81 FR 72624 - Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Notice of Filing of a Proposed Rule Change to Bats BZX Rule 14.13, Company Listing Fees, and to the Bats BZX Fee Schedule; Suspension of and Order Instituting Proceedings To Determine Whether To Approve or Disapprove the Proposed Rule Change

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 203 (October 20, 2016)

Page Range		72624-72629
FR Document		2016-25350
Federal Register, Volume 81 Issue 203 (Thursday, October 20, 2016)
[Federal Register Volume 81, Number 203 (Thursday, October 20, 2016)]
[Notices]
[Pages 72624-72629]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-25350]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79103; File No. SR-BatsBZX-2016-60]


Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change to Bats BZX Rule 14.13, Company 
Listing Fees, and to the Bats BZX Fee Schedule; Suspension of and Order 
Instituting Proceedings To Determine Whether To Approve or Disapprove 
the Proposed Rule Change

October 14, 2016.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on September 29, 2016, Bats BZX Exchange, Inc. (the ``Exchange'' 
or ``BZX'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons and is, pursuant to 
Section 19(b)(3)(C) of the Act, hereby: (1) Temporarily suspending the 
proposed rule change; and (2) instituting proceedings to determine 
whether to approve or disapprove the proposal.
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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 filed a proposal to amend the fees applicable to 
securities listed on the Exchange, which are set forth in BZX Rule 
14.13 as well as to amend the fee schedule applicable to Members \3\ 
and non-Members of the Exchange pursuant to Exchange Rules 15.1(a) and 
(c). Changes to the Exchange's fees pursuant to this proposal are 
effective upon filing.
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    \3\ A Member is defined as ``any registered broker or dealer 
that has been admitted to membership in the Exchange.'' See Exchange 
Rule 1.5(n).
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    The text of the proposed rule change is available at the Exchange's 
Web site at www.batstrading.com, at the principal office of the 
Exchange, and at the Commission's Public Reference Room.

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant parts of such 
statements.

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

1. Purpose
    On August 30, 2011, the Exchange received approval of rules 
applicable to the qualification, listing, and delisting of companies on 
the Exchange,\4\ which it modified on February 8, 2012 in order to 
adopt pricing for the listing of exchange traded products (``ETPs'') 
\5\ on the Exchange,\6\ which it subsequently modified again on June 4, 
2014.\7\ On October 16, 2014, the Exchange modified Rule 14.13, 
entitled ``Company Listing Fees'' to eliminate the annual fees for ETPs 
not participating in the Exchange's Competitive Liquidity Provider 
Program pursuant to Rule 11.8, Interpretation and Policy .02 (the ``CLP 
Program'').\8\ On May 22, 2015, the Exchange further modified Rule 
14.13 to eliminate the $5,000 application fee for ETPs, effectively 
eliminating any compulsory fees for both new ETP issues and transfer 
listings in ETPs on the Exchange.\9\ On October 1, 2015, the Exchange 
started offering an incentive payment to ETPs listed on the Exchange 
based on the consolidated average daily volume (``CADV'') of the ETP 
(the ``Issuer Incentive Program'') \10\ and subsequently made an 
administrative change to the Issuer Incentive Program that required an 
issuer to enroll in order to receive payment.\11\ The Exchange is now 
proposing to amend the Issuer Incentive Program such that series of 
Portfolio Depository Receipts, Index Fund Shares, Trust Issued 
Receipts, and Managed Fund Shares (``Funds'') listed on the Exchange 
will no longer be eligible to receive payments under the Issuer 
Incentive Program. The Exchange is also proposing that the LMM \12\ in 
a Fund \13\ would receive a payment from the Exchange based on the CADV 
of the Fund, as described below (the ``LMM Partnership Program'').
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    \4\ See Securities Exchange Act Release No. 65225 (August 30, 
2011), 76 FR 55148 (September 6, 2011) (SR-BATS-2011-018).
    \5\ As defined in BZX Rule 11.8(e)(1)(A), the term ``ETP'' means 
any security listed pursuant to Exchange Rule 14.11.
    \6\ See Securities Exchange Act Release No. 66422 (February 17, 
2012), 77 FR 11179 (February 24, 2012) (SR-BATS-2012-010).
    \7\ See Securities Exchange Act Release No. 72377 (June 12, 
2014), 79 FR 34822 (June 18, 2014) (SR-BATS-2014-024).
    \8\ See Securities Exchange Act Release No. 73414 (October 23, 
2014), 79 FR 64434 (October 29, 2014) (SR-BATS-2014-050).
    \9\ See Securities Exchange Act Release No. 75085 (June 1, 
2015), 80 FR 32190 (June 5, 2015) (SR-BATS-2015-39).
    \10\ See Securities Exchange Act Release No. 76113 (October 8, 
2015), 80 FR 62142 (October 15, 2015) (SR-BATS-2015-80) (the 
``Issuer Incentive Program Filing'').
    \11\ See Securities Exchange Act Release No. 77960 (June 1, 
2016), 81 FR 36632 (June 7, 2016) (SR-BatsBZX-2016-20).
    \12\ As defined in Rule 11.8(e)(1)(B), the term LMM means a 
Market Maker registered with the Exchange for a particular LMM 
Security that has committed to maintain Minimum Performance 
Standards in the LMM Security.
    \13\ As noted above, the term ``Fund'' includes Portfolio 
Depository Receipts, Index Fund Shares, Trust Issued Receipts, and 
Managed Fund Shares, which are defined in Rule 14.11(b), 14.11(c), 
14.11(f), and 14.11(i), respectively, which the Exchange may propose 
to expand in the future as it adds products which may be listed on 
the Exchange. Any such expansion would require the Exchange to file 
a proposal with the Commission under Rule 19b-4 of the Act.
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    Specifically, the Exchange is proposing that the Exchange would 
provide payments to the LMM in a Fund on a quarterly basis as follows: 
\14\
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    \14\ The Exchange notes that the CADV standards and proposed 
payments applicable to the LMM Partnership Program are identical to 
the standards and payments currently applicable under the Issuer 
Incentive Program.

