Document ID: SEC-2020-2029-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2020-12-21T05:00Z

[Federal Register Volume 85, Number 245 (Monday, December 21, 2020)]
[Notices]
[Pages 83121-83125]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-28008]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90675; File No. SR-NYSEArca-2020-54]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Amendment No. 1 and Order Instituting Proceedings To Determine 
Whether To Approve or Disapprove a Proposed Rule Change, as Modified by 
Amendment No. 1, To Amend NYSE Arca Rule 5.3-E To Exempt Registered 
Investment Companies That List Certain Categories of the Securities 
Defined as Derivative and Special Purpose Securities Under NYSE Arca 
Rules From Having To Obtain Shareholder Approval Prior to the Issuance 
of Securities in Connection With Certain Acquisitions of the Stock or 
Assets of an Affiliated Company

December 15, 2020.

I. Introduction

    On August 28, 2020, 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'' or ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend NYSE Arca Rule 5.3-E (Corporate 
Governance and Disclosure Policies) to exempt certain categories of 
derivative and special purpose securities from the requirement to 
obtain shareholder approval prior to the issuance of securities in 
connection with certain acquisitions of the stock or assets of another 
company. The

[[Page 83122]]

proposed rule change was published for comment in the Federal Register 
on September 17, 2020.\3\ On October 30, 2020, pursuant to Section 
19(b)(2) of the Exchange 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 
disapprove the proposed rule change.\5\ On December 1, 2020, the 
Exchange filed Amendment No. 1 to the proposed rule change, which 
superseded the proposed rule change as originally filed.\6\ The 
Commission has received no comments on the proposed rule change. The 
Commission is publishing this notice and order to solicit comments on 
the proposed rule change, as modified by Amendment No. 1, from 
interested persons, and to institute proceedings pursuant to Section 
19(b)(2)(B) of the Exchange Act \7\ to determine whether to approve or 
disapprove the proposed rule change, as modified by Amendment No. 1.
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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. 89834 (September 11, 
2020), 85 FR 58090 (``Original Proposal'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 90297, 85 FR 70701 
(November 5, 2020). The Commission designated December 16, 2020, as 
the date by which the Commission shall approve or disapprove, or 
institute proceedings to determine whether to disapprove, the 
proposed rule change.
    \6\ In Amendment No. 1, the Exchange: (1) Removed from the 
proposed rule text a condition that the proposed exemption from the 
Exchange's shareholder approval requirement would apply only to a 
transaction that does not require shareholder approval under Rule 
17a-8 (as defined herein); (2) removed the related discussion in the 
proposed rule change about why the Exchange believed it would have 
been appropriate to only exempt transactions that do not require 
shareholder approval under Rule 17a-8; (3) removed statements in its 
purpose section that incorrectly stated that Rule 17a-8 exempts the 
acquiring company from obtaining shareholder approval under certain 
conditions; (4) supplemented its discussion of why the Exchange 
believes it is appropriate to exempt an issuer of 1940 Act 
Securities (as defined herein) from obtaining shareholder approval 
in the context of a merger of affiliated companies in light of its 
revised discussion of Rule 17a-8's shareholder approval 
requirements; and (5) made other clarifications, corrections, and 
technical changes. Amendment No. 1 is available on the Commission's 
website at https://www.sec.gov/rules/sro/nysearca.htm.
    \7\ 15 U.S.C. 78s(b)(2)(B).
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II. The Exchange's Description of the Proposed Rule Change, as Modified 
by Amendment No. 1

