[Federal Register Volume 79, Number 155 (Tuesday, August 12, 2014)]
[Rules and Regulations]
[Pages 46993-46996]
[FR Doc No: 2014-18969]

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Food and Drug Administration

21 CFR Part 172

[Docket No. FDA-2012-F-0138]

Food Additives Permitted for Direct Addition to Food for Human
Consumption; Vitamin D3

AGENCY: Food and Drug Administration, HHS.

ACTION: Final rule.

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SUMMARY: The Food and Drug Administration (FDA or we) is amending the
food additive regulations to provide for the safe use of vitamin
D3 as a nutrient supplement in meal replacement beverages
that are not intended for special dietary use in reducing or
maintaining body weight and for use in foods that are sole sources of
nutrition for enteral feedings. We are taking this action in response
to a petition filed by Abbott Laboratories (Abbott).

DATES: This rule is effective August 12, 2014. See section VII
``Objections'' for further information on the filing of objections.
Submit either electronic or written objections and requests for a
hearing by September 11, 2014. The incorporation by reference of
certain publications listed in the regulations is approved by the
Director of the Federal Register as of August 12, 2014.

ADDRESSES: You may submit either electronic or written objections and
requests for a hearing identified by Docket No. FDA-2012-F-0138, by any
of the following methods:

Electronic Submissions

    Submit electronic objections in the following way:
     Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.

Written Submissions

    Submit written objections in the following ways:
     Mail/Hand delivery/Courier (for paper submissions):
Division of Dockets Management (HFA-305), Food and Drug Administration,
5630 Fishers Lane, Rm. 1061, Rockville, MD 20852.
    Instructions: All submissions received must include the Agency name
and Docket No. FDA-2012-F-0138 for this rulemaking. All objections
received will be posted without change to http://www.regulations.gov,
including any personal information provided. For detailed instructions
on submitting objections, see the ``Objections'' heading of the
SUPPLEMENTARY INFORMATION section.
    Docket: For access to the docket to read background documents or
objections received, go to http://www.regulations.gov and insert the
docket number, found in brackets in the heading of this document, into
the ``Search'' box and follow the prompts and/or go to the Division of
Dockets Management, 5630 Fishers Lane, Rm. 1061, Rockville, MD 20852.

FOR FURTHER INFORMATION CONTACT: Judith Kidwell, Center for Food Safety
and Applied Nutrition (HFS-265), Food and Drug Administration, 5100
Paint Branch Pkwy., College Park, MD 20740-3835,<PHONE_NUMBER>.

SUPPLEMENTARY INFORMATION:

I. Background

    In the Federal Register of March 6, 2012 (77 FR 13232), FDA
announced that Abbott Laboratories, 3300 Stelzer Rd., Columbus, OH
43219, had filed a food additive petition (FAP 2A4788). The petition
proposed that FDA amend the food additive regulations in Sec.  172.380
(21 CFR 172.380), Vitamin D3, to provide for the safe use of
vitamin D3 as a nutrient supplement in meal replacement
beverages and meal replacement bars that are not intended for special
dietary use in reducing or maintaining body weight and for use in foods
that are sole sources of nutrition for enteral tube feeding. After the
document was published, Abbott amended the petition to exclude the
proposed use of vitamin D3 in meal replacement bars. This
final rule is a complete response to the petition.
    Abbott has requested that we amend Sec.  172.380 to authorize the
use of vitamin D3 as a nutrient supplement at levels not to
exceed 500 International Units (IU) per 240 milliliters (mL) (prepared
beverage) in meal replacement beverages that are not intended for
special dietary use in reducing or maintaining body weight and that are
represented for use such that the total amount of vitamin D3
provided by the product does not exceed 1,000 IU per day, and at levels
not to exceed 1.0 IU per kilocalorie (kcal) in food represented for use
as a sole source of nutrition for enteral feeding.
    Vitamin D comprises a group of fat-soluble seco-sterols and comes
in many forms. The two major physiologically relevant forms are vitamin
D2 and vitamin D3. Vitamin D without a subscript
represents either vitamin D2 or vitamin D3 or
both. Vitamin D is affirmed as generally recognized as safe (GRAS) for
use in food as a nutrient supplement in Sec.  184.1950(c)(1) (21 CFR
184.1950(c)(1)) in accordance with Sec.  184.1(b)(2) (21 CFR
184.1(b)(2)), with the following specific limitations:

------------------------------------------------------------------------
                                             Maximum levels in food (as
             Category of food                          served)
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Breakfast cereals.........................  350 IU/100 grams (g).
Grain products and pasta..................  90 IU/100 g.
Milk......................................  42 IU/100 g.
Milk products.............................  89 IU/100 g.
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    Additionally, under Sec.  184.1950(c)(2) and (c)(3), vitamin D is
affirmed as GRAS for use in infant formulas and margarine,
respectively. Under Sec.  172.380, vitamin D3 is approved
for use as a food additive as a nutrient supplement in calcium-
fortified fruit juices and fruit juice drinks; meal replacement and
other type bars, soy protein-based meal replacement beverages
represented for special dietary use in reducing or maintaining body
weight; and cheese and cheese products as defined therein. Under Sec.
172.379, vitamin D2 is approved for use as a food additive
as a nutrient supplement in soy beverages, soy beverage products, soy-
based butter substitute spreads, and soy-based cheese substitutes and
soy-based cheese substitute products. Under Sec.  172.381, vitamin
D2 bakers yeast is approved for use as a food additive as a
source of vitamin D2 and as a leavening agent in yeast-
leavened baked goods and baking mixes and yeast-leavened baked snack
foods.
    Vitamin D is essential for human health. The major function of
vitamin D is the maintenance of blood serum concentrations of calcium
and phosphorus by enhancing the absorption of these minerals in the
small intestine. Vitamin D deficiency can lead to abnormalities in
calcium and bone metabolism, such as rickets in children or
osteomalacia in adults. Excessive intake of vitamin D elevates blood
plasma calcium levels (hypercalcemia) by increased intestinal
absorption and/or mobilization from the bone.
    To ensure that vitamin D is not added to the U.S. food supply at
levels that could raise safety concerns, FDA affirmed vitamin D as GRAS
with specific limitations as listed in Sec.  184.1950. Under Sec.
184.1(b)(2), an ingredient affirmed as GRAS with

specific limitations may be used in food only within such limitations,
including the category of food, functional use of the ingredient, and
level of use. Any addition of vitamin D to food beyond those
limitations set out in Sec.  184.1950 requires either a food additive
regulation or an amendment of Sec.  184.1950.
    To support the safety of the proposed uses of vitamin
D3, Abbott submitted dietary exposure estimates of vitamin D
from the proposed uses of vitamin D3, as well as all current
dietary sources for four scenarios: (1) Background exposure from
naturally occurring sources of vitamin D and currently regulated uses
of vitamin D at levels reported in the U.S. Department of Agriculture
Food and Nutrient Database for Dietary Studies, which represent typical
vitamin D levels in foods; (2) background exposure plus exposure from
yeast-leavened baked goods and baking mixes and yeast-leavened snack
foods containing 400 IU vitamin D/100 g food as served (at the time
that Abbott submitted their petition, the petition to amend the food
additive regulations for the use of vitamin D2 bakers yeast
was under review); (3) background exposure, exposure from yeast-
containing baked products containing 400 IU vitamin D/100 g food, and
from dietary supplement use; and (4) background exposure, exposure from
yeast-containing baked products containing 400 IU vitamin D/100 g food,
dietary supplements, and the proposed uses in meal replacement
beverages and bars. They compared these intake estimates to the
Tolerable Upper Intake Level (UL) for vitamin D established by the
Institute of Medicine (IOM) of the National Academies. Abbott also
submitted a number of publications pertaining to human clinical studies
on vitamin D. Based on this information, which is discussed in section
II, Abbott concluded that the proposed uses of vitamin D3 in
meal replacement beverages that are not intended for special dietary
use in reducing or maintaining body weight and in foods that are sole
sources of nutrition for enteral feeding are safe.

