Document ID: SEC-2021-0443-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Nasdaq PHLX, LLC
Posted Date: 2021-04-01T04:00Z

[Federal Register Volume 86, Number 61 (Thursday, April 1, 2021)]
[Notices]
[Pages 17254-17257]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-06672]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91418; File No. SR-Phlx-2021-16]

Self-Regulatory Organizations; Nasdaq PHLX, LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend Phlx's 
Pricing Schedule at Options 7, Section 6, Part D To Reduce the Phlx 
Options Regulatory Fee

March 26, 2021.
    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 16, 2021, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``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 to amend Phlx's Pricing Schedule at Options 
7, Section 6, Part D to reduce the Phlx Options Regulatory Fee or 
``ORF''.
    While the changes proposed herein are effective upon filing, the 
Exchange has designated the amendments become operative on April 1, 
2021.
    The text of the proposed rule change is available on the Exchange's 
website at https://listingcenter.nasdaq.com/rulebook/phlx/rules, 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
    Currently, Phlx assesses an ORF of $0.0050 per contract side as 
specified in Phlx's Pricing Schedule at Options 7, Section 6, Part D. 
The Exchange proposes to reduce the ORF from $0.0050 per contract side 
to $0.0042 per contract side as of April 1, 2021, in order to help 
ensure that revenue collected from the ORF, in combination with other 
regulatory fees and fines, does not exceed the Exchange's total 
regulatory costs.
Collection of ORF
    Currently, Phlx assesses its ORF for each customer option 
transaction that is either: (1) Executed by a member organization \3\ 
on Phlx; or (2) cleared by a Phlx member organization at The Options 
Clearing Corporation (``OCC'') in the customer range,\4\ even if the 
transaction was executed by a non-member organization of Phlx, 
regardless of the exchange on which the transaction occurs.\5\ If the 
OCC clearing member is a Phlx member organization, ORF is assessed and 
collected on all cleared customer contracts (after adjustment for CMTA 
\6\); and (2) if the OCC clearing member is not a Phlx member 
organization, ORF is collected

[[Page 17255]]

