[Federal Register Volume 63, Number 233 (Friday, December 4, 1998)]
[Notices]
[Pages 67157-67160]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-32324]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40717; File No. SR-MSRB-97-15]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Order Granting Approval of Proposed Rule Change and Amendment 
No. 1 Relating to Rules G-11, on Sales of New Issue Municipal 
Securities During the Underwriting Period, G-12, on Uniform Practice, 
and G-8, on Books and Records

November 27, 1998.

I. Introduction

    On December 23, 1997, the Municipal Securities Rulemaking Board 
(``Board'' or ``MSRB'') filed with the Securities and Exchange 
Commission (``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend Rules G-11, on sales of 
new issue municipal securities during the underwriting period, G-12, on 
uniform practice, and G-8, on books and records. Notice of the proposed 
rule change appeared in the Federal Register on April 21, 1998.\3\ The 
Commission received two comment letters concerning the proposed rule 
change.\4\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Rel. No. 39873 (April 14, 1998), 
63 FR 19775.
    \4\ Letters from George Brakatselos, Vice President, The Bond 
Market Association, to Secretary, Securities and Exchange 
Commission, dated May 12, 1998 (``TBMA Letter No. 1'') and David B. 
Levy, Director & Associate General Counsel, Capital Markets 
Division, SalomonSmithBarnery, to Secretary, Securities and Exchange 
Commission, dated May 13, 1998 (``Salomon Letter'').
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    The MSRB received one comment letter concerning the proposed rule 
change.\5\ On August 18, 1998, the Board submitted Amendment No. 1 to 
Rule G-11(g)(i) of the proposed rule change on sales of new issue 
municipal securities during the underwriting period. Notice of 
Amendment No. 1 appeared in the Federal Register on September 29, 
1998.\6\ The Commission received one comment letter concerning 
Amendment No. 1.\7\ This order approves the proposed rule change and 
Amendment No. 1.
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    \5\ Letter from Mark Page, Deputy Director and General Counsel, 
Office of Management and Budget and John White, Deputy Comptroller 
for Public Finance, New York City Comptroller's Office, City of New 
York, to Terry L. Atkinson, Chairman, MSRB, dated June 5, 1998 
(``HYC Letter''). The Board concurred with the NYC Letter that Rule 
G-11(g)(1) should not be interpreted to required that a bond 
purchase agreement (``BPA'') be signed within 24 hours of the 
sending of the commitment wire. As the Board would not meet again 
before August 1998, it consented to an extension for Commission 
action until August 31, 1998. Letter from Ronald W. Smith, Senior 
Legal Associate, MSRB, to Mignon McLemore Esq., Division of Market 
Regulation, SEC, dated June 26, 1998.
    \6\ Securities Exchange Act Rel. No. 40456 (September 22, 1998), 
63 FR 51976 (``Amendment No. 1'').
    \7\ Letter from Sarah M. Starkweather, Vice President and 
Associate General Counsel, The Bond Market Association, to Jonathan 
G. Katz, Secretary, SEC, dated October 19, 1998 (``TBMA Letter No. 
2'').
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II. Description of the Proposal and Amendment No. 1

    The proposed rule change requires the managing underwriter of a 
syndicate to maintain a record of all issuer syndicate requirements; 
requires the managing underwriter to complete the allocation of 
securities within 24 hours of the sending of the commitment wire; 
requires the managing underwriter to disclose to syndicate members all 
available designation information; requires the managing underwriter to 
disclose to members of the syndicate, in writing, the amount of any 
portion of the take-down that is directed to each member of the 
syndicate by the issuer; and shortens the deadline for payment of 
designations to 30 calendar days after the issuer delivers the 
securities to the syndicate.
    Amendment No. 1 retains the requirement of the proposed change to 
Rule G-11(g)(i) to complete the allocation of securities within 24 
hours of the sending of the commitment wire. It further provides that, 
if the bond purchase agreement (``BPA'') is not yet signed or if the 
award has not been made at the time allocations are made, the 
allocations are subject to the signing of the BPA or the award of 
bonds. The purchaser must be informed of this fact.

