[Federal Register Volume 61, Number 195 (Monday, October 7, 1996)]
[Notices]
[Pages 52480-52483]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-25623]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37744; File No. SR-Amex-96-27]
Self-Regulatory Organizations; Order Granting Approval of a
Proposed Rule Change and Notice of Filing and Order Granting
Accelerated Approval of Amendment Nos. 1 and 2 to the Proposed Rule
Change by the American Stock Exchange, Inc. Relating to Healthcare/
Biotechnology Market Index Target-Term Securities (``MITTS'')
September 27, 1996.
I. Introduction
On July 15, 1996, the American Stock Exchange, Inc. (``Amex'' or
``Exchange''), pursuant to Section 19(b)(1) of the Securities Exchange
Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ filed with the
Securities and Exchange Commission (``SEC'' or ``Commission'') a
proposed rule change to list and trade Market Index Target-Term
Securities (``MITTS''),\3\ the return on which is based upon an equal-
dollar weighted portfolio of 26 healthcare/biotechnology industry
securities (``H/B Index'' or ``Index'').\4\ Notice of the proposal
appeared in the Federal Register on July 24, 1996.\5\ No comment
letters were received on the proposed rule change. On September 6,
1996, the Amex filed Amendment No. 1 to the proposed rule change.\6\ On
September 17, 1996, the Amex filed Amendment No. 2 to the proposal.\7\
This order approves the proposed rule change, as amended.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ ``MITTS'' and ``Market Index Target-Term Securities'' are
service marks of Merrill Lynch & Co., Inc. (``Merrill Lynch'').
\4\ Initially, the H/B Index was comprised of 29 stocks. In
Amendment No. 1 the Exchange deleted three stocks from the Index.
See Amendment No. 1, infra note 6. As of July 31, 1996 the Index was
comprised of the stocks of the following 26 issuers: Amgen, Inc.,
Apria Healthcare Group, Inc., Baxter International, Inc., Beverly
Enterprises, Biogen, Inc., Chiron Corporation, Columbia/HCA
Healthcare Corporation, Emcare Holdings, Inc., Genzyme Corporation,
Genesis Health Ventures, Inc., Health Management Associates, Inc.,
Healthsource, Inc., Healthsouth Corporation, Humana, Inc., Johnson &
Johnson, Medpartner/Mullikin, Inc., Neuromedical Systems, Inc.,
Olsten Corporation, Ornda Healthcorp., Oxford Health Plans, Inc.,
Phycor, Inc., Quorum Health Group, Inc., Renal Treatment Centers,
Inc., Tenet Healthcare Corporation, Total Renal Care Holdings, Inc.,
and United Healthcare Corporation. According to the Exchange as of
September 13, 1996, the market capitalizations of these companies
ranged from $207 million to $65.6 billion, and average monthly
trading volumes over the preceding six month period ranged from 1.44
million to 52.21 million shares.
\5\ See Securities Exchange Act Release No. 37447 (July 17,
1996), 61 FR 38485 (July 24, 1996).
\6\ In Amendment No. 1 the Exchange revises the list of
component securities in the H/B Index by deleting the stocks of
Abbott Laboratories, Inc., Caremark International, Inc., and
Horizon/CMS Healthcare Corporation. Amendment No. 1 also alters the
original proposal to provide that adjustments to the share
multiplier will not be made for rights offerings, distributions,
recapitalizations, expropriation or nationalization of a foreign
issuer or the imposition of certain foreign taxes on shareholders of
a foreign issuer. Additionally, Amendment No. 1 provides that H/B
MITTS will be traded under the Exchange's equity rules, subject to
equity margin requirements, and subject to Amex Rule 411, as
described more fully herein. Amendment No. 1 also provides that the
H/B Mitts are subject to continued listing provisions set forth in
Sections 1001 through 1003 in the Exchange's Company Guide. The
Exchange intends to submit a proposed rule change in the near future
to provide continued listing standards that apply specifically to
hybrid securities such as the H/B Mitts. See Letter from Claire P.
McGrath, Managing Director and Special Counsel, Derivative
Securities, Amex, to Livette Lopez, Assistant Director, Office of
Market Supervision (``OSM''), Division of Market Regulation
(``Division''), Commission, dated September 4, 1996 (``Amendment No.
1'').
\7\ In Amendment No. 2, the Amex changes the proposal to provide
that the share multiplier of each component also will remain
constant in the event of a merger, consolidation, dissolution or
liquidation of an issuer. See Letter from Claire P. McGrath,
Managing Director and Special Counsel, Derivative Securities, Amex,
to Ivette Lopez, Assistant Director, OMS, Division, Commission,
dated September 13, 1996 (``Amendment No. 2'').