    In its filing with the Commission, the self-regulatory organization 
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 those 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 parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    NYSE Arca Rule 5.3-E(d)(9) requires issuers to obtain shareholder 
approval in connection with the acquisition of the stock or assets of 
another company, in the following circumstances:
    (i) If any director, officer, or substantial shareholder of the 
listed company has a 5% or greater interest (or such persons 
collectively have a 10% or greater interest), directly or indirectly, 
in the company or assets to be acquired or in the consideration to be 
paid in the transaction (or series of related transactions) and the 
present or potential issuance of common stock, or securities 
convertible into or exercisable for common stock, could result in an 
increase in outstanding common shares or voting power of 5% or more; or
    (ii) where the present or potential issuance of common stock, or 
securities convertible into or exercisable for common stock (other than 
in a public offering for cash), could result in an increase in 
outstanding common shares of 20% or more or could represent 20% or more 
of the voting power outstanding before the issuance of such stock or 
securities.
    The Exchange proposes to exempt issuers of certain categories of 
derivative and special purpose securities \8\ from having to comply 
with this requirement when they issue securities in connection with the 
acquisition of the stock or assets of an affiliated company. In 
general, the requirement to obtain shareholder approval prior to the 
issuance of securities in connection with certain acquisitions of the 
stock or asset of another company is designed to give existing 
shareholders a vote on the issuance of stock that may dilute their 
voting or economic rights. The Exchange notes that NYSE Arca Rule 5.3-
E(d)(9) is also intended to give shareholders a vote on transactions 
where a director, officer, or substantial shareholder of the listed 
company has a significant interest in the company or assets to be 
acquired or the consideration to be paid and therefore may benefit from 
the transaction. Due to the unique nature of 1940 Act Securities as 
well as Rule 17a-8 \9\ (Mergers of affiliated companies) under the 1940 
Act (``Rule 17a-8''), the Exchange believes that these concerns are 
limited with respect to the holders of such securities. Therefore, the 
Exchange believes it is appropriate to exempt issuers of 1940 Act 
Securities from having to obtain shareholder approval under Exchange 
rules which can be both time consuming and expensive.
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    \8\ The Exchange proposes to exempt the following categories of 
derivative and special purpose securities: securities listed 
pursuant to Rules 5.2-E(h) (Unit Investment Trusts), 5.2-E(j)(3) 
(Investment Company Units), 5.2-E(j)(8) (Exchange-Traded Fund 
Shares), 8.100-E (Portfolio Depositary Receipts), 8.600-E (Managed 
Fund Shares), 8.601-E (Active Proxy Portfolio Shares) and 8.900-E 
(Managed Portfolio Shares) (collectively, the ``1940 Act 
Securities''). Each of the aforementioned categories of derivative 
and special purpose securities are issued by an entity organized 
under the Investment Company Act of 1940 (the ``1940 Act'').
    \9\ 17 CRF 270.17a-8.
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    The Exchange believes that the potential economic dilution concerns 
sometimes associated with a large share issuance are unlikely to be 
present when an issuer of a 1940 Act Security issues shares in 
connection with the acquisition of the stock or assets of an affiliated 
company. As described above, the proposed exemption will only apply to 
issuers of derivative and special purpose securities organized under 
the 1940 Act.\10\ Rule 17a-8 exempts such issuers from prohibitions 
under the 1940 Act on certain transactions with affiliated persons, 
provided that, in connection with the merger with an affiliated 
investment company, the board of directors, including a majority of the 
directors that are not interested persons, affirmatively determine that 
(i) participation in the merger is in the best interest of their 
respective investment company, and (ii) the interests of their 
shareholders will not be diluted as a result of the transaction.\11\ 
Because the board of directors must make an affirmative determination 
that the merger is not dilutive to existing shareholders, the shares 
issued by the acquiring investment company are issued at a price equal 
to the fund's net asset value.\12\ While the Exchange notes that the 
shares are issued at a fund's net asset value when the fund is 
registered, the requirements of Rule 17a-8 also protect against 
dilution when the fund to be acquired is unregistered. Specifically, 
Rule 17a-8(a)(2)(iii) requires that where a fund is acquiring

[[Page 83123]]