II. Evaluation of Safety

    To establish with reasonable certainty that a food additive is not
harmful under its intended conditions of use, we consider the projected
human dietary exposure to the additive, the additive's toxicological
data, and other relevant information (such as published literature)
available to us. We compare an individual's estimated daily intake
(EDI) of the additive from all food sources to an acceptable intake
level established by toxicological data. The EDI is determined by
projections based on the amount of the additive proposed for use in
particular foods and on data regarding the amount consumed from all
food sources of the additive. We commonly use the EDI for the 90th
percentile consumer of a food additive as a measure of high chronic
dietary intake.

A. Acceptable Intake Level for Vitamin D

    In 1997, the Standing Committee on the Scientific Evaluation of
Dietary Reference Intakes of the Food and Nutrition Board at the IOM
conducted an extensive review of toxicology and metabolism studies on
vitamin D published through 1996. The IOM published a detailed report
that included a UL for vitamin D for infants, children, and adults. At
that time, the IOM established a UL for vitamin D of 2,000 IU/per day
(p/d) for children 1 to 18 years of age and adults, and a UL of 1,000
IU/p/d for all infants.
    In 2011, the IOM conducted an extensive review of relevant
published scientific literature on vitamin D to update current dietary
reference intakes and ULs for vitamin D. Based on this information, the
IOM revised the ULs for vitamin D and developed a report on their
findings (Ref. 1). In their 2011 assessment of vitamin D, the IOM
established a UL of 1,000 IU/p/d for infants 0 months to 6 months of
age and a UL of 1,500 IU/p/d for infants 6 months to 12 months of age.
For children 1 year to 3 years of age, the IOM established a UL of
2,500 IU/p/d; for children 4 years to 8 years of age, the IOM
established a UL of 3,000 IU/p/d. For children 9 years to 18 years of
age and adults, the IOM established a UL of 4,000 IU/p/d.
    The IOM considers the UL as the highest average daily intake level
of a nutrient that poses no risk of adverse effects when the nutrient
is consumed over long periods of time. The UL is determined using a
risk assessment model developed specifically for nutrients and
considers intake from all sources: Food, water, nutrient supplements,
and pharmacological agents. The dose-response assessment, which
concludes with an estimate of the UL, is built upon three toxicological
concepts commonly used in assessing the risk of exposures to chemical
substances: No-observed-adverse-effect level, lowest-observed-effect
level, and an uncertainty factor.

B. Estimated Daily Intake for Vitamin D

1. Meal Replacement Beverages
    For the proposed use of vitamin D3 in meal replacement
beverages that are not intended for special dietary use in reducing or
maintaining body weight, Abbott provided dietary intake estimates for
vitamin D for seven population groups, assuming typical vitamin D
levels in food. Although Abbott stated that their proposed uses do not
include products for infants or children less than 9 years of age,
Abbott included exposure estimates for children 1 to 3 years of age and
4 to 8 years of age. Because Abbott's exposure estimates differed in
several aspects from the way in which we typically calculate dietary
exposure, we conducted our own exposure estimate for vitamin D from:
(1) The proposed use of vitamin D3 in meal replacement
beverages that are not intended for special dietary use in reducing or
maintaining body weight; (2) current food uses of vitamin D (including
regulated uses, naturally occurring sources of vitamin D, and dietary
supplements); and (3) combined current and proposed food uses. We
estimated the exposure to vitamin D for the overall U.S. population (1
year of age and older) and 10 population subgroups (including 2
subgroups for infants less than 12 months of age), assuming that all
foods that can be fortified with vitamin D will be fortified at the
maximum level permitted.
    Our estimated exposure to vitamin D from all food sources for the
overall U.S. population (1 years of age and older), including consumers
of meal replacement beverages that are not intended for special dietary
use in reducing or maintaining body weight, was 1,520 IU per person per
day (IU/p/d) for the 90th percentile consumer, based on food
consumption data in the 2007-2008 National Health and Nutrition
Examination Survey (NHANES). Infants are not expected to consume meal
replacement beverages; however, we included these subpopulations in our
exposure assessment for completeness. According to the 2007-2008
NHANES, no meal replacement beverage consumption was reported for
infants 0 months to 6 months of age, and only very limited consumption
of meal replacement beverages was reported for infants 6 to 12 months
of age. The cumulative exposure for infants 0 to 6 months of age and
infants 6 to 12 months of age from all food sources of vitamin D,
including the proposed uses and dietary supplements, was estimated to
be 844

IU/p/d and 831 IU/p/d, respectively, for the 90th percentile consumer
(Ref. 2).
2. Enteral Feeding Products
    For the proposed use of vitamin D3 for food represented
as the sole source of nutrition for enteral feeding, Abbott indicated
that there are many different methods available in the scientific
literature for estimating caloric needs when using fortified enteral
nutrition products as the sole source of nutrition. Abbott reported
that the simplest method is to assume that a person requires 25-30 kcal
per kilogram body weight per day (kcal/kg bw/d). Thus, a 60 kg person
being fed only an enteral nutrition product would require 1,500 kcal to
1,800 kcal per day. Assuming the proposed vitamin D3
fortification level of 1.0 IU/kcal in enteral products represented for
use as the sole source of nutrition and the highest recommended caloric
requirement of 30 kcal/kg bw/d, results in an estimated vitamin
D3 exposure of 1,800 IU/p/d for a 60 kg person (Ref. 3). As
noted by Abbott, this level is far below the UL of 4,000 IU vitamin D
for an adult. In addition, any person receiving vitamin D3
from an enteral feeding product as their sole source of nutrition would
be under the care of a doctor who would be monitoring the patient's
vitamin D intake.

