Document ID: SEC-2020-1701-0001
Agency: sec
Document Type: Notice
Title: Order Granting Conditional Exemptive Relief: Reporting of Allocations Pursuant to the National Market System Plan Governing the Consolidated Audit Trail
Posted Date: 2020-10-23T04:00Z

[Federal Register Volume 85, Number 206 (Friday, October 23, 2020)]
[Notices]
[Pages 67576-67579]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-23467]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90223]

Order Granting Conditional Exemptive Relief, Pursuant to Section 
36 of the Securities Exchange Act of 1934 (``Exchange Act'') and Rule 
608(e) of Regulation NMS Under the Exchange Act, Relating to the 
Reporting of Allocations Pursuant to the National Market System Plan 
Governing the Consolidated Audit Trail

October 19, 2020.

I. Introduction

    By letter dated August 27, 2020, BOX Exchange LLC, Cboe BYX 
Exchange, Inc., Cboe BZX Exchange, Inc., Cboe EDGA Exchange, Inc., Cboe 
EDGX Exchange, Inc., Cboe C2 Exchange, Inc., Cboe Exchange, Inc., 
Financial Industry Regulatory Authority, Inc. (``FINRA''), Investors 
Exchange LLC, Long Term Stock Exchange, Inc., MEMX LLC, Miami 
International Securities Exchange LLC, MIAX Emerald, LLC, MIAX PEARL, 
LLC, NASDAQ BX, LLC, Nasdaq GEMX, LLC, Nasdaq ISE, LLC, Nasdaq MRX, 
LLC, NASDAQ PHLX LLC, The NASDAQ Stock Market LLC, New York Stock 
Exchange LLC, NYSE American LLC, NYSE Arca, Inc., NYSE Chicago, Inc., 
and NYSE National, Inc. (collectively, the ``Participants'') requested 
that the Securities and Exchange Commission (``Commission'' or ``SEC'') 
grant them exemptive relief from the National Market System Plan 
Governing the Consolidated Audit Trail (``CAT NMS Plan''),\1\ pursuant 
to its authority under Section 36 of the Securities Exchange Act of 
1934 (``Exchange Act'') \2\ and Rule 608(e) of Regulation NMS under the 
Exchange Act, from certain allocation reporting requirements of 
Sections 6.4(d)(ii)(A)(1) and (2) of the CAT NMS Plan.\3\
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    \1\ The CAT NMS Plan was approved by the Commission, as 
modified, on November 15, 2016. See Securities Exchange Act Release 
No. 79318 (November 15, 2016), 81 FR 84696 (November 23, 2016).
    \2\ 15 U.S.C. 78mm(a)(1).
    \3\ See letter from the Participants to Vanessa Countryman, 
Secretary, Commission, dated August 27, 2020 (the ``August 27, 2020 
Exemption Request''). Unless otherwise noted, capitalized terms are 
used as defined in the CAT NMS Plan.
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    Section 36 of the Exchange Act grants the Commission the authority, 
with certain limitations, to ``conditionally or unconditionally exempt 
any person, security, or transaction . . . from any provision or 
provisions of [the Exchange Act] or of any rule or regulation 
thereunder, to the extent that such exemption is necessary or 
appropriate in the public interest, and is consistent with the 
protection of investors.'' \4\ Under Rule 608(e) of Regulation NMS, the 
Commission may ``exempt from [Rule 608], either unconditionally or on 
specified terms and conditions, any self-regulatory organization, 
member thereof, or specified security, if the Commission determines 
that such exemption is consistent with the public interest, the 
protection of investors, the maintenance of fair and orderly markets 
and the removal of impediments to, and perfection of the mechanism of, 
a national market system.'' \5\
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    \4\ 15 U.S.C. 78mm(a)(1).
    \5\ 17 CFR 242.608(e).
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    For the reasons set forth below, this Order grants the 
Participants' request for an exemption from Sections 6.4(d)(ii)(A)(1) 
and (2) of the CAT NMS Plan as set forth in the August 27, 2020 
Exemption Request, subject to certain conditions.

