[Federal Register Volume 60, Number 90 (Wednesday, May 10, 1995)]
[Notices]
[Pages 24957-24961]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-11513]



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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21040; File No. 812-9338]


The Mutual Life Insurance Company of New York, et al.

May 4, 1995
AGENCY: Securities and Exchange Commission (the ``SEC'' or the 
``Commission'').

ACTION: Notice of Application for Exemption under the Investment 
Company Act of 1940 (the ``1940 Act'').

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APPLICANTS: The Mutual Life Insurance Company of New York (``Mutual of 
New York''), MONY Life Insurance Company of America (``MONY'', together 
with Mutual of New York, the ``Companies''), MONY Variable Account L 
(``Account L''), MONY America Variable Account L (``MONY Account L''), 
any other separate account established by the Companies in the future 
to support flexible premium, single premium, or scheduled premium 
variable life insurance polices (the ``Other Accounts,'' collectively, 
with Account L and MONY Account L, the ``Accounts'') and MONY 
Securities Corp.

RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) of the 
1940 Act for exemptions from Section 27(c)(2) of the 1940 Act and Rules 
6e-2(c)(4)(v), 6e-3(T)(c)(4)(v), 6e-2(a)(2), and 6e-2(b)(15) 
thereunder.

SUMMARY OF APPLICATION: Applicants seek an order to permit them to 
deduct from premiums received under certain variable life insurance 
policies (the ``Contracts'') issued by the Accounts and the Companies a 
charge that is reasonable in relation to the Companies' increased 
federal income tax burden resulting from the Companies' receipt of such 
premiums in connection with the Contracts. Applicants also seek an 
order to permit any of the Accounts to derive its assets from both 
flexible and scheduled premium variable life insurance policies and 
nevertheless to qualify as a variable life insurance separate account, 
with respect to single premium or scheduled premium life insurance 
policies, for the purposes of Rule 6e-2.

FILING DATE: The application was filed on November 23, 1994.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the Commission orders a hearing. Interested 
persons may request a hearing on this application by writing to the 
Secretary of the SEC and serving Applicants with a copy of the request, 
personally or by mail. Hearing requests must be received by the 
Commission by 5:30 p.m. on May 30, 1995 and should be accompanied by 
proof of service on Applicants in the form of an affidavit or, for 
lawyers, a certificate of service. Hearing requests should state the 
nature of the interest, the reason for the request, and the issues 
contested. Persons may request notification of a hearing by writing to 
the Secretary of the SEC.

[[Page 24958]] ADDRESSES: Secretary, Securities and Exchange 
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. Applicants, 
Edward P. Bank, Vice President and Deputy General Counsel, The Mutual 
Life Insurance Company of New York, 1740 Broadway, New York, New York, 
10019.

FOR FURTHER INFORMATION CONTACT: Barbara J. Whisler, Senior Attorney, 
or Wendy Friedlander, Deputy Chief, both at (202) 942-0670, Office of 
Insurance Products, Division of Investment Management.

SUPPLEMENTARY INFORMATION: Following is a summary of the application. 
The complete application is available for a fee from the Commission's 
Public Reference Branch.

