[Federal Register Volume 63, Number 114 (Monday, June 15, 1998)]
[Proposed Rules]
[Pages 32628-32631]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-15827]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-40077, International Series Release No. 1139, File No. 
S7-15-98]
RIN 3235-AH46


Exemption of the Securities of the Kingdom of Belgium Under the 
Securities Exchange Act of 1934 for Purposes of Trading Futures 
Contracts on Those Securities

AGENCY:Securities and Exchange Commission.

ACTION:Proposed rule.

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SUMMARY:The Commission proposes for comment an amendment to Rule 3a12-8 
(``Rule'') that would designate debt obligations issued by the Kingdom 
of Belgium (``Belgium'') as ``exempted securities'' for the purpose of 
marketing and trading of futures contracts on those securities in the 
United States. The amendment is intended to permit futures trading on 
the sovereign debt of Belgium.

DATES:Comments should be submitted by July 15, 1998.

ADDRESSES: All comments should be submitted in triplicate and addressed 
to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 
Fifth Street, NW., Washington, DC 20549. Comments also may be submitted 
electronically at the following E-mail address: [email protected]. 
All comments should refer to File No. S7-15-98; this file number should 
be included on the subject line if e-mail is used. Comment letters will 
be available for public inspection and copying at the Commission's 
Public Reference Room, 450 Fifth Street, NW., Washington, DC 20549. 
Electronically submitted comment letters will also be posted on the 
Commission's Internet web site (http://www.sec.gov).

FOR FURTHER INFORMATION CONTACT: Joshua Kans, Attorney, Office of 
Market Supervision (``OMS''), Division of Market Regulation 
(''Division''), Securities and Exchange Commission (Mail Stop 10-1), 
450 Fifth Street, NW., Washington, DC 20549, at 202/942-0079.

SUPPLEMENTARY INFORMATION:

I. Introduction

    Under the Commodity Exchange Act (``CEA''), it is unlawful to trade 
a futures contract on any individual security unless the security in 
question is an exempted security (other than a municipal security) 
under the Securities Act of 1933 (``Securities Act'') or the Securities 
Exchange Act of 1934 (``Exchange Act''). Debt obligations of foreign 
governments are not exempted securities under either of these statutes. 
The Securities and Exchange Commission (``SEC'' or ``Commission''), 
however, has adopted Rule 3a12-8 (17 CFR 240.3a12-8) (``Rule'') under 
the Exchange Act to designate debt obligations issued by certain 
foreign governments as exempted securities under the Exchange Act 
solely for the purpose of marketing and trading futures contracts on 
those securities in the United States. As amended, the foreign 
governments currently designated in the Rule are Great Britain, Canada, 
Japan, Australia, France, New Zealand, Austria, Denmark, Finland, the 
Netherlands, Switzerland, Germany, the Republic of Ireland, Italy, 
Spain, Mexico, Brazil, Argentina, and Venezuela (the ``Designated 
Foreign Governments''). As a result, futures contracts on the debt 
obligations of these countries may be sold in the United States, as 
long as the other terms of the Rule are satisfied.
    The Commission today is soliciting comments on a proposal to amend 
Rule 3a12-8 to add the debt obligations of the Kingdom of Belgium 
(``Belgium'') to the list of Designated Foreign Governments whose debt 
obligations are exempted by Rule 3a12-8. To qualify for the exemption, 
futures contracts on the debt obligations of Belgium would have to

[[Page 32629]]

meet all the other existing requirements of the Rule.