C. Safety of the Petitioned Uses of Vitamin D3

    FDA reviewed and evaluated the information submitted by Abbott
regarding the safety of the dietary intake of vitamin D3
that would result from the proposed uses in meal replacement beverages
that are not intended for special dietary use in reducing or
maintaining body weight and for use in foods that are sole sources of
nutrition for enteral feeding. Abbott submitted scientific articles
published subsequent to the 1997 IOM report and issuance of the August
29, 2012, final rule (77 FR 52228) authorizing the use of vitamin
D2 bakers yeast in yeast-leavened baked goods and baking
mixes and yeast-leavened baked snack foods. Abbott concluded that these
recent publications support the safety of increases in the levels of
vitamin D supplementation in humans that could result from the proposed
uses. We concur with Abbott's conclusion (Ref. 4).
    We considered the ULs established by the IOM relative to the intake
estimates as the primary basis for assessing the safety of petitioned
uses of vitamin D3. We also reviewed the scientific articles
on vitamin D intake submitted by Abbott, as well as other relevant
published studies available to FDA since our previous evaluations of
five food additive petitions for fortifying a variety of foods with
vitamin D. The most recent petition resulted in our amendment of the
food additive regulations in Sec.  172.381 to allow for the safe use of
vitamin D2 bakers yeast as a source of vitamin D2
and as a leavening agent in yeast-leavened baked goods and baking mixes
and yeast-leavened baked snack foods (77 FR 52228, August 29, 2012).
The four earlier food additive petitions also resulted in amendments of
the food additive regulations to allow for the safe use of vitamin D as
a nutrient supplement in certain foods (74 FR 11019, March 16, 2009; 70
FR 69435, November 16, 2005; 70 FR 37255, June 29, 2005; 70 FR 36021,
June 22, 2005; and 68 FR 9000, February 27, 2003).
1. Meal Replacement Beverages
    Depending on the age group, the IOM UL for vitamin D for the U.S.
population 1 year of age and older ranges from 2,500 IU/p/d to 4,000
IU/p/d. The estimated exposure to vitamin D from all food sources,
including the proposed use in meal replacement beverages that are not
intended for special dietary use in reducing or maintaining body
weight, at the 90th percentile for the overall U.S. population (1 years
of age and older) is estimated to be 1,520 IU/p/d, which is below the
lowest IOM UL in the range of ULs for the overall U.S. population (1
year of age and older), 2,500 IU/p/d. The estimated exposure to vitamin
D from all food sources, including the proposed use in meal replacement
beverages that are not intended for special dietary use in reducing or
maintaining body weight, for infants 0 months to 6 months of age at the
90th percentile is 844 IU/p/d; for infants 6 months to 12 months of
age, estimated exposure to vitamin D is 831 IU/p/d. Both of these
estimates are below the respective IOM UL of 1,000 IU/p/d for infants 0
months to 6 months of age and 1,500 IU/p/d for infants 6 months to 12
months of age. Because the 90th percentile EDI of vitamin D from all
current and proposed food sources for each population group is less
than the corresponding IOM UL for that population group, we conclude
that dietary intake of vitamin D3 from the proposed use as a
nutrient supplement in meal replacement beverages that are not intended
for special dietary use in reducing or maintaining body weight is safe.
2. Enteral Feeding Products
    Based on the proposed use level of 1.0 IU/kcal in enteral feeding
products, the dietary exposure to vitamin D3 is estimated to
be 1,800 IU/p/d for a 60 kg person. This estimate is below the IOM UL
of 4,000 IU/p/d for adults. Because the use of these products are
intended for individuals under medical supervision and monitoring by a
physician, we have no safety concerns regarding the proposed use of
vitamin D3 in enteral feeding products, and we conclude that
this use is safe.

III. Conclusion

    Based on all data relevant to vitamin D3 that we
reviewed, we conclude that the petitioned use of vitamin D3
as a nutrient supplement in meal replacement beverages that are not
intended for special dietary use in reducing or maintaining body weight
and for use in foods that are sole sources of nutrition for enteral
feeding within the limits proposed by Abbott is safe. Consequently, we
are amending the food additive regulations as set forth in this
document. Additionally, the current regulation for the use of vitamin
D3 in food (Sec.  172.380) indicates that the additive must
meet the specifications in the Food Chemicals Codex, 7th Edition (FCC
7). The more current FCC is the 8th Edition (FCC 8). Because the
specifications for vitamin D3 in FCC 8 are identical to
those in FCC 7, we are amending Sec.  172.380 by adopting the
specifications for vitamin D3 in FCC 8 in place of FCC 7.

IV. Public Disclosure

    In accordance with Sec.  171.1(h) (21 CFR 171.1(h)), the petition
and the documents that we considered and relied upon in reaching our
decision to approve the petition will be made available for public
disclosure (see FOR FURTHER INFORMATION CONTACT). As provided in Sec.
171.1(h), we will delete from the documents any materials that are not
available for public disclosure.

V. Environmental Impact

    We previously considered the environmental effects of this rule, as
stated in the March 6, 2012, Federal Register document of petition for
FAP 2A4788. We stated that we had determined, under 21 CFR 25.32(k),
that this action ``is of a type that does not individually or
cumulatively have a significant effect on the human environment'' such
that neither an environmental assessment nor an environmental impact
statement is required. We have not received any new information or
comments that would affect our previous determination.

VI. Paperwork Reduction Act of 1995

    This final rule contains no collection of information. Therefore,
clearance by the Office of Management and Budget

under the Paperwork Reduction Act of 1995 is not required.

VII. Objections

    If you will be adversely affected by one or more provisions of this
regulation, you may file with the Division of Dockets Management (see
ADDRESSES) either electronic or written objections. You must separately
number each objection, and within each numbered objection you must
specify with particularity the provision(s) to which you object, and
the grounds for your objection. Within each numbered objection, you
must specifically state whether you are requesting a hearing on the
particular provision that you specify in that numbered objection. If
you do not request a hearing for any particular objection, you waive
the right to a hearing on that objection. If you request a hearing,
your objection must include a detailed description and analysis of the
specific factual information you intend to present in support of the
objection in the event that a hearing is held. If you do not include
such a description and analysis for any particular objection, you waive
the right to a hearing on the objection.
    It is only necessary to send one set of documents. Identify
documents with the docket number found in brackets in the heading of
this document. Any objections received in response to the regulation
may be seen in the Division of Dockets Management between 9 a.m. and 4
p.m., Monday through Friday, and will be posted to the docket at http://www.regulations.gov.

VIII. Section 301(ll) of the Federal Food, Drug, and Cosmetic Act

    Our review of this petition was limited to section 409 of the
Federal Food, Drug, and Cosmetic Act (the FD&C Act) (21 U.S.C. 348).
This final rule is not a statement regarding compliance with other
sections of the FD&C Act. For example, the Food and Drug Administration
Amendments Act of 2007, which was signed into law on September 27,
2007, amended the FD&C Act to, among other things, add section 301(ll)
of the FD&C Act (21 U.S.C. 331(ll)). Section 301(ll) of the FD&C Act
prohibits the introduction or delivery for introduction into interstate
commerce of any food that contains a drug approved under section 505 of
the FD&C Act (21 U.S.C. 355), a biological product licensed under
section 351 of the Public Health Service Act (42 U.S.C. 262), or a drug
or biological product for which substantial clinical investigations
have been instituted and their existence has been made public, unless
one of the exemptions in section 301(ll)(1) to (ll)(4) of the FD&C Act
applies. In our review of this petition, FDA did not consider whether
section 301(ll) of the FD&C Act or any of its exemptions apply to food
containing this additive. Accordingly, this final rule should not be
construed to be a statement that a food containing this additive, if
introduced or delivered for introduction into interstate commerce,
would not violate section 301(ll) of the FD&C Act. Furthermore, this
language is included in all food additive final rules and therefore
should not be construed to be a statement of the likelihood that
section 301(ll) of the FD&C Act applies.

IX. References

    The following sources are referred to in this document. References
marked with an asterisk (*) have been placed on display at the Division
of Dockets Management (see ADDRESSES), under Docket No. FDA-2012-F-
0138, and may be seen by interested persons between 9 a.m. and 4 p.m.,
Monday through Friday, and are available electronically at http://www.regulations.gov. References without asterisks are not on display;
they are available as published articles and books.

    1. Committee to Review Dietary Reference Intakes for Vitamin D
and Calcium, Food and Nutrition Board, Institute of Medicine,
``Dietary Reference Intakes for Calcium and Vitamin D,'' National
Academies Press, Washington, DC, 2011.
    *2. Memorandum from D. Folmer, Chemistry Review Group, Division
of Petition Review, to J. Kidwell, Regulatory Group I, Division of
Petition Review, December 11, 2013.
    *3. Memorandum from D. Folmer, Chemistry Review Group, Division
of Petition Review, to J. Kidwell, Regulatory Group I, Division of
Petition Review, February 7, 2013.
    *4. Memorandum from A. Khan, Toxicology Review Group, Division
of Petition Review, to J. Kidwell, Regulatory Group I, Division of
Petition Review, February 11, 2014.