only on the cleared customer contracts executed at Phlx, taking into 
account any CMTA instructions which may result in collecting the ORF 
from a non-member organization.\7\
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    \3\ The term ``member organization'' means a corporation, 
partnership (general or limited), limited liability partnership, 
limited liability company, business trust or similar organization, 
transacting business as a broker or a dealer in securities and which 
has the status of a member organization by virtue of (i) admission 
to membership given to it by the Membership Department pursuant to 
the provisions of General 3, Sections 5 and 10 or the By-Laws or 
(ii) the transitional rules adopted by the Exchange pursuant to 
Section 6-4 of the By-Laws. References herein to officer or partner, 
when used in the context of a member organization, shall include any 
person holding a similar position in any organization other than a 
corporation or partnership that has the status of a member 
organization. See General 1, Section 1(17).
    \4\ Participants must record the appropriate account origin code 
on all orders at the time of entry in order. The Exchange represents 
that it has surveillances in place to verify that member 
organizations mark orders with the correct account origin code.
    \5\ The Exchange uses reports from OCC when assessing and 
collecting the ORF.
    \6\ CMTA or Clearing Member Trade Assignment is a form of 
``give-up'' whereby the position will be assigned to a specific 
clearing firm at OCC.
    \7\ By way of example, if Broker A, a Phlx member organization, 
routes a customer order to CBOE and the transaction executes on CBOE 
and clears in Broker A's OCC Clearing account, ORF will be collected 
by Phlx from Broker A's clearing account at OCC via direct debit. 
While this transaction was executed on a market other than Phlx, it 
was cleared by a Phlx member organization in the member 
organization's OCC clearing account in the customer range, therefore 
there is a regulatory nexus between Phlx and the transaction. If 
Broker A was not a Phlx member organization, then no ORF should be 
assessed and collected because there is no nexus; the transaction 
did not execute on Phlx nor was it cleared by a Phlx member 
organization.
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    In the case where a member organization both executes a transaction 
and clears the transaction, the ORF is assessed to and collected from 
that member organization. In the case where a member organization 
executes a transaction and a different member organization clears the 
transaction, the ORF is assessed to and collected from the member 
organization who clears the transaction and not the member organization 
who executes the transaction. In the case where a non-member 
organization executes a transaction at an away market and a member 
organization clears the transaction, the ORF is assessed to and 
collected from the member organization who clears the transaction. In 
the case where a member executes a transaction on Phlx and a non-member 
organization clears the transaction, the ORF is assessed to the member 
organization that executed the transaction on Phlx and collected from 
the non-member organization who cleared the transaction. In the case 
where a member organization executes a transaction at an away market 
and a non-member organization clears the transaction, the ORF is not 
assessed to the member organization who executed the transaction or 
collected from the non-member organization who cleared the transaction 
because the Exchange does not have access to the data to make 
absolutely certain that ORF should apply. Further, the data does not 
allow the Exchange to identify the member organization executing the 
trade at an away market.
ORF Revenue and Monitoring of ORF
    The Exchange monitors the amount of revenue collected from the ORF 
to ensure that it, in combination with other regulatory fees and fines, 
does not exceed regulatory costs. In determining whether an expense is 
considered a regulatory cost, the Exchange reviews all costs and makes 
determinations if there is a nexus between the expense and a regulatory 
function. The Exchange notes that fines collected by the Exchange in 
connection with a disciplinary matter offset ORF.
    Revenue generated from ORF, when combined with all of the 
Exchange's other regulatory fees and fines, is designed to recover a 
material portion of the regulatory costs to the Exchange of the 
supervision and regulation of member \8\ and member organization 
customer options business including performing routine surveillances, 
investigations, examinations, financial monitoring, and policy, 
rulemaking, interpretive, and enforcement activities. Regulatory costs 
include direct regulatory expenses and certain indirect expenses in 
support of the regulatory function. The direct expenses include in-
house and third party service provider costs to support the day to day 
regulatory work such as surveillances, investigations and examinations. 
The indirect expenses include support from such areas as Office of the 
General Counsel, technology, and internal audit. Indirect expenses are 
estimated to be approximately 42% of the total regulatory costs for 
2021. Thus, direct expenses are estimated to be approximately 58% of 
total regulatory costs for 2021.
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    \8\ The term ``member'' means a permit holder which has not been 
terminated in accordance with the By-Laws and these Rules of the 
Exchange. A member is a natural person and must be a person 
associated with a member organization. Any references in the rules 
of the Exchange to the rights or obligations of an associated person 
or person associated with a member organization also includes a 
member. See General 1, Section 1(16).
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    The ORF is designed to recover a material portion of the costs to 
the Exchange of the supervision and regulation of its members and 
member organizations, including performing routine surveillances, 
investigations, examinations, financial monitoring, and policy, 
rulemaking, interpretive, and enforcement activities.
Proposal
    Based on the Exchange's most recent review, the Exchange is 
proposing to reduce the amount of ORF that will be collected by the 
Exchange from $0.0050 per contract side to $0.0042 per contract side. 
The Exchange issued an Options Trader Alert on February 8, 2021 
indicating the proposed rate change for April 1, 2021.\9\
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    \9\ See Options Trader Alert 2021-9.
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    The proposed decrease is based on recent options volumes which 
included an increase in retail investors. With respect to options 
volume, the Exchange experienced a significant increase particularly in 
the fourth quarter of 2020. For example, total options contract volume 
in November 2020 was 71% higher than the total options contract volume 
in November 2019.\10\ Below is industry data from OCC \11\ which 
illustrates the significant increase in volume during the fourth 
quarter of 2020.
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    \10\ See data from OCC at: https://www.businesswire.com/news/home/20201202005584/en/OCC-November-2020-Total-Volume-Up-71-Percent-From-a-Year-Ago.
    \11\ See data from OCC at: https://www.theocc.com/Market-Data/Market-Data-Reports/Volume-and-Open-Interest/Volume-by-Account-Type.

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                                        October            November            December             Q4 2020
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Total...........................         633,365,184         673,660,858         753,568,354       2,060,594,396
Customer........................         587,707,301         630,297,252         708,037,956       1,926,042,509
Total ADV.......................       28,789,326.55       33,683,042.90       34,253,107.00       32,196,787.44
Customer ADV....................       26,713,968.23       31,514,862.60       32,183,543.45       30,094,414.20
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    With respect to customer options volume across the industry, total 
customer options contract average daily volume in December 2020 was 
88.6% higher than total customer average daily volume in December 
2019.\12\
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    \12\ See data from OCC at: https://www.theocc.com/Market-Data/Market-Data-Reports/Volume-and-Open-Interest/Volume-by-Account-Type.
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    There can be no assurance that the Exchange's final costs for 2021 
will not differ materially from these expectations and prior practice, 
nor can the Exchange predict with certainty whether options volume will 
remain at the current level going forward. The Exchange notes however, 
that when combined with regulatory fees and fines, the revenue being 
generated utilizing the current ORF rate results in revenue that is 
running in excess of the Exchange's