II. Background

    Rule 3a12-8 was adopted in 1984 \1\ pursuant to the exemptive 
authority in Section 3(a)(12) of the Exchange Act in order to provide a 
limited exception from the CEA's prohibition on futures overlying 
individual securities.\2\ As originally adopted, the Rule provided that 
the debt obligations of Great Britain and Canada would be deemed to be 
exempted securities, solely for the purpose of permitting the offer, 
sale, and confirmation of ``qualifying foreign futures contracts'' on 
such securities. The securities in question were not eligible for the 
exemption if they were registered under the Securities Act or were the 
subject of any American depositary receipt so registered. A futures 
contract on the covered debt obligation under the Rule is deemed to be 
a ``qualifying foreign futures contract'' if the contract is 
deliverable outside the United States and is traded on a board of 
trade.\3\
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    \1\ See Securities Act Release No. 20708 (``Original Adopting 
Release'') (March 2, 1984), 49 FR 8595 (March 8, 1984); Securities 
Exchange Act Release No. 19811 (``Original Proposing Release'') (May 
25, 1983), 48 FR 24725 (June 2, 1983).
    \2\ In approving the Futures Trading Act of 1982, Congress 
expressed its understanding that neither the SEC nor the Commodity 
Futures Trading Commission (``CFTC'') had intended to bar the sale 
of futures on debt obligations of the United Kingdom of Great 
Britain and Northern Ireland to U.S. persons, and its expectation 
that administrative action would be taken to allow the sale of such 
futures contracts in the United States. See Original Proposing 
Release, supra note 1, 48 FR at 24725 (citing 128 Cong. Rec. H7492 
(daily ed. September 23, 1982) (statements of Representatives 
Daschle and Wirth)).
    \3\ As originally adopted, the Rule required that the board of 
trade be located in the country that issued the underlying 
securities. This requirement was eliminated in 1987. See Securities 
Exchange Act Release No. 24209 (March 12, 1987), 52 FR 8875 (March 
20, 1987).
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    The conditions imposed by the Rule were intended to facilitate the 
trading of futures contracts on foreign government securities in the 
United States while requiring offerings of foreign government 
securities to comply with the federal securities laws. Accordingly, the 
conditions set forth in the Rule were designed to ensure that, absent 
registration, a domestic market in unregistered foreign government 
securities would not develop, and that markets for futures on these 
instruments would not be used to avoid the securities law registration 
requirements. In particular, the Rule was intended to ensure that 
futures on exempted sovereign debt did not operate as a surrogate means 
of trading the unregistered debt.
    Subsequently, the Commission amended the Rule to include the debt 
securities issued by Japan, Australia, France, New Zealand, Austria, 
Denmark, Finland, the Netherlands, Switzerland, Germany, Ireland, 
Italy, Spain, Mexico and, most recently, Brazil, Argentina, and 
Venezuela.\4\
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    \4\ As originally adopted, the Rule applied only to British and 
Canadian government securities. See Original Adopting Release, supra 
note 1. In 1986, the Rule was amended to include Japanese government 
securities. See Securities Exchange Act Release No. 23423 (July 11, 
1986), 51 FR 25996 (July 18, 1986). In 1987, the Rule was amendmed 
to include debt securities issued by Australia, France and New 
Zealand. See Securities Exchange Act Release No. 25072 (October 29, 
1987), 52 FR 42277 (November 4, 1987). In 1988, the Rule was amended 
to include debt securities issued by Austria, Denmark, Finland, the 
Netherlands, Switzerland, and West Germany. See Securities Exchange 
Act Release No. 26217 (October 26, 1988), 53 FR 43860 (October 31, 
1988). In 1992 the Rule was again amended to (1) include debt 
securities offered by the Republic of Ireland and Italy, (2) change 
the country designation of ``West Germany'' to the ``Federal 
Republic of Germany,'' and (3) replace all references to the 
informal names of the countries listed in the Rule with references 
to their official names. See Securities Exchange Act Release No. 
30166 (January 8, 1992), 57 FR 1375 (January 14, 1992). In 1994, the 
Rule was amended to include debt securities issued by the Kingdom of 
Spain. See Securities Exchange Act Release No. 34908 (October 27, 
1994), 59 FR 54812 (November 2, 1994). In 1995, the Rule was amended 
to include the debt securities of Mexico. See Securities Exchange 
Act Release No. 36530 (November 30, 1995), 60 FR 62323 (December 6, 
1995). Finally, in 1996, the Rule was amended to include debt 
securities issued by the Federative Republic of Brazil, the Republic 
of Argentina, and the Republic of Venezuela. See Securities Exchange 
Act Release No. 36940 (March 7, 1996) 61 FR 10271 (March 13, 1996).
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III. Discussion