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II. Description of the Proposal
Under Section 107A of the Amex Company Guide, the Exchange may
approve for listing and trading securities which cannot be readily
categorized under the listing criteria for common and preferred stocks,
bonds, debentures, or warrants.\8\ The Amex proposes to list for
trading under Section 107A of the Company Guide, MITTS based on the H/B
Index (``H/B MITTS'').\9\ The H/B Index will be determined, calculated
and maintained solely by the Amex.\10\
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\8\ See Securities Exchange Act Release No. 27753 (March 1,
1990) (``Hybrid Approval Order'').
\9\ The Commission has approved the listing and trading on the
New York Stock Exchange of MITTS based upon portfolios of securities
representing (1) telecommunications companies, (2) European
companies, (3) health care companies, (4) U.S. real estate
investment trusts, and (5) restructuring companies. See Securities
Exchange Act Release Nos. 32840 (September 2, 1993), 58 FR 47485
(September 9, 1993); 33368 (December 22, 1993), 58 FR 68975
(December 29, 1993); 34655 (September 12, 1994), 59 FR 47966
(September 19, 1994); 34691 (September 20, 1994), 59 FR 49264
(September 27, 1994); and 34692 (September 20, 1994), 59 FR 49267
(September 27, 1994) (``MITTS Approval Orders''). The Commission has
also approved the listing and trading on the Amex of hybrid
securities similar to MITTS, based upon portfolios of securities
representing various industries, including, among others, (1)
telecommunications companies, (2) banking industry stocks, (3) real
estate investment trusts, and, most recently, (4) the ten highest
yielding stocks in the Dow Jones Industrial Average. See Securities
Exchange Act Release Nos. 33495 (January 19, 1994), 59 FR 3883
(January 27, 1994); 34848 (October 17, 1994), 59 53217 (October 21,
1994); 36130 (August 22, 1995), 60 FR 44917 (August 29, 1995); and
37533 (August 7, 1996) 61 FR 42075 (August 13, 1996).
\10\ The Ending Portfolio Value, however, will be determined by
Merrill, Lynch, Pierce, Fenner & Smith, Incorporated (``Calculation
Agent''). See infra note 14.
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The MITTS will conform to the initial listing guidelines under
Section 107A \11\ and continued listing guidelines under Sections 1001-
1003 \12\ of the Company
[[Page 52481]]
Guide. MITTS are non-callable senior hybrid debt securities of Merrill
Lynch that provide for a single payment at maturity, and will bear no
periodic payments of interest. H/B MITTS will entitle the owner at
maturity to receive the principal amount, plus an amount based upon the
percentage change between the ``Benchmark Portfolio Value'' and the
``Ending Portfolio Value. `` \13\ Because the cash amount investors
will receive at settlement is based on the difference between the
Ending Portfolio Value and the Benchmark Portfolio Value, beneficial
owners of H/B Mitts will receive a cash amount only to the extent the
Ending Portfolio Value exceeds the Starting Portfolio Value by 12% to
18%. The ``Ending Portfolio Value'' is the value of the H/B Index upon
the expiration of the H/B MITTS approximately five years from the
pricing date.\14\ The Ending Portfolio Value will be used in
calculating the amount owners will receive upon maturity.
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\11\ The initial listing standards for MITTS require: (1) a
minimum public distribution of one million units; (2) a minimum of
400 shareholders; (3) a market value of at least $4 million; and (4)
a term of at least one year. In addition, the listing guidelines
provide that the issuer have assets in excess in excess of $100
million, stockholders's equity of at least $10 million, and pre-tax
income of at least $750,000 in the last fiscal year or in two of the
three prior fiscal years. In the case of an issuer which is unable
to satisfy the earnings criteria stated in Section 101 of the
Company Guide, the Exchange will require the issuer to have the
following: (1) assets in excess of $200 million and stockholders'
equity of at least $10 million; or (2) assets in excess of $100
million and stockholders' equity of at least $20 million.