List of Subjects in 21 CFR Part 172

    Food additives, Incorporation by reference, Reporting and
recordkeeping requirements.

    Therefore, under the Federal Food, Drug, and Cosmetic Act and under
authority delegated to the Commissioner of Food and Drugs and
redelegated to the Director, Center for Food Safety and Applied
Nutrition, 21 CFR part 172 is amended as follows:

PART 172--FOOD ADDITIVES PERMITTED FOR DIRECT ADDITION TO FOOD FOR
HUMAN CONSUMPTION

0
1. The authority citation for 21 CFR part 172 continues to read as
follows:

    Authority: 21 U.S.C. 321, 341, 342, 348, 371, 379e.

0
2. Amend Sec.  172.380 by revising paragraph (b) and by adding
paragraphs (c)(6) and (c)(7) to read as follows:

Sec.  172.380  Vitamin D3.

* * * * *
    (b) Vitamin D3 meets the specifications of the Food
Chemicals Codex, 8th ed. (2012), pp. 1186-1187, which is incorporated
by reference. The Director of the Office of the Federal Register
approves this incorporation by reference in accordance with 5 U.S.C.
552(a) and 1 CFR part 51. You may obtain copies from the United States
Pharmacopeial Convention, 12601 Twinbrook Pkwy., Rockville, MD 20852
(Internet address http://www.usp.org). Copies may be examined at the
Food and Drug Administration's Main Library, 10903 New Hampshire Ave.,
Bldg. 2, Third Floor, Silver Spring, MD 20993,<PHONE_NUMBER>, or at the
National Archives and Records Administration (NARA). For information on
the availability of this material at NARA, call<PHONE_NUMBER>, or go to:
http://www.archives.gov/federal_register/code_of_federal_regulations/ibr_locations.html.
    (c) * * *
    (6) At levels not to exceed 500 IU per 240 mL (prepared beverage)
in meal replacement beverages that are not intended for special dietary
use in reducing or maintaining body weight and that are represented for
use such that the total amount of Vitamin D3 provided by the
product does not exceed 1,000 IU per day.
    (7) At levels not to exceed 1.0 IU per kilocalorie in foods
represented for use as a sole source of nutrition for enteral feeding.

    Dated: August 6, 2014.
Philip L. Chao,
Acting Director, Office of Regulations, Policy and Social Sciences,
Center for Food Safety and Applied Nutrition.
[FR Doc. 2014-18969 Filed 8-11-14; 8:45 am]
BILLING CODE 4164-01-P


[Federal Register Volume 87, Number 48 (Friday, March 11, 2022)]
[Notices]
[Pages 14062-14068]
[FR Doc No: 2022-05150]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94374; File No. SR-CboeBZX-2022-017]

Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of
Filing of a Proposed Rule Change Relating to Amend BZX Rule 11.17,
Clearly Erroneous Executions

March 7, 2022.
    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 March 7, 2022, Cboe BZX Exchange, Inc. (the ``Exchange'' or
``BZX'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I, II,
and III 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.
---------------------------------------------------------------------------

    \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

    Cboe BZX Exchange, Inc. (``BZX'' or the ``Exchange'') is filing
with the Securities and Exchange Commission (the ``Commission'') a
proposed rule change to amend BZX Rule 11.17, Clearly Erroneous
Executions. The text of the proposed rule change is provided in Exhibit
5.
    The text of the proposed rule change is also available on the
Exchange's website (http://markets.cboe.com/us/equities/regulation/rule_filings/bzx/), at the Exchange's Office of the Secretary, 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
    The purpose of the proposed rule change is to amend BZX Rule 11.17,
Clearly Erroneous Executions. Specifically, the Exchange proposes to:
(1) Make the current clearly erroneous pilot program permanent; and (2)
limit the circumstances where clearly erroneous review would continue
to be available during Regular Trading Hours,\3\ when the LULD Plan to
Address Extraordinary Market Volatility (the ``LULD Plan'') \4\ already
provides similar protections for trades occurring at prices that may be
deemed erroneous. The Exchange believes that these changes are
appropriate as the LULD Plan has been approved by the Commission on a

permanent basis,\5\ and in light of amendments to the LULD Plan,
including changes to the applicable Price Bands \6\ around the open and
close of trading.
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    \3\ The term ``Regular Trading Hours'' means the time between
9:30 a.m. and 4:00 p.m. Eastern Time. See BZX Rule 1.5(w).
    \4\ See Securities Exchange Act Release No. 67091 (May 31,
2012), 77 FR 33498 (June 6, 2012).
    \5\ See Securities Exchange Act Release No. 84843 (December 18,
2018), 83 FR 66464 (December 26, 2018) (``Notice''); 85623 (April
11, 2019), 84 FR 16086 (April 17, 2019) (File No. 4-631)
(``Amendment Eighteen'').
    \6\ ``Price Bands'' refers to the term provided in Section V of
the LULD Plan.
---------------------------------------------------------------------------

Proposal To Make the Clearly Erroneous Pilot Permanent
    On September 10, 2010, the Commission approved, on a pilot basis,
changes to BZX Rule 11.17 that, among other things: (i) Provided for
uniform treatment of clearly erroneous execution reviews in multi-stock
events involving twenty or more securities; and (ii) reduced the
ability of the Exchange to deviate from the objective standards set
forth in the rule.\7\ In 2013, the Exchange adopted a provision
designed to address the operation of the LULD Plan.\8\ Finally, in
2014, the Exchange adopted two additional provisions providing that:
(i) A series of transactions in a particular security on one or more
trading days may be viewed as one event if all such transactions were
effected based on the same fundamentally incorrect or grossly
misinterpreted issuance information resulting in a severe valuation
error for all such transactions; and (ii) in the event of any
disruption or malfunction in the operation of the electronic
communications and trading facilities of an Exchange, another SRO, or
responsible single plan processor in connection with the transmittal or
receipt of a trading halt, an Officer, acting on his or her own motion,
shall nullify any transaction that occurs after a trading halt has been
declared by the primary listing market for a security and before such
trading halt has officially ended according to the primary listing
market.\9\ These changes are currently scheduled to operate for a pilot
period that would end at the close of business on April 20, 2022.\10\
---------------------------------------------------------------------------

    \7\ See Securities Exchange Act Release No. 62886 (Sept. 10,
2010), 75 FR 56613 (Sept. 16, 2010) (SR-BATS-2010-016).
    \8\ See Securities Exchange Act Release No. 68797 (Jan. 31,
2013), 78 FR 8635 (Feb. 6, 2013) (SR-BATS-2013-008).
    \9\ See Securities Exchange Act Release No. 72434 (June 19,
2014), 79 FR 36110 (June 25, 2014) (SR-BATS-2014-014).
    \10\ See Securities Exchange Act Release No. 93342 (October 15,
2021), 86 FR 58332 (October 21, 2021) (SR-CboeBZX-2021-070).
---------------------------------------------------------------------------

    When it originally approved the clearly erroneous pilot, the
Commission explained that the changes were ``being implemented on a
pilot basis so that the Commission and the Exchanges can monitor the
effects of the pilot on the markets and investors, and consider
appropriate adjustments, as necessary.'' \11\ In the 12 years since
that time, the Exchange and other national securities exchanges have
gained considerable experience in the operation of the rule, as amended
on a pilot basis. Based on that experience, the Exchange believes that
the program should be allowed to continue on a permanent basis so that
equities market participants and investors can benefit from the
increased certainty provided by the amended rule.
---------------------------------------------------------------------------

