Document ID: SEC-2018-0904-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2018-06-15T04:00Z

[Federal Register Volume 83, Number 116 (Friday, June 15, 2018)]
[Notices]
[Pages 28045-28048]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-12856]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83407; File No. SR-FINRA-2018-024]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change To Amend Security Futures Risk Disclosure 
Statement To Reflect the T+2 Settlement Cycle, Incorporate Prior 
Supplements, and Make Other Non-Substantive Changes

June 11, 2018.
    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 June 7, 2018, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by FINRA. FINRA has 
designated the proposed rule change as constituting a non-controversial 
rule change under paragraph (f)(6) of Rule 19b-4 under the Act,\3\ 
which renders the proposal effective upon receipt of this filing by the 
Commission. 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.
    \3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to update the 2002 security futures risk 
disclosure statement (``2002 Statement'' or ``Statement'') \4\ that 
would incorporate prior supplements pertaining to Sections 5.2 
(Settlement by Physical Delivery) and 8.1 (Corporate Events),\5\ make a 
technical change to Section 5.2 to reflect that the normal clearance 
and settlement cycle for securities transaction is now two business 
days, amend Section 6.1 (Protections for Securities Accounts) to 
reflect the current address for the Securities Investor Protection 
Corporation (``SIPC''), and make other non-substantive and technical 
changes. FINRA is not proposing any textual changes to FINRA rules.
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    \4\ See infra note 8.
    \5\ See infra notes 10 and 11. The Commission notes that the 
exhibits referenced are exhibits to the proposed rule change, not to 
this Notice.
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    The proposed updated Statement is attached as Exhibit 3a. The 
proposed supplement pertaining to changes to the specified paragraphs 
under Sections 5.2 and 6.1, and the proposed non-substantive and 
technical changes to the other Sections as described herein are 
attached as Exhibit 3b.
    The text [sic] of the proposed rule change is available on FINRA's 
website at http://www.finra.org, at the principal office of FINRA 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, FINRA 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. FINRA 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
    Rule 2370(b)(11)(A) requires a member to deliver the current 
security futures risk disclosure statement to each customer at or prior 
to the time such customer's account is approved for

[[Page 28046]]

trading security futures.\6\ Thereafter, the member must distribute 
each new or revised security futures risk disclosure statement to each 
customer having an account approved for such trading or, in the 
alternative, not later than the time a confirmation of a transaction is 
delivered to each customer that enters into a security futures 
transaction. The rule requires FINRA to advise members when a new or 
revised security futures risk disclosure statement is available. To 
comply with the requirements of Rule 2370(b)(11)(A), a member may 
distribute the new or revised statement (i.e., supplement) in various 
ways, including, but not limited to: (1) Conducting a mass mailing of 
the supplement to all of its customers approved to trade security 
futures who have already received the Statement; or (2) distributing 
the supplement to a customer who has already received the Statement not 
later than the time a confirmation of a transaction is delivered to 
each customer that enters into a security futures transaction.\7\
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    \6\ In general, the security futures risk disclosure statement 
provides customers with disclosures regarding the characteristics 
and potential risks of investing in standardized security futures 
contracts traded on regulated U.S. exchanges.
    \7\ See Information Notice, September 7, 2010 (August 2010 
Supplement to the Security Futures Risk Disclosure Statement); see 
also Regulatory Notice 14-24 (May 2014) (stating, a member may 
separately distribute new supplements to such customers and that a 
member is not required to redistribute the entire Statement or 
earlier supplements).
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    The Statement is a uniform statement that was jointly developed by 
FINRA, the American Stock Exchange, the Chicago Board Options Exchange 
(``Cboe''), the National Futures Association (``NFA''), Nasdaq Liffe 
Markets, the New York Stock Exchange, OneChicago, and the Options 
Clearing Corporation (``OCC''), and approved by the SEC in 2002.\8\ Two 
supplements were added to the 2002 Statement in 2010 and 2014, and they 
are intended to be read in conjunction with Statement.\9\ The 2010 
supplement \10\ revised the third paragraph under Section 8.1 of the 
Statement to accommodate changes by OneChicago, an exchange listing 
security futures products, to list a class of security futures for 
which adjustments are made for ordinary dividends. The 2010 
supplemental paragraph reads as follows:
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    \8\ See Securities Exchange Act Release No. 46862 (November 20, 
2002), 67 FR 70993 (November 27, 2002) (Order Approving File No. SR-
NASD-2002-129); see also Securities Exchange Act Release No. 46613 
(October 7, 2002), 67 FR 64176 (October 17, 2002) (Notice of Filing 
and Effectiveness of File No. SR-NFA-2002-05).
    \9\ See infra notes 10 and 11.
    \10\ See Securities Exchange Act Release No. 62787 (August 27, 
2010), 75 FR 53998 (September 2, 2010) (Notice of Filing and 
Immediate Effectiveness of File No. SR-FINRA-2010-045).

