[Federal Register Volume 59, Number 136 (Monday, July 18, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-17353]


[[Page Unknown]]

[Federal Register: July 18, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34355; File No. SR-NASD-93-38]

 

Self-Regulatory Organizations; Notice of Proposed Rule Change by 
National Association of Securities Dealers, Inc. Relating to Interim 
Injunctive Relief in Intra-Industry Disputes and Certain Other Changes 
in the NASD Code of Arbitration Procedure

July 12, 1994.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on February 
8, 1994, the National Association of Securities Dealers, Inc. (``NASD'' 
or ``Association'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the 
NASD.\1\ The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
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    \1\The NASD initially submitted the proposed rule change on July 
13, 1993. Amendment No. 1 made technical changes to the text of the 
rule. See Letter from Suzanne E. Rothwell, Associate General 
Counsel, NASD, to Selwyn Notelovitz, Branch Chief, Over-the-Counter 
Regulation, SEC (available in Commission's Public Reference Room).
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I. Self-Regulatory Organizations Statement of the Terms of Substance of 
the Proposed Rule Change

    The NASD proposes to amend its Code of Arbitration Procedure 
(``Code'') to: (1) redesignate Part III, Section 44\2\ et seq. as new 
Part IV; (2) amend Sections 22 and 44; and (3) add a new Section to the 
Code. Below is the text of the proposed rule change. Proposed new 
language is in italics, proposed deletions are in brackets.
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    \2\NASD Manual, Code of Arbitration Procedure, Art. III, Sec. 44 
(CCH) 3744.
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CODE OF ARBITRATION PROCEDURE
* * * * *

PART III

UNIFORM CODE OF ARBITRATION

* * * * *

Peremptory Challenge

    Sec. 22. In any arbitration proceeding, except as provided in 
Section (XX--Injunctions), each party shall have the right to one 
peremptory challenge. In arbitration where there are multiple 
Claimants, Respondents and/or Third-Party Respondents, the Claimants 
shall have one peremptory challenge, the Respondents shall have one 
peremptory challenge, and the Third-Party Respondents shall have one 
peremptory challenge, unless the Director of Arbitration determines 
that the interests of justice would best be served by awarding 
additional peremptory challenges. Unless extended by the Director of 
Arbitration, a party wishing to exercise a peremptory challenge must do 
so by notifying the Director of Arbitration in writing within five (5) 
business days of notification of the identify of the person(s) named 
under Section 21 or Section 32(d) or (e), whichever comes first. There 
shall be unlimited challenges for cause.
* * * * *

PART IV

MISCELLANEOUS

* * * * *

Schedule of Fees for Industry and Clearing Controversies

Sec. 44.
* * * * *
    (h) In each industry or clearing controversy which is required to 
be submitted to arbitration before the Association as set forth in 
Section 8, above, [requiring] where interim injunctive relief is 
requested or where a court has issued a temporary injunction and a 
party requests expedited [hearings] proceedings, a total non-refundable 
surcharge of $2,500 shall be paid by [all Claimants, collectively, and 
a non-refundable surcharge of $2,500 shall be paid by all Respondents, 
collectively] the party or parties requesting the expedited proceedings 
as provided in Section (XX--Injunctions). These surcharge fees shall be 
in addition to all other non-refundable filing fees, hearing deposits, 
or costs which may be required. The arbitrator may determine that a 
party shall reimburse another party for any non-refundable surcharge it 
has paid.
* * * * *

Injunctions

    Sec. XX. In industry or clearing disputes required to be submitted 
to arbitration pursuant to Section 8, parties to the arbitration may 
seek injunctive relief either within the arbitration process or from a 
court of competent jurisdiction. Within the arbitration process, 
parties may seek either an ``interim injunction'' from a single 
arbitrator or a permanent injunction from a full arbitration panel. 
From a court of competent jurisdiction, parties may seek a temporary 
injunction. This section (XX--Injunctions) contains procedures for 
obtaining an interim injunction. Paragraph(g) of this Section relates 
to the effect of court-imposed injunctions on arbitration proceedings. 
If any injunction is sought as part of the final award, such request 
should be made in the remedies portion of the Statement of Claim, 
pursuant to Section 25(a).

Single Arbitrator

    (a) Applicants for interim injunctive relief shall be heard by a 
single arbitrator.

Showing Required

    (b) In order to obtain an interim injunction, the party seeking the 
injunction must make a clear showing that it is likely to succeed on 
the merits, that it will suffer irreparable injury unless the relief is 
granted, and that the balancing of the equities lies in its favor.