    \11\ See Securities Exchange Act Release No. 62886 (September
10, 2010), 75 FR 56613 (September 16, 2010) (SR-BATS-2010-016).
---------------------------------------------------------------------------

    The clearly erroneous pilot was implemented following a severe
disruption in the U.S. equities markets on May 6, 2010 (``Flash
Crash'') to ``provide greater transparency and certainty to the process
of breaking trades.'' \12\ Largely, the pilot reduced the discretion of
the Exchange, other national securities exchanges, and Financial
Industry Regulatory Authority (``FINRA'') to deviate from the objective
standards in their respective rules when dealing with potentially
erroneous transactions. The pilot has thus helped afford greater
certainty to Members and investors about when trades will be deemed
erroneous pursuant to self-regulatory organization (``SRO'') rules, and
has provided a more transparent process for conducting such reviews.
The Exchange proposes to make the current pilot permanent so that
market participants can continue to benefit from the increased
certainty afforded by the current rule.
---------------------------------------------------------------------------

    \12\ Id.
---------------------------------------------------------------------------

Amendments to the Clearly Erroneous Rules
    When the Participants to the LULD Plan filed to introduce the Limit
Up-Limit Down (``LULD'') mechanism, itself a response to the Flash
Crash, a handful of commenters noted the potential discordance between
the clearly erroneous rules and the Price Bands used to limit the price
at which trades would be permitted to be executed pursuant to the LULD
Plan. For example, two commenters requested that the clearly erroneous
rules be amended so the presumption would be that trades executed
within the Price Bands would not be not subject to review.\13\ While
the Participants acknowledged that the potential to prevent clearly
erroneous executions would be a ``key benefit'' of the LULD Plan, the
Participants decided not to amend the clearly erroneous rules at that
time.\14\ In the years since, industry feedback has continued to
reflect a desire to eliminate the discordance between the LULD
mechanism and the clearly erroneous rules so that market participants
would have more certainty that trades executed with the Price Bands
would stand. For example, the Equity Market Structure Advisory
Committee (``EMSAC'') Market Quality Subcommittee included in its April
19, 2016 status report a preliminary recommendation that clearly
erroneous rules be amended to conform to the Price Bands--i.e., ``any
trade that takes place within the band would stand and not be broken
and trades outside the LU/LD bands would be eligible for the
consideration of the Clearly Erroneous rules.'' \15\
---------------------------------------------------------------------------

    \13\ See Securities Exchange Act Release No. 67091 (May 31,
2012), 77 FR 33498 (June 6, 2012) (File No. 4-631) (n. 33505).
    \14\ Id.
    \15\ See EMSAC Market Quality Subcommittee, Recommendations for
Rulemaking on Issues of Market Quality (November 29, 2016),
available at https://www.sec.gov/spotlight/emsac/emsac-recommendations-rulemaking-market-quality.pdf.
---------------------------------------------------------------------------

    The Exchange believes that it is important for there to be some
mechanism to ensure that investors' orders are either not executed at
clearly erroneous prices, or are subsequently busted as needed to
maintain a fair and orderly market. At the same time, the Exchange
believes that the LULD Plan, as amended, would provide sufficient
protection for trades executed during Regular Trading Hours. Indeed,
the LULD mechanism could be considered to offer superior protection as
it prevents potentially erroneous trades from being executed in the
first instance. After gaining experience with the LULD Plan, the
Exchange now believes that it is appropriate to largely eliminate
clearly erroneous review during Regular Trading Hours when Price Bands
are in effect. Thus, as proposed, trades executed within the Price
Bands would stand, barring one of a handful of identified scenarios
where such review may still be necessary for the protection of
investors. The Exchange believes that this change would be beneficial
for the U.S. equities markets as it would ensure that trades executed
within the Price Bands are subject to clearly erroneous review in only
rare circumstances, resulting in greater certainty for Members and
investors.
    The current LULD mechanism for addressing extraordinary market
volatility is available solely during Regular Trading Hours. Thus,
trades

during the Exchange's Early Trading,\16\ Pre-Opening,\17\ or After
Hours Sessions \18\ would not benefit from this protection, and could
ultimately be executed at prices that may be considered erroneous. For
this reason, the Exchange proposes that transactions executed during
the Early Trading, Pre-Opening, or After Hours Sessions would continue
to be reviewable as clearly erroneous. Continued availability of the
clearly erroneous rule during pre- and post-market trading sessions
would therefore ensure that investors have appropriate recourse when
erroneous trades are executed outside of the hours where similar
protection can be provided by the LULD Plan. Further, the proposal is
designed to eliminate the potential discordance between clearly
erroneous review and LULD Price Bands, which does not exist outside of
Regular Trading Hours because the LULD Plan is not in effect. Thus, the
Exchange believes that it is appropriate to continue to allow
transactions to be eligible for clearly erroneous review if executed
outside of Regular Trading Hours.
---------------------------------------------------------------------------

    \16\ The term ``Early Trading Session'' means the time between
7:00 a.m. and 8:00 a.m. Eastern Time. See BZX Rule 1.5(ee).
    \17\ The term ``Pre-Opening Session'' means the time between
8:00 a.m. and 9:30 a.m. Eastern Time. See BZX Rule 1.5(r).
    \18\ The term ``After Hours Trading Session'' means the time
between 4:00 p.m. and 8:00 p.m. Eastern Time. See BZX Rule 1.5(c).
---------------------------------------------------------------------------

    On the other hand, there would be much more limited potential to
request that a transaction be reviewed as potentially erroneous during
Regular Trading Hours. With the introduction of the LULD mechanism in
2013, clearly erroneous trades are largely prevented by the requirement
that trades be executed within the Price Bands. In addition, in 2019,
Amendment Eighteen to the LULD Plan eliminated double-wide Price Bands:
(1) At the Open, and (2) at the Close for Tier 2 NMS Stocks 2 with a
Reference Price above $3.00.\19\ Due to these changes, the Exchange
believes that the Price Bands would provide sufficient protection to
investor orders such that clearly erroneous review would no longer be
necessary during Regular Trading Hours. As the Participants to the LULD
Plan explained in Amendment Eighteen: ``Broadly, the Limit Up-Limit
Down mechanism prevents trades from happening at prices where one party
to the trade would be considered `aggrieved,' and thus could be viewed
as an appropriate mechanism to supplant clearly erroneous rules.''
While the Participants also expressed concern that the Price Bands
might be too wide to afford meaningful protection around the open and
close of trading, amendments to the LULD Plan adopted in Amendment
Eighteen narrowed Price Bands at these times in a manner that the
Exchange believes is sufficient to ensure that investors' orders would
be appropriately protected in the absence of clearly erroneous review.
The Exchange therefore believes that it is appropriate to rely on the
LULD mechanism as the primary means of preventing clearly erroneous
trades during Regular Trading Hours.
---------------------------------------------------------------------------

    \19\ See Amendment Eighteen, supra note 5.
---------------------------------------------------------------------------