\12\ The Exchange's continued listing guidelines are set forth
in Sections 1001 through 1003 of Part 10 to the Exchange's Company
Guide. Section 1002(b) of the Company Guide states that the Exchange
will consider removing from listing any security where, in the
opinion of the Exchange, it appears that the extent of public
distribution or aggregate market value has become so reduced to make
further dealings on the Exchange inadvisable. With respect to
continued listing guidelines for distribution of the H/B MITTS, the
Exchange will rely, in part, on the guidelines for bonds in Section
1003(b)(iii). Section 1003(b) provides that the Exchange will
normally consider suspending dealings in, or removing from the list,
a security if the aggregate market value or the principal amount of
bonds publicly held is less than $400,000. The Exchange is in the
process of developing continued listing standards that apply
specifically to hybrid securities such as the MITTS proposed herein.
If the Exchange considers delisting the H/B MITTS prior to adopting
its own guidelines, the Exchange would consider the NYSE's recently
adopted continued listing standards when making its decision. These
guidelines contain minimum criteria for public holders, aggregate
market value, and publicly held shares. See Securities Exchange Act
Release No. 37238 (May 22, 1996) (Order approving NYSE continued
listing guidelines for hybrid securities). See also Amendment No. 1,
supra note 6.
\13\ The Benchmark Portfolio Value will be 12% to 18% (the
actual percentage will be determined on the date the MITTS are
priced by Merrill Lynch for initial sale to the public) greater than
the ``Starting Portfolio Value'' which will be set at 100.
\14\ The Ending Portfolio Value, as determined by the
Calculation Agent, will equal the average (i.e. arithmetic mean) of
the closing values of the portfolio on certain days, or if certain
events occur, the closing value of the portfolio on a single day
prior to the maturity of the securities.
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H/B MITTS are cash-settled in U.S. dollars \15\ and do not give the
holder any right to receive a portfolio security or any other ownership
right or interest in the portfolio securities, although the return on
the investment is based on the aggregate portfolio value of the H/B
Index securities.
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\15\ See Amendment No. 1, supra note 6.
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Components of the H/B Index approved pursuant to this filing will
meet the following criteria: (1) A minimum market value of at least 75%
million, except that up to 10% of the component securities in the Index
may have a market value of $50 million; (2) average monthly trading
volume in the last six months of not less than 1,000,000 shares, except
that up to 10% of the component securities in the Index may have an
average monthly trading volume of 500,000 shares or more in the last
six months; (3) 90% of the Index's numerical value and at least 80% of
the total number of component securities will meet the then current
criteria for standardized option trading set forth in Exchange Rule
915; and (4) all component stocks will either be listed on the Amex,
the New York Stock Exchange, or traded through the facilities of the
National Association of Securities Dealers Automated Quotation System
and reported National Market System securities.
As of September 13, 1996, the market capitalizations of the initial
portfolio of securities representing the Index ranged from a high of
$65.6 billion to a low of $207 million. The average monthly trading
volume for the last six months, as of the same date, ranged from a high
of 52.21 million shares to a low of 1.44 million shares.
At the outset, each of the securities in the H/B Index will
represent approximately an equal percentage of the Starting Portfolio
Value of the Index. Specifically, each security included in the
portfolio will be assigned a multiplier on the date of issuance so that
the security represents approximately an equal percentage of the value
of the entire portfolio on the date of issuance (i.e. the Index will be
``equal-dollar weighted.'') The multiplier indicates the number of
shares (or fraction of one share) of a security, given its market price
on an exchange or through NASDAQ, to be included in the calculation of
the portfolio. Accordingly, each of the 26 companies included in the
Index initially will represent approximately 3.84 percent of the total
portfolio at the time of issuance. The Index initially will be set to
provide a Starting Portfolio Value of 100.00 at the close of trading on
the day preceding its selection. The value of the Index at any time
will equal the sum of the products of the current market price for each
stock underlying the Index and the applicable share multiplier.
The multiplier of each component stock in the Index will remain
fixed unless adjusted for certain corporate events, such as payment of
a dividend other than an ordinary cash dividend, a distribution of
stock of another issuer to its shareholders, stock split, reverse stock
split, or reorganization.\16\ In these limited circumstances, the
multiplier of the affected security in the Index may be adjusted to
maintain the component's relative weight in the Index at the level
immediately prior to the corporate action. In all cases, the multiplier
will be adjusted, if necessary, to ensure Index continuity.
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\16\ See Amendment Nos. 1 and 2, supra notes 6 and 7.