    Belfox c.v./s.c. (``Belfox''), the Belgian company recognized as 
the institution to organize and administer the Belgian Futures and 
Options Exchange (``BELFOX''), has proposed that the Commission amend 
Rule 3a12-8 to include the sovereign debt of Belgium.\5\ BELFOX 
currently lists two futures contracts \6\ overlying Belgian public debt 
securities, and wishes to market and make trading of those products 
available to U.S. investors.
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    \5\ See Letters from Jos Schmitt, President and Chief Executive 
Officer, Belfox, to Arthur Levitt, Jr., Chairman, Commission, dated 
June 27, 1997, to Howard L. Kramer, Senior Associate Director, 
Division, Commission, dated February 10, 1998 (collectively ``Belfox 
petition'').
    \6\ The Belgian long-term government bond future (``BGB 
future'') and the Belgian medium-term government bond future (``BMB 
future''). Id.
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    Under the proposed amendment, the existing conditions set forth in 
the Rule (i.e., that the underlying securities not be registered in the 
United States, the futures contracts require delivery outside the 
United States, and the contracts be traded on a board of trade) would 
continue to apply. Belfox has represented that (1) the securities 
underlying the futures contracts listed on BELFOX are not registered in 
the United States; (2) the two futures contracts overlying Belgian 
public debt securities which BELFOX intends to market to U.S. investors 
are listed exclusively on BELFOX, located in Brussels, Belgium; and (3) 
when the BELFOX listed futures contracts expire, the underlying 
securities are delivered against payment through the clearing system of 
the National Bank of Belgium.\7\
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    \7\ The Belgian public debt securities underlying the two 
futures contracts traded on BELFOX are not represented by physical 
certificates, but appear as entries in an electronic register held 
by the National Bank of Belgium. Id.
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    In the most recent determinations to amend the Rule adding Mexico, 
Brazil, Argentina, and Venezuela, the Commission considered primarily 
whether an active and liquid secondary trading market existed for the 
particular sovereign debt of these countries.\8\ Prior to the addition 
of those countries to the Rule, the Commission considered principally 
whether the particular sovereign debt had been rated in one of the two 
highest rating categories \9\ by at least two nationally recognized 
statistical rating organizations (``NRSROs'').\10\ The Commission will 
continue to consider the existence of a high credit rating in its 
evaluation of an application to amend the Rule, because the Commission 
believes that a high debt rating provides indirect evidence of