Issuer syndicate requirements

    Issuer requirements involving syndicate formation, order review, 
designation policies and bond allocations have become much more 
prevalent in the municipal securities market. Such requirements are 
significant because they help to determine which dealers, and 
ultimately which investors, obtain the bonds. As issuer syndicate 
requirements can affect the functioning of the syndicate, and at times 
the final costs to the issuer of the new issue, the records of such 
requirements should be maintained so that any problems or concerns 
regarding the functioning of the syndicate arising from these 
requirements can be identified and addressed and the information must 
be provided to syndicate members and others, upon request.
    The proposed rule change amends Rules G-8(a)(viii) and G-11(f) to 
require the managing underwriter to maintain a record of all issuer 
syndicate requirements. If the requirements are in a published 
guideline, the guideline should be maintained by the dealer and 
supplemented by a statement of any additional requirements that arise 
prior to settlement. If the requirements are not in published form, the 
managing underwriter must create a written detailed statement of the 
requirements and maintain the statement in its records. The managing 
underwriter must provide a copy of the published guideline or 
underwriter prepared statement of issuer syndicate requirements to 
syndicate members prior to the first offer of any securities by the 
syndicate. Syndicate members must furnish this summary promptly to 
others, upon request. In addition, the managing underwriter must 
provide the

[[Page 67158]]

issuer with a copy of any such statement for its review.

Disclosure of designation information

    The proposed rule change amends Rule G-11(g) to require that the 
managing underwriter disclose to syndicate members all available 
designation information within 10 business days following the date of 
sale and all information with the sending of the designation checks.

Payment of designations

    The proposed rule change amends Rule G-12(k) to move the deadline 
for payment of designations from 30 business days following delivery of 
the securities to the customer to 30 calendar dates after the issuer 
delivers the securities to the syndicate.

Disclosure of take-down

    A small number of issuers are ``setting aside,'' or holding back, 
at their discretion, a portion of the take-down \8\ to direct to 
syndicate members. As this issuer ``set-aside'' is part of the take-
down, it should be disclosed to syndicate members in the same manner as 
customer designations. The proposed rule change amends Rule G-11(g) to 
require the managing underwriter to disclose to members of the 
syndicate, in writing, the amount of any portion of the take-down that 
is directed to each member of the syndicate by the issuer. Such 
disclosure must be made by the later of 15 business days following the 
date of sale or three business days following receipt by the managing 
underwriter of notification of such set-asides by the issuer.
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    \8\ The takedown is normally the largest component of the 
spread, similar to a commission, which represents the income derived 
from the sale of securities.
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Allocation of securities

    The proposed rule change amends Rule G-11(g) to require the 
managing underwriter to complete the allocation of securities within 24 
hours of the sending of the commitment wire. This amendment attempts to 
address delays in allocations of securities which may be the result of 
issuers and financial advisors failing to review orders and proposed 
allocations in a timely fashion. In case where there is a delay in 
allocation, investors may find it difficult to finalize their portfolio 
positions when their orders remain unfilled for as long as two or more 
days after the end of the order period. Moreover, during volatile 
market conditions, delays in allocations hurt the prospect for a 
successful underwriting.

Amendment No. 1

    The proposed rule change requiring the managing underwriter to 
complete the allocation of securities within 24 hours of the sending of 
the commitment wire implies that the BPA will be signed prior to the 
completion of the allocation. It is possible that allocations may be 
completed (and investors notified of these allocations) prior to the 
signing of the BPA. Amendment No. 1, therefore, revises the proposed 
rule change to include this exception in the rule language.