------------------------------------------------------------------------
                                                              Annualized
                         CADV range                             payment
------------------------------------------------------------------------
1,000,000-3,000,000 shares..................................      $3,000
3,000,001-5,000,000 shares..................................      10,000
5,000,001-10,000,000 shares.................................      50,000
10,000,001-20,000,000 shares................................     100,000

[[Page 72625]]

 
20,000,001-35,000,000 shares................................     250,000
Greater than 35,000,000 shares..............................     400,000
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    The LMM would only be eligible to receive such payments in quarters 
during which it is a Qualified LMM \15\ for each full month that the 
Fund was listed on the Exchange.
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    \15\ As defined in the fee schedule, the term ``Qualified LMM'' 
means an LMM that meets the Minimum Performance Standards, as 
defined in Rule 11.8(e)(1)(D).
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    Because the payments would be provided for each trading day, where 
a Fund had a CADV of 4,000,000 over the course of a full calendar 
quarter that it was listed on the Exchange, the LMM for that Fund would 
receive a payment of $2,500 (.25 * $10,000, the annualized payment for 
that CADV) at the end of the quarter. Where the same Fund had a CADV of 
4,000,000, but was only listed on the Exchange for exactly half of the 
trading days in the calendar quarter, the LMM for that Fund would 
receive a payment of $1,250 ((.25 * $10,000) * .5) at the end of the 
quarter.
    The Exchange is proposing to make these changes as a means to 
equitably allocate the revenues and expenses associated with bringing a 
successful Fund to market among the issuer, the listing exchange, and 
the LMM. For example, in new Funds, the cost to a firm of making a 
market as an LMM, such as holding inventory in the security, is often 
not fully offset by the revenue provided through enhanced LMM rebates, 
as further discussed below, that it receives from the Exchange. In such 
cases, LMMs often take on the role as LMM despite the negative 
economics based on the hope, without guarantee, that the costs for 
acting as an LMM will eventually be reduced to a level lower than the 
gradually decreasing enhanced LMM rebates. Without an LMM taking this 
risk to make markets in these new Funds, the products would likely be 
significantly less liquid and would have a greatly reduced likelihood 
of achieving success.
    As highlighted in the Issuer Incentive Program Filing, the primary 
listing exchange for a Fund earns additional trading fees through the 
outsized share of intraday trading volume that a primary listed 
security typically garners for the listing exchange as well as trading 
fees for orders participating in the opening and closing auctions. Such 
trading fees generally increase as the CADV for a Fund increases. 
Similarly, as the CADV increases for a Fund, so does the amount of 
assets under management (``AUM'') for a Fund tend to increase and AUM 
is a common measure of a Fund's success and is the basis for certain 
fees charged by a Fund. As such, both the primary listing exchange and 
the issuer experience financial benefits as the CADV for a Fund 
increases. For LMMs, however, as the CADV increases, the enhanced 
rebates that LMMs receive in securities for which they are an LMM 
decrease.\16\ While this structure provides the potential for an LMM to 
financially share in the success of a Fund with a high CADV if the 
costs of making a market in the Fund, the enhanced LMM rebates, and the 
typical market conditions in the Fund align properly, it does not 
guarantee it and, further, even if the economics do align properly, the 
rebate structure fails to account for the LMM's importance in that Fund 
achieving a high CADV.
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    \16\ See Exchange Fee Schedule, Footnote 14. The Exchange offers 
standard credits for LMM orders that add liquidity in securities for 
which they are the LMM as follows: $0.0045 per share for securities 
with a CADV less than 1,000,000 shares; $0.0040 per share for 
securities with a CADV from 1,000,000 shares to 5,000,000 shares; 
$0.0035 per share for securities with a CADV greater than 5,000,000 
shares. See also NYSE Arca Equities, Inc. Schedule of Fees and 
Charges for Exchange Services, https://www.nyse.com/publicdocs/nyse/markets/nyse-arca/NYSE_Arca_Marketplace_Fees.pdf. Standard credits 
for LMM orders that add liquidity in securities for which they are 
an LMM are as follows: $0.0045 per share for securities with a CADV 
less than 1,000,000 shares; $0.0040 per share for securities with a 
CADV between 1,000,000 shares and 3,000,000 shares; $0.0033 per 
share for securities with a CADV greater than 3,000,000 shares.
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    Based on the foregoing, the Exchange believes that the current 
model of compensation for LMMs could be amended to better reflect the 
role that LMMs play in the success of Funds by having the Exchange 
direct payments to the LMM. While the Issuer Incentive Program was 
originally designed to create a more equitable and appropriate 
allocation based on revenue and expenses associated with listing Funds, 
upon further examination, the Exchange believes that allowing LMMs to 
receive payment under the LMM Partnership Program will further enhance 
the equitability of the distribution of revenues and expenses 
associated with bringing a successful Fund to market. As such, the 
Exchange is proposing to adopt the above described tiered payment 
structure for LMMs in Funds listed on the Exchange under the LMM 
Partnership Program.
    The Exchange is not proposing to make any changes to the Issuer 
Incentive Program as it currently applies to ETPs that are not Funds.
    The Exchange proposes to implement the amendments to Rule 
14.13(b)(2)(C) and to its fee schedule effective October 3, 2016.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder that are applicable to a national securities exchange, and, 
in particular, with the requirements of Section 6 of the Act.\17\ 
Specifically, the Exchange believes that the proposed rule change is 
consistent with Section 6(b)(4) and 6(b)(5) of the Act,\18\ in that it 
provides for the equitable allocation of reasonable dues, fees and 
other charges among issuers and its Members and is designed to promote 
just and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in 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 are not designed to 
permit unfair discrimination between customers, issuers, brokers, or 
dealers.
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    \17\ 15 U.S.C. 78f.
    \18\ 15 U.S.C. 78f(b)(4) and (5).
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    The Exchange believes that the proposed amendment to the fee 
schedule to provide payment to the LMM for a Fund listed on the 
Exchange based on the CADV of the Fund is reasonable, fair and 
equitable, and not an unfairly discriminatory allocation of fees and 
other charges, would promote just and equitable principles of trade, 
foster cooperation with persons engaged in facilitating transactions in 
securities, and remove impediments to and perfect the mechanism of a 
free and open market and a national market system because it would 
apply equally to all LMMs and create a distribution of fees and other 
charges that reflects a more equitable distribution among the Exchange, 
issuer, and LMM of revenue that a Fund listed on the Exchange creates. 
The Exchange believes that each of the issuer, the exchange, and the 
LMM play a key role in the ultimate success of a Fund. While no single 
party can take an action that will determine the ultimate success of a 
Fund, if just one of the three parties falters at any point in the life 
of the Fund, it can determine the Fund's failure. As such, the process 
of bringing a successful Fund to market requires the full commitment of 
all three of the issuer, the exchange, and the LMM. As described above, 
trading fees for the primary listing exchange generally increase as the 
CADV for a Fund increases. Similarly, as the CADV