Applicants' Representations

    1. Mutual of New York, a mutual life insurance company organized 
under the laws of New York in 1842, is the depositor of Account L for 
purposes of the 1940 Act. MONY, a stock life insurance company 
organized under Arizona law in 1969, is the depositor of MONY Account L 
for purposes of the 1940 Act. Mutual of New York is the issuer of 
Contracts which permit allocation of premiums to Account L and MONY is 
the issuer of Contracts which permit allocation of premiums to MONY 
Account L. Account L and MONY Account L have twelve subaccounts, not 
all of which are available under the Contracts. Each subaccount invests 
solely in a corresponding portfolio of either the MONY Series Fund, 
Inc., or the Enterprise Accumulation Trust (collectively, the 
``Funds''). Each of the Funds is an open-end diversified management 
investment company registered under the 1940 Act. The Companies may 
elect to crate additional subaccounts in the future. The Accounts are, 
and will be registered with the Commission as unit investment trusts.
    2. MONY Securities Corp., a wholly owned subsidiary of Mutual of 
New York, is registered with the Commission as a broker-dealer under 
the Securities Exchange Act of 1934 and is a member of the National 
Association of Securities Dealers, Inc. MONY Securities Corp. will be 
the principal underwriter of the Contracts and may serve in the future 
as the principal underwriter for Contracts issued by the Other 
Accounts.
    3. The Contracts are flexible premium variable life insurance 
policies. The Contracts issued by Account L and MONY Account L will be, 
and the Contracts issued by the Other Accounts are expected to be, 
issued in reliance on Rule 6e-3(T) under the 1940 Act. Applicants state 
that the Companies will deduct 1.25% of each premium payment to cover 
the Companies' estimated cost for the federal income tax treatment of 
deferred acquisition costs.
    4. In the Omnibus Budget Reconciliation Act of 1990, Congress 
amended the Internal Revenue Code of 1986 (the ``Code'') by, among 
other things, enacting Section 848 thereof. Section 848 changed how a 
life insurance company must compute its itemized deductions from gross 
income for federal income tax purposes. Section 848 requires an 
insurance company to capitalize and amortize over a period of ten years 
part of the company's general expenses for the current year. Under 
prior law, these general expenses were deductible in full from the 
current year's gross income.
    5. The amount of deductions that must be capitalized and amortized 
over ten years rather than deducted in the year incurred is based 
solely upon ``net premiums'' received in connection with certain types 
of insurance contracts. Section 848 of the Code defines ``net premium'' 
for a type of contract as gross premiums received by the insurance 
company on the contracts minus return premiums and premiums paid by the 
insurance company for reinsurance of its obligations under such 
contracts. Applicants state that the effect of Section 848 is to 
accelerate the realization of income from insurance contracts covered 
by that Section, and, accordingly, the payment of taxes on the income 
generated by those contracts.
    6. The amount of general deductions that must be capitalized 
depends upon the type of contract to which the premiums received relate 
and varies according to a schedule set forth in Section 848. Applicants 
state that the Contracts are ``specified insurance contracts'' that 
fall into the category of life insurance contracts, and under Section 
848, 7.7% of the year's net premiums received must be capitalized and 
amortized.
    7. Applicants state that the increased tax burden on the Companies 
resulting from Section 848 may be quantified as follows: For each 
$10,000 of net premiums received by the Companies under the Contracts 
in a given year, the Companies' general deductions are reduced by 
$731.50 or (a) $770 (7.7% of $10,000) minus (b) $38.50 (one-half year's 
portion of the ten year amortization). This leaves $731.50 ($770 minus 
$38.50) subject to taxation at the corporate tax rate of 35%. This 
results in an increase in tax for the current year of $256.03 (.35 x 
$731.50). This increase will be partially offset by deductions that 
will be allowed during the next ten years as a result of amortizing the 
remainder of the $770 ($77 in each of the following nine years and 
$38.50 in the tenth year).
    8. In the business judgment of the Companies, a discount rate of 8% 
is appropriate for use in calculating the present value of the 
Companies' future tax deductions resulting from the amortization 
described above. Applicants state that the Companies seek an after tax 
rate of return on the investment of their capital of 8%. To the extent 
that capital must be used by the Companies to meet their increased 
federal tax burden under Section 848 resulting from the receipt of 
premiums, such capital is not available to the Companies for 
investment. Thus, Applicants argue, the cost of capital used to satisfy 
the Companies' increased federal income tax burden under Section 848 
is, in essence, the Companies' after tax rate of return on capital; 
and, accordingly, the rate of return on capital is appropriate for use 
in this present value calculation.