Application for Relief

    (c) Interim injunctions include both Immediate Injunctive Orders 
and Regular Injunctive Orders, as described in paragraph (d) below. In 
either case, the applicator shall make application for relief by 
serving a Statement of Claim, a statement of facts demonstrating the 
necessity for injunctive relief, and a properly-executed Submission 
Agreement on the party or parties against whom injunctive relief is 
sought. The above documents shall simultaneously and in the same manner 
be filed with the Director of Arbitration, together with an extra copy 
of each document for the arbitrator, proof of service on all parties, 
and all fees required under Section 44. Filings and service required 
under this Section (XX--Injunctions) may be made by United States mail, 
overnight delivery service or messenger.
    (d) The procedures and timetable for handling applications for 
interim injunctive relief are as follows:
    (1) Immediate Injunctive Orders.
    (A) Upon receipt of an application for an Immediate Injunctive 
Order, the Director shall endeavor to schedule a hearing no sooner than 
one and no later than three business days after receipt of the 
application by the respondent and the Director.
    (B) The filing of a response to an application for an Immediate 
Injunctive Order is optional to the party against whom the immediate 
order is sought. Any response shall be served on the applicant. If a 
response is submitted, the responding party shall, prior to the hearing 
or at the hearing, file with the Director two copies of the response 
and proof of service on all parties.
    (C) Notice of the date, time and place of the hearing; the name and 
employment history of the single arbitrator required by Section 21; and 
any information required to be disclosed by the arbitrator pursuant to 
Section 23 shall be provided to all parties via telephone, facsimile 
transmission or messenger delivery prior to the hearing.
    (D) The hearing on the application for an Immediate Injunctive 
Order may be held, at the discretion of the arbitrator or the Director, 
by telephone or in person in a city designated by the Director of 
Arbitration.
    (E) The arbitrator shall endeavor to grant or deny the application 
within one business day after the hearing and record are closed.
    (F) If the application is granted, the arbitrator shall determine 
the duration of the Immediate Injunctive Order. Unless the parties 
agree otherwise, however, the order will expire no later than the 
earlier of the issuance or denial of a Regular Injunctive Order under 
subparagraph (2) or a decision on the merits of the entire controversy 
by an arbitration panel appointed under this Code.
    (2) Regular Injunctive Orders.
    (A) Upon receipt of an application for a Regular Injunctive Order, 
the Director shall endeavor to schedule a hearing no sooner than three 
and no later than five business days after the response is filed or due 
to be filed, whichever comes first.
    (B) The party against which a Regular Injunctive Order is sought 
shall serve a response on the applicant within three business days of 
receipt of the application. The responding party shall simultaneously 
and in the same manner file with the Director two copies of the 
response and proof of service on all parties. Failure to file a 
response within the specified time period shall not be grounds for 
delaying the hearing, nor shall it bar the respondent from presenting 
evidence at the hearing.
    (C) Notice of the date, time and place of the hearing; the name and 
employment history of the single arbitrator required by Section 21; and 
any information required to be disclosed by the arbitrator pursuant to 
Section 23 shall be provided to all parties via telephone, facsimile 
transmission or messenger delivery prior to the hearing.
    (D) The hearing on the application for a Regular Injunctive Order 
may be held, at the discretion of the arbitrator or the Director, by 
telephone or in person in a city designated by the Director of 
Arbitration.
    (E) The arbitrator shall endeavor to grant or deny the application 
within one business day after the hearing and record are closed.
    (F) If the application is granted, the arbitrator shall determine 
the duration of the Regular Injunctive Order. Unless the parties agree 
otherwise, however, a Regular Injunctive Order shall expire no later 
than a decision on the merits of the entire controversy by an 
arbitration panel appointed under this Code.

Challenges to Arbitrators

    (e) There shall be unlimited challenges for cause to the single 
arbitrator appointed to hear the application for injunctive relief, but 
there shall be no peremptory challenges. Parties wishing to object to 
the arbitrator shall do so by telephone to the Director, and shall 
confirm such objection immediately in writing or by facsimile 
transmission, with a copy to all parties. A peremptory challenge may 
not be made to an arbitrator who heard an application for an injunctive 
order and who subsequently participates or is to participate on the 
arbitration panel hearing the same arbitration case on the merits.

Hearing on the Merits

    (f) If an Immediate or Regular Injunctive Order is issued by an 
arbitrator, the arbitration concerning the matter of the injunction 
shall proceed in an expedited manner, according to a time schedule and 
procedures specified by the arbitration panel appointed under this 
Code.

