Document ID: SEC-2020-0555-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Nasdaq Stock Market LLC
Posted Date: 2020-04-10T04:00Z

[Federal Register Volume 85, Number 70 (Friday, April 10, 2020)]
[Notices]
[Pages 20309-20312]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-07548]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88568; File No. SR-NASDAQ-2020-014]

Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
Relating to the First Trust California Municipal High Income ETF and 
the First Trust Municipal High Income ETF

April 6, 2020.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on March 27, 2020, The Nasdaq Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II 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 a rule change relating to the First Trust 
California Municipal High Income ETF (the ``California Fund'') and the 
First Trust Municipal High Income ETF (the ``Municipal Fund''), each a 
series of First Trust Exchange-Traded Fund III (the ``Trust''), the 
shares of which have been approved by the Commission for listing and 
trading under Nasdaq Rule 5735 (``Managed Fund Shares''). The 
California Fund and the Municipal Fund are each, a ``Fund'' and 
collectively, the ``Funds.'' The shares of the Funds are collectively 
referred to herein as the ``Shares.''
    The text of the proposed rule change is available on the Exchange's 
website at http://nasdaq.cchwallstreet.com, at the principal office of 
the Exchange, 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 Commission has approved the listing and trading of Shares under 
Nasdaq Rule 5735, which governs the listing and trading of Managed Fund 
Shares on the Exchange.\3\ The Exchange

[[Page 20310]]