    At the same time, the Exchange is cognizant that there may be
limited circumstances where clearly erroneous review may continue to be
appropriate, even during Regular Trading Hours. Thus, the Exchange
proposes to amend its clearly erroneous rules to enumerate the specific
circumstances where such review would remain available during the
course of Regular Trading Hours, as follows. All transactions that fall
outside of these specific enumerated exceptions would be ineligible for
clearly erroneous review.
    First, pursuant to proposed paragraph (c)(1)(A), a transaction
executed during Regular Trading Hours would continue to be eligible for
clearly erroneous review if the transaction is not subject to the LULD
Plan. In such case, the Numerical Guidelines set forth in paragraph
(c)(2) of Rule 11.17 will be applicable to such NMS Stock. While the
majority of securities traded on the Exchange would be subject to the
LULD Plan, certain equity securities, such as rights and warrants, are
explicitly excluded from the provisions of the LULD Plan and would
therefore be eligible for clearly erroneous review instead.\20\
Similarly, there are instances, such as the opening auction on the
primary listing market,\21\ where transactions are not ordinarily
subject to the LULD Plan, or circumstances where a transaction that
ordinarily would have been subject to the LULD Plan is not--due, for
example, to some issue with processing the Price Bands. These
transactions would continue to be eligible for clearly erroneous
review, effectively ensuring that such review remains available as a
backstop when the LULD Plan would not prevent executions from occurring
at erroneous prices in the first instance.
---------------------------------------------------------------------------

    \20\ See Appendix A of the LULD Plan.
    \21\ The initial Reference Price used to calculate Price Bands
is typically set by the Opening Price on the primary listing market.
See Section V(B) of the LULD Plan.
---------------------------------------------------------------------------

    Second, investors would also continue to be able to request review
of transactions that resulted from certain systems issues pursuant to
proposed paragraphs (c)(1)(B) and (c)(1)(C). In each case, these
limited exceptions would help to ensure that trades that should not
have been executed would continue to be subject to clearly erroneous
review. Specifically, as proposed, transactions executed during Regular
Trading Hours would be eligible for clearly erroneous review pursuant
to proposed paragraph (c)(1)(B) if the transaction involves a
disruption or malfunction in the operation of any electronic
communications and trading facilities of the Exchange pursuant to BZX
Rule 11.17(f). A transaction subject to review pursuant to this
paragraph shall be found to be clearly erroneous if the price of the
transaction to buy (sell) that is the subject of the complaint is
greater than (less than) the Reference Price, described in paragraph
(d) below, by an amount that equals or exceeds the applicable
Percentage Parameter defined in Appendix A to the LULD Plan
(``Percentage Parameters''). Similarly, transactions executed during
Regular Trading Hours would remain eligible for clearly erroneous
review pursuant to proposed paragraph (c)(1)(C) if a transaction is the
result of an Exchange technology or systems issue that results in the
transaction occurring outside of the applicable Price Bands pursuant to
BZX Rule 11.17(h) or if the transaction is executed after the primary
listing market for the security declares a regulatory trading halt,
suspension, or pause pursuant to BZX Rule 11.17(j). In such case, the
Percentage Parameters will be applicable to such transactions.\22\
---------------------------------------------------------------------------

    \22\ Such transactions similarly involve the execution of trades
that should have been prevented but were not properly prevented due
to a disruption or malfunction in the operation of the electronic
communications and trading facilities of the Exchange, another
market center or responsible single plan processor.
---------------------------------------------------------------------------

    Third, the Exchange proposes to narrowly allow for the review of
transactions during Regular Trading Hours when the Reference Price,
described in proposed paragraph (d), is determined to be erroneous by
an Officer of the Exchange. Specifically, pursuant to proposed
paragraph (c)(1)(D), a transaction that involved, in the case of (1) a
corporate action or new issue or (2) a security that enters a Trading
Pause pursuant to LULD and resumes trading without an auction,\23\ a
Reference Price that is determined to be erroneous by an Officer of the
Exchange,

the transaction will be reviewable as clearly erroneous. In such
circumstances, the Exchange may use a different Reference Price
pursuant to proposed paragraph (d)(2) of this Rule. A transaction
subject to review pursuant to this paragraph shall be found to be
clearly erroneous if the price of the transaction to buy (sell) that is
the subject of the complaint is greater than (less than) the new
Reference Price, described in paragraph (d)(2), by an amount that
equals or exceeds the applicable Numerical Guidelines or Percentage
Parameters. Specifically, the Percentage Parameters would apply to all
transactions except those in an NMS Stock that is not subject to the
LULD Plan, as described in paragraph (c)(1)(A).
---------------------------------------------------------------------------

    \23\ The Exchange notes that the ``resumption of trading without
an auction'' provision of the proposed rule text applies only to
securities that enter a Trading Pause pursuant to LULD and does not
apply to a corporate action or new issue.
---------------------------------------------------------------------------

    In the context of a corporate action or a new issue, there may be
instances where the security's Reference Price is later determined by
the Exchange to be erroneous (e.g., because of a bad first trade for a
new issue), and subsequent LULD Price Bands are calculated from that
incorrect Reference Price. In determining whether the Reference Price
is erroneous in such instances, the Exchange would generally look at
the theoretical price for the security as the correct Reference Price.
For a corporate action, the theoretical price would be derived from a
mathematical formula using the prior day's close and then applying the
ratio for the corporate action. For a new issue, the theoretical price
would likewise be derived from the valuation of the new issue. If the
new issue is an uplift from the OTC markets, the theoretical price
would be the prior day's close on the OTC market. In the foregoing
instances, the theoretical price of the security would be used as the
new Reference Price when applying the Percentage Parameters under the
LULD Plan (or Numerical Guidelines if the transaction is in an NMS
Stock that is not subject to the LULD Plan) to determine whether
executions would be cancelled as clearly erroneous.
    The following illustrate the proposed application of the rule in
the context of a corporate action or new issue:
Example 1
1. ABCD is subject to a corporate action, 1 for 10 reverse split, and
the previous day close was $5, but the new theoretical price based on
the terms of the corporate action is $50
2. The security opens at $5, with LULD bands at $4.50 x $5.50
3. The bands will be calculated correctly but the security is trading
at an erroneous price based on the valuation of the remaining
outstanding shares
4. The theoretical price of $50 would be used as the new Reference
Price when applying LULD bands to determine if executions would be
cancelled as clearly erroneous
Example 2
1. ABCD is subject to a corporate action, the company is doing a spin
off where a new issue will be listed, BCDE. ABCD trades at $50, and the
spinoff company is worth \1/5\ of ABCD
2. BCDE opens at $50 in the belief it is the same company as ABCD
3. The theoretical values of the two companies are ABCD $40 and BCDE
$10
4. BCDE would be deemed to have had an incorrect Reference Price and
the theoretical value of $10 would be used as the new Reference Price
when applying the LULD Bands to determine if executions would be
cancelled as clearly erroneous
Example 3
1. ABCD is an uplift from the OTC market, the prior days close on the
OTC market was $20
2. ABCD opens trading on the new listing exchange at $0.20 due to an
erroneous order entry
3. The new Reference Price to determine clearly erroneous executions
would be $20, the theoretical value of the stock from where it was last
traded

    In the context of the rare situation in which a security that
enters a LULD Trading Pause and resumes trading without an auction
(i.e., reopens with quotations), the LULD Plan requires that the new
Reference Price in this instance be established by using the mid-point
of the best bid and offer (``BBO'') on the primary listing exchange at
the reopening time.\24\ This can result in a Reference Price and
subsequent LULD Price Band calculation that is significantly away from
the security's last traded or more relevant price, especially in less
liquid names. In such rare instances, the Exchange is proposing to use
a different Reference Price that is based on the prior LULD Band that
triggered the Trading Pause, rather than the midpoint of the BBO.
---------------------------------------------------------------------------

    \24\ See LULD Plan, Section I(U) and V(C)(1).
---------------------------------------------------------------------------