II. Background

    Pursuant to Section 6.4(d)(ii)(A) of the CAT NMS Plan, each 
Participant must, through its Compliance Rule, require its Industry 
Members to record and report to the Central Repository, if the order is 
executed, in whole or in part: (1) An Allocation Report; \6\ (2) the 
SRO-Assigned Market Participant Identifier of the clearing broker or 
prime broker, if applicable; and the (3) CAT-Order-ID of any contra-
side order(s). Accordingly, the Participants have implemented 
Compliance Rules that, among other things, require their Industry 
Members that are executing brokers to submit to the Central Repository, 
among other things, Allocation Reports and the SRO-Assigned Market 
Participant Identifier of the clearing broker or prime broker, if 
applicable.\7\
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    \6\ Section 1.1 of the CAT NMS Plan defines an ``Allocation 
Report'' as ``a report made to the Central Repository by an Industry 
Member that identifies the Firm Designated ID for any account(s), 
including subaccount(s), to which executed shares are allocated and 
provides the security that has been allocated, the identifier of the 
firm reporting the allocation, the price per share of shares 
allocated, the side of shares allocated, the number of shares 
allocated to each account, and the time of the allocation; provided 
for the avoidance of doubt, any such Allocation Report shall not be 
required to be linked to particular orders or executions.''
    \7\ See, e.g., Cboe Exchange, Inc. Rule 7.22(a)(2)(A); New York 
Stock Exchange LLC Rule 6830(a)(2)(A).
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III. Request for Relief

    In the August 27, 2020 Exemption Request, the Participants request 
that the Participants be permitted to implement an alternative approach 
to reporting allocations to the Central Repository, the ``Allocation 
Alternative.'' Under the Allocation Alternative, any Industry Member 
that performs an allocation to a client

[[Page 67577]]

account would be required through their Compliance Rules to submit an 
Allocation Report to the Central Repository when shares/contracts are 
allocated to the client account regardless of whether the Industry 
Member was involved in executing the underlying order(s). Under the 
Allocation Alternative, an ``Allocation'' would be defined as: (1) The 
placement of shares/contracts into the same account for which an order 
was originally placed; or (2) the placement of shares/contracts into an 
account based on allocation instructions (e.g., subaccount allocations, 
delivery versus payment (``DVP'') allocations). Pursuant to this 
definition and the proposed Allocation Alternative, an Industry Member 
that performs an Allocation to an account that is not a client account, 
such as proprietary accounts and events including step outs,\8\ or 
correspondent flips,\9\ would not be required to submit an Allocation 
Report to the Commission for that allocation, but could do so on a 
voluntary basis. The Participants propose to allow Industry Members to 
report Allocations to accounts other than client accounts, but if 
Industry Members report such Allocations, such Allocations must be 
marked as Allocations to accounts other than client accounts.\10\
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    \8\ ``A step-out allows a broker-dealer to allocate all or part 
of a client's position from a previously executed trade to the 
client's account at another broker-dealer. In other words, a step-
out functions as a client's position transfer, rather than a trade; 
there is no exchange of shares and funds and no change in beneficial 
ownership.'' See FINRA, Trade Reporting Frequently Asked Questions, 
at Section 301, available at: https://www.finra.org/filing-reporting/market-transparency-reporting/trade-reporting-faq.
    \9\ Correspondent clearing flips are the movement of a position 
from an executing broker's account to a different account for 
clearance and settlement, allowing a broker-dealer to execute a 
trade through another broker-dealer and settle the trade in its own 
account. See, e.g., The Depository Trust & Clearing Corporation, 
Correspondent Clearing, available at: https://www.dtcc.com/clearing-services/equities-trade-capture/correspondent-clearing.
    \10\ The Participants state that a ``client account'' is any 
account that is not owned or controlled by the Industry Member.
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A. Executing Brokers and Allocation Reports