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an active and liquid secondary trading market.\11\ Absent a high debt 
rating, the Commission would consider a debt instrument's historical 
trading data.
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    \8\ See, e.g., Securities Exchange Act Release No. 36530 
(November 30, 1995), 60 FR 62323 (December 6, 1995) (amending the 
Rule to add Mexico because the Commission believed that as a whole, 
the market for Mexican sovereign debt was sufficiently liquid and 
deep for the purposes of the Rule); Securities Exchange Act Release 
No. 36940 (March 7, 1996), 61 FR 10271 (March 13, 1996) (amending 
the Rule to add Brazil, Argentina and Venezuela because the 
Commission believed that the market for the sovereign debt of those 
countries was sufficiently liquid and deep for the purposes of the 
Rule).
    \9\ The two highest categories used by Moody's Investor Services 
(``Moody's'') for long-term debt are ``Aaa'' and ``Aa.'' See Moody's 
Investors Service, Rating Definitions (http://www.moodys.com/
ratings/ratdefs.htm). The two highest categories used by Standard 
and Poor's (``S&P'') for long-term debt are ``AAA'' and ``AA.'' See 
Standard & Poor's Global Rating Handbook, ``Issue Credit Rating 
Definitions'' and ``Issuer Credit Rating Definitions'' (February 
1998) (submitted as part of Belfox's petition).
    \10\ See, e.g., Securities Exchange Act Release No. 30166 
(January 6, 1992) 57 FR 1375 (January 14, 1992) (amending the Rule 
to include debt securities issued by Ireland and Italy--Ireland's 
long-term sovereign debt was rated Aa3 by Moody's and AA- by S&P, 
and Italy's long-term sovereign debt was rated Aaa by Moody's and 
AA+ by S&P); and Securities Exchange Act Release No. 34908 (October 
27, 1994), 59 FR 54812 (November 2, 1994) (amending the Rule to 
include Spain, which had long-term debt ratings of Aa2 from Moody's 
and AA from S&P)
    \11\ See, e.g., Securities Exchange Act Release No. 36213 
(September 11, 1995), 60 FR 48078 (September 18, 1995) (proposal to 
add Mexico to list of countries encompassed by rule); Securities 
Exchange Act Release No. 24428 (May 5, 1987), 52 FR 18237 (May 14, 
1987) (proposed amendment, which was not implemented, that would 
have extended the rule to encompass all countries rated in one of 
the two highest categories by at least two NRSROs).
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    Belgian long-term debt meets the debt rating standard. Moody's 
Investors Service (``Moody's'') has assigned an official rating of Aa1 
to long-term local currency denominated \12\ Belgian government 
securities and to long-term foreign currency denominated Belgian 
government securities.\13\ Standard & Poor's (''S&P'') has assigned the 
Kingdom of Belgium a long-term local currency issuer credit rating of 
AAA and a long-term foreign currency issuer credit rating of AA+.\14\
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    \12\ The Belgian public debt is principally denominated in 
Belgian francs (``BEF''). The portion of Belgian public debt 
denominated in foreign currencies was 7.6% in 1996, 11.4% in 1995 
and 14.5% in 1994. The debt instruments that underlie the futures 
contracts currently listed on BELFOX are denominated in Belgian 
francs. Belfox petition, supra note 5.
    \13\ See Moody's Investor Service, Moody's Bond Record at 131-32 
(March 1998); see also Letter from Sosi Vartanesyan, Vice President, 
Moody's, dated January 15, 1998 (submitted as part of Belfox 
petition; confirming Aa1 ratings for Belgian long-term local 
currency denominated government securities and long-term foreign 
currency denominated government securities).
    \14\ See Letter from Konrad Reuss, Director, Standard & Poor's, 
to An De Pauw, Senior Legal Advisor, Belfox, dated Feb. 5, 1998 
(accompanying Belfox petition). The letter explained that those 
``issuer'' credit ratings ``have not been assigned as issue credit 
ratings to any outstanding debt issued by the Kingdom.''
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    The Commission also observes that there appears to exist an active 
and liquid trading market for Belgian issued debt instruments, based on 
the representations in Belfox's petition.\15\ The total Belgian public 
debt outstanding\16\ was equivalent to approximately US$258.92 billion 
as of December 31, 1996, approximately US$256.86 billion in 1995, and 
approximately US$251.64 billion in 1994. Linear bonds (``Obligations 
Lineaires--Lineaire Obligaties'' or ``OLOs''),\17\ which are the only 
type of Belgian public debt instruments underlying the two futures 
contracts (BGB and BMB) currently listed on BELFOX, represented 53.6 
percent of the total amount of Belgian public debt outstanding in 1996, 
50.6 percent in 1995 and 44.6 percent in 1994.\18\ At the end of the 
first quarter of 1997, the total amount of outstanding OLOs was 
equivalent to approximately US$139.89 billion. The total value traded 
in OLOs on an annual basis was equivalent to approximately US$1.86 
trillion in 1996, US$1.7 trillion in 1995, and US$1.3 trillion in 1994. 
The average value traded in OLOs on a daily basis was equivalent to 
approximately US$7.44 billion in 1996, US$6.79 billion in 1995, and 
US$5.23 billion in 1994. The average number of trades on a daily basis 
involving OLOs was approximately 571, 614, and 636 for 1996, 1995 and 
1994, respectively.\19\
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    \15\ The market figures set forth here are found in Belfox's 
petition. U.S. dollar equivalents are based on a conversion rate of 
BEF 37.10 for USD 1.00 (the conversion rate on December 31, 1997). 
Belfox petition, supra note 5.
    \16\ Belgian public debt is comprised of government bonds, 
Treasury bills and various debt instruments of lesser importance, 
such as road fund loans, and municipal and provincial loans. Id.
    \17\ OLOs, which are issued by means of a price auction system, 
have maturities ranging from 1 to 20 years and are available with 
fixed or variable interest rate payments. Only those holding a 
Linear bond account with the National Bank of Belgium may 
participate in the auction for these bonds. The bonds are 
denominated in Belgian francs. Id.
    \18\ The amount of OLOs outstanding was equivalent to 
approximately US$138.79 billion at the end of 1996, US$130.01 
billion in 1995, and US$112.27 billion in 1994. Id.
    \19\ OLOs are traded on the Brussels Stock Exchange and over the 
counter. Id.
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    In light of the above data, the Commission preliminarily believes 
that the debt obligations of Belgium should be subject to the same 
regulatory treatment under the Rule as the debt obligations of the 
Designated Foreign Governments. Moreover, the trading of futures on the 
sovereign debt of Belgium should provide U.S. investors with a vehicle 
for hedging the risks involved in the trading of the underlying 
sovereign debt of Belgium.
    In addition, the Commission preliminarily believes that the 
proposed amendment offers potential benefits for U.S. investors. If 
adopted, the proposed amendment would allow U.S. and foreign boards of 
trade to offer in the United States, and U.S. investors to trade, a 
greater range of futures contracts on foreign government debt 
obligations. The Commission does not anticipate that the proposed 
amendment would result in any direct cost for U.S. investors or others. 
The proposed amendment would impose no recordkeeping or compliance 
burdens, and merely would provide a limited purpose exemption under the 
federal securities laws. The restrictions imposed under the proposed 
amendment are identical to the restrictions currently imposed under the 
terms of the Rule and are designed to protect U.S. investors.
    Section 23(a)(2) of the Exchange Act \20\ requires the Commission 
in amending rules to consider the potential impact on competition. 
Because the proposal is intended to expand the range of financial 
products available in the United States, the Commission preliminarily 
believes that the proposed amendment to the Rule will not impose any 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Exchange Act.
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    \20\ 15 U.S.C. 78w(a)(2).
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IV. Request for Comments