believes the proposed rule change reflects no significant issues not 
previously addressed in the Prior Releases.
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    \3\ The Commission approved Nasdaq Rule 5735 in Securities 
Exchange Act Release No. 57962 (June 13, 2008), 73 FR 35175 (June 
20, 2008) (SR-NASDAQ-2008-039). The Commission previously approved 
the listing and trading of the Shares of each Fund. With respect to 
the California Fund, see Securities Exchange Act Release No. 80745 
(May 23, 2017), 82 FR 24755 (May 30, 2017) (SR-NASDAQ-2017-033) 
(Order Granting Approval of a Proposed Rule Change, as Modified by 
Amendments No. 1 and 2, To List and Trade Shares of the First Trust 
California Municipal High Income ETF) (the ``California 2017 
Release''). With respect to the Municipal Fund, see Securities 
Exchange Act Release No. 78913 (September 23, 2016), 81 FR 69109 
(October 5, 2016) (SR-NASDAQ-2016-002) (Notice of Filing of 
Amendment No. 3, and Order Granting Accelerated Approval of Proposed 
Rule Change, as Modified by Amendment No. 3, To List and Trade 
Shares of the First Trust Municipal High Income ETF of First Trust 
Exchange-Traded Fund III) (the ``Municipal 2016 Release''). 
Subsequently, the Commission approved a proposed rule change 
relating to the Municipal Fund, the primary purpose of which was to 
modify certain representations included in the Municipal 2016 
Release. See Securities Exchange Act Release No. 81265 (July 31, 
2017), 82 FR 36460 (August 4, 2017) (SR-NASDAQ-2017-038) (Notice of 
Filing of Amendment No. 1, and Order Granting Accelerated Approval 
of a Proposed Rule Change, as Modified by Amendments No. 1 and 2, 
Relating to the First Trust Municipal High Income ETF) (the 
``Municipal 2017 Release''). The Municipal 2016 Release, together 
with the Municipal 2017 Release, are referred to collectively as the 
``Municipal 2016/2017 Release.'' In 2019, the Commission approved a 
proposed rule change relating to each Fund, the primary purpose of 
which was to modify certain representations included in the 
Municipal 2017 Release and the California 2017 Release. See 
Securities Exchange Act Release No. 85666 (April 16, 2019), 84 FR 
16739 (April 22, 2019) (SR-NASDAQ-2019-021) (Notice of Filing and 
Immediate Effectiveness of Proposed Rule Change to the First Trust 
California Municipal High Income ETF and the First Trust Municipal 
High Income ETF) (the ``2019 Release''). The Municipal 2016/2017 
Release, together with the 2019 Release, are referred to 
collectively as the ``Municipal Prior Release.'' The California 2017 
Release, together with the 2019 Release, are referred to 
collectively as the ``California Prior Release.'' The California 
Prior Release and the Municipal Prior Release are each, a ``Prior 
Release'' and collectively, the ``Prior Releases.''
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    Each Fund is an actively-managed exchange-traded fund (``ETF''). 
The Shares of each Fund are offered by the Trust, which was established 
as a Massachusetts business trust on January 9, 2008. The Trust, which 
is registered with the Commission as an investment company under the 
Investment Company Act of 1940 (the ``1940 Act''), has, with respect to 
each Fund, filed a post-effective amendment to its registration 
statement on Form N-1A (``Registration Statement'') with the 
Commission.\4\ Each Fund is a series of the Trust.
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    \4\ See, with respect to each Fund, Post-Effective Amendment No. 
103 to Registration Statement on Form N-1A for the Trust, dated 
November 27, 2019 (File Nos. 333-176976 and 811-22245). The 
descriptions of the Funds and the Shares contained herein are based, 
in part, on information in the Registration Statement. First Trust 
Advisors L.P. (the ``Adviser'') represents that the Adviser will not 
implement the changes described herein until the instant proposed 
rule change is operative.
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    As described in more detail below, the purpose of this proposed 
rule change is to delete a representation that was set forth (a) with 
respect to the California Fund, the California 2017 Release (and not 
subsequently modified in the 2019 Release) and (b) with respect to the 
Municipal Fund, the Municipal 2016 Release (and not subsequently 
modified in the Municipal 2017 Release or the 2019 Release) relating to 
weighted average maturity (i.e., the ``Average Maturity 
Representation,'' as defined below) in order to provide the Adviser 
with additional flexibility in constructing and managing the applicable 
Fund's portfolio. The Exchange believes that the proposed modification 
would provide each Fund with greater ability to select ``Municipal 
Securities'' (as defined below) that would support such Fund's 
investment goals and should not raise concerns. In this regard, the 
Exchange notes that the Commission has previously approved other 
proposed rule changes involving ETFs investing in municipal securities 
that did not include a representation comparable to the Average 
Maturity Representation.\5\ In addition, the generic listing standards 
for actively-managed ETFs that invest in fixed income securities (the 
``Fixed Income GLS'') do not impose a requirement relating to the 
average maturity of securities in a portfolio.\6\ Further, the 2019 
Release includes certain representations that relate to each Fund's 
diversity, liquidity and mitigation of risks associated with 
manipulation that would not be affected by the proposed change.\7\
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    \5\ See, e.g., Securities Exchange Act Release Nos. 84381 
(October 5, 2018), 83 FR 51752 (October 12, 2018) (SR-NYSEArca-2018-
72) (Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change Relating to Listing and Trading of Shares of the First Trust 
Ultra Short Duration Municipal ETF Under NYSE Arca Rule 8.600-E); 
84379 (October 5, 2018), 83 FR 51724 (October 12, 2018) (SR-