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If the issuer of a stock included in the Index were to no longer
exist, whether by reason of a merger, acquisition or similar type of
corporate transaction, a value equal to the stock's final value will be
assigned to the stock for the purpose of calculating the Index. For
example, if a company included in the Index were acquired by another
company, a value will be assigned to the company's stock equal to the
value per share at the time the acquisition occurred. If the issuer of
stock included in the Index is in the process of liquidation or subject
to a bankruptcy proceeding, insolvency, or other similar adjudication,
such security will continue to be included in the Index so long as a
market price for such security is available. If a market price is no
longer available for an Index stock due to circumstances including but
not limited to, liquidation, bankruptcy, insolvency, or any other
similar proceeding, then the security will be assigned a value of zero
when calculating the Index for so long as no market price exists for
that security.
The Exchange will calculate the Index continuously and, similar to
other stock index values published by the Exchange, the value of the
Index will be disseminated every 15 seconds over the Consolidated Tape
Association's Network B. The Index value will equal the sum of the
products of the most recently available market prices and the
applicable multipliers for the component securities.
H/B MITTS may not be redeemed prior to maturity and are not
callable by the issuer.\17\ Holders of H/B MITTS will only be able to
cash-out of their investment by selling the security on the Amex.
Because H/B MITTS are linked to a portfolio of equity securities, the
Amex's existing equity floor trading rules will apply to the trading of
H/B MITTS. First, pursuant to Amex Rule 411, the Exchange will impose a
duty of due diligence on its members and member firms to learn the
essential facts relating to every customer prior to
[[Page 52482]]
trading H/B MITTS.\18\ Second, the Amex has adopted a heightened
suitability standard that will apply to recommendations in H/B MITTS.
In particular, before a member or member organization recommends a
transaction in H/B MITTS, such member must make a determination that H/
B MITTS are suitable for such customer and the person making the
recommendation should have a reasonable basis for believing that the
customer has such knowledge and experience in financial matters that he
may reasonably be expected to be capable of evaluating the risks and
the special characteristics of the recommended transaction, and is
financially able to bear the risks of the recommended transaction.\19\
Third, H/B MITTS will be subject to the equity margin rules of the
Exchange.\20\ Finally, in accordance with the Amex's Hybrid Approval
Orders, the Exchange will, prior to trading H/B MITTS, distribute a
circular to the membership providing guidance with regard to member
firm compliance responsibilities, including the heightened suitability
standard discussed above, when handling transactions in H/B MITTS and
highlighting the special risks and characteristics of H/B MITTS.\21\
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\17\ See Amendment No. 1, supra note 6.
\18\ See Amendment No. 1, supra note 6. Amex Rule 411 requires
that every member, member firm or member corporation use due
diligence to learn the essential facts relative to every customer
and to every order or account accepted.
\19\ Telephone Conversation between Sharon Lawson, Assistant
Director, OMS, Division, Commission and Michael T. Bickford, Vice
President, Amex, on September 27, 1996.
\20\ See Amendment No. 1, supra note 6.
\21\ The Commission expects such circular to, among other
things, highlight the payment methodology upon settlement and, in
particular, that investors will only participate in appreciation to
the extent that the Index value appreciates above a certain amount.
See supra note 13 and accompanying text.
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III. Commission Findings and Conclusions
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange, and, in
particular, the requirements of Section 6(b)(5).\22\ Specifically, the
Commission believes that providing for exchange-trading of H/B MITTS
will offer a new and innovative means of participating in the market
for healthcare/biotechnology securities. In particular, the Commission
believes that H/B MITTS will permit investors to gain equity exposure
in such companies, while at the same time, limiting the downside risk
of the original investment. Accordingly, for the same reasons as
discussed in the MITTS Approval Orders, the Commission finds that the
listing and training of H/B MITTS is consistent with the Act.\23\
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\22\ 15 U.S.C. 78f(b)(5).
\23\ See MITTS Approval Orders, supra note 9.
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As with other MITTS products, H/B MITTS are not leveraged
instruments, however, their price will still be derived and based upon
the underlying linked security. Accordingly, the level of risk involved
in the purchase or sale of H/B MITTS is similar to the risk involved in
the purchase or sale of traditional common stock. Nonetheless, because
the final rate of return of a MITTS is derivatively priced, based on
the performance of a portfolio of securities, and investors will only
participate in a limited amount of appreciation,\24\ there are several
issues regarding the trading of this type of product.
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\24\ See supra note 13 and accompanying text.
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The Commission notes that the Exchange's rules and procedures that
address the special concerns attendant to the trading of hybrid
securities will be applicable to H/B MITTS. In particular, by imposing
the hybrid listing standards, heightened suitability, disclosure, and
compliance requirements noted above, the Commission believes the
Exchange has addressed adequately the potential problems that could
arise from the hybrid nature of H/B MITTS. Moreover, the Exchange will
distribute a circular to its membership calling attention to the
specific risks associated with H/B MITTS,\25\ and the suitability
standards which the Amex will apply to transactions in H/B MITTS.\26\
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\25\ See supra note 21.