Effect of Court Injunction

    (g) If a court has issued an injunction against one of the parties 
to an arbitration agreement, unless otherwise specified by the court, 
any requested arbitration concerning the matter of the injunction shall 
proceed in an expedited manner according to a time schedule and 
procedures specified by the arbitration panel appointed under this 
Code.

Security

    (h) The arbitrator issuing the Immediate or Regular Injunctive 
Order may require the applicant, as a condition to effectiveness of the 
order, to deposit security in an amount that the arbitrator deems 
proper for the payment of any costs and damages that may be incurred or 
suffered by the party against whom injunctive relief is sought if it is 
found to have been wrongfully enjoined.

Effective Date

    (i) This Section (XX--Injunctions) shall apply to arbitration 
claims filed on or after the effective date of this section. Except as 
otherwise provided in this Section (XX--Injunctions), the remaining 
provisions of the Code shall apply to proceedings instituted under 
Section (XX--Injunctions). Section (XX--Injunctions) shall expire one 
year after its effective date unless extended by the NASD Board of 
Governors.
* * * * *

Resolution of the Board of Governors

Failure to Act Under Provisions of Code of Arbitration Procedure

    It may be deemed conduct inconsistent with just and equitable 
principles of trade and a violation of Article III, Section 1 of the 
Rules of Fair Practice for a member or a person associated with a 
member to fail to submit a dispute for arbitration under the Code of 
Arbitration Procedure as required by that Code, to fail to comply with 
any injunctive order issued pursuant to Section (XX--Injunctions), to 
fail to appear or to produce any documents in his possession or control 
as directed pursuant to provisions of the Code of Arbitration 
Procedure, or to fail to honor an award of arbitrators properly 
rendered pursuant to the Uniform Code of Arbitration under the auspices 
of the National Association of Securities Dealers, Inc., the New York, 
American, Boston, Cincinnati, Chicago, Pacific, or Philadelphia Stock 
Exchanges, the Chicago Board Options Exchange, the Municipal Securities 
Rulemaking Board, or pursuant to the rules applicable to the 
arbitration of securities disputes before the American Arbitration 
Association, where a timely motion has not been made to vacate or 
modify such award pursuant to applicable law.
* * * * *

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 NASD 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 NASD 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