    Corporate issuers also occasionally issue special dividends. A 
special dividend is an announced cash dividend payment outside the 
normal and customary practice of a corporation. The terms of a 
security futures contract may be adjusted for special dividends. The 
adjustments, if any, will be based upon the rules of the exchange 
and clearing organization. In general, there will be no adjustments 
for ordinary dividends as they are a normal and customary practice 
of an issuer and are already accounted for in the pricing of 
security futures. However, adjustments for ordinary dividends may be 
made for a specified class of security futures contracts based on 
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the rules of the exchange and the clearing organization.

    The 2014 supplement \11\ revised the first paragraph under Section 
5.2 of the Statement to accommodate changes by OneChicago to list a 
product with a physical delivery settlement cycle shorter than three 
business days. The 2014 supplemental paragraph also indicates that the 
normal clearance and settlement cycle for securities transactions is 
three business days and reads as follows:
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    \11\ See Securities Exchange Act Release No. 71981 (April 21, 
2014), 79 FR 23034 (April 25, 2014) (Notice of Filing and Immediate 
Effectiveness of File No. SR-FINRA-2014-019).

    Settlement by physical delivery is carried out by clearing 
brokers or their agents with National Securities Clearing 
Corporation (``NSCC''), an SEC-regulated securities clearing agency. 
Such settlements are made in much the same way as they are for 
purchases and sales of the underlying security. Promptly after the 
last day of trading, the regulated exchange's clearing organization 
will report a purchase and sale of the underlying stock at the 
previous day's settlement price (also referred to as the ``invoice 
price'') to NSCC. In general, if NSCC does not reject the 
transaction by a time specified in its rules, settlement is effected 
pursuant to the rules of the exchange and NSCC's Rules and 
Procedures within the normal clearance and settlement cycle for 
securities transactions, which currently is three business days. 
However, settlement may be effected on a shorter timeframe based on 
the rules of the exchange and subject to NSCC's Rules and 
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Procedures.

    FINRA is proposing to update the 2002 Statement in several ways. 
First, the proposed update to the Statement would incorporate the 2010 
supplement pertaining to Section 8.1, with one corrective non-
substantive change, into the main body of the Statement. The proposed 
non-substantive change would insert the words, ``recognized as,'' 
within the fifth sentence in the third paragraph under Section 8.1 as 
these words were inadvertently omitted from the 2010 supplement. The 
proposed insertion of the words, ``recognized as,'' would correct the 
sentence to read as follows: ``In general, there will be no adjustments 
for ordinary dividends as they are recognized as a normal and customary 
practice of an issuer and are already accounted for in the pricing of 
security futures.'' This proposed insertion of the words, ``recognized 
as,'' would make the sentence identical to the fifth sentence in the 
third paragraph under Section 8.1 of NFA's Statement.\12\
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    \12\ See generally Securities Exchange Act Release No. 62787 
(August 27, 2010), 75 FR 53998 (September 2, 2010) (Notice of Filing 
and Immediate Effectiveness of File No. SR-FINRA-2010-045) and 
Securities Exchange Act Release No. 62624 (August 2, 2010), 75 FR 
47666 (August 6, 2010) (Notice of Filing and Immediate Effectiveness 
of File No. SR-NFA-2010-02).
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    Second, the proposed updated Statement would incorporate the 2014 
supplement pertaining to Section 5.2, with one technical change, into 
the main body of the Statement. The proposed technical change would 
indicate that the normal clearance and settlement cycle for securities 
transactions is now two business days by replacing the word ``three'' 
with the word ``two'' in the phrase ``three business days.'' \13\
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    \13\ See Securities Exchange Act Release No. 80295 (March 22, 
2017), 82 FR 15564 (March 29, 2017) (Securities Transaction 
Settlement Cycle; Final Rule) (File No. S7-22-16); see also 
Securities Exchange Act Release No. 80004 (February 9, 2017), 82 FR 
10835 (February 15, 2017) (Order Approving File No. SR-FINRA-2016-
047) and Securities Exchange Act Release No. 80004A (March 6, 2017), 
82 FR 13517 (March 13, 2017) (Correction to Order Approving File No. 
SR-FINRA-2016-047); and Regulatory Notice 17-19 (May 2017).
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    Third, Section 6.1 of the Statement currently provides that a 
customer may check whether a firm is a SIPC member by accessing SIPC's 
website at www.sipc.org, calling the SIPC Membership Department at 
(202) 371-8300, or writing to the SIPC Membership Department at 805 
Fifteenth Street NW, Suite 800, Washington, DC 20005-2215. FINRA is 
proposing to amend the second paragraph under Section 6.1 to reflect 
that SIPC's address is now 1667 K Street NW, Suite 1000, Washington, DC 
20006-1620.\14\ The website address and telephone number would remain 
unchanged.
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    \14\ See Securities Investor Protection Corporation, Contact Us, 
https://www.sipc.org/contact-us (last visited June 6, 2018).
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    Finally, FINRA is proposing to incorporate other non-substantive 
and technical changes into the proposed updated Statement.\15\ FINRA is 
proposing to correct a cross-reference appearing within the last 
sentence in