    9. The Companies recognize that a charge of 1.25%, or, a charge at 
any level, could conceivably exceed the tax burden if, in the future, 
the Companies' corporate tax rate or targeted after tax rate of return 
were reduced. The Companies submit that, while it is difficult to 
predict, with certainty, whether or the extent to which the rate will 
be reduced, a measure of comfort is provided that the calculation of 
the Companies' increased tax burden attributable to the receipt of 
premiums will continue to be reasonable over time, even if the 
corporate tax or the targeted after tax rate of return applicable to 
the Companies is reduced. The Contracts provide that the Companies can 
decrease the charge under such circumstances. The Companies undertake 
to monitor the tax burden imposed on them and to reduce the charge to 
the extent of any significant decrease in the tax burden.
    10. In determining the after tax rate of return used in arriving at 
the 8% discount rate, Applicants state that the Companies considered a 
number of factors, including: market interest rates; the Companies' 
anticipated long term growth rate; the risk level for this type of 
business; inflation; and available information about the rates of 
return obtained by other life insurance companies. The Companies 
represent that such factors are appropriate factors to consider in 
determining the Companies' cost of capital. Applicants state that the 
Companies first project their future growth rate based on the sales 
projections, the current interest rates, the inflation rate, and the 
amount [[Page 24959]] of capital that the Companies can provide to 
support such growth. The Companies then use the anticipated growth rate 
and the other factors enumerated above to set a rate of return on 
capital that equals or exceeds this rate of growth. Of these other 
factors, market interest rates, the acceptable risk level, the surplus 
level required by ratings agencies, and the inflation rate receive 
significantly more weight than information about the rates of return 
obtained by other companies. Applicants state that the Companies seek 
to maintain a ratio of capital to assets that is established based on 
the Companies' judgment of the risks represented by various components 
of the Companies' assets and liabilities. Applicants state that 
maintaining the ratio of capital to assets is critical to offering 
competitively priced products and, as to the Companies, to maintaining 
a competitive rating from various rating agencies. Consequently, 
Applicants state that the Companies' capital should grow at least at 
the same rate as do the Companies' assets.
    11. Applying the 8% discount rate, and assuming a 35% corporate 
income tax rate, the present value of the tax effect of the increased 
deductions allowable in the following ten years amounts to a federal 
income tax savings of $174.60. Thus, the present value of the increased 
tax burden resulting from the effect of Section 848 on each $10,000 of 
net premiums received under the Contracts is $81.43, i.e., $256.03 
minus $174.60.
    12. State premium taxes are deductible in computing federal income 
taxes. Thus, the Companies do not incur incremental federal income tax 
when they pass on state premium taxes to owners of the Contracts. 
Conversely, federal income taxes are not deductible in computing the 
Companies' federal income taxes. To compensate the Companies fully for 
the impact of Section 848, therefore, it would be necessary to allow 
them to impose an additional charge that would make them whole not only 
for the $81.43 additional federal income tax burden attributable to 
Section 848 but also for the federal income tax on the additional 
$81.43 itself. This federal income tax can be determined by dividing 
$81.43 by the complement of the 35% federal corporate income tax rate, 
i.e., 65%, resulting in an additional charge of $125.28 for each 
$10,000 of net premiums, or 1.25%.
    13. Based on prior experience, the Companies expect that all of 
their current and future deductions will be fully taken. It is the 
Companies' judgment that a charge of 1.25% would reimburse them for the 
impact of Section 848 on the Companies' federal income tax liabilities. 
Applicants represent that the charge to be deducted by the Companies 
pursuant to the relief requested is reasonably related to the increased 
federal income tax burden under Section 848, taking into account the 
benefit to the Companies' of the amortization permitted by Section 848, 
and the use by the Companies' of a discount rate of 8% in computing the 
future deductions resulting from such amortization, such rate being the 
equivalent of the Companies' cost of capital.
    14. While the application states that the Companies believe that a 
charge of 1.25% of premium payments would reimburse them for the impact 
of Section 848 (as currently written) on the Companies' federal income 
tax liabilities, the application also states, however, that the 
Companies believe that they will have to increase this charge if any 
future change in, or interpretation of Section 848, or any successor 
provision, results in an increased federal income tax burden due to the 
receipt of premiums. Such an increase could result from a change in the 
corporate federal income tax rate, a change in the 7.7% figure, or a 
change in the amortization period.