    (a) The NASD is proposing to amend the Code to codify the authority 
of arbitrators to grant interim injunctive relief in intra-industry 
disputes under Section 8 of the Code that are subject to NASD 
arbitration, to provide that peremptory challenges may not later be 
made to arbitrators who handled requests for interim injunctive relief 
in the same case, to provide that the $2,500 nonrefundable surcharge 
for expedited proceedings shall be paid by the party requesting such 
proceedings, and to provide that failure to comply with any injunctive 
order issued pursuant to the new injunction section may be deemed to be 
a violation of Article III, Section 1 of the Rules of Fair Practice.
    (1) Peremptory Challenge to Arbitrator Who Handled Request for 
Injunction: The proposed rule change to Section 22 excepts proceedings 
for injunctive orders under the proposed new section from the provision 
granting a party one peremptory challenge to an arbitrator. This 
provision is compatible with the expedited nature of injunctive 
proceedings. See discussion below of subsection (e) of the proposed new 
section.
    (2) Non-refundable Surcharge for Expedited Proceedings: Currently, 
Section 44 imposes a non-refundable surcharge of $2,500 on all parties 
in an expedited proceeding. Expedited proceedings are provided in 
connection with a request for injunctive relief under the proposed new 
section and as a result of a court granting injunctive relief. The 
proposed rule change would amend Section 44 to provide that the total 
surcharge of $2,500 is to be paid only by the party or parties 
requesting expedited proceedings. In addition, the rule change provides 
that the arbitrator may determine that a party shall reimburse another 
party for any such surcharge it has paid.
    (3) Procedure for Granting Interim Injunctive Relief: The 
introduction to the proposed new section gives arbitrators authority to 
grant interim injunctive relief in intra-industry disputes and 
clarifies the ability of parties to seek injunctive relief in court if 
they wish. The introduction sets out that under the proposed new 
section, the parties may seek either an ``interim injunction'' or a 
``permanent injunction'' and that subsection (g) of the proposed new 
section describes the effect of court-imposed injunctions on an 
arbitration proceeding. Finally, the introduction clarifies that if any 
injunction is sought as part of the final award, the request must by 
made pursuant to Section 25(a).
    Paragraph (a) provides that applications for interim injunctions 
are to be heard by a single arbitrator. Paragraph (b) requires the 
party seeking interim injunctive relief to make a clear showing that it 
is likely to succeed on the merits, that it will suffer irreparable 
injury unless the relief is granted, and that the balancing of the 
equities lies in its favor. Thus, the proposed standards for granting 
injunctive relief are similar to those traditionally employed in many 
courts. Paragraph (c) lists the documents that must be filed to apply 
for interim injunctive relief. Paragraph (d) sets forth the procedure 
and timetable for handling applications for interim injunctive relief. 
Under subparagraph (d)(1), an expedited timetable is provided for 
handling applications for Immediate Injunctive Orders, which are 
similar to temporary restraining orders (``TROs'') that might be issued 
by a court, in that a response to such an application is optional. In 
such cases, that Director is to endeavor to schedule a hearing within 
one to three business days after receipt of the application. 
Information required to be given to parties may be sent by facsimile 
transmission, and the hearing may be held by telephone or in a limited 
number of cities, at the discretion of the arbitrator or the Director 
of Arbitration. At present, the NASD contemplates holding such hearings 
in New York, Chicago and San Francisco. The arbitrator will endeavor to 
grant or deny the application within one business day after the hearing 
and record are closed. The duration of an Interim Injunction will be 
determined by the arbitrator, but in any event it will expire no later 
than the date of the issuance or denial or a Regular Injunctive Order 
(if any) or a decision on the merits of the entire controversy.
    Subsection (d)(2) of the proposed new section deals with Regular 
Injunctive Orders, which are similar to preliminary injunctions issued 
by the courts. Under these provisions, the Director will endeavor to 
schedule a hearing within three to five business days after the 
response is filed or due to be filed, whichever comes first. Failure to 
file a response will not, however, delay the hearing, and the 
responding party may choose to present evidence at the hearing whether 
or not it has previously filed a response. As in paragraph (d)(1), 
hearings may be held by telephone or in selected cities. Regular 
injunctions expire as determined by the arbitrator, but in no event 
later than the date of a decision on the merits of the underlying 
controversy.
    Subsection (e) of the proposed new section provides that there can 
be unlimited challenges for cause to the single arbitrator appointed to 
hear the application for an interim injunction, but no peremptory 
challenges are permitted. Moreover, peremptory challenges may not later 
be made to an arbitrator who heard an application for an injunctive 
order and who subsequently is appointed to participate on the 
arbitration panel hearing the same arbitration on the merits. As stated 
above with regard to Section 22, the elimination of peremptory 
challenges promotes the expedited nature of injunctive proceedings, 
while still preserving the parties' rights to challenge an arbitrator 
for cause.
    Subsection (f) of the proposed new section provides that the 
arbitration of the underlying controversy is to proceed in an expedited 
manner according to a timetable and procedures specified by the 
arbitration panel. This continues the expedited treatment of cases in 
which interim injunctive relief has been granted, to provide a faster 
resolution of the merits of the dispute. Paragraph (g) provides that if 
a court has issued an injunction against one of the parties to an 
arbitration agreement, any arbitration that might be requested will be 
handled expeditiously, according to a timetable and procedures 
determined by the arbitration panel. Paragraph (h) permits the 
arbitrator to require a party to deposit security in an amount that the 
arbitrator deems proper for the payment of any costs or damages that 
might be incurred by the adverse party if it were wrongfully enjoined.
    Subsection (i) of the proposed new section contains a ``sunset'' 
clause, causing the section to expire in one year unless the NASD files 
a rule change under Rule 19b-4 to amend the proposed rule change to 
extend its period of effectiveness or eliminate the expiration date. 
This will provide for a pilot period during which the feasibility of 
allowing arbitrators to issue interim injunctions can be assessed.
    (4) Resolution of the Board of Governors: The proposed rule change 
would amend the Resolution of the Board of Governors currently found at 
paragraph 3744 of the Manual to provide that failure to comply with any 
interim injunctive order issued pursuant to the proposed new section 
will be added to the types of conduct that may be considered to be 
violative of Article III, Section 1 of the Rules of Fair Practice.
    (b) The NASD believes that the proposed rule change is consistent 
with the provisions of Section 15A(b)(6) of the Act,\3\ in that the 
proposed rule change will facilitate the arbitration process in the 
public interest by codifying authority of arbitrators to grant interim 
injunctive relief in intra-industry disputes under Section 8 of the 
Code that are subject to NASD arbitration, providing that peremptory 
challenges may not later be made to arbitrators who handled requests 
for interim injunctive relief in the same case, providing that the 
$2,500 non-refundable surcharge for expedited proceedings shall be paid 
by the party or parties requesting such proceedings, and providing that 
failure to comply with any injunctive order issued pursuant to the new 
injunction section may be deemed to be a violation of Article III, 
Section 1 of the Rules of Fair Practice.
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    \3\15 U.S.C. Sec 78o-3.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Association 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 purpose of the Act, as amended.