[[Page 17256]]

estimated regulatory costs for the year.\13\ Particularly, as noted 
above, the options market has seen a substantial increase in volume in 
2020, due in large part to the extreme volatility in the marketplace as 
a result of the COVID-19 pandemic. This unprecedented spike in 
volatility resulted in significantly higher volume than was originally 
projected by the Exchange (thereby resulting in substantially higher 
ORF revenue than projected). The Exchange therefore proposes to 
decrease the ORF in order to ensure that it no longer exceeds its 
regulatory costs for the year. Particularly, the Exchange believes that 
decreasing the ORF when combined with all of the Exchange's other 
regulatory fees and fines, would allow the Exchange to continue 
covering a material portion of its regulatory costs, while eliminating 
excess ORF revenue collected and, in the future, lessening the 
potential for generating excess revenue that may otherwise occur using 
the current rate.\14\
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    \13\ The Exchange notes that notwithstanding the excess ORF 
revenue collected to date, it has not used such revenue for non-
regulatory purposes.
    \14\ The Exchange notes that its regulatory responsibilities 
with respect to member and member organization compliance with 
options sales practice rules have largely been allocated to FINRA 
under a 17d-2 agreement. The ORF is not designed to cover the cost 
of that options sales practice regulation.
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    The Exchange will continue to monitor the amount of revenue 
collected from the ORF to ensure that it, in combination with its other 
regulatory fees and fines, does not exceed regulatory costs. If the 
Exchange determines regulatory revenues exceed regulatory costs, the 
Exchange will adjust the ORF by submitting a fee change filing to the 
Commission and notifying \15\ its members and member organizations via 
an Options Trader Alert. \16\
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    \15\ The Exchange will provide members and member organizations 
with such notice at least 30 calendar days prior to the effective 
date of the change.
    \16\ The Exchange notes that in connection with this proposal, 
it provided the Commission confidential details regarding the 
Exchange's projected regulatory revenue, including projected revenue 
from ORF, along with a projected regulatory expenses.
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    The Exchange also proposes to amend Options 7, Section 6D of the 
Phlx Pricing Schedule to make clear that the ORF is assessed to member 
organizations. The Exchange inadvertently utilized the term ``member'' 
within the rule text instead of ``member organization'' and in one 
place neglected to note ``member organization'' next to the term 
``member''. A member organization is the entity transacting business as 
a broker or a dealer in securities on Phlx whereas a member is the 
permit holder.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to the Exchange and, in particular, 
the requirements of Section 6(b) of the Act.\17\ Specifically, the 
Exchange believes the proposed rule change is consistent with Section 
6(b)(4) of the Act, \18\ which provides that Exchange rules may provide 
for the equitable allocation of reasonable dues, fees, and other 
charges among its members, member organizations, and other persons 
using its facilities. Additionally, the Exchange believes the proposed 
rule change is consistent with the Section 6(b)(5) \19\ requirement 
that the rules of an exchange not be designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers.
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    \17\ 15 U.S.C. 78f(b).
    \18\ 15 U.S.C. 78f(b)(4).
    \19\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes the proposed fee change is reasonable because 
customer transactions will be subject to a lower ORF fee than the 
current rate and the adjustment will eliminate excess ORF revenue. 
Moreover, the proposed reduction is necessary in order for the Exchange 
to no longer collect revenue, in combination with other regulatory fees 
and fines, in excess of its anticipated regulatory costs which is 
consistent with the Exchange's practices.
    The Exchange had designed the ORF to generate revenues that would 
be less than the amount of the Exchange's regulatory costs to ensure 
that it, in combination with its other regulatory fees and fines, does 
not exceed regulatory costs, which is consistent with the view of the 
Commission that regulatory fees be used for regulatory purposes and not 
to support the Exchange's business operations. As discussed above, 
however, after review of its regulatory costs and regulatory revenues, 
which includes revenues from ORF and other regulatory fees and fines, 
the Exchange determined that absent a reduction in ORF, it would 
continue to collect revenue in excess of its regulatory costs. Indeed, 
the Exchange notes that when taking into account the recent options 
volume, which included an increase in customer options transactions, it 
estimates the ORF will generate revenues that would cover more than the 
approximated Exchange's projected regulatory costs. Moreover, when 
coupled with the Exchange's other regulatory fees and revenues, the 
Exchange estimates ORF to generate over 100% of the Exchange's 
projected regulatory costs. As such, the Exchange believes it's 
reasonable and appropriate to decrease the ORF amount from $0.0050 to 
$0.0042 per contract side.
    The Exchange also believes the proposed fee change is equitable and 
not unfairly discriminatory in that it is charged to all member 
organizations on all their transactions that clear in the customer 
range at the OCC.\20\ The Exchange believes the ORF ensures fairness by 
assessing higher fees to those members and member organizations that 
require more Exchange regulatory services based on the amount of 
customer options business they conduct. Regulating customer trading 
activity is much more labor intensive and requires greater expenditure 
of human and technical resources than regulating non-customer trading 
activity, which tends to be more automated and less labor-intensive. 
For example, there are costs associated with main office and branch 
office examinations (e.g., staff expenses), as well as investigations 
into customer complaints and the terminations of registered persons. As 
a result, the costs associated with administering the customer 
component of the Exchange's overall regulatory program are materially 
higher than the costs associated with administering the non-customer 
component (e.g., member and member organization proprietary 
transactions) of its regulatory program. Moreover, the Exchange notes 
that it has broad regulatory responsibilities with respect to 
activities of its members and member organizations, irrespective of 
where their transactions take place. Many of the Exchange's 
surveillance programs for customer trading activity may require the 
Exchange to look at activity across all markets, such as reviews 
related to position limit violations and manipulation. Indeed, the 
Exchange cannot effectively review for such conduct without looking at 
and evaluating activity regardless of where it transpires. In addition 
to its own surveillance programs, the Exchange also works with other 
SROs and exchanges on intermarket surveillance related issues. Through 
its participation in the Intermarket Surveillance Group