    The Commission seeks comments on the desirability of designating 
the debt securities of Belgium as exempted securities under Rule 3a12-
8. Comments should address whether the trading or other characteristics 
of Belgium's sovereign debt warrant an exemption for purposes of 
futures trading. Commentators may wish to discuss whether there are any 
legal or policy reasons for distinguishing between Belgium and the 
Designated Foreign Governments for purposes of the Rule. The Commission 
also solicits comments on the costs and benefits of the proposed 
amendment to Rule 3a12-8. Specifically, the Commission requests 
commentators to address whether the proposed amendment would generate 
the anticipated benefits, or impose any costs on U.S. investors or 
others. The Commission also requests information regarding the 
potential impact of the proposed rule on the economy on an annual 
basis. If possible, commenters should provide empirical data to support 
their views. Finally, the Commission seeks comments on the general 
application and operation of the Rule given the increased globalization 
of the securities markets since the Rule was adopted.

V. Administrative Requirements

    Pursuant to section 605(b) of the Regulatory Flexibility Act, 5 
U.S.C. 605(b), the Chairman of the Commission has certified that the 
amendment proposed herein would not, if adopted, have a significant 
economic impact on a substantial number of small entities. This 
certification, including the reasons therefor, is attached to this 
release as Appendix A. We encourage written comments on the 
Certification. Commentators are asked to describe the nature of any 
impact on small entities and provide empirical data to support the 
extent of the impact. The Paperwork Reduction Act does not apply 
because the proposed amendment does not impose recordkeeping or 
information collection requirements, or other

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collections of information which require the approval of the Office of 
Management and Budget under 44 U.S.C. 3501, et seq.

VI. Statutory Basis

    The amendment to Rule 3a12-8 is being proposed pursuant to 15 
U.S.C. 78a et seq., particularly sections 3(a)(12) and 23(a), 15 U.S.C. 
78c(a)(12) and 78w(a).

List of Subjects in 17 CFR Part 240

    Reporting and recordkeeping requirements, Securities.

Text of the Proposed Amendment

    For the reasons set forth in the preamble, the Commission is 
proposing to amend part 240 of Chapter II, Title 17 of the Code of 
Federal Regulations as follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

    1. The authority citation for part 240 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77eee, 
77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78f, 78i, 78j, 78j-1, 78k, 
78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 78w, 78x, 78ll(d), 
78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4 and 
80b-11, unless otherwise noted.
* * * * *
    2. Section 240.3a12-8 is amended by removing the word ``or'' at the 
end of paragraph (a)(1)(xviii), removing the ``period'' at the end of 
paragraph (a)(1)(xix) and adding ``; or'' in its place, and adding 
paragraph (a)(1)(xx), to read as follows:


Sec. 240.3a12-8  Exemption for designated foreign government securities 
for purposes of futures trading.

    (a) * * *
    (1) * * *
    (xx) The Kingdom of Belgium.
* * * * *
    By the Commission.

    Dated: June 8, 1998.
Margaret H. McFarland,
Deputy Secretary.

    Note: Appendix A to the Preamble will not appear in the Code of 
Federal Regulations.

Appendix A--Regulatory Flexibility Act Certification

    I, Arthur Levitt, Jr., Chairman of the Securities and Exchange 
Commission, hereby certify, pursuant to 5 U.S.C. 605(b), that the 
proposed amendment to Rule 3a12-8 (``Rule'') under the Securities 
Exchange Act of 1934 (``Exchange Act'') set forth in Securities 
Exchange Act Release No. 40077, which would define the government 
debt securities of the Kingdom of Belgium (``Belgium'') as exempted 
securities under the Exchange Act for the purpose of trading futures 
on such securities, will not have a significant economic impact on a 
substantial number of small entities for the following reasons. 
First, the proposed amendment imposes no record-keeping or 
compliance burden in itself and merely allows, in effect, the 
marketing and trading in the United States of futures contracts 
overlying the government debt securities of Belgium. Second, because 
futures contracts on the nineteen countries whose debt obligations 
are designated as ``exempted securities'' under the Rule, which 
already can be traded and marketed in the U.S., still will be 
eligible for trading under the proposed amendment, the proposal will 
not affect any entity currently engaged in trading such futures 
contracts. Third, because those primarily interested in trading such 
futures contracts are large, institutional investors, neither the 
availability nor the unavailability of these futures products will 
have a significant economic impact on a substantial number of small 
entities, as that term is defined for broker-dealers in 17 CFR 
240.0-10.

    Dated: June 4, 1998.
Arthur Levitt, Jr.,
Chairman.
[FR Doc. 98-15827 Filed 6-14-98; 8:45 am]
BILLING CODE 8010-01-P