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

    Written comments were neither solicited nor received.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date 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 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. The Commission requests that, in 
addition to any general comments concerning whether the proposed rule 
change is consistent with Section 15A(b)(6) of the Act, commentators 
address the following:
    1. The proposed new section would permit parties to seek injunctive 
relief from a court of competent jurisdiction. Section 6 of the Code of 
Arbitration Procedure provides that ``no party shall commence any suit, 
action or proceeding against any other party touching upon any of the 
matters referred to arbitration pursuant to this Code''. Should the 
relationship between the two sections be clarified?
    It is not clear under the proposed amendment whether the new 
section clarifies the parties' access to existing procedures under 
certain state statutes allowing for injunctive actions even where 
parties have entered into arbitration agreements, or whether it 
establishes a new contractual agreement by the parties excepting 
injunctive actions in court from the parties' agreements to arbitrate 
under NASD rules. Should the proposal be amended to clarify that it is 
limited to existing rights under statute, or to clarify that it is 
intended to extend to all agreements to arbitrate under NASD rules?
    2. The proposed rule change would amend an existing Resolution of 
the Board of Governors to provide that failure to comply with any 
injunctive order issued pursuant to the proposed new section may be 
considered to be violative of Article III, Section 1 of the Rules of 
Fair Practice. Since the proposed new section authorizes both court-
issued injunctions (discussed in question 1 of this solicitation of 
comments) and interim injunctions issued by an arbitrator, should the 
proposed change to the resolution be clarified to indicate whether the 
amendment would extend to both types of injunctions or only to the 
interim injunctions issued by arbitrators pursuant to the section? 
Should the resolution be limited to arbitrator-issued interim 
injunctions?
    3. The proposed rule change provides for two different types of 
interim injunctions, ``immediate injunctive orders'' and ``regular 
injunctive orders''. Should the proposed rule change make it clear 
whether different standards apply for the granting of the two types of 
orders, or whether the only difference in the two types of injunctive 
proceedings consists of the number of days in which decisions under the 
section are to be made?
    Subsection (d)(1) of the proposed new section provides that an 
immediate injunctive order expires no later than the earlier of the 
issuance or denial of a regular injunctive order or a decision on the 
merits of the entire controversy. Should the proposed rule change make 
it clear how and when proceedings for a regular injunctive proceeding 
would follow an immediate injunctive proceeding?
    4. Subsections (f) and (g) of the proposed new section provide that 
the arbitration concerning a matter in which either an interim 
injunction under the section or a court injunction has been issued will 
be expedited, under a schedule specified by the arbitration panel 
appointed under the Code. Since it appears under the proposal that the 
arbitration panel would be appointed after a decision on the 
application for injunctive relief is made, should there be a time frame 
in the proposed new section for the Director of Arbitration to appoint 
the panel? Should it be made clear under the expedited procedures in 
the proposed new section how the prehearing procedures under section 32 
of the Code would operate to assure that parties can obtain access to 
necessary information prior to the hearing on the merits?
    5. Although the introduction to the section provides that if any 
injunction is sought as part of the final award, the request should be 
made in the remedies portion of the statement of claim under Section 
25(a) of the Code, and although subsection (c) provides that 
applications for interim injunctions must be accompanied by a statement 
of claim, it is not clear under the proposal whether applications for 
interim injunctive relief must be submitted together with the statement 
of claim for the full case on the merits or merely a statement of claim 
to support the application for injunctive relief. If the full statement 
of claim is not required at the time of the application for injunctive 
relief, should the proposed new section impose a fixed time period for 
the submission of the statement of claim in order to avoid prejudice to 
the party against which interim injunctive relief has been awarded? If 
the full statement of claim for the case on the merits is required at 
the time of the application for an interim injunction, should the 
proposed new section be amended to clarify that point?
    Persons making written submissions should file six copies thereof 
with the Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, DC 20549. 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 inspection and copying in the Commission's Public 
Reference Section. Copies of such filing will also be available for 
inspection and copying at the principal office of the NASD. All 
submissions should refer to File Number SR-NASD-93-38 and should be 
submitted by August 8,1994.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority, 17 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-17353 Filed 7-15-94; 8:45 am]
BILLING CODE 8010-01-M