    To implement the Allocation Alternative, the Participants request 
exemptive relief from Section 6.4(d)(ii)(A)(1) of the CAT NMS Plan, to 
the extent that the provision requires each Participant to, through its 
Compliance Rule, require its Industry Members that are executing 
brokers, who do not perform Allocations, to record and report to the 
Central Repository, if the order is executed, in whole or in part, an 
Allocation Report. Under the Allocation Alternative, when an Industry 
Member other than an executing broker (e.g., a prime broker or clearing 
broker) performs an Allocation, that Industry Member would be required 
to submit the Allocation Report to the Central Repository. When an 
executing broker performs an Allocation for an order that is executed, 
in whole or in part, the burden of submitting an Allocation Report to 
the Central Repository would remain with the executing broker under the 
Allocation Alternative. In certain circumstances this would result in 
multiple Allocation Reports--the executing broker (if self-clearing) or 
its clearing firm would report individual Allocation Reports 
identifying the specific prime broker to which shares/contracts were 
allocated and then each prime broker would itself report an Allocation 
Report identifying the specific customer accounts to which the shares/
contracts were finally allocated.
    The Participants state that granting exemptive relief from 
submitting Allocation Reports for executing brokers who do not perform 
an Allocation, and requiring the Industry Member other than the 
executing broker that is performing the Allocation to submit such 
Allocation Reports, is consistent with the basic approach taken by the 
Commission in adopting Rule 613. Specifically, the Participants believe 
that the Commission sought to require each broker-dealer and exchange 
that touches an order to record the required data with respect to 
actions it takes on the order.\11\ Without the proposed exemptive 
relief, executing brokers that do not perform Allocations would be 
required to submit Allocation Reports. In addition, the Participants 
state because shares/contracts for every execution must be allocated to 
an account by the clearing broker, there would be no loss of 
information by shifting the reporting obligation from the executing 
broker to the clearing broker.
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    \11\ See Securities Exchange Act Release No. 67457 (July 18, 
2012), 77 FR 45722, 45748 (Aug. 1, 2012).
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B. Identity of Prime Broker

    To implement the Allocation Alternative, the Participants request 
exemptive relief from Section 6.4(d)(ii)(A)(2) of the CAT NMS Plan, to 
the extent that the provision requires each Participant to, through its 
Compliance Rule, require its Industry Members to record and report to 
the Central Repository, if an order is executed, in whole or in part, 
the SRO-Assigned Market Participant Identifier of the prime broker, if 
applicable. Currently, under the CAT NMS Plan, an Industry Member is 
required to report the SRO-Assigned Market Participant Identifier of 
the clearing broker or prime broker in connection with the execution of 
an order, and such information would be part of the order's lifecycle, 
rather than in an Allocation Report that is not linked to the order's 
lifecycle.\12\ Under the Allocation Alternative, the identity of the 
prime broker would be required to be reported by the clearing broker on 
the Allocation Report, and, in addition, the prime broker itself would 
be required to report the ultimate allocation, which the Participants 
believe would provide more complete information.
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    \12\ The Participants are not requesting exemptive relief 
relating to the reporting of the SRO-Assigned Market Participant 
Identifier of clearing brokers.
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    The Participants state that associating a prime broker with a 
specific execution, as is currently required by the CAT NMS Plan, does 
not reflect how the allocation process works in practice as allocations 
to a prime broker are done post-trade and are performed by the clearing 
broker of the executing broker. The Participants also state that with 
the implementation of the Allocation Alternative, it would be 
duplicative for the executing broker to separately identify the prime 
broker for allocation purposes.
    The Participants state that if a particular customer only has one 
prime broker, the identity of the prime broker can be obtained from the 
customer and account information through the DVP accounts for that 
customer that contain the identity of the prime broker. The 
Participants further state that Allocation Reports related to those 
executions would reflect that shares/contracts were allocated to the 
single prime broker. The Participants believe that there is no loss of 
information through the implementation of the Allocation Alternative 
compared to what is required in the CAT NMS Plan and that this approach 
does not decrease the regulatory utility of the CAT for single prime 
broker circumstances.
    In cases where a customer maintains relationships with multiple 
prime brokers, the Participants assert that the executing broker will 
not have information at the time of the trade as to which particular 
prime broker may be allocated all or part of the execution.\13\ Under 
the Allocation Alternative, the executing broker (if self-clearing) or 
its