III. Summary of Comments

    The Commission received two comment letters \9\ concerning the 
proposed rule change and one comment letter \10\ concerning Amendment 
No. 1. The Commission requested and received a response to these 
comments from the MSRB.\11\ The MSRB received one comment letter from 
New York City.\12\ In response to issues raised in this letter, the 
MSRB submitted Amendment No. 1 to the Commission.\13\
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    \9\ See note 4 supra.
    \10\ See note 7 supra.
    \11\ Letter from Ron W. Smith, Senior Legal Associate, MSRB, to 
Mignon McLemore, Attorney, Division of Market Regulation, SEC, dated 
June 10, 1998 (``MSRB Letter''). The TBMA's second letter was 
received after the MSRB Letter. The Commission believes the MSRB's 
letter sufficiently addresses both TBMA letters, because TBMA's 
second letter reiterates much of its submission.
    \12\ See note 5 supra.
    \13\ See note 6 supra.
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    TBMA strongly opposed the proposed amendments which would require 
the managing underwriter to maintain and, where applicable, record all 
issuer requirements involving syndicate formation, order review, 
designation policies, and bond allocations.\14\ Any requirement that 
would result in underwriters spending substantial amounts of time 
preparing documents and obtaining issuer approvals is neither 
productive nor practical.\15\ TBMA suggested that ``issuers seeking to 
impose their requirements on syndicates must take the initiative to 
enunciate such requirements, in writing, and publish them so they are 
available to all who are involved, or considering becoming involved, in 
a syndicate for that issuer.'' \16\
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    \14\ TBMA Letter No. 1 at 1.
    \15\ Id at 1-2.
    \16\ Id at 2.
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    According to the Board, ``managing underwriters currently take 
issuer direction on syndicate matters and release such information to 
the syndicate members.'' \17\ Thus, the proposed amendments are 
essentially codifying current syndicate practices.\18\ The Commission 
agrees with the Board that the additional requirements should not be 
unduly burdensome to the managing underwriter, as they are codifying 
existing practices. The Commission notes that dealers can address other 
issuer problems through contract.
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    \17\ MSRB Letter at 1.
    \18\ Id.
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    TBMA also opposed the amendment to Rule G-11(g). The amendment not 
only established a time limit for completing the allocation of 
securities, it also urged issuers and their financial advisors to 
review orders and proposed allocations as soon as possible so as not to 
delay dissemination of information to investors.\19\ While TBMA 
supports prompt completion of the allocation, it strongly opposed the 
amendment because, as drafted, the lead manager's compliance would be 
wholly dependent upon the timely performance of financial advisors and 
issuers.\20\ TBMA noted that it generally opposes any attempts by the 
MSRB to modify the behavior of entities that are not directly regulated 
by the MSRB through the regulation of the dealer community.\21\ ``A 
municipal securities dealer should not be faced with a possible 
violation of MSRB rules where compliance by the dealer is dependent 
upon a specific action of an unregulated entity.'' \22\ This places the 
dealer in the untenable position of being charged with a violation of 
MSRB rules through no fault of its own.\23\
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    \19\ TBMA Letter No. 1 at 2.
    \20\ Id.
    \21\ Id. See also Salomon Letter at 1.
    \22\ Id.
    \23\ Id. See also Salomon Letter at 1 (stating that municipal 
securities dealers should neither be forced to ``police'' the 
activities of unregulated entities nor be faced with regulatory 
sanctions for activities that are beyond their direct control).
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    The Board determined to adopt the proposed rule change as drafted, 
because it will assist investors by greatly facilitating the allocation 
process.\24\ According to the MSRB, delays in allocations can adversely 
affect investors' portfolio positions and the underwriting.\25\ By 
placing a time limit on the allocation of the securities, the Board 
believes underwriters will ensure compliance with the proposal by 
either including a provision in the BPA or otherwise reaching an 
agreement with issuers, that allocations must be completed within the 
24 hour timeframe.\26\ ``If issuers or financial advisors wish to 
review orders and proposed allocations, they will have to

