual maturities of relatively small size, although 
they generally are constituents of a much larger municipal bond 
offering.\11\ Accordingly, the Exchange proposes to reduce the 
requirement for minimum original principal amount outstanding for 
component securities from at least $100 million to at least $5 million. 
Further, the Exchange proposes that qualifying securities must have 
been issued as part of a transaction of at least $20 million. Lastly, 
the Exchange proposes to increase the percentage weight of an index or 
portfolio that must satisfy the original principal amount outstanding 
requirement from 75% to 90%.
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    \11\ See supra note 10 and accompanying text.
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    The Exchange asserts that reducing the minimum original principal 
amount outstanding for component securities will not make an index or 
portfolio more susceptible to manipulation.\12\ The Exchange argues 
that the requirement that component securities in a Municipal 
Securities index or portfolio have a minimum principal amount 
outstanding, in concert with the other requirements of Commentary .02A, 
will ensure that such index or portfolio is sufficiently broad-based in 
scope as to minimize potential manipulation of the index or 
portfolio.\13\ In addition, the Exchange asserts that its proposal to 
require that 90% of the weight of a Municipal Securities index or 
portfolio meet the original principal amount outstanding requirement 
(as opposed to 75% for existing Commentary .02) will further deter 
potential manipulation by ensuring that a greater portion of the index 
or portfolio meets this minimum size requirement.\14\
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    \12\ See Notice, supra note 3, 84 FR at 6452.
    \13\ See id.
    \14\ See id. at 6453.
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    The Exchange notes that the Commission has previously approved the 
listing and trading of several series of Units where the underlying 
Municipal Securities index or portfolio required that component 
securities representing at least 90% of the weight of the index or 
portfolio have a minimum original principal amount outstanding of at 
least $5 million and have been issued as part of a transaction of at 
least $20 million.\15\
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    \15\ See Securities Exchange Act Release No. 84049 (Sept. 6, 
2018), 83 FR 46228 (Sept. 12, 2018) (SR-NYSEArca-2018-38) (order 
approving, among other things, revisions to the continued listing 
criteria applicable to the iShares New York AMT-Free Muni Bond ETF).
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b. Component Concentration
    Commentary .02, the current generic listing rules for Units based 
on a fixed-income index or portfolio, permits individual component 
securities to account for up to 30% of the weight of such index or 
portfolio and the top-five weighted component securities to account for 
up to 65% of the weight of such index or portfolio. The Exchange 
proposes to tighten these thresholds, proposing that under Commentary 
.02A an individual Municipal Security may comprise only 10% of the 
index or portfolio and that the five most heavily-weighted Municipal 
Securities in an index or portfolio may comprise only 30% of the index 
or portfolio. The Exchange asserts that its proposal will reduce the 
susceptibility to manipulation of a Municipal Securities index or 
portfolio underlying a series of Units.\16\
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    \16\ See Notice, supra note 3, 84 FR at 6453.
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c. Issuer Diversification
    The current generic listing rules for Units based on an index or 
portfolio of fixed-income securities require that an index or portfolio 
must include securities from at least 13 non-affiliated issuers. 
Notably, however, the current rules exempt indices consisting of either 
entirely exempted securities or exempted securities and cash from 
complying with this diversification requirement.\17\ Therefore, under 
the current generic listing criterion, an index or portfolio comprised 
of only Municipal Securities (or Municipal Securities and cash) is not 
required to satisfy any minimum issuer diversification requirement. The 
Exchange proposes that an index or portfolio of Municipal Securities or 
Municipal Securities and cash must include securities from at least 13 
non-affiliated issuers. The Exchange asserts that requiring such 
diversification will reduce the likelihood that an index or portfolio 
may be manipulated by

[[Page 25601]]