NYSEArca-2018-73) (Notice of Filing and Immediate Effectiveness of 
Proposed Rule Change Relating to Listing and Trading of Shares of 
the First Trust Short Duration Managed Municipal ETF Under NYSE Arca 
Rule 8.600-E); 83982 (August 29, 2018), 83 FR 45168 (September 5, 
2018) (SR-NYSEArca-2018-62) (Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change Relating to Listing and 
Trading of Shares of the American Century Diversified Municipal Bond 
ETF Under NYSE Arca Rule 8.600-E); and 71913 (April 9, 2014), 79 FR 
21333 (April 15, 2014) (SR-NASDAQ-2014-019) (Notice of Filing of 
Amendment No. 1 and Order Granting Accelerated Approval of Proposed 
Rule Change, as Modified by Amendment No. 1 Thereto, Relating to the 
Listing and Trading of the Shares of the First Trust Managed 
Municipal Fund of First Trust Exchange-Traded Fund III) 
(collectively, the ``Other Municipal Approvals'').
    \6\ See Nasdaq Rule 5735(b)(1)(B).
    \7\ See infra footnote 12 and accompanying text.
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    As described in the California Prior Release,\8\ the primary 
investment objective of the California Fund is to seek to provide 
current income that is exempt from regular federal income taxes and 
California income taxes, and its secondary objective is long-term 
capital appreciation. As described in the Municipal Prior Release,\9\ 
the primary investment objective of the Municipal Fund is to generate 
current income that is exempt from regular federal income taxes, and 
its secondary objective is long-term capital appreciation. Under normal 
market conditions, each Fund seeks to achieve its investment objectives 
by investing at least 80% of its net assets (including investment 
borrowings) in municipal debt securities (referred to as ``Municipal 
Securities'') that pay interest that is exempt from regular federal 
income taxes (and, in the case of the California Fund, California 
income taxes).
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    \8\ See the California 2017 Release and the 2019 Release.
    \9\ See the Municipal 2016 Release and the 2019 Release.
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    As discussed in the Prior Release for each Fund,\10\ the applicable 
Fund may invest in Municipal Securities of any maturity. However, each 
Prior Release \11\ also states that under normal market conditions, 
except for the initial invest-up period and periods of high cash 
inflows or outflows, the weighted average maturity of the applicable 
Fund will be less than or equal to 14 years (the ``Average Maturity 
Representation''). With respect to each Fund, the Average Maturity 
Representation has not previously been modified.
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    \10\ See, with respect to the California Fund, the California 
2017 Release and with respect to the Municipal Fund, the Municipal 
2016 Release.
    \11\ See, with respect to the California Fund, the California 
2017 Release and with respect to the Municipal Fund, the Municipal 
2016 Release.
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    In order to provide each Fund with greater ability to select 
Municipal Securities that would support such Fund's investment goals, 
the Exchange is proposing that, going forward, the Average Maturity 
Representation be deleted. The Exchange does not believe that this 
change should raise concerns. As noted above, the Other Municipal 
Approvals did not include a similar representation and the Fixed Income 
GLS do not impose a comparable requirement. Further, the Exchange notes 
that the 2019 Release includes certain representations that relate to 
each Fund's diversity, liquidity and mitigation of risks associated 
with manipulation that would not be affected by the proposed 
change.\12\
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    \12\ As noted in the 2019 Release, under normal market 
conditions, except for the initial invest-up period and periods of 
high cash inflows or outflows, (a) for each Fund, no component fixed 
income security (excluding specified U.S. government securities) 
would represent more than 15% of such Fund's net assets, and the 
five most heavily weighted component fixed income securities in each 
Fund's portfolio (excluding U.S. government securities) would not, 
in the aggregate, account for more than 25% of such Fund's net 
assets; (b) each Fund's portfolio of Municipal Securities would 
continue to be diversified among a minimum of 30 non-affiliated 
issuers; (c) component securities that in the aggregate account for 
at least 90% of the weight of each Fund's portfolio of Municipal 
Securities would continue to be exempted securities as defined in 
Section 3(a)(12) of the Act; and (d) each Fund's investments in 
Municipal Securities would continue to provide exposure (based on 
dollar amount invested) to at least 10 different industries (with no 
more than 25% of the value of such Fund's net assets comprised of 
Municipal Securities that provide exposure to any single industry). 
In addition, each Fund's investments in illiquid assets (calculated 
at the time of investment), including Rule 144A securities deemed 
illiquid by the Adviser, would continue to be limited to 15% of such 
Fund's net assets and, subject to certain exceptions, each Fund 
would not invest 25% or more of the value of its total assets in 
securities of issuers in any one industry. Further, with respect to 
the Municipal Fund, under normal market conditions, except for the 
initial invest-up period and periods of high cash inflows or 
outflows, such Fund's investments in Municipal Securities would 
continue to provide exposure (based on dollar amount invested) to at 
least 15 different states (with no more than 30% of the value of 
such Fund's net assets comprised of Municipal Securities that 
provide exposure to any single state). The foregoing representations 
set forth in this footnote 12 are referred to collectively as the 
``2019 Representations.''