[[Page 67159]]

do so within 24 hours.'' \27\ The Commission believes that any 
unnecessary delay in distribution securities, once the BPA has been 
executed, can disadvantage syndicate members and ultimately, investors. 
Thus the Commission supports the shortened timeframe in which syndicate 
managers must complete the allocation of securities.
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    \24\ MSRB Letter at 2.
    \25\ Id.
    \26\ Id.
    \27\ Id.
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    In its second letter, TBMA reiterated its opposition to the 
proposed rule change.\28\ However, TBMA did agree with the specific 
proposal in Amendment No. 1 which provides that allocations completed 
prior to execution of the BPA would be made subject to execution of 
that agreement.\29\ As the TBMA's positions remain unchanged, the 
MSRB's response sufficiently addresses the issues raised in the second 
letter.
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    \28\ TBMA Letter No. 2 at 1-2.
    \29\ Id. at 2.
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    Salomon generally opposed the proposed rule change for reasons 
similar to those stated by TBMA.\30\ Specifically, Salomon believed 
that syndicate members would be the economic beneficiaries of these 
changes and senior managers would bear the cost.\31\ According to 
Salomon, the cost of doing business in municipal securities has 
increased while the revenue generated by the business has 
decreased.\32\ Moreover, each time the syndicate requirements are 
modified, the senior managers expend significant amounts of resources 
to ensure their systems are in compliance.\33\
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    \30\ Salomon Letter at 1.
    \31\ Id.
    \32\ Id.
    \33\ Id.
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    In its response, the Board stated that it was concerned that 
syndicate members (and ultimately customers) have information regarding 
issuer requirements to help frame orders.\34\ Requiring the 
dissemination of this information to syndicate members helps ensure 
that managers are ``following the rules'' of the syndicate so that, if 
there are any problems regarding the economics of the deal, they can be 
corrected prior to settlement or when the syndicate monies are 
distributed.\35\ The Board recognizes that syndicate managers may incur 
additional costs complying with these requirements, however, it 
believes the benefits of disclosure to syndicate members of important 
information on syndicate operations outweigh such costs.\36\ The 
Commission believes that the benefits of increased disclosure (e.g., 
investor protection, market transparency, and equal access to the 
municipal securities market) outweigh costs that may be incurred as a 
result of the proposed rule change. Thus, the Commission supports the 
proposed rule change.
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    \34\ MSRB Letter at 2.
    \35\ Id.
    \36\ Id.
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    Salomon strenuously objects to the proposal that syndicate managers 
disclose to syndicate members information relating to designations.\37\ 
Salomon contends that because it and similarly-situated firms provide a 
full range of services to issuers and investors and they spend 
significant resources to maintain the infrastructure to provide those 
services, designations are the way they realize a return on the 
investment in that infrastructure.\38\ Moreover, it is Salomon's view 
that the proposals run counter to the interest of investors.\39\ 
According to Salomon, information concerning designations is 
competitive, confidential information that should be known only to the 
beneficiary of the designation and the syndicate manager (in its 
capacity as bookrunner of the underwriting) and should only be 
disclosable by the investor.\40\
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    \37\ Salomon Letter at 2.
    \38\ Id.
    \39\ Id.
    \40\ Id.
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    The Board disagrees that investors would object to the disclosure 
of designation information.\41\ The amendment does not require that the 
identity of the investors providing the designations be disclosed, only 
that the total amount of the designations for each dealer be 
disclosed.\42\ The Board believes that all syndicate members have the 
right to the disclosure of all designation information.\43\ The MSRB 
believes that the proposed rule change will help ``assure syndicate 
members of equitable distribution of the economics of the deal pursuant 
to syndicate requirements.''\44\
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    \41\ MSRB Letter at 2.
    \42\ Id.
    \43\ Id.
    \44\ Id.
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    The Commission reiterates its position that it supports more 
disclosure in the municipal securities markets. The Commission respects 
investors' right to choose the firms with which to do business as well 
as syndicate members' rights to accept designations. The Commission 
believes, however, that the amount of the designation each member 
receives should be disclosed to prevent fraudulent and manipulative 
practices in the municipal securities market. According to the Board, 
confidentiality is preserved because only the total amount of the 
designations is disclosed, thus investors will ``be free to designate 
any firm without fear of reprisal or pressure from other syndicate 
members.'' The Commission, therefore, supports this proposed rule 
change.