Applicants' Legal Analysis

    1. Applicants request an order of the Commission pursuant to 
Section 6(c) exempting them from the provisions of Section 27(c)(2) of 
the 1940 Act and Rules 6e-2(c)(4)(v) and 6e-3(T)(c)(4)(v) thereunder to 
the extent necessary to permit deductions to be made from premium 
payments received in connection with the Contracts. The deductions 
would be in an amount that is reasonable in relation to the Companies' 
increased federal income tax burden related to the receipt of such 
premiums. Applicants further request an exemption from Rule 6e-
3(T)(c)(4)(v) of the 1940 Act to permit the proposed deductions to be 
treated as other than ``sales load'' for the purposes of Section 27 of 
the 1940 Act and the exemptions from various provisions of that Section 
found in Rule 6e-3(T)(b)(13).
    2. Section 6(c) of the 1940 Act provides, in pertinent part, that 
the Commission may, by order upon application, conditionally or 
unconditionally exempt any person, security or transaction from any 
provision of the 1940 Act if and to the extent that such exemption is 
necessary or appropriate in the public interest and consistent with the 
protection of investors and the purposes fairly intended by the policy 
and the provisions of the 1940 Act.

Section 27(c)(2) and Rules 6e-3(T)(c)(4) and 6e-2(c)(4)(v)

    1. Section 27(c)(2) of the 1940 Act prohibits the sale of periodic 
payment plan certificates unless the proceeds of all payments (except 
such amounts as are deducted for sales load) are held under an 
indenture or agreement containing in substance the provisions required 
by Sections 26(a)(2) and 26(a)(3) of the 1940 Act. Certain provisions 
of Rule 6e-3(T) provide a range of exemptive relief for the offering of 
flexible premium variable life insurance policies such as the 
Contracts. Rule 6e-3(T)(b)(13)(iii) provides, subject to certain 
conditions, exemptions from Section 27(c)(2) that include permitting a 
payment of certain administrative fees and expenses, the deduction of a 
charge for certain mortality and expense risks, and the ``deduction of 
premium taxes imposed by any State or other governmental entity.''
    2. Rule 6e-2(c)(4)(v) defines ``sales load'' charged on any payment 
as the excess of the payment over certain specified charges and 
adjustments, including ``a deduction approximately equal to state 
premium taxes.'' Rule 6e-3(T)(c)(4)(v) defines ``sales load'' charged 
during a contract period as the excess of any payments made during the 
period over the sum of certain specified charges and adjustments, 
including ``a deduction for and approximately equal to state premium 
taxes.''
    3. Applicants submit that the deduction for federal income tax 
charges, proposed to be deducted in connection with the Contracts, is 
akin to a state premium tax charge in that it is an appropriate charge 
related to the Companies' tax burden attributable to premiums received. 
Thus, Applicants submit that the proposed deduction be treated as other 
than sales load, as is a state premium tax charge, for purposes of the 
1940 Act.
    4. Applicants argue that the requested exemptions from Rules 6e-
2(c)(4) and 6e-3(T)(c)(4) are necessary in connection with Applicants' 
reliance on certain provisions of Rules 6e-2(b)(13) and 6e-3(T)(b)(13), 
and particularly on subparagraphs (b)(13)(i) of the Rules, which 
provide exemptions from Sections 27(a)(1) and 27(h)(1) of the 1940 Act. 
Issuers and their affiliates may only rely on Rules 6e-2(b)(13)(i) or 
6e-3(T)(b)(13)(i) if they meet the respective Rule's alternative 
limitations on sales load as defined in Rules 6e-2(c)(4) or Rule 6e-
3(T)(c)(4). Applicants state that, depending upon the load structure of 
a particular Contract, these [[Page 24960]] alternative limitations may 
not be met if the deduction for the increase in an issuer's federal tax 
burden is included in sales load. Although a deduction for an insurance 
company's increased federal tax burden does not fall squarely within 
any of the specified charges or adjustments which are excluded from the 
definition of ``sales load'' in Rules 6e-2(c)(4) and 6e-3(T)(c)(4), 