the assets of an unregistered fund, the board have procedures in place 
for the valuation of assets. Such procedures must include procedures 
that provide for a report to be prepared by an independent evaluator to 
provide a valuation for assets to be acquired.
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    \10\ Approximately 88% of securities listed on the Exchange are 
issued by investment companies registered under the 1940 Act.
    \11\ 17 CRF 270.17a-8.
    \12\ The Exchange notes that the proposing releases for Rule 
17a-8 specifically contemplated that, in certain circumstances, the 
price paid may deviate from a fund's net asset value due to 
adjustments for tax purposes. See Investment Company Act Release No. 
25259 at Footnote 26.
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    The Exchange believes that the same provisions of Rule 17a-8 that 
protect against economic dilution also provide safeguards for existing 
shareholders when the transaction involves a director, officer, or 
substantial shareholder of the listed company that has a significant 
interest in the company or assets to be acquired or the consideration 
to be paid and therefore may benefit from the transaction. Because the 
board must make an affirmative decision that the transaction is in the 
best interest of its shareholders and that the transaction will not 
result in economic dilution for existing shareholders, there is reduced 
concern that existing shareholders will be disenfranchised as a result 
of the Exchange's proposed exemption.
    Under Rule 17a-8 shareholders of funds being acquired by an 
affiliated company have the opportunity to vote on the proposed merger 
unless certain conditions are met. However, Rule 17a-8 does not require 
the acquiring fund (i.e., the fund issuing shares in the merger) to 
obtain the approval of its shareholders. When the Securities and 
Exchange Commission (the ``Commission'') proposed amendments to Rule 
17a-8, it specifically sought comment on whether the outstanding voting 
securities of the fund that will survive the merger should also be 
required to approve the merger.\13\ Importantly, the Commission 
ultimately did not include a requirement of approval of shareholders of 
an acquiring fund in its final rule.
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    \13\ See Investment Company Act Release No. 25259 at Section 
II(A)(2)(a): ``Should the outstanding voting securities of the fund 
that will survive the merger also be required to approve the 
merger?''
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    Given that the Commission's rules do not require an issuer of 1940 
Act Securities to obtain shareholder approval in the context of a 
merger of affiliated companies, the Exchange believes it is appropriate 
to exempt such issuers of 1940 Act Securities from having to comply 
with NYSE Arca Rule 5.3-E(d)(9).
    As described above, the Exchange only proposes to exempt issuers of 
1940 Act Securities from having to comply with NYSE Arca Rule 5.3-
E(d)(9) if they are issuing shares to acquire the stock or assets of an 
affiliated company. Notwithstanding the proposed exemption, the 
Exchange notes that other provisions of Exchange rules or the 1940 Act 
may require shareholder approval and will still apply.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Exchange Act,\14\ in general, and furthers the 
objectives of Section 6(b)(5) of the Exchange Act,\15\ in particular in 
that it is designed to promote just and equitable principles of trade, 
to foster cooperation and coordination with persons engaged in 
regulating, clearing, settling, processing information with respect to, 
and facilitating transactions in securities, to remove impediments to 
and perfect the mechanism of a free and open market and a national 
market system, and, in general, to protect investors and the public 
interest and is not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed amendment is consistent 
with the protection of investors, as the unique nature of 1940 Act 
Securities, as well as protections afforded by Rule 17a-8, means that 
(i) there is little risk of economic dilution to existing shareholders 
as a result of an issuance of shares by an issuer of 1940 Act 
Securities in connection with the acquisition of the stock or assets of 
an affiliated company, and (ii) existing shareholders are unlikely to 
be disenfranchised as a result of a Rule 17a-8-compliant transaction 
that involves a director, officer, or substantial shareholder of the 
listed company that has a significant interest in the company or assets 
to be acquired or the consideration to be paid.
    The Exchange further believes its proposal is consistent with the 
protection of investors because its proposal is limited to issuers of 
derivative and special purpose securities that are organized under the 
1940 Act. In the case of a merger of affiliated investment companies, 
the board of directors of each investment company, including a majority 
of the directors that are not interested persons of the respective 
investment company, must affirmatively determine that (i) participation 
in the merger is in the best interest of their respective investment 
company, and (ii) the interests of their shareholders will not be 
diluted as a result of the transaction. Because the interests of 
shareholders in such a transaction cannot be diluted, shares issues by 
one investment company to acquire the stock or assets of an affiliated 
investment company are issued at a price equal to the acquiring fund's 
net asset value. Because of the safeguards embedded in Rule 17a-8, as 
described above, the Exchange also believes that there are reduced 
concerns about economic dilution when the transaction involves a merger 
with an affiliate unregistered fund.
    The Exchange believes that the same provisions of Rule 17a-8 that 
protect against economic dilution also provide safeguards for existing 
shareholders when the transaction involves a director, officer, or 
substantial shareholder of the listed company that has a significant 
interest in the company or assets to be acquired or the consideration 
to be paid and therefore may benefit from the transaction. Because the 
board must make an affirmative decision that the transaction is in the 
best interest of its shareholders and that the transaction will not 
result in economic dilution for existing shareholders, the is reduced 
concern that existing shareholders will be disenfranchised as a result 
of the Exchange's proposed exemption.
    Rule 17a-8 proscribes when shareholder approval is required in the 
context of a merger of affiliated companies. Although shareholders of 
the company being acquired have a right to vote on the merger under 
certain circumstances, Rule 17a-8 does not require the shareholders of 
the acquiring company to approve the transaction. Accordingly, the 
Exchange believes it is appropriate to exempt issuers of 1940 Act 
Securities from the requirements of NYSE Arca Rule 5.3-E(d)(9) in this 
same limited circumstance.
    Notwithstanding the proposed exemption described above, the 
Exchange notes that other provisions of Exchange rules or the 1940 Act 
may require shareholder approval and will still apply.
    The Exchange believes it is not unfairly discriminatory to offer 
the exemption only to issuers of 1940 Act Securities completing a 
merger with an affiliated company, as opposed to all issuers of 
derivative and special purpose securities, because only 1940 Act 
Securities are subject to the requirements of the 1940 Act which offer 
the protections against dilution and self-dealing described herein.