[[Page 67578]]

clearing firm would report individual Allocation Reports identifying 
the specific prime broker to which shares/contracts were allocated and 
then each prime broker would itself report an Allocation Report 
identifying the specific customer accounts where the shares/contracts 
were ultimately allocated. To determine the prime broker for a 
customer, a regulatory user would query the customer and account 
database using the customer's CCID to obtain all DVP accounts for the 
CCID at broker-dealers. The Participants state that when a customer 
maintains relationships with multiple prime brokers, the customer 
typically has a separate DVP account with each prime broker, and the 
identities of those prime brokers can be obtained from the customer and 
account information.
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    \13\ Based on discussions with members of the Advisory 
Committee, the Participants understand that multiple prime broker 
arrangements are common, particularly with respect to customers that 
are large funds. August 27, 2020 Exemption Request, supra note 3, at 
5, n.13.
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C. Additional Conditions to Exemptive Relief

    Currently, the definition of Allocation Report in the CAT NMS Plan 
only refers to shares. To implement the Allocation Alternative, the 
Participants propose to require that all required elements of 
Allocation Reports apply to both shares and contracts, as applicable, 
for all Eligible Securities. Specifically, Participants would require 
the reporting of the following in each Allocation Report: (1) The FDID 
for the account receiving the allocation, including subaccounts; (2) 
the security that has been allocated; (3) the identifier of the firm 
reporting the allocation; (3) the price per share/contracts of shares/
contracts allocated; (4) the side of shares/contracts allocated; (4) 
the number of shares/contracts allocated; and (5) the time of the 
allocation.
    Furthermore, to implement the Allocation Alternative, the 
Participants propose to require the following information on all 
Allocation Reports: (1) Allocation ID, which is the internal allocation 
identifier assigned to the allocation event by the Industry Member; (2) 
trade date; (3) settlement date: (4) IB/correspondent CRD Number (if 
applicable); (5) FDID of new order(s) (if available in the booking 
system); \14\ (6) allocation instruction time (optional); (7) if the 
account meets the definition of institution under FINRA Rule 4512(c); 
\15\ (8) type of allocation (allocation to a custody account, 
allocation to a DVP account, step out, correspondent flip, allocation 
to a firm owned or controlled account, or other non-reportable 
transactions (e.g., option exercises, conversions); (9) for DVP 
allocations, custody broker-dealer clearing number (prime broker) if 
the custodian is a U.S. broker-dealer, DTCC number if the custodian is 
a U.S. bank, or a foreign indicator, if the custodian is a foreign 
entity; and (10) if an allocation was cancelled, a cancel flag, which 
indicates that the allocation was cancelled, and a cancel timestamp, 
which represents the time at which the allocation was cancelled.
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    \14\ The Participants propose that for scenarios where the 
Industry Member responsible for reporting the Allocation has the 
FDID of the related new order(s) available, such FDID must be 
reported. This would include scenarios in which: (1) The FDID 
structure of the top account and subaccounts is known to the 
Industry Member responsible for reporting the Allocation(s); and (2) 
the FDID structure used by the IB/Correspondent when reporting new 
orders is known to the clearing firm reporting the related 
Allocations.
    \15\ FINRA Rule 4512(c) states the for purposes of the rule, the 
term ``institutional account'' means the account of: (1) A bank, 
savings and loan association, insurance company or registered 
investment company; (2) an investment adviser registered either with 
the SEC under Section 203 of the Investment Advisers Act or with a 
state securities commission (or any agency or office performing like 
functions); or (3) any other person (whether a natural person, 
corporation, partnership, trust or otherwise) with total assets of 
at least $50 million.
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IV. Discussion