Applicants state that they have found no public policy reason for 
including these deductions in ``sales load''.
    5. The public policy that underlies Rules 6e-2(b)(13)(i) and 6e-
3(T)(b)(13)(i), like that which underlies Sections 27(a)(1) and 
27(h)(1) of the 1940 Act, is to prevent excessive sales loads from 
being charged in connection with the sale of periodic payment plan 
certificates. Applicants submit that the treatment of a federal income 
tax charge attributable to premium payments as sales load would not in 
any way further this legislative purpose because such a deduction has 
no relation to the payment of sales commissions or other distribution 
expenses. Applicants state that the Commission has concurred with this 
conclusion by excluding deductions for state premium taxes from the 
definition of ``sales load'' in Rules 6e-2(c)(4) and 6e-3(T)(c)(4).
    6. Applicants assert that the source for the definition of ``sales 
load'' found in the Rules supports this analysis. Applicants state that 
the Commission's intent in adopting such provisions was to tailor the 
general terms of Section 2(a)(35) of the 1940 Act to variable life 
insurance contracts. Just as the percentage limits of Sections 27(a)(1) 
and 27(h)(1) depend on the definition of ``sales load'' in Section 
2(a)(35) for their efficacy, the percentage limits in Rules 6e-
2(b)(13)(i) and 6e-3(T)(b)(13)(i) depend on Rules 6e-2(c)(4) and 6e-
3(T)(c)(4), respectively, which do not depart, in principle, from 
Section 2(a)(35).
    7. Section 2(a)(35) excludes deductions from premiums for ``issue 
taxes'' from the definition of ``sales load'' under the 1940 Act. 
Applicants submit that this suggests that it is consistent with the 
policies of the 1940 Act to exclude from the definition of ``sales 
load'' in Rules 6e-2 and 6e-3(T) deductions made to pay an insurance 
company's costs attributable to its tax obligations. Section 2(a)(35) 
also excludes administrative expenses or fees that are ``not properly 
chargeable to sales or promotional activities.'' Applicants argue that 
this suggests that the only deductions intended to fall within the 
definition of ``sales load'' are those that are properly chargeable to 
such activities. Because the proposed deductions will be used to 
compensate the Companies for their increased federal income tax burden 
attributable to the receipt of premiums, and are not properly 
chargeable to sales or promotional activities, this language in Section 
2(a)(35) is another indication that not treating such deductions as 
``sales load'' is consistent with the policies of the 1940 Act.
    8. Applicants assert that the terms of the relief requested with 
respect to Contracts to be issued through the Accounts are consistent 
with the standards enumerated in Section 6(c) of the 1940 Act. Without 
the requested relief, the Companies would have to request and obtain 
exemptive relief for each Contract to be issued through one of the 
Other Accounts. Applicants state that such additional requests for 
exemptive relief would present no issues under the 1940 Act not already 
addressed in this request for exemptive relief.
    9. Applicants assert that the requested relief is appropriate in 
the public interest because it would promote competitiveness in the 
variable life insurance market by eliminating the end for the Companies 
to file redundant exemptive applications, thereby reducing 
administrative expenses and maximizing efficient use of resources. The 
delay and expense involved in having to seek repeated exemptive relief 
would impair the ability of the Companies to take advantage fully of 
business opportunities as those opportunities arise. Additionally, 
Applicants state that the requested relief is consistent with the 
purposes of the 1940 Act and the protection of investors for the same 
reasons. If the Companies were required to seek exemptive relief 
repeatedly with respect to the same issues addressed in this 
application, investors would not receive any benefit or additional 
protection thereby and might be disadvantaged as a result of increased 
overhead expenses for the Companies.