[[Page 28047]]

the second paragraph under Section 2.4 (How Security Futures Differ 
from the Underlying Security),\16\ and to remove the extraneous word, 
``apply,'' appearing within the first sentence in the second paragraph 
under Section 8.2 (Position Limits and Large Trader Reporting). FINRA 
expects conforming changes to be made to NFA's Statement.
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    \15\ For example, FINRA is proposing to make one stylistic 
change that would spell ``broker/dealer'' as ``broker-dealer'' 
throughout the Statement. FINRA anticipates this conforming change 
to be made to NFA's Statement.
    \16\ Currently, the last sentence in the second paragraph under 
Section 2.4 directs the reader to refer to Section 9 for further 
discussion of the impact of corporate events on a security futures 
contract. Section 8.1 is the appropriate cross-reference as Section 
9 contains the Statement's glossary of terms.
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    Currently, the 2002 Statement, to which the 2010 and 2014 
supplements are appended, is posted on FINRA's website,\17\ and the 
2010 and 2014 supplements are also posted on the website \18\ as 
separate documents to facilitate a member's compliance with Rule 
2370(b)(11)(A). In accordance with existing guidance, a member could 
meet its Rule 2370(b)(11)(A) obligations by redistributing the entire 
Statement to its security futures customers or separately distributing 
each new supplement to those customers who have already received the 
Statement.\19\
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    \17\ See Security Futures Risk Disclosure Statement (June 2016) 
brochure, http://www.finra.org/sites/default/files/Security_Futures_Risk_Disclosure_Statement.pdf, posted in its 
current design to the FINRA website on June 23, 2016, http://www.finra.org (enter ``security futures risk disclosure statement'' 
in the search bar).
    \18\ See FINRA's Security Futures Topic Page, http://www.finra.org/industry/security-futures (last visited June 6, 2018).
    \19\ See supra note 7 and accompanying text.
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    As noted above, the Statement is a uniform statement that was 
jointly developed by FINRA, the NFA, and several other securities and 
futures exchanges. The NFA's Statement currently includes the language 
from the 2010 and 2014 supplements in the main body, which is posted on 
NFA's website.\20\ Other securities and futures exchanges, such as Cboe 
and OneChicago, also make publicly available the inclusive Statement on 
their respective websites.\21\ In an effort to modernize the 
presentation of FINRA's Statement, FINRA is proposing to replace the 
2002 Statement currently posted on FINRA's website with the proposed 
updated Statement that would incorporate all the supplemental 
paragraphs and the proposed non-substantive and technical changes 
described above into the main body.\22\ This replacement would also 
align with the way in which other self-regulatory organizations present 
the Statement, inclusive of supplemental paragraphs, to the public.
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    \20\ See NFA's Risk Disclosure Statement for Security Futures 
Contracts, https://www.nfa.futures.org/investors/investor-resources/files/security-futures-disclosure.pdf. See also Securities Exchange 
Act Release No. 62624 (August 2, 2010), 75 FR 47666 (August 6, 2010) 
(Notice of Filing and Immediate Effectiveness of File No. SR-NFA-
2010-02) and Securities Exchange Act Release No. 71980 (April 21, 
2014), 79 FR 23027 (April 25, 2014) (Notice of Filing and Immediate 
Effectiveness of File No. SR-NFA-2014-02).
    \21\ See Cboe's Risk Disclosure Statement for Security Futures, 
http://cfe.cboe.com/about-cfe/risk-disclosure-security-futures 
(linking to NFA's Statement, https://www.nfa.futures.org/investors/investor-resources/files/security-futures-disclosure.pdf) and 
OneChicago's Risk Disclosure Statement for Security Futures 
Contracts (RDS), https://www.onechicago.com/?page_id=91. See also 
the OCC's Risk Disclosure Statement for Security Futures Contracts, 
https://www.theocc.com/about/publications/kids.jsp (Key Information 
Documents, linking to NFA's Statement, https://www.nfa.futures.org/investors/investor-resources/files/security-futures-disclosure.pdf).
    \22\ The Statement, in its original language approved by the SEC 
in 2002, would remain accessible on FINRA's website for those 
members whose customers may still refer to the original version of 
the Statement. The Statement, however, would bear a notation that an 
updated version of the Statement, which incorporates the paragraphs 
specified in the 2018 supplement, is available.
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    To facilitate a member's compliance with Rule 2370(b)(11)(A), FINRA 
is proposing to encapsulate the various changes to the Statement done 
through the 2010 supplement, the 2014 supplement, and those proposed 