    The Commission believes that granting exemptive relief from 
Sections 6.4(d)(ii)(A)(1) and (2) of the CAT NMS Plan as set forth 
below to allow for the Allocation Alternative, subject to the 
conditions described herein, is appropriate in the public interest and 
consistent with the protection of investors, and that pursuant to Rule 
608(e), this exemption is consistent with the public interest, the 
protection of investors, the maintenance of fair and orderly markets 
and the removal of impediments to, and the perfection of a national 
market system.

A. Executing Brokers and Allocation Reports

    The Commission is granting the Participants an exemption from the 
requirement that the Participants, through their Compliance Rule, 
require executing brokers to submit Allocation Reports. The Commission 
understands that executing brokers that are not self-clearing do not 
perform allocations themselves, and such allocations are handled by 
prime and/or clearing brokers, and these executing brokers therefore do 
not possess the requisite information to provide Allocation Reports. 
Correspondingly, the Commission believes that it is appropriate to 
condition this exemption on the Participants adopting Compliance Rules 
that require prime and/or clearing brokers to submit Allocation Reports 
when such brokers perform allocations. The Commission believes granting 
exemptive relief would improve efficiency and reduce the costs and 
burdens of reporting allocations for Industry Members because the 
reporting obligation would belong to the Industry Member with the 
requisite information, and executing brokers that do not have the 
information required to provide an Allocation Report would not be 
required to develop the infrastructure and processes required to 
obtain, store and report the information. This exemptive relief should 
not reduce the regulatory utility of CAT because an Allocation Report 
would still be submitted covering each executed trade allocated to a 
client account, which in certain circumstances could still result in 
multiple Allocation Reports,\16\ just not necessarily by the executing 
broker.
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    \16\ As noted above, under the Allocation Alternative, for 
certain executions, the executing broker (if self-clearing) or its 
clearing firm would report individual Allocation Reports identifying 
the specific prime broker to which shares/contracts were allocated 
and then each prime broker would itself report an Allocation Report 
identifying the specific customer accounts to which the shares/
contracts were finally allocated.
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B. Identity of Prime Broker

    The Commission believes that exempting Participants from the 
requirement that they, through their Compliance Rules, require 
executing brokers to provide the SRO-Assigned Market Participant 
Identifier of the prime broker is appropriate because, as stated by the 
Participants, allocations are done on a post-trade basis and the 
executing broker will not have the requisite information at the time of 
the trade. Because an executing broker, in certain circumstances, does 
not have this information at the time of the trade, this relief 
relieves executing brokers of the burdens and costs of developing 
infrastructure and processes to obtain this information in order to 
meet the contemporaneous reporting requirements of the CAT NMS 
Plan.\17\
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    \17\ See CAT NMS Plan, supra note 1, at Section 6.4(b)(i).
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    The Commission believes that, although executing brokers would no 
longer be required to provide this information, regulators will still 
be able to determine the prime broker(s) associated with orders through 
querying the customer and account information database. If an executing 
broker has only one prime broker, the identity of the prime broker can 
be obtained from the customer and account information associated with 
the executing broker. For customers with multiple prime brokers, the 
identity of the prime brokers can be obtained from the customer and 
account information

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which will list the prime broker, if there is one, that is associated 
with each account.