Conditions for Relief

    1. Applicants represent that the Companies will monitor the 
reasonableness of the charge to be deducted by the Companies pursuant 
to the requested exemptive relief.
    2. Applicants represent that the registration statement for each 
Contract under which the charge referenced in paragraph one of this 
section is deducted will: (i) Disclose the charge; (ii) explain the 
purpose of the charge; and (iii) state that the charge is reasonable in 
relation to the Companies' increased federal income tax burden under 
Section 848 resulting from the receipt of premiums.
    3. Applicants represent that the registration statement for each 
Contract under which the charge referenced in paragraph one of this 
section is deducted will contain as an exhibit an actuarial opinion as 
to: (i) The reasonableness of the charge in relation to the Companies' 
increased federal income tax burden under Section 848 resulting from 
the receipt of premiums; (ii) the reasonableness of the after tax rate 
of return that is used in calculating such charge; and (iii) the 
appropriateness of the factors taken into account by the Companies in 
determining the after tax rate of return.

Rules 6e-2(a)(2) and 6e-2(b)(15)

    1. Applicants also request that the Commission, pursuant to Section 
6(c) of the 1940 Act, grant exemptions from Rules 6e-2(a)(2) and 6e-
2(b)(15) to the extent necessary to permit the Accounts to issue 
flexible premium variable life insurance policies under Rule 6e-3(T) 
without the Accounts losing the ability to rely on Rule 6e-2 with 
regard to single premium and scheduled premium variable life insurance 
policies issued by the Accounts.
    2. Rules 6e-2(a)(2), in effect, requires that separate accounts 
such as the Accounts derive their assets, other than advances by the 
life insurance company, ``solely from the sale of variable life 
insurance contracts'' as that term is defined in the Rule. Rule 6e-2 
defines a variable life insurance contract differently than Rule 6e-
3(T) defines a flexible premium life insurance contract. Thus, 
Applicants note, a separate account that funds single premiums and 
scheduled premium variable life insurance contracts and flexible 
premium life insurance contracts would not be deemed to have its assets 
derived solely from the sale of ``variable life insurance contracts.'' 
Additionally, Applicants note that the exemptions afforded by Rules 6e-
2(b)(15) are available only with respect to the ``variable life 
insurance separate accounts'' contemplated by Rule 6e-2, i.e., separate 
accounts that fund only scheduled premium variable life insurance 
contracts.
    3. Applicants argue that no policy reason would justify prohibiting 
the use of the same Account as a funding vehicle for Contracts relying 
on Rule 6e-2 and Rule 6e-3(T). Applicants represent that the interests 
of flexible payment variable life policyholders and scheduled payment 
variable life policyholders and the regulatory frameworks of Rules 6e-2 
and 6e-3(T) are sufficiently parallel that the use of 
[[Page 24961]] the same separate account to fund both types of policies 
should not prejudice the owners of any of the Contracts. Applicants 
also argue that the increased pooling, diversification, and economies 
of scale realized from the use of an Account should benefit the owners 
of the Contracts.
    4. Applicants believe that the terms of the relief with respect to 
Contracts funded by Account L, MONY Account L or the Other Accounts are 
consistent with the standards enumerated in Section 6(c) of the 1940 
Act. Without the requested relief, Applicants state that they would 
have to request and obtain exemptive relief in connection with the 
Contracts to the extent required. Any such additional requests for 
exemption, Applicants submit, would present no issues under the 1940 
Act not already addressed in the application.
    5. Applicants submit that the requested relief from Rules 6e-
2(a)(2) and 6e-2(b)(15) is appropriate in the public interest because 
the relief will promote competitiveness in the variable life insurance 
market by eliminating the need for the Companies to file redundant 
exemptive applications, thereby reducing the Companies' administrative 
expenses and maximizing the efficient use of resources. Applicants 
argue that the delay and expense involved in having to repeatedly seek 
exemptive relief would impair the ability of the Companies to take 
advantage effectively of business opportunities as those opportunities 
arise. Applicants further submit that the requested relief is 
consistent with the purposes of the 1940 Act and the protection of 
investors for the same reasons. Thus, Applicants believe that the 
requested exemptions are appropriate in the public interest and 
consistent with the protection of investors and the purposes fairly 
intended by the policy and provisions of the 1940 Act.

Conclusion

    Applicants submit that, for the reasons and upon the facts set 
forth above, the requested exemptions from Section 27(c)(2) of the 1940 
Act and Rules 6e-2(c)(4)(v), 6e-3(T)(c)(4)(v), 6e-2(a)(2) and 6e-
2(b)(15) thereunder to: (a) permit the Companies to deduct 1.25% of 
premium payments under the Contracts; and (b) to permit any of the 
Accounts to derive its assets from flexible premium, single premium and 
scheduled premium variable life insurance policies, and to nevertheless 
qualify as a variable life insurance separate account for the purposes 
of Rule 6e-2, meet the standards set forth in Section 6(c) of the 1940 
Act. In this regard, Applicants assert that granting the relief 
requested in the application would be appropriate in the public 
interest and consistent with the protection of investors and the 
purposes fairly intended by the policy and provisions of the 1940 Act.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-11513 Filed 5-9-95; 8:45 am]
BILLING CODE 8010-01-M