[[Page 72626]]

increases for a Fund, so does the amount of AUM for a Fund tend to 
increase, which is a common measure of a Fund's success and the basis 
for certain fees charged by a Fund. As such, both the primary listing 
exchange and the issuer experience financial benefits as the CADV for a 
Fund increases and are rewarded for their commitment to the Fund. For 
LMMs, however, as the CADV increases, the enhanced rebates that LMMs 
receive in securities for which they are an LMM decrease. On its face, 
this rebate structure makes sense: As the CADV for a Fund increases, 
the market for that Fund becomes more liquid, spreads become tighter, 
and the cost associated with making a market in that Fund should 
generally decrease. Practically, however, the rebate structure fails to 
account for the LMM's important role in the Fund's success. The LMM 
Partnership Program, on the other hand, acknowledges the additional 
revenue brought to the Exchange by virtue of a Fund listing on the 
Exchange and moves to share that revenue in a more equitable manner 
based on the integral role that all three parties--the issuer, the 
exchange, and the LMM--play in the ultimate success of a Fund. 
Specifically, the proposal is designed to reward the LMM in that Fund 
for such additional revenue, which the Exchange believes creates a more 
equitable and appropriate relationship between the Exchange, issuers, 
and LMMs. As such, the Exchange believes that it is reasonable, fair 
and equitable, and not unfairly discriminatory allocation of fees and 
other charges to provide payment to LMMs in Funds listed on the 
Exchange under the LMM Partnership Program.
    The Exchange also believes that the proposed amendment to its fee 
schedule to provide tiered payments to LMMs in Funds listed on the 
Exchange based on the CADV of a Fund is a reasonable, fair and 
equitable, and not unfairly discriminatory allocation of fees and other 
charges because it would create a distribution of fees and other 
charges applicable to all LMMs that are commensurate with the 
additional revenue that a Fund listed on the Exchange creates for the 
Exchange through executions occurring in the auctions and additional 
shares executed on the Exchange. As described above, where the CADV of 
a Fund increases, so does the additional trading fee revenue earned by 
the primary listing exchange. Similarly, as the CADV increases for a 
Fund, typically so does the amount of AUM for a Fund, which is the 
basis for certain fees charged by a Fund. As such, both the primary 
listing exchange and the issuer experience financial benefits as the 
CADV for a Fund increases. Accordingly, the proposed tiers within the 
LMM Partnership Program are designed to reward the LMM in a Fund on the 
basis of the additional revenue potential that the Fund brings to the 
Exchange and the issuer through increased CADV. Further to this point, 
the Exchange does not believe that the proposal is unfairly 
discriminatory because, as described above, the annualized payments 
associated with the various CADV tiers in the LMM Partnership Program 
are designed based on the approximate additional revenue that the 
Exchange will receive from a Fund listed on the Exchange within a 
particular CADV tier and are identical to those currently provided 
under the Issuer Incentive Program. The Exchange notes that certain 
LMMs in Funds in the proposed tiers with higher CADV would receive 
disproportionately higher rebates than LMMs in Funds in other tiers 
with lower CADV. The Exchange believes it is equitable and not unfairly 
discriminatory to provide a disproportionately higher payment to LMMs 
of Funds in higher tiers because such Funds would likely bring a 
disproportionately larger amount of revenue to the Exchange from the 
auctions the Exchange would conduct for such securities and increased 
trading activity on the Exchange in such securities. The Exchange 
believes that the additional revenue it will generate from Funds that 
are eligible for the LMM Partnership Program, including Funds that 
qualify for the higher tiers, will exceed the amount of such payments 
to LMMs. To the extent the additional revenue generated by Funds that 
are eligible to participate in the LMM Partnership Program does not 
exceed the amount of such payments to LMMs, the Exchange will modify 
the structure of the LMM Partnership Program such that the program does 
generate revenue for the Exchange.
    The Exchange further believes that it is reasonable, fair and 
equitable, and not unfairly discriminatory allocation of fees and other 
charges, would promote just and equitable principles of trade, foster 
cooperation with persons engaged in facilitating transactions in 
securities, and 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 to provide payment to LMMs in 
Funds listed on the Exchange through the LMM Partnership Program 
because receiving payment under the LMM Partnership Program will 
provide additional incentives for market makers to act as LMM in all 
BZX-listed Funds, including newly listed Funds. For the vast majority 
of Funds, the LMM does not change after the Fund is launched. Stated 
another way, the LMM for a Fund at launch is very likely to be the LMM 
for the Fund for the foreseeable future. Because of this low turnover 
in LMMs, the Exchange believes that providing payments to LMMs on the 
basis of CADV will incentivize more market makers to seek to act as an 
LMM in more BZX-listed Funds. In particular, the Exchange believes that 
the implementation of the LMM Partnership Program in conjunction with 
the low turnover in LMMs for Funds would make it more attractive for a 
market maker to become an LMM at the launch of a Fund in order to 
ensure that the market maker does not miss out on the opportunity to 
receive a payment under the LMM Partnership at some point in the 
future. This incentive to register as an LMM in new Funds will benefit 
such Funds by creating greater interest in acting as an LMM and meeting 
the associated quoting requirements. The same mechanics under the LMM 
Partnership Program that incentivize market makers to register as LMMs 
in Funds would also incentivize LMMs in Funds to create the best market 
conditions for a Fund to increase its CADV and help it attract assets, 
which likely includes quoting in tighter spreads and at greater depth 
than they otherwise would in the absence of the LMM Partnership 
Program. Such tighter spreads and greater depth would result in 
enhanced market quality in BZX-listed Funds, which would also benefit 
all market participants. As such, the Exchange believes that aligning 
the interests and incentives of the LMMs, Fund issuers, and the 
Exchange will create an ecosystem that benefits all participants.
    The Exchange further believes that it is reasonable, fair and 
equitable, and not unfairly discriminatory allocation of fees and other 
charges, would promote just and equitable principles of trade, foster 
cooperation with persons engaged in facilitating transactions in 
securities, and 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 because it is designed to 
attract additional Fund listings to the Exchange. Based on 
conversations with numerous market participants, the Exchange believes 
that the equitable allocation of revenue generated from a Fund listed 
on the Exchange under the LMM Partnership Program would make