ensuring that securities from a variety of issuers are represented in 
an index or portfolio of Municipal Securities.\18\
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    \17\ Municipal Securities are included in the definition of 
exempted securities. See Section 3(a)(12) of the Act.
    \18\ See Notice, supra note 3, 84 FR at 6453.
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d. Minimum Number of Components
    The current generic listing requirements for Units based on an 
index or portfolio of fixed-income securities do not have an explicit 
requirement that an index or portfolio contain a minimum number of 
securities. However, given that such rules require an index or 
portfolio to contain securities from at least thirteen non-affiliated 
issuers, there is an effective requirement that an index or portfolio 
of fixed-income securities contain at least thirteen component 
securities. As described above, a fixed-income index or portfolio 
comprised of exempted securities (including Municipal Securities) is 
not required to satisfy the issuer diversification test, and therefore 
such indices need not have a minimum number of component securities.
    The Exchange proposes to require that a Municipal Securities index 
or portfolio contain at least 500 component securities. According to 
the Exchange, this proposed requirement will ensure that a Municipal 
Securities index or portfolio is sufficiently broad-based and 
diversified to make it less susceptible to manipulation.\19\
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    \19\ See id.
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e. Additional Requirements
    In addition to the quantitative requirements described above, the 
Exchange proposes to adopt additional rules related to: (1) Index 
methodology and calculation; (2) dissemination of information; (3) 
initial shares outstanding; (4) hours of trading; (5) surveillance 
procedures; and (6) disclosures.
    The Exchange proposes to adopt Commentary .02A(b) to NYSE Arca Rule 
5.2-E(j)(3), which requires that (i) if a Municipal Securities index is 
maintained by a broker-dealer or fund advisor, the broker-dealer or 
fund advisor shall erect and maintain a ``firewall'' around the 
personnel who have access to information concerning changes and 
adjustments to the index; (ii) the current index value for Units listed 
pursuant to proposed Commentary .02A(a) to NYSE Arca Rule 5.2-E(j)(3) 
will be widely disseminated by one or more major market data vendors at 
least once per day and, if the index value does not change during some 
or all of the period when trading is occurring on the NYSE Arca 
Marketplace, the last official calculated index value must remain 
available throughout NYSE Arca Marketplace trading hours; and (iii) any 
advisory committee, supervisory board, or similar entity that advises a 
Reporting Authority \20\ or that makes decisions on the index 
composition, methodology, and related matters, must implement and 
maintain, or be subject to, procedures designed to prevent the use and 
dissemination of material non-public information regarding the 
applicable Municipal Securities index.
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    \20\ The term ``Reporting Authority'' has the meaning given to 
it in NYSE Arca Rule 5.1-E(b)(16).
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    The Exchange proposes to adopt Commentary .02A(c) to NYSE Arca Rule 
5.2-E(j)(3), which requires that one or more major market data vendors 
shall disseminate for each series of Units based on an index or 
portfolio of Municipal Securities an estimate, updated at least every 
15 seconds during the Core Trading Session, of the value of a share of 
each series (the ``Intraday Indicative Value'' or ``IIV''). The 
Intraday Indicative Value may be based, for example, upon current 
information regarding the required deposit of securities and cash 
amount to permit creation of new shares of the series or upon the index 
value. The Intraday Indicative Value may be calculated by the Exchange 
or by an independent third party throughout the day using prices 
obtained from independent market data providers or other independent 
pricing sources such as a broker-dealer or price evaluation services. 
If the Intraday Indicative Value does not change during some or all of 
the period when trading is occurring on the Exchange, then the last 
official calculated Intraday Indicative Value must remain available 
throughout Exchange trading hours.
    The Exchange proposes to adopt Commentary .02A(d) to NYSE Arca Rule 
5.2-E(j)(3), which requires that a minimum of 100,000 shares of a 
series of Units will be required to be outstanding at commencement of 
trading.
    The Exchange proposes to adopt Commentary .02A(e) to NYSE Arca Rule 
5.2-E(j)(3), which specifies that the hours of trading for the Units 
will be as governed by NYSE Arca Rule 7.34-E(a).
    The Exchange proposes to adopt Commentary .02A(f) to NYSE Arca Rule 
5.2-E(j)(3), which specifies that Units that are listed or traded 
pursuant to unlisted trading privileges will be subject to the 
Exchange's written surveillance procedures.
    Lastly, proposed Commentary .02A(g) to NYSE Arca Rule 5.2-E(j)(3) 
incorporates the information circular requirement of Commentary .01(g) 
NYSE Arca Rule 5.2-E(j)(3).