herein into a single, integrated supplement (``2018 supplement'') that 
would show the proposed updated paragraphs in Sections 2.4, 5.2, 6.1, 
8.1, and 8.2. The proposed 2018 supplement would appear on FINRA's 
website as a separate document to continue to afford members with the 
flexibility to comply with the requirements of Rule 2370(b)(11)(A) by 
separately distributing the supplement to customers who have already 
received the 2002 Statement.\23\
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    \23\ The 2010 and 2014 supplements would remain accessible on 
FINRA's website with a notation that these paragraphs, as updated, 
appear in the 2018 supplement.
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    FINRA has filed the proposed rule change for immediate 
effectiveness. FINRA will announce the implementation date of the 
proposed rule change in a Regulatory Notice to be published no later 
than 60 days following Commission notice of the filing of the proposed 
rule change for immediate effectiveness. The implementation date will 
be no later than 90 days after the date of the filing.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\24\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. FINRA believes that updating the Statement to 
incorporate all supplements into the main body will help to accurately 
inform customers of the characteristics and risks of security futures. 
The proposed updated Statement would also disclose that the normal 
clearance and settlement cycle for securities transactions is currently 
two business days, and the current contact information for the SIPC.
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    \24\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. While FINRA recognizes that 
there may be a burden associated with the distribution of the proposed 
updated Statement or supplement, FINRA believes that any such burden 
would be outweighed by the benefit to customers of accurately 
disclosing the characteristics and risks of security futures. FINRA 
also believes that any burden will be minimal because firms currently 
have an existing obligation to deliver each new (i.e., updated) 
Statement or supplement to customers, and may electronically transmit 
documents that they are required to furnish to customers under FINRA 
rules, including the proposed updated Statement or supplement, provided 
firms adhere to the standards contained in the Commission's May 1996 
and October 1995 releases on electronic delivery,\25\ and as discussed 
in Notice to Members 98-3.\26\ Firms also may transmit the proposed 
updated Statement or supplement to customers through the use of a 
hyperlink, provided that customers have consented to electronic 
delivery.\27\ Moreover, Rule 2370(b)(11) provides flexibility on when 
each updated Statement or supplement must be delivered after a 
customer's account is approved for trading security futures. Instead of 
having to automatically and immediately distribute an updated Statement 
or supplement to every customer having an account approved for trading 
security futures, a firm may distribute an updated Statement or 
supplement no later than the time a confirmation of a transaction is 
delivered to each

[[Page 28048]]

customer who enters into a security futures transaction. Accordingly, 
firms would not be required to distribute the proposed updated 
Statement or supplement to customers who have accounts approved for 
trading security futures but do not engage in any new security futures 
transactions.
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    \25\ See Securities Act Release No. 7288 (May 9, 1996), 61 FR 
24644 (May 15, 1996) and Securities Act Release No. 7233 (October 6, 
1995), 60 FR 53458 (October 13, 1995).
    \26\ See Notice to Members 98-3 (January 1998).
    \27\ See Information Notice, September 7, 2010 (August 2010 
Supplement to the Security Futures Risk Disclosure Statement).
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor 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) of the Act \28\ and Rule 19b-
4(f)(6) thereunder.\29\
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    \28\ 15 U.S.C. 78s(b)(3)(A).
    \29\ 17 CFR 240.19b-4(f)(6).
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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. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or disapproved.

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 [email protected]. Please include 
File Number SR-FINRA-2018-024 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-FINRA-2018-024. 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 such filing also will be available for inspection 
and copying at the principal office of FINRA. 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-FINRA-2018-024 and should be submitted 
on or before July 6, 2018.

    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)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-12856 Filed 6-14-18; 8:45 am]
 BILLING CODE 8011-01-P