[[Page 72627]]

the Exchange a more attractive listing venue from both issuers' and 
LMMs' perspectives. As such, the Exchange believes that the proposal is 
reasonable, fair and equitable, and not unfairly discriminatory in that 
the Exchange believes that it will attract additional Fund listings and 
LMMs in Funds, which will, in turn, benefit the Exchange and all other 
BZX-listed Funds.
    In addition, the Exchange does not believe that it is unfairly 
discriminatory to exclude Funds with a CADV of less than 1,000,000 from 
the LMM Partnership Program because such Funds do not typically 
generate revenue to the same degree as the higher CADV products. The 
Exchange notes that Funds with a CADV of less than 1,000,000 are 
eligible to participate in the ETP CLP Program, which is designed to 
incentivize market makers to provide liquidity in less actively traded 
products with the goal of facilitating the growth of such products.\19\
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    \19\ Pursuant to Rule 11.8, Interpretation and Policy .03(n), a 
security participating in the ETP CLP Program will no longer be 
eligible to participate once such security sustains CADV of 
1,000,000 shares or more for three consecutive months.
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    Based on the foregoing, the Exchange believes that the proposed 
amendment to the fee schedule to provide payment to the LMM for a Fund 
listed on the Exchange under the LMM Partnership Program is a 
reasonable, equitable, and non-discriminatory allocation of fees to 
issuers and LMMs.
    The Exchange believes that the proposed amendment to the annual 
listing fees in Rule 14.13(b)(2)(C) to eliminate the payment to Funds 
under the Issuer Incentive Program is reasonable, fair and equitable, 
and not an unfairly discriminatory allocation of fees and other charges 
because it would apply equally to all Funds and eliminating the payment 
will allow the Exchange to better allocate its resources in order to 
make BZX a more attractive listing venue for Funds. The payment to 
Funds under the Issuer Incentive Program has not had the impact that 
the Exchange sought when it was implemented. As noted above, 
eliminating the payment to all Funds under the Issuer Incentive Program 
will allow the Exchange to reallocate its resources in order to make 
BZX a more attractive listing venue for Funds. The Exchange does not 
believe that it is unfairly discriminatory to have Funds participate in 
the LMM Partnership Program and non-Funds remain under the Issuer 
Incentive Program because the only ETPs currently listed on the 
Exchange are Funds and the Exchange will continue to evaluate both of 
the LMM Partnership Program and the Issuer Incentive Program and how 
they should best apply to Funds and non-Funds moving forward. As such, 
the Exchange believes that the proposal is reasonable, fair and 
equitable, and not an unfairly discriminatory allocation of fees and 
other charges.