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[[Page 20311]]

Continued Listing Representations
    For each Fund, all statements and representations made in this 
filing regarding (a) the description of the portfolio or reference 
assets, (b) limitations on portfolio holdings or reference assets, (c) 
dissemination and availability of the reference asset or intraday 
indicative values, or (d) the applicability of Exchange listing rules 
shall constitute continued listing requirements for listing the 
applicable Shares on the Exchange. In addition, the issuer has 
represented to the Exchange that it will advise the Exchange of any 
failure by a Fund to comply with the continued listing requirements, 
and, pursuant to its obligations under Section 19(g)(1) of the Act, the 
Exchange will monitor for compliance with the continued listing 
requirements. If a Fund is not in compliance with the applicable 
listing requirements, the Exchange will commence delisting procedures 
with respect to such Fund under the Nasdaq 5800 Series.
    The Adviser represents that there would be no change to either 
Fund's investment objectives. Except as provided herein, with respect 
to each Fund, all currently effective representations (i.e., 
representations that have not previously been modified or superseded) 
made in the applicable Prior Releases (collectively, the ``Prior 
Release Representations'') would remain unchanged, including but not 
limited to such currently effective representations regarding (a) the 
description of the portfolio or reference assets, (b) limitations on 
portfolio holdings or reference assets, (c) dissemination and 
availability of the reference asset or intraday indicative values, or 
(d) the applicability of Exchange listing rules.\13\ Except for the 
generic listing provisions of Nasdaq Rule 5735(b)(1) (the ``generic 
listing standards''),\14\ the Funds and the Shares would continue to 
comply with the requirements applicable to Managed Fund Shares under 
Nasdaq Rule 5735.
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    \13\ The Exchange notes, however, that certain statements in the 
Prior Releases include references that are no longer current and has 
not specifically updated such statements in this filing. For 
example, the Municipal 2016 Release includes references to Form N-
SAR (under the heading ``Availability of Information'') and a 
``minimum price variation'' provision in Nasdaq Rule 5735(b)(3) 
(under the heading ``Trading Rules''), neither of which is currently 
in effect.
    \14\ With respect to the Municipal Fund, the generic listing 
standards were specifically discussed in the Municipal 2017 Release 
and the 2019 Release. With respect to the California Fund, the 
generic listing standards were specifically discussed in the 
California 2017 Release and the 2019 Release. The Exchange notes, 
however, that references to Nasdaq Rule 5735(b)(1)(B)(v) in the 
Municipal 2017 Release and the California 2017 Release did not 
reflect a change to such rule that was effected in 2019. See 
Securities Exchange Release No. 86399 (July 17, 2019), 84 FR 35446 
(July 23, 2019) (SR-NASDAQ-2019-054).
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2. Statutory Basis
    Nasdaq believes that the proposal is consistent with Section 6(b) 
of the Act in general and Section 6(b)(5) of the Act, in particular, in 
that it is 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 facilitating 
transactions in securities, and to remove impediments to and perfect 
the mechanism of a free and open market and, in general, to protect 
investors and the public interest.
    The purpose of this proposed rule change is to delete the Average 
Maturity Representation in order to provide the Adviser with additional 
flexibility in constructing and managing each Fund's portfolio. The 
Exchange believes that the proposed modification would provide each 
Fund with greater ability to select Municipal Securities that would 
support such Fund's investment goals. Except as provided herein, with 
respect to each Fund, all currently effective Prior Release 
Representations would remain unchanged. Except for the generic listing 
standards,\15\ the Funds and the Shares would continue to comply with 
the requirements applicable to Managed Fund Shares under Nasdaq Rule 
5735.
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    \15\ See supra note 14.
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    The Exchange believes that the proposed rule change is designed to 
prevent fraudulent and manipulative acts and practices in that the 
Shares would continue to be listed and traded on the Exchange pursuant 
to Nasdaq Rule 5735. The Exchange also notes the continued listing 
representations set forth above. The Exchange represents that trading 
in the Shares would continue to be subject to the existing trading 
surveillances, administered by both Nasdaq and also the Financial 
Industry Regulatory Authority (``FINRA''), on behalf of the Exchange, 
which are designed to detect violations of Exchange rules and 
applicable federal securities laws.
    The proposed rule change is designed to promote just and equitable 
principles of trade and to protect investors and the public interest in 
that the deletion of the Average Maturity Representation is intended to 
provide each Fund with greater ability to select from Municipal 
Securities that would support such Fund's investment goals. The 
Exchange notes that the 2019 Representations would not be affected by 
the proposed modification. Additionally, the Exchange notes that the 
Other Municipal Approvals did not include a representation similar to 
the Average Maturity Representation and the Fixed Income GLS do not 
impose a comparable requirement.
    In addition, a large amount of information would continue to be 
publicly available regarding the Funds and the Shares, thereby 
promoting market transparency. For example, the Intraday Indicative 
Value (as defined in Nasdaq Rule 5735(c)(3)), available on the Nasdaq 
Information LLC proprietary index data service, would continue to be 
widely disseminated by one or more major market data vendors and 
broadly displayed at least every 15 seconds during the Regular Market 
Session. On each business day, before commencement of trading in Shares 
in the Regular Market Session on the Exchange, each Fund would continue 
to disclose on its website the Disclosed Portfolio (as defined in 
Nasdaq Rule 5735(c)(2)) that will form the basis for such Fund's 
calculation of net asset value (``NAV'') at the end of the business 
day.
    The proposed rule change is designed to perfect the mechanism of a 
free and open market and, in general, to protect investors and the 
public interest in that the additional flexibility to be afforded to 
the Adviser under the proposed rule change is intended to enhance each 
Fund's ability to meet its investment goals, to the benefit of 
investors. In addition, NAV per Share would continue to be calculated 
daily and each Fund's Disclosed Portfolio would continue to be made 
available to all

[[Page 20312]]

market participants at the same time. Further, investors would continue 
to have ready access to information regarding each Fund's holdings, the 
Intraday Indicative Value, the Disclosed Portfolio, and quotation and 
last sale information for the Shares.
    For the above reasons, Nasdaq believes the proposed rule change is 
consistent with the requirements of Section 6(b)(5) of the Act.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The Exchange believes that 
the proposed rule change would provide the Adviser with additional 
flexibility in managing the Funds, thereby helping each Fund to achieve 
its investment goals. As such, it is expected that each Fund may become 
a more attractive investment product in the marketplace and, therefore, 
that the proposed rule change would not impose any burden on 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \16\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\17\
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    \16\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \17\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    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.

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 rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2020-014 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-NASDAQ-2020-014. 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-NASDAQ-2020-014 and should be submitted 
on or before May 1, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-07548 Filed 4-9-20; 8:45 am]
 BILLING CODE 8011-01-P