    The following example illustrates the proposed application of the
rule in the context of a security that reopens without an auction:
Example 4
    1. ABCD stock is trading at $20, with LULD Bands at $18 x $22.
    2. An incoming buy order causes the stock to enter a Limit State
pursuant to the LULD Plan and then a Trading Pause at $22.
    3. During the Trading Pause, the buy order causing the Trading
Pause is cancelled.
    4. At the end of the 5 minute halt, there is no crossed interest
for an auction to occur, thus trading would resume on a quote.
    5. Upon resumption, the quote available is widely set at $10 x $90.
    6. The Reference Price upon resumption is $50 (mid-point of BBO).
    7. The SIP will use this Reference Price and publish LULD Bands of
$45 x $55 (i.e., far away from BBO prior to the halt).
    8. The bands will be calculated correctly, but the $50 Reference
Price is subsequently determined to be incorrect as the price clearly
deviated from where it previously traded prior to the Trading Pause.
    9. The new Reference Price would be $22 (i.e., the last effective
Price Band that was in a Limit State before the Trading Pause pursuant
to the LULD Plan), and the LULD Bands would be applied to determine if
the executions should be cancelled as clearly erroneous.
    In all of the foregoing situations, investors would be left with no
remedy to request clearly erroneous review without the proposed
carveouts in paragraph (c)(1)(D) because the trades occurred within the
LULD Price Bands (albeit LULD Price Bands that were calculated from an
erroneous Reference Price). The Exchange believes that removing the
current ability for the Exchange to review in these narrow
circumstances would lessen investor protections.
Numerical Guidelines
    Today, paragraph (c)(1) defines the Numerical Guidelines that are
used to determine if a transaction is deemed clearly erroneous during
Regular Trading Hours, or during the Early Trading, Pre-Opening and
After Hours Sessions. With respect to Regular Trading Hours, trades are
generally deemed clearly erroneous if the execution price differs from
the Reference Price (i.e., last sale) by 10% if the Reference Price is
greater than $0.00 up to and including $25.00; 5% if the Reference
Price is greater than $25.00 up to and including $50.00; and 3% if the
Reference Price is greater than $50.00. Wider parameters are also used
for reviews for Multi-Stock Events, as described in paragraph (c)(2).
With respect to transactions in Leveraged ETF/ETN securities executed
during

Regular Trading Hours, Early Trading, Pre-Opening and After Hours
Trading Session, trades are deemed clearly erroneous if the execution
price exceeds the Regular Trading Hours Numerical Guidelines multiplied
by the leverage multiplier.
    Given the changes described in this proposed rule change, the
Exchange proposes to amend the way that the Numerical Guidelines are
calculated during Regular Trading Hours in the handful of instances
where clearly erroneous review would continue to be available.
Specifically, the Exchange would base these Numerical Guidelines, as
applied to the circumstances described in paragraph (c)(1)(A), on the
Percentage Parameters used to calculate Price Bands, as set forth in
Appendix A to the LULD Plan. Without this change, a transaction that
would otherwise stand if Price Bands were properly applied to the
transaction may end up being subject to review and deemed clearly
erroneous solely due to the fact that the Price Bands were not
available due to a systems or other issue. The Exchange believes that
it makes more sense to instead base the Price Bands on the same
parameters as would otherwise determine whether the trade would have
been allowed to execute within the Price Bands. The Exchange also
proposes to modify the Numerical Guidelines applicable to leveraged
ETF/ETN securities during Regular Trading Hours. As noted above, the
Numerical Guidelines will only be applicable to transactions eligible
for review pursuant paragraph (c)(1)(A) (i.e., to NMS Stocks that are
not subject to the LULD Plan). As leveraged ETF/ETN securities are
subject to LULD and thus the Percentage Parameters will be applicable
during Regular Trading Hours, the Exchange proposes to eliminate the
Numerical Guidelines for leveraged ETF/ETN securities traded during
Regular Trading Hours. However, as no Price Bands are available outside
of Regular Trading Hours, the Exchange proposes to keep the existing
Numerical Guidelines in place for transactions in leveraged ETF/ETN
securities that occur during Early Trading, Pre-Opening and After Hours
Trading.
    The Exchange also proposes to move existing paragraphs (c)(2),
(c)(3), and (d) to proposed paragraph (c)(2)(B), (c)(2)(C), and
(C)(2)(D), respectively, as Multi-Stock Events, Additional Factors, and
Outlier Transactions will only be subject to review if those NMS Stocks
are not subject to the LULD Plan or occur during the Early Trading,
Pre-Opening and After Hours Sessions. Proposed paragraph (c)(2)(B) is
substantially similar to existing paragraph (c)(2) except for a change
in rule reference to paragraph (c)(1) has been updated to paragraph
(c)(1)(A). Further, given the proposal to move existing paragraph
(c)(2) to paragraph (c)(2)(B), the Exchange also proposes to amend
applicable rule references throughout paragraph (c)(2)(A). Finally, the
Exchange proposes to update applicable rule references in paragraph
(c)(2)(D) based on the above-described structural changes to the Rule.
Reference Price
    As proposed, the Reference Price used would continue to be based on
last sale and would be memorialized in proposed paragraph (d).
Continuing to use the last sale as the Reference Price is necessary for
operational efficiency as it may not be possible to perform a timely
clearly erroneous review if doing so required computing the arithmetic
mean price of eligible reported transactions over the past five
minutes, as contemplated by the LULD Plan. While this means that there
would still be some differences between the Price Bands and the clearly
erroneous parameters, the Exchange believes that this difference is
reasonable in light of the need to ensure timely review if clearly
erroneous rules are invoked. The Exchange also proposes to allow for an
alternate Reference Price to be used as prescribed in proposed
paragraphs (d)(1), (2), and (3). Specifically, the Reference Price may
be a value other than the consolidated last sale immediately prior to
the execution(s) under review (1) in the case of Multi-Stock Events
involving twenty or more securities, as described in paragraph
(c)(2)(B) above, (2) in the case of an erroneous Reference Price, as
described in paragraph (c)(1)(D) above (and in the case of
(c)(1)(D)(2), the price of the prior LULD Band that triggered the
Trading Pause will be used as the new Reference Price), or (3) in other
circumstances, such as, for example, relevant news impacting a security
or securities, periods of extreme market volatility, sustained
illiquidity, or widespread system issues, where use of a different
Reference Price is necessary for the maintenance of a fair and orderly
market and the protection of investors and the public interest.
System Disruption or Malfunction
    The Exchange proposes to change to Rule 11.17(f) to conform to the
structural changes to the Rule described above and to reference the
applicability of Percentage Parameters. Specifically, the Exchange
proposes eliminate a reference to paragraph (c)(3) based on the
structural changes described above. Further, existing rule text
provides that in extraordinary circumstances an Officer of the Exchange
or other senior level employee designee may use a lower Numerical
Guideline if necessary to maintain a fair and order market, protect
investors and the public interest. The Exchange proposes to amend this
language to provide that an Officer of the Exchange or other senior
level employee designee may use a lower Percentage Parameter, in the
case of an NMS Stock subject to the LULD Plan, or a Numerical
Guideline, in the case of an NMS Stock not subject to the LULD in such
case.
Trade Nullification for UTP Securities That Are the Subject of Initial
Public Offerings
    Current paragraph (h) of BZX Rule 11.17 provides different
procedures for conducting clearly erroneous review in initial public
offering (``IPO'') securities that are traded pursuant to unlisted
trading privileges (``UTP'') after the initial opening of such IPO
securities on the listing market. Specifically, this paragraph provides
that a clearly erroneous error may be deemed to have occurred in the
opening transaction of the subject security if the execution price of
the opening transaction on the Exchange is the lesser of $1.00 or 10%
away from the opening price on the listing exchange or association. The
Exchange no longer believes that this provision is necessary as opening
transactions on the Exchange following an IPO are subject to Price
Bands pursuant to the LULD Plan. The Exchange therefore proposes to
eliminate this provision in connection with the broader changes to
clearly erroneous review during Regular Trading Hours.
Securities Subject to Limit Up-Limit Down Plan
    The Exchange proposes to renumber paragraph (i) to paragraph (h)
based on the proposal to eliminate existing paragraph (h), and to
rename the paragraph to provide for transactions occurring outside of
LULD Price Bands. Given that proposed paragraph (c)(1) defines the LULD
Plan, the Exchange also proposes to eliminate redundant language from
proposed paragraph (h). Finally, the Exchange also proposes to update
references to the LULD Plan and Price Bands so that they are uniform
throughout the Rule and to update rule references throughout the
paragraph to conform to the structural changes to the Rule described
above.
Multi-Day Event and Trading Halts
    The Exchange proposes to renumber paragraphs (j) and (k) to
paragraphs (i)