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

    The Exchange 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, as amended. With 
respect to the proposed new pricing, the Exchange does not believe that 
the changes burden competition, but instead, enhance competition, as 
they are intended to increase the competitiveness of the Exchange's 
listings program by eliminating certain payments under the Issuer 
Incentive Program that have not garnered their intended results and 
will providing [sic] LMMs in Funds with quarterly payments based on the 
CADV of the Fund, which the Exchange believes will be directly related 
to the amount of additional revenue that the Exchange receives from 
additional transactions in the Fund. As such, the proposal is a 
competitive proposal that is intended to attract additional Fund 
listings and LMMs in Funds, which will, in turn, benefit the Exchange 
and all other BZX-listed Funds.

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

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any written comments from members or other interested parties.

III. Suspension of SR-BatsBZX-2016-60

    Pursuant to Section 19(b)(3)(C) of the Act,\20\ at any time within 
60 days of the date of filing of a proposed rule change pursuant to 
Section 19(b)(1) of the Act,\21\ the Commission summarily may 
temporarily suspend the change in the rules of a self-regulatory 
organization 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. The 
Commission believes it is appropriate in the public interest to 
temporarily suspend the proposal to solicit comment on and further 
evaluate the statutory basis for BZX's proposal to adopt the proposed 
LMM Partnership Program.
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    \20\ 15 U.S.C. 78s(b)(3)(C).
    \21\ 15 U.S.C. 78s(b)(1).
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    In temporarily suspending the proposal, the Commission intends to 
further assess whether the LMM Partnership Program is consistent with 
the statutory requirements applicable to a national securities exchange 
under the Act. In particular, the Commission will assess whether the 
proposed rule change satisfies the requirements of the Act and the 
rules thereunder requiring, among other things, that an exchange's 
rules provide for the equitable allocation of reasonable fees among 
members, issuers, and other persons using its facilities; not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers; and do not impose any burden on competition not 
necessary or appropriate in furtherance of the purposes of the Act.\22\
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    \22\ See 15 U.S.C. 78f(b)(4), (5) and (8).
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    Therefore, the Commission finds that it is appropriate in the 
public interest,\23\ for the protection of investors, and otherwise in 
furtherance of the purposes of the Act, to temporarily suspend the 
proposed rule change.
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    \23\ For purposes of temporarily suspending the proposed rule 
change, the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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IV. Proceedings To Determine Whether To Approve or Disapprove SR-
BatsBZX-2016-60

    The Commission is instituting proceedings pursuant to Sections 
19(b)(3)(C) \24\ and 19(b)(2) of the Act \25\ to determine whether 
BZX's proposed rule change should be approved or disapproved. Pursuant 
to Section 19(b)(2)(B) of the Act,\26\ the Commission is providing 
notice of the grounds for disapproval under consideration. As discussed 
above, the Exchange proposes to make quarterly payments to LMMs in 
Funds with CADV of 1,000,000 or higher. These payments would increase

[[Page 72628]]

as the CADV of the Fund increases, up to a maximum annual payment of 
$400,000 to the LMM of a Fund with a CADV of 35,000,000 or more, and 
they would not be accompanied by enhanced market-quality requirements 
for the LMM or be determined based on the actual quoting or trading 
activity of the LMM.
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    \24\ 15 U.S.C. 78s(b)(3)(C). Once the Commission temporarily 
suspends a proposed rule change, Section 19(b)(3)(C) of the Act 
requires that the Commission institute proceedings under Section 
19(b)(2)(B) to determine whether a proposed rule change should be 
approved or disapproved.
    \25\ 15 U.S.C. 78s(b)(2).
    \26\ 15 U.S.C. 78s(b)(2)(B). Section 19(b)(2)(B) of the Act also 
provides that proceedings to determine whether to disapprove a 
proposed rule change must be concluded within 180 days of the date 
of publication of notice of the filing of the proposed rule change. 
Id. The time for conclusion of the proceedings may be extended for 
up to 60 days if the Commission finds good cause for such extension 
and publishes its reasons for so finding. Id.
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    As noted above, the Exchange asserts that the LMM Partnership 
Program is designed to ``equitably allocate the revenues and expenses 
associated with bringing a successful Fund to market among the issuer, 
the listing exchange, and the LMM.'' The Exchange notes that the 
Exchange's LMM rebate structure ``fails to account for the LMM's 
important role in [a] Fund's success,'' because ``as the CADV 
increases, the enhanced rebates that LMMs receive in securities for 
which they are an LMM decrease.'' \27\ The Exchange believes that the 
LMM Partnership Program will ``provide additional incentives for market 
makers to act as LMM in all [Exchange]-listed Funds, including newly 
listed Funds.'' \28\
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    \27\ See Section II.A.1, supra.
    \28\ See Section II.A.2, supra.
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    The Commission believes there are questions as to whether the 
Exchange has adequately explained why it is consistent with the Act to 
make substantial additional payments to LMMs in the most-liquid ETFs--
where performance incentives would seem least necessary to maintain 
market quality--without the imposition of any additional performance 
standards. While the Exchange asserts that the LMM Partnership Program 
may incent market makers to become LMMs in newly listed Funds, the 
Commission does not believe it is clear how higher payments to LMMs in 
the most-liquid ETFs will encourage them to become LMMs in less-liquid 
ETFs, particularly given that the LMM Partnership Program does not 
obligate participants to become LMMs in any less-liquid ETFs or impose 
additional performance standards on them. As a result, the connection 
between the proposed LMM incentives and the desired LMM behavior 
appears indirect and tenuous.
    The Commission believes it is appropriate to institute proceedings 
at this time in view of the legal and policy issues raised by the 
proposal. Institution of proceedings does not indicate, however, that 
the Commission has reached any conclusions with respect to the issues 
involved. The sections of the Act and the rules thereunder which are 
applicable to the proposed rule change include:
     Section 6(b)(4) of the Act,\29\ which requires that the 
rules of a national securities exchange ``provide for the equitable 
allocation of reasonable dues, fees, and other charges among its 
members and issuers and other persons using its facilities.''
---------------------------------------------------------------------------