\26\ See supra note 19 and accompanying text.
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The Commission realizes that H/B MITTS are dependent upon the
individual credit of the issuer, Merrill Lynch. To some extent this
credit risk is minimized by the Exchange's listing standards in Section
107A of the Company Guide which provide that only issuers satisfying
substantial asset and equity requirements may issue securities such as
MITTS. In addition, the Exchange's hybrid listing standards further
require that H/B MITTS have at least $4 million in market value.\27\ In
any event, financial information regarding Merrill Lynch, in addition
to the information on the issuers of the underlying securities
comprising the Index, will be publicly available.\28\
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\27\ See Amex Company Guide Sec. 107A.
\28\ The companies that comprise the Index are reporting
companies under the Act.
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The Commission also has a systemic concern, however, that a broker-
dealer, such as Merrill Lynch, or a subsidiary providing a hedge for
the issuer will incur position exposure. As discussed in the MITTS
Approval Orders, the commission believes this concern is minimal given
the size of the H/B MITTS issuance in relation to the net worth of
Merrill Lynch.\29\
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\29\ See MITTS Approval Orders, supra note 9.
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The Commission also believes that the listing and trading of H/B
MITTS should not unduly impact the market for the underlying securities
comprising the Index. First, the underlying securities comprising the
Index are well-capitalized, highly liquid stocks. Second, because all
of the components of the Index will be equally weighted, no single
stock or group of stocks will likely dominate the Index. Finally, the
issuers of the underlying securities comprising the Index, are subject
to reporting requirements under the Act, and all of the portfolio
securities are either listed or traded on, or traded through the
facilities of, U.S. securities markets. Additionally, the Amex's
surveillance procedures will serve to deter as well as detect any
potential manipulation.
Finally, the Commission notes that the value of the Index will be
disseminated at least once every 15 seconds throughout the trading day.
The Commission believes that providing access to the value of the Index
at least once every 15 seconds throughout the trading day is extremely
important and will provide benefits to investors in the product.
The Commission finds good cause for approving amendment Nos. 1 and
2 to the proposed rule change prior to the thirtieth day after the date
of publication of notice thereof in the Federal Register. Amendment No.
1 revises the initial portfolio of securities comprising the Index by
deleting three of the original proposed securities, includes various
specifications regarding the H/B MITTS, and alters the original
proposal to provide that adjustments to the share multiplier will not
be made for rights offerings, distributions, recapitalizations,
expropriation or nationalization of a foreign issuer or the imposition
of certain foreign taxes on shareholders of a foreign issuer.
Additionally Amendment No. 1 states that H/B MITTS will be traded under
the Exchange's equity rules, subject to equity margin requirements, and
subject to Amex Rule 411, as described above. Amendment No. 1 also
provides that the H/B MITTS are subject to continued listing provisions
set forth in Sections 1001 through 1003 in the Exchange's
[[Page 52483]]
Company Guide. The Commission believes that Amendment No. 1 clarifies
and strengthens the Exchange's proposal by providing additional
information, similar to that provided for other MITTS products
previously approved by the Commission, and by stating the specific
continued listing guidelines that will apply to H/B MITTS which should
help to ensure a minimal level of depth and liquidity for continued
trading of the product on the Amex. The Commission believes that
Amendment No. 2 also clarifies the Exchange's proposal by providing
that no adjustments to the share multiplier for a component stock will
be made in the event of merger, consolidation, dissolution or
liquidation of an issuer. Accordingly, the Commission believes it is
consistent with Section 6(b)(5) of the Act to approve Amendment Nos. 1
and 2 on an accelerated basis.
Interested persons are invited to submit written data, views and
arguments concerning Amendment Nos. 1 and 2. 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, 450 Fifth Street,
NW., Washington, DC. Copies of such filing will also be available for
inspection and copying at the principal office of the Amex. All
submissions should refer to File No. SR-Amex-96-27 and should be
submitted by October 28, 1996.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\30\ that the proposed rule change (File No. SR-Amex-96-27), as
amended, is approved.
\30\ 15 U.S.C. 78S(b)(2)
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\31\
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\31\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-25623 Filed 10-4-96; 8:45 am]
BILLING CODE 8010-01-M