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 proposed amendment will 
not impose

[[Page 83124]]

any burden on competition, as they simply propose to offer 1940 Act 
Securities a limited exemption for the Exchange's shareholder approval 
rule in a specific circumstance where the Exchange believes there is a 
low risk of dilution to existing shareholders.

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

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Proceedings To Determine Whether To Approve or Disapprove SR-
NYSEArca-2020-54, as Modified by Amendment No. 1, and Grounds for 
Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Exchange Act \16\ to determine whether the proposed 
rule change, as modified by Amendment No. 1, 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 to inform the Commission's analysis of whether to approve or 
disapprove the proposal.
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    \16\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Exchange Act,\17\ 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 the 
Exchange Act, and, in particular, with Section 6(b)(5) of the Exchange 
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, 
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.\18\
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    \17\ Id.
    \18\ 15 U.S.C. 78f(b)(5).
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    As discussed above, the Exchange is proposing to exempt issuers of 
registered investment companies that list certain categories of 
derivative and special purpose securities, including ETFs, from the 
requirement to obtain shareholder approval prior to substantial 
issuances of securities in connection with the acquisition of stock or 
assets of an affiliated company. The Exchange conditions its proposed 
exemption on, among other things, the transaction complying with Rule 
17a-8 under the Investment Company Act of 1940, which requires that the 
board of directors of each company participating in such a merger 
determine that participation in the merger is in the best interests of 
the company and that the interests of the company's shareholders will 
not be diluted as a result of the merger. In its Original Proposal, 
however, the Exchange erroneously described Rule 17a-8 as exempting an 
acquiring company from its shareholder approval requirements subject to 
certain conditions, when in fact that provision only applies to the 
non-surviving acquired company, and the Exchange justified its proposal 
in part on that misunderstanding. On December 1, 2020, the Exchange 
filed Amendment No. 1 that replaced and superseded its Original 
Proposal, and attempted to correct the erroneous description of Rule 
17a-8.\19\ The Exchange also made related changes to its proposed rule 
text and justification. Given the filing of this recent amendment, the 
Commission is seeking additional public comment on the proposed rule 
change in order to determine whether it is consistent with the 
requirements of Section 6(b)(5) of the Act.
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    \19\ See supra note 6.
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    The Commission notes that, under the Commission's Rules of 
Practice, the ``burden to demonstrate that a proposed rule change is 
consistent with the Exchange Act and the rules and regulations 
thereunder . . . is on the self-regulatory organization [`SRO'] that 
proposed the rule change.'' \20\ The description of a proposed rule 
change, its purpose and operation, its effect, and a legal analysis of 
its consistency with applicable requirements must all be sufficiently 
detailed and specific to support an affirmative Commission finding,\21\ 
and any failure of an SRO to provide this information may result in the 
Commission not having sufficient basis to make an affirmative finding 
that a proposed rule change is consistent with the Exchange Act and the 
applicable rule and regulations.\22\
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    \20\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
    \21\ See id.
    \22\ See id.
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    For these reasons, the Commission believes it is appropriate to 
institute proceedings pursuant to Section 19(b)(2)(B) of the Exchange 
Act \23\ to determine whether the proposal should be approved or 
disapproved.
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    \23\ 15 U.S.C. 78s(b)(2)(B).
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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, as modified by Amendment No. 1, is consistent with Section 
6(b)(5) or any other provision of the Exchange 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, any request for an opportunity to 
make an oral presentation.\24\
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    \24\ Section 19(b)(2) of the Exchange Act, as amended by the 
Securities Act Amendments of 1975, Pub. L. 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 Act 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, as modified by 
Amendment No. 1, should be approved or disapproved by January 11, 2021. 
Any person who wishes to file a rebuttal to any other person's 
submission must file that rebuttal by January 25, 2021.
    The Commission asks that commenters address the sufficiency of the 
Exchange's statements in support of the proposal, which are set forth 
in Amendment No. 1,\25\ in addition to any other comments they may wish 
to submit about the proposed rule change.
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    \25\ See supra note 6.
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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 rule-comments@sec.gov. Please include 
File Number SR-NYSEArca-2020-54 on the subject line.

[[Page 83125]]

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-2020-54. 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-2020-54 and should be submitted 
on or before January 11, 2021. Rebuttal comments should be submitted by 
January 25, 2021.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
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    \26\ 17 CFR 200.30-3(a)(12) and 17 CFR 200.30-3(a)(57).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-28008 Filed 12-18-20; 8:45 am]
BILLING CODE 8011-01-P