    \29\ 15 U.S.C. 78f(b)(4).
---------------------------------------------------------------------------

     Section 6(b)(5) of the Act,\30\ which requires that the 
rules of a national securities exchange be designed to, among other 
things, ``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 not be ``designed to permit 
unfair discrimination between customers, issuers, brokers, or 
dealers.''
---------------------------------------------------------------------------

    \30\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

     Section 6(b)(8) of the Act,\31\ which requires that the 
rules of a national securities exchange ``not impose any burden on 
competition not necessary or appropriate'' in furtherance of the Act.
---------------------------------------------------------------------------

    \31\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

V. Commission's Solicitation of Comments

    The Commission requests written views, data, and arguments with 
respect to the concerns identified above as well as other relevant 
concerns. Such comments should be submitted by November 10, 2016. 
Rebuttal comments should be submitted by November 25, 2016. Although 
there do not appear to be any issues relevant to approval or 
disapproval which 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.\32\
---------------------------------------------------------------------------

    \32\ 15 U.S.C. 78s(b)(2). Section 19(b)(2) of the Act 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).
---------------------------------------------------------------------------

    The Commission asks that commenters address the sufficiency and 
merit of the Exchange's statements in support of the proposal, in 
addition to any other comments they may wish to submit about the 
proposed rule change. Interested persons are invited to submit written 
data, views, and arguments concerning the proposed rule change, 
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-BatsBZX-2016-60 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-BatsBZX-2016-60. 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 Web site (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 Web site 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. All comments received will be posted without 
change; the Commission does not edit personal identifying information 
from submissions. You should submit only information that you wish to 
make publicly available. All submissions should refer to File Number 
SR-BatsBZX-2016-60 and should be submitted on or before November 10, 
2016. Rebuttal comments should be submitted by November 25, 2016.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(3)(C) of the 
Act,\33\ that File Number SR-BatsBZX-2016-60, be and hereby is, 
temporarily suspended. In addition, the Commission is instituting 
proceedings to determine whether the proposed rule changes should be 
approved or disapproved.
---------------------------------------------------------------------------

    \33\ 15 U.S.C. 78s(b)(3)(C).


[[Page 72629]]


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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\34\
---------------------------------------------------------------------------

    \34\ 17 CFR 200.30-3(a)(57) and (58).
---------------------------------------------------------------------------

Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-25350 Filed 10-19-16; 8:45 am]
 BILLING CODE 8011-01-P
Federal Register / Vol. 81, No. 203 / Thursday, October 20, 2016 / Notices 72627