C. Additional Conditions for Exemptive Relief

    The Commission is granting the relief conditioned upon the adoption 
of Compliance Rules that implement the reporting requirements of the 
Allocation Alternative. The Commission believes that the proposed 
definition of Allocation is reasonable. The Commission is also 
exempting Participants from the requirement that they amend their 
Compliance Rules to require Industry Members to report Allocations for 
accounts other than client accounts. The Commission believes that 
allocations to client accounts, and not allocations to proprietary 
accounts or events such as step-outs and correspondent flips,\18\ 
provide regulators the necessary information to detect abuses in the 
allocation process because it would provide regulators with detailed 
information regarding the fulfillment of orders submitted by clients, 
while reducing reporting burdens on broker-dealers. For example, 
Allocation Reports would be required for allocations to registered 
investment advisor and money manager accounts. The Commission further 
believes that the proposed approach should facilitate regulators' 
ability to distinguish Allocation Reports relating to allocations to 
client accounts from other Allocation Reports because Allocations to 
accounts other than client accounts would have to be identified as 
such. This approach could reduce the time CAT Reporters expend to 
comply with CAT reporting requirements and lower costs by allowing 
broker-dealers to use existing business practices.
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    \18\ See, supra notes 8 and 9.
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    The Commission is conditioning this exemption on the Participants 
amending their Compliance Rules to require additional elements in 
Allocation Reports.\19\ These additional elements would enhance the 
utility of CAT by providing more information related to allocations and 
will ultimately assist market surveillance, market reconstructions, and 
examinations. The Commission further believes that applying the 
requirements for Allocation Reports to contracts in addition to shares 
is appropriate because CAT reporting requirements apply to both options 
and equities.
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    \19\ Specifically, the Participants would be required to modify 
their Compliance Rules such that all required elements of Allocation 
Reports apply to both shares and contracts, as applicable, for all 
Eligible Securities. In addition, the Participants would be required 
to modify their Compliance Rules so that Allocation Reports include 
the following additional elements: (1) Allocation ID, which is the 
internal allocation identifier assigned to the allocation event by 
the Industry Member; (2) trade date; (3) settlement date: (4) IB/
correspondent CRD Number (if applicable); (5) FDID of new order(s) 
(if available in the booking system); (6) allocation instruction 
time (optional); (7) if account meets the definition of institution 
under FINRA Rule 4512(c); (8) type of allocation (allocation to a 
custody account, allocation to a DVP account, step out, 
correspondent flip, allocation to a firm owned or controlled 
account, or other non-reportable transactions (e.g., option 
exercises, conversions); (9) for DVP allocations, custody broker-
dealer clearing number (prime broker) if the custodian is a U.S. 
broker-dealer, DTCC number if the custodian is a U.S. bank, or a 
foreign indicator, if the custodian is a foreign entity; and (10) if 
an allocation was cancelled, a cancel flag, which indicates if the 
allocation was cancelled, and a cancel timestamp, which represents 
the time at which the allocation was cancelled.
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    The proposed approach described in the August 27, 2020 Exemption 
Request would require Participants to amend their Compliance Rules to 
require Industry Members to provide Allocation Reports to the Central 
Repository any time they perform Allocations to a client account, 
whether or not the Industry Member was the executing broker for the 
trades. The Participants also would be required to amend their 
Compliance Rules to require their Industry Members reporting the 
Allocation Reports to include the additional elements set forth above 
on all Allocation Reports, in addition to those elements currently 
required under the CAT NMS Plan.
    Based on the foregoing, the Commission believes that, pursuant to 
Section 36 of the Exchange Act, this exemption is appropriate in the 
public interest and consistent with the protection of investors, and 
that pursuant to Rule 608(e), this exemption is consistent with the 
public interest, the protection of investors, the maintenance of fair 
and orderly markets and the removal of impediments to, and the 
perfection of a national market system.
    Accordingly, it is hereby ordered, pursuant to Section 36(a)(1) of 
the Exchange Act,\20\ and Rule 608(e) of the Exchange Act \21\ and with 
respect to the proposed Allocation Alternative specifically described 
above, that the Participants are granted an exemption from the 
requirements set forth in Section 6.4(d)(ii)(A)(1) and (2) of the CAT 
NMS Plan, subject to the conditions described above.
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    \20\ 15 U.S.C. 78mm(a)(1).
    \21\ 17 CFR 242.608(e).

    By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-23467 Filed 10-22-20; 8:45 am]
BILLING CODE 8011-01-P