B. Proposed Amendments to Commentary .03 to NYSE Arca Rule 5.2-E(j)(3)

    The Exchange also proposes to amend Commentary .03 to NYSE Arca 
Rule 5.2-E(j)(3) to allow the generic listing and trading of Units 
based on a combination of two or more types of indexes, including a 
combination index that includes Municipal Securities. Currently, the 
scope of the rule allows the Exchange to generically list Units 
overlying on a combination of indexes or an index or portfolio of 
component securities representing: (1) The U.S. or domestic equity 
market; (2) the international equity market; and (3) the fixed income 
market. To the extent that an index or portfolio of Municipal 
Securities is included in a combination, the proposed rule specifies 
the Municipal Securities index or portfolio must satisfy all 
requirements of Commentary .02A to NYSE Arca Rule 5.2-E(j)(3). The 
Exchange also proposes other conforming changes to Commentary .03 to 
NYSE Arca Rule 5.2-E(j)(3) to specify that the current requirements 
related to index value dissemination and related continued listing 
standards will apply to indexes of Municipal Securities. The Exchange 
notes that a combination index or portfolio that includes an index or 
portfolio of Municipal Securities will not be permitted to seek to 
provide investment results in a multiple of the direct or inverse 
performance of such combination index or portfolio.\21\
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    \21\ See Notice, supra note 3, 84 FR at 6454.
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III. Proceedings To Determine Whether To Approve or Disapprove SR-
NYSEArca-2019-04 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \22\ to determine whether the proposed rule 
change should be approved or disapproved. Institution of such 
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 any of the issues involved. Rather, as described below, the 
Commission seeks and encourages interested persons to provide comments 
on the proposed rule change.
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    \22\ 15 U.S.C. 78s(b)(2)(B).

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[[Page 25602]]

    Pursuant to Section 19(b)(2)(B) of the Act,\23\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the proposed rule change's consistency with Section 6(b)(5) 
of the Act, which requires, among other things, that the rules of a 
national securities exchange be ``designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade,'' and ``to protect investors and the public 
interest.'' \24\ Specifically, the Commission seeks comment regarding 
the following:
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    \23\ Id.
    \24\ 15 U.S.C. 78f(b)(5).

    1. The Exchange's current generic listing requirement that at 
least 75% of the Fixed Income Securities portion of the weight of an 
underlying index or portfolio be comprised of components that each 
have a minimum original principal amount outstanding of $100 million 
is designed to ensure that adequate information is available about a 
substantial portion of the index components.\25\ Do the Exchange' 
proposed alternative thresholds for Municipal Securities indexes or 
portfolios similarly ensure that adequate information is available 
about a majority of the index components? Should one or more 
alternative criteria be employed to achieve the objective of the 
current generic listing requirement?
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    \25\ C.f., Securities Exchange Act Release No. 55783 (May 17, 
2007), 72 FR 29194, 29199 (May 24, 2007) (order approving generic 
listing standards for Units based on fixed income indexes) (``The 
Commission believes that [the requirements of Commentary .02] are 
reasonably designed to ensure that a substantial portion of any 
underlying index or portfolio consists of securities about which 
information is publicly available . . .'').
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    2. Would the Exchange's proposed requirements that the 
underlying index or portfolio of Municipal Securities include at 
least 500 components from at least 13 non-affiliated issuers 
mitigate manipulation concerns? Should one or more alternative 
criteria be employed to achieve diversification sufficient to 
mitigate manipulation concerns?
    3. Taken collectively, would the proposed generic listing 
criteria adequately ensure that each index or portfolio of Municipal 
Securities underlying an issue of Investment Company Units is not 
susceptible to manipulation?

IV. Procedure: 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 proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposed rule change 
is consistent with Section 6(b)(5) or any other provision of the Act, 
or the rules and regulations 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 under the Act,\26\ any 
request for an opportunity to make an oral presentation.\27\
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    \26\ 17 CFR 240.19b-4.
    \27\ Section 19(b)(2) of the Act, as amended by the Securities 
Acts Amendments of 1975, Public Law 94-29 (June 4, 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, Senate Comm. 
on Banking, Housing & Urban Affairs, 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 June 24, 2019. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
July 8, 2019. The Commission asks that commenters address the 
sufficiency of the Exchange's statements in support of the proposal, 
which are set forth in Notice,\28\ in addition to any other comments 
they may wish to submit about the proposed rule change.
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    \28\ See supra note 3.
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    In this regard, the Commission seeks comment on the Exchange's 
proposed generic listing standards for Units based on an index or 
portfolio of Municipal Securities. The Commission specifically seeks 
comment on whether the proposed requirement that an underlying index or 
portfolio must include a minimum of 500 component Municipal Securities 
is consistent with the requirement that the rules of a national 
securities exchange be ``designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade,'' and ``to protect investors and the public 
interest.'' \29\
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    \29\ 15 U.S.C. 78f(b)(5).
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    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-NYSEArca-2019-04 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-NYSEArca-2019-04. 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 (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 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 10:00 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. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NYSEArca-2019-04 and should be submitted 
by June 24, 2019. Rebuttal comments should be submitted by June 24, 
2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\30\

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    \30\ 17 CFR 200.30-3(a)(57).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-11446 Filed 5-31-19; 8:45 am]
BILLING CODE 8011-01-P