the Exchange a more attractive listing will continue to evaluate both of the the public interest to temporarily
venue from both issuers’ and LMMs’ LMM Partnership Program and the suspend the proposal to solicit comment
perspectives. As such, the Exchange Issuer Incentive Program and how they on and further evaluate the statutory
believes that the proposal is reasonable, should best apply to Funds and non- basis for BZX’s proposal to adopt the
fair and equitable, and not unfairly Funds moving forward. As such, the proposed LMM Partnership Program.
discriminatory in that the Exchange Exchange believes that the proposal is In temporarily suspending the
believes that it will attract additional reasonable, fair and equitable, and not proposal, the Commission intends to
Fund listings and LMMs in Funds, an unfairly discriminatory allocation of further assess whether the LMM
which will, in turn, benefit the fees and other charges. Partnership Program is consistent with
Exchange and all other BZX-listed the statutory requirements applicable to
B. Self-Regulatory Organization’s a national securities exchange under the
Funds.
In addition, the Exchange does not Statement on Burden on Competition Act. In particular, the Commission will
believe that it is unfairly discriminatory The Exchange does not believe that assess whether the proposed rule
to exclude Funds with a CADV of less the proposed rule change will result in change satisfies the requirements of the
than 1,000,000 from the LMM any burden on competition that is not Act and the rules thereunder requiring,
Partnership Program because such necessary or appropriate in furtherance among other things, that an exchange’s
Funds do not typically generate revenue of the purposes of the Act, as amended. rules provide for the equitable
to the same degree as the higher CADV With respect to the proposed new allocation of reasonable fees among
products. The Exchange notes that pricing, the Exchange does not believe members, issuers, and other persons
Funds with a CADV of less than that the changes burden competition, using its facilities; not be designed to
1,000,000 are eligible to participate in but instead, enhance competition, as permit unfair discrimination between
the ETP CLP Program, which is they are intended to increase the customers, issuers, brokers, or dealers;
designed to incentivize market makers competitiveness of the Exchange’s and do not impose any burden on
to provide liquidity in less actively listings program by eliminating certain competition not necessary or
traded products with the goal of payments under the Issuer Incentive appropriate in furtherance of the
facilitating the growth of such Program that have not garnered their purposes of the Act.22
products.19 intended results and will providing [sic] Therefore, the Commission finds that
Based on the foregoing, the Exchange LMMs in Funds with quarterly it is appropriate in the public interest,23
believes that the proposed amendment payments based on the CADV of the for the protection of investors, and
to the fee schedule to provide payment Fund, which the Exchange believes will otherwise in furtherance of the purposes
to the LMM for a Fund listed on the be directly related to the amount of of the Act, to temporarily suspend the
Exchange under the LMM Partnership additional revenue that the Exchange proposed rule change.
Program is a reasonable, equitable, and receives from additional transactions in IV. Proceedings To Determine Whether
non-discriminatory allocation of fees to the Fund. As such, the proposal is a To Approve or Disapprove SR–
issuers and LMMs. competitive proposal that is intended to
The Exchange believes that the BatsBZX–2016–60
attract additional Fund listings and
proposed amendment to the annual LMMs in Funds, which will, in turn, The Commission is instituting
listing fees in Rule 14.13(b)(2)(C) to benefit the Exchange and all other BZX- proceedings pursuant to Sections
eliminate the payment to Funds under listed Funds. 19(b)(3)(C) 24 and 19(b)(2) of the Act 25
the Issuer Incentive Program is to determine whether BZX’s proposed
reasonable, fair and equitable, and not C. Self-Regulatory Organization’s rule change should be approved or
an unfairly discriminatory allocation of Statement on Comments on the disapproved. Pursuant to Section
fees and other charges because it would Proposed Rule Change Received From 19(b)(2)(B) of the Act,26 the Commission
apply equally to all Funds and Members, Participants or Others is providing notice of the grounds for
eliminating the payment will allow the The Exchange has not solicited, and disapproval under consideration. As
Exchange to better allocate its resources does not intend to solicit, comments on discussed above, the Exchange proposes
in order to make BZX a more attractive this proposed rule change. The to make quarterly payments to LMMs in
listing venue for Funds. The payment to Exchange has not received any written Funds with CADV of 1,000,000 or
Funds under the Issuer Incentive comments from members or other higher. These payments would increase
Program has not had the impact that the interested parties.
Exchange sought when it was 22 See 15 U.S.C. 78f(b)(4), (5) and (8).
implemented. As noted above, III. Suspension of SR–BatsBZX–2016– 23 For purposes of temporarily suspending the
eliminating the payment to all Funds 60 proposed rule change, the Commission has
considered the proposed rule’s impact on
under the Issuer Incentive Program will Pursuant to Section 19(b)(3)(C) of the efficiency, competition, and capital formation. See
allow the Exchange to reallocate its Act,20 at any time within 60 days of the 15 U.S.C. 78c(f).
resources in order to make BZX a more date of filing of a proposed rule change 24 15 U.S.C. 78s(b)(3)(C). Once the Commission

attractive listing venue for Funds. The temporarily suspends a proposed rule change,
pursuant to Section 19(b)(1) of the Section 19(b)(3)(C) of the Act requires that the
Exchange does not believe that it is Act,21 the Commission summarily may Commission institute proceedings under Section
unfairly discriminatory to have Funds temporarily suspend the change in the 19(b)(2)(B) to determine whether a proposed rule
participate in the LMM Partnership rules of a self-regulatory organization if change should be approved or disapproved.
Program and non-Funds remain under it appears to the Commission that such 25 15 U.S.C. 78s(b)(2).
26 15 U.S.C. 78s(b)(2)(B). Section 19(b)(2)(B) of the
the Issuer Incentive Program because
mstockstill on DSK3G9T082PROD with NOTICES

action is necessary or appropriate in the Act also provides that proceedings to determine
the only ETPs currently listed on the public interest, for the protection of whether to disapprove a proposed rule change must
Exchange are Funds and the Exchange investors, or otherwise in furtherance of be concluded within 180 days of the date of
the purposes of the Act. The publication of notice of the filing of the proposed
19 Pursuant to Rule 11.8, Interpretation and Policy rule change. Id. The time for conclusion of the
Commission believes it is appropriate in proceedings may be extended for up to 60 days if
.03(n), a security participating in the ETP CLP
Program will no longer be eligible to participate the Commission finds good cause for such
20 15 U.S.C. 78s(b)(3)(C).
once such security sustains CADV of 1,000,000 extension and publishes its reasons for so finding.
shares or more for three consecutive months. 21 15 U.S.C. 78s(b)(1). Id.

VerDate Sep<11>2014 16:40 Oct 19, 2016 Jkt 241001 PO 00000 Frm 00066 Fmt 4703 Sfmt 4703 E:\FR\FM\20OCN1.SGM 20OCN1
72628 Federal Register / Vol. 81, No. 203 / Thursday, October 20, 2016 / Notices