and (j), respectively, based on the proposal to eliminate existing
paragraph (h). Additionally, the Exchange proposes to modify the text
of both paragraphs to reference the Percentage Parameters as well as
the Numerical Guidelines. Specifically, the existing text of proposed
paragraphs (i) and (j) provides that any action taken in connection
with this paragraph will be taken without regard to the Numerical
Guidelines set forth in this Rule. The Exchange proposes to amend the
rule text to provide that any action taken in connection with this
paragraph will be taken without regard to the Percentage Parameters or
Numerical Guidelines set forth in this Rule, with the Percentage
Parameters being applicable to an NMS Stock subject to the LULD Plan
and the Numerical Guidelines being applicable to an NMS Stock not
subject to the LULD Plan.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with
the requirements of Section 6(b) of the Act,\25\ in general, and
Section 6(b)(5) of the Act,\26\ in particular, in that it is designed
to remove impediments to and perfect the mechanism of a free and open
market and a national market system, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest and not to permit unfair discrimination between
customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \25\ 15 U.S.C. 78f(b).
    \26\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    As explained in the purpose section of this proposed rule change,
the current pilot was implemented following the Flash Crash to bring
greater transparency to the process for conducting clearly erroneous
reviews, and to help assure that the review process is based on clear,
objective, and consistent rules across the U.S. equities markets. The
Exchange believes that the amended clearly erroneous rules have been
successful in that regard, and have thus furthered fair and orderly
markets. Specifically, the Exchange believes that the pilot has
successfully ensured that such reviews are conducted based on objective
and consistent standards across SROs, and has therefore afforded
greater certainty to Members and investors. The Exchange therefore
believes that making the current pilot a permanent program is
appropriate so that equities market participants can continue to reap
the benefits of a clear, objective, and transparent process for
conducting clearly erroneous reviews. In addition, the Exchange
understands that the other U.S. equities exchanges and FINRA will also
file largely identical proposals to make their respective clearly
erroneous pilots permanent. The Exchange therefore believes that the
proposed rule change would promote transparency and uniformity across
markets concerning review of transactions as clearly erroneous, and
would also help assure consistent results in handling erroneous trades
across the U.S. equities markets, thus furthering fair and orderly
markets, the protection of investors, and the public interest.
    Similarly, the Exchange believes that it is consistent with just
and equitable principles of trade to limit the availability of clearly
erroneous review during Regular Trading Hours. The Plan was approved by
the Commission to operate on a permanent rather than pilot basis. As a
number of market participants have noted, the LULD Plan provides
protections that ensure that investors' orders are not executed at
prices that may be considered clearly erroneous. Further, amendments to
the LULD Plan approved in Amendment Eighteen serve to ensure that the
Price Bands established by the LULD Plan are ``appropriately tailored
to prevent trades that are so far from current market prices that they
would be viewed as having been executed in error.'' \27\ Thus, the
Exchange believes that clearly erroneous review should only be
necessary in very limited circumstances during Regular Trading Hours.
Specifically, such review would only be necessary in instances where a
transaction was not subject to the LULD Plan, or was the result of some
form of systems issue, as detailed in the purpose section of this
proposed rule change. Additionally, in narrow circumstances where the
transaction was subject to the LULD Plan, a clearly erroneous review
would be available in the case of (1) a corporate action or new issue
or (2) a security that enters a Trading Pause pursuant to LULD and
resumes trading without an auction, where the Reference Price is
determined to be erroneous by an Officer of the Exchange. Thus,
eliminating clearly erroneous review in all other instances will serve
to increase certainty for Members and investors that trades executed
during Regular Trading Hours would typically stand and would not be
subject to review.
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    \27\ See Amendment Eighteen, supra note 5.
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    Given the fact that clearly erroneous review would largely be
limited to transactions that were not subject to the LULD Plan, the
Exchange also believes that it is necessary to change the parameters
used to determine whether a trade is clearly erroneous. Specifically,
due to the different parameters currently used for clearly erroneous
review and for determining Price Bands, it is possible that a trade
that would have been permitted to execute within the Price Bands would
later be deemed clearly erroneous, if, for example, a systems issue
prevented the dissemination of the Price Bands. The Exchange believes
that this result is contrary to the principle that trades within the
Price Bands should stand, and has the potential to cause investor
confusion if trades that are properly executed within the applicable
parameters described in the LULD Plan are later deemed erroneous. By
using consistent parameters for clearly erroneous reviews conducted
during Regular Trading Hours and the calculation of the Price Bands,
the Exchange believes that this change would also serve to promote
greater certainty with regards to when trades may be deemed erroneous.
    The Exchange believes that it is consistent with the protection of
investors and the public interest to remove the current provision of
the clearly erroneous rule dealing with UTP securities that are the
subject of IPOs. This provision applies specifically to opening
transactions on a non-listing market following an IPO on the listing
market. As such, review under this paragraph is limited to trades
conducted during Regular Trading Hours. As previously addressed, trades
executed during Regular Trading Hours would generally not be subject to
clearly erroneous review but would instead be protected by the Price
Bands. The Exchange therefore no longer believes that this paragraph is
necessary, as all trades subject to this provision today would either
be subject to the LULD Plan, or, in the event of some systems or other
issue, would be subject to the provisions that apply to transactions
that are not adequately protected by the LULD Plan.
    Finally, the proposed rule changes make organizational updates to
the Exchange's Clearly Erroneous Execution Rule as well as minor
updates and corrections to the Rule to improve readability and clarity.

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

    The Exchange does not believe that the proposed rule change would
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The proposal would ensure
the continued, uninterrupted operation of harmonized clearly erroneous
execution rules across

the U.S. equities markets while also amending those rules to provide
greater certainty to Members and investors that trades will stand if
executed during Regular Trading Hours where the LULD Plan provides
adequate protection against trading at erroneous prices. The Exchange
understands that the other national securities exchanges and FINRA will
also file similar proposals, the substance of which are identical to
this proposal. Thus, the proposed rule change will help to ensure
consistency across SROs without implicating any competitive issues.

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

    No comments were solicited or received on the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

    Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule
change should be 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-CboeBZX-2022-017 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-CboeBZX-2022-017. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-CboeBZX-2022-017 and should be submitted
on or before April 1, 2022.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\28\
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    \28\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-05150 Filed 3-10-22; 8:45 am]
BILLING CODE 8011-01-P