[[Page 17257]]

(``ISG'') \21\ the Exchange shares information and coordinates 
inquiries and investigations with other exchanges designed to address 
potential intermarket manipulation and trading abuses. Accordingly, 
there is a strong nexus between the ORF and the Exchange's regulatory 
activities with respect to customer trading activity of its members and 
member organizations.
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    \20\ If the OCC clearing member is a Phlx member organization, 
ORF is assessed and collected on all cleared customer contracts 
(after adjustment for CMTA); and (2) if the OCC clearing member is 
not a Phlx member organization, ORF is collected only on the cleared 
customer contracts executed at Phlx, taking into account any CMTA 
instructions which may result in collecting the ORF from a non-
member organization.
    \21\ ISG is an industry organization formed in 1983 to 
coordinate intermarket surveillance among the SROs by cooperatively 
sharing regulatory information pursuant to a written agreement 
between the parties. The goal of the ISG's information sharing is to 
coordinate regulatory efforts to address potential intermarket 
trading abuses and manipulations.
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    The Exchange's proposal to amend Options 7, Section 6D of the Phlx 
Pricing Schedule to make clear that the ORF is assessed to member 
organizations and note ``member organization'' next to the term 
``member'' in one place is reasonable, equitable and not unfairly 
discriminatory. The proposed amendments will bring greater clarity to 
the ORF rule text by utilizing the defined terms ``member'' and 
``member organization'' correctly.

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 not necessary or appropriate in 
furtherance of the purposes of the Act. This proposal does not create 
an unnecessary or inappropriate intra-market burden on competition 
because the ORF applies to all customer activity, thereby raising 
regulatory revenue to offset regulatory expenses. It also supplements 
the regulatory revenue derived from non-customer activity. The Exchange 
notes, however, the proposed change is not designed to address any 
competitive issues. Indeed, this proposal does not create an 
unnecessary or inappropriate inter-market burden on competition because 
it is a regulatory fee that supports regulation in furtherance of the 
purposes of the Act. The Exchange is obligated to ensure that the 
amount of regulatory revenue collected from the ORF, in combination 
with its other regulatory fees and fines, does not exceed regulatory 
costs.
    The Exchange's proposal to amend Options 7, Section 6D of the Phlx 
Pricing Schedule to make clear that the ORF is assessed to member 
organizations and note ``member organization'' next to the term 
``member'' in one place does not impose an undue burden on competition. 
The proposed amendments will bring greater clarity to the ORF rule text 
by utilizing the defined terms ``member'' and ``member organization'' 
correctly.

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

    The foregoing rule change is effective upon filing pursuant to 
Section 19(b)(3)(A) \22\ of the Act and subparagraph (f)(2) of Rule 
19b-4 \23\ thereunder, because it establishes a due, fee, or other 
charge imposed by the Exchange.
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    \22\ 15 U.S.C. 78s(b)(3)(A).
    \23\ 17 CFR 240.19b-4(f)(2).
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    At any time within 60 days of the filing of such 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 under 
Section 19(b)(2)(B) \24\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
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    \24\ 15 U.S.C. 78s(b)(2)(B).
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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 No. SR-Phlx-2021-16 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 No. SR-Phlx-2021-16. 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 No. SR-Phlx-2021-16, and should be submitted on or 
before April 22, 2021.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-06672 Filed 3-31-21; 8:45 am]
BILLING CODE 8011-01-P