as the CADV of the Fund increases, up • Section 6(b)(4) of the Act,29 which Electronic Comments
to a maximum annual payment of requires that the rules of a national
$400,000 to the LMM of a Fund with a securities exchange ‘‘provide for the • Use the Commission’s Internet
CADV of 35,000,000 or more, and they equitable allocation of reasonable dues, comment form (http://www.sec.gov/
would not be accompanied by enhanced fees, and other charges among its rules/sro.shtml); or
market-quality requirements for the members and issuers and other persons • Send an email to rule-comments@
LMM or be determined based on the using its facilities.’’ sec.gov. Please include File Number SR–
actual quoting or trading activity of the BatsBZX–2016–60 on the subject line.
LMM. • Section 6(b)(5) of the Act,30 which
requires that the rules of a national Paper Comments
As noted above, the Exchange asserts
that the LMM Partnership Program is securities exchange be designed to,
among other things, ‘‘remove • Send paper comments in triplicate
designed to ‘‘equitably allocate the
impediments to and perfect the to Secretary, Securities and Exchange
revenues and expenses associated with
mechanism of a free and open market Commission, 100 F Street NE.,
bringing a successful Fund to market
and a national market system, and, in Washington, DC 20549–1090.
among the issuer, the listing exchange,
and the LMM.’’ The Exchange notes that general, to protect investors and the All submissions should refer to File
the Exchange’s LMM rebate structure public interest’’ and not be ‘‘designed to Number SR–BatsBZX–2016–60. This file
‘‘fails to account for the LMM’s permit unfair discrimination between number should be included on the
important role in [a] Fund’s success,’’ customers, issuers, brokers, or dealers.’’ subject line if email is used. To help the
because ‘‘as the CADV increases, the • Section 6(b)(8) of the Act,31 which Commission process and review your
enhanced rebates that LMMs receive in requires that the rules of a national comments more efficiently, please use
securities for which they are an LMM securities exchange ‘‘not impose any only one method. The Commission will
decrease.’’ 27 The Exchange believes that burden on competition not necessary or post all comments on the Commission’s
the LMM Partnership Program will appropriate’’ in furtherance of the Act. Internet Web site (http://www.sec.gov/
‘‘provide additional incentives for rules/sro.shtml). Copies of the
market makers to act as LMM in all V. Commission’s Solicitation of
submission, all subsequent
[Exchange]-listed Funds, including Comments
amendments, all written statements
newly listed Funds.’’ 28
The Commission requests written with respect to the proposed rule
The Commission believes there are
views, data, and arguments with respect change that are filed with the
questions as to whether the Exchange
has adequately explained why it is to the concerns identified above as well Commission, and all written
consistent with the Act to make as other relevant concerns. Such communications relating to the
substantial additional payments to comments should be submitted by proposed rule change between the
LMMs in the most-liquid ETFs—where November 10, 2016. Rebuttal comments Commission and any person, other than
performance incentives would seem should be submitted by November 25, those that may be withheld from the
least necessary to maintain market 2016. Although there do not appear to public in accordance with the
quality—without the imposition of any be any issues relevant to approval or provisions of 5 U.S.C. 552, will be
additional performance standards. disapproval which would be facilitated available for Web site viewing and
While the Exchange asserts that the by an oral presentation of views, data, printing in the Commission’s Public
LMM Partnership Program may incent and arguments, the Commission will Reference Room, 100 F Street NE.,
market makers to become LMMs in consider, pursuant to Rule 19b–4, any Washington, DC 20549, on official
newly listed Funds, the Commission request for an opportunity to make an business days between the hours of
does not believe it is clear how higher oral presentation.32 10:00 a.m. and 3:00 p.m. All comments
payments to LMMs in the most-liquid received will be posted without change;
The Commission asks that
ETFs will encourage them to become the Commission does not edit personal
commenters address the sufficiency and
LMMs in less-liquid ETFs, particularly identifying information from
given that the LMM Partnership merit of the Exchange’s statements in
support of the proposal, in addition to submissions. You should submit only
Program does not obligate participants information that you wish to make
to become LMMs in any less-liquid any other comments they may wish to
submit about the proposed rule change. publicly available. All submissions
ETFs or impose additional performance should refer to File Number SR–
standards on them. As a result, the Interested persons are invited to submit
written data, views, and arguments BatsBZX–2016–60 and should be
connection between the proposed LMM submitted on or before November 10,
incentives and the desired LMM concerning the proposed rule change,
including whether the proposed rule 2016. Rebuttal comments should be
behavior appears indirect and tenuous.
change is consistent with the Act. submitted by November 25, 2016.
The Commission believes it is
appropriate to institute proceedings at Comments may be submitted by any of VI. Conclusion
this time in view of the legal and policy the following methods:
issues raised by the proposal. Institution It is therefore ordered, pursuant to
of proceedings does not indicate, 29 15 U.S.C. 78f(b)(4). Section 19(b)(3)(C) of the Act,33 that File
however, that the Commission has 30 15 U.S.C. 78f(b)(5). Number SR–BatsBZX–2016–60, be and
31 15 U.S.C. 78f(b)(8).
reached any conclusions with respect to hereby is, temporarily suspended. In
mstockstill on DSK3G9T082PROD with NOTICES

32 15 U.S.C. 78s(b)(2). Section 19(b)(2) of the Act
the issues involved. The sections of the addition, the Commission is instituting
grants the Commission flexibility to determine what
Act and the rules thereunder which are type of proceeding—either oral or notice and proceedings to determine whether the
applicable to the proposed rule change opportunity for written comments—is appropriate proposed rule changes should be
include: for consideration of a particular proposal by a self- approved or disapproved.
regulatory organization. See Securities Act
Amendments of 1975, Senate Comm. on Banking,
27 See Section II.A.1, supra. Housing & Urban Affairs, S. Rep. No. 75, 94th
28 See Section II.A.2, supra. Cong., 1st Sess. 30 (1975). 33 15 U.S.C. 78s(b)(3)(C).

VerDate Sep<11>2014 16:40 Oct 19, 2016 Jkt 241001 PO 00000 Frm 00067 Fmt 4703 Sfmt 4703 E:\FR\FM\20OCN1.SGM 20OCN1
Document Created: 2016-10-21 09:58:49
Document Modified: 2016-10-21 09:58:49
Category		Regulatory Information
Collection		Federal Register
sudoc Class		AE 2.7: GS 4.107: AE 2.106:
Publisher		Office of the Federal Register, National Archives and Records Administration
Section		Notices
FR Citation		81 FR 72624