IV. Discussion

    The Commission believes the proposed rule change is consistent with 
the Act and the rules and regulations promulgated thereunder.\45\ 
Specifically, the Commission believes that approval of the proposed 
rule change is consistent with Section 15B(b)(2)(C) \46\ of the Act. 
This proposed rule change should help protect investors and the public 
interest through its enhanced disclosure and recordkeeping requirements 
which are designed to prevent fraudulent and manipulative acts and 
practices and to promote just and equitable principles of trade.
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    \45\ The Commission has considered the proposed rule's impact on 
efficiency, competition and capital formation. The proposed rule 
change should improve efficiency in recordkeeping and information 
dissemination because the syndicate manager must now maintain a 
record of issuer requirements. Competition in the marketplace should 
also benefit as designation information will be available to all 
members of the syndicate, thus making collusion in the municipal 
securities market more difficult. The proposal shortens the deadline 
for payment of designations which should decrease the time it takes 
for firms to receive revenue which should benefit capital formation. 
15 U.S.C 78c(f).
    \46\ Section 15B(b)(2)(C) requires the Commission to determine 
that the Board's rules are designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
municipal securities, to remove impediments to and perfect the 
mechanism of a free and open market in municipal securities, and, in 
general, to protect investors and the public interest.
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    The Commission believes the proposal, which requires managing 
underwriters to maintain and where necessary, create records of issuer 
requirements, is a reasonable requirement to impose on a syndicate 
manager of a new issue of municipal securities. A syndicate manager has 
the primary responsibility for conducting the affairs of the syndicate. 
Thus, it is appropriate to require the syndicate manager to be 
responsible for the recordkeeping concerning syndicate activities. The 
Commission recognizes that these managers could experience an increase 
in costs attempting to comply with these requirements. However, 
syndicate managers are allowed to recover expenses for administrative 
tasks performed for the benefit of the syndicate. Further, resolving 
accounting discrepancies or other syndicate disputes would be less 
cumbersome and time-consuming if accurate records have

[[Page 67160]]

been maintained and are readily accessible.
    The Commission believes the proposal, requiring managing 
underwriters to disclose all available designation information, should 
encourage competition among dealers for other designations in 
subsequent underwritings. The proposal should not result in fixed 
pricing because only the designation amounts are being revealed. 
Investors will still be able to designate any firm they choose, because 
the investors' identities will remain confidential. Furthermore, 
disclosure of all designation information should prevent delays in 
disseminating full designation payments to members because designation 
information must be made available to syndicate members within ten 
business days following the date of sale. This requirement should, 
therefore, help ensure members receive the full designation credit they 
have earned.
    The Commission also supports shortening the deadline for payment of 
designations from 30 business days following delivery of the securities 
to the customer to 30 calendar days after the issuer delivers the 
securities to the syndicate. The shortened deadline should prevent 
syndicate mangers from unnecessarily delaying payment of designations 
to syndicate members.
    The Commission agrees that an issuer ``set-aside'' is part of the 
take-down and, therefore, should be disclosed to syndicate members in 
the same manner as customer designations. This proposed rule change 
should act as a deterrent to fraudulent activity because disclosure of 
take down information including each dealers' percentage must be made 
by the later of 15 days following the date of sale or three business 
days following receipt by the managing underwriter of notification of 
any set-asides by the issuer. Furthermore, timely disclosure of this 
information will allow dealers to verify the accuracy of the 
information and, where necessary, address any discrepancies before 
settlement.
    The Commission supports the proposed rule change and Amendment No. 
1 concerning the allocation of securities. The proposed rule change 
required that the managing underwriter complete the allocation of 
securities within 24 hours of the sending of the commitment wire. In 
its letter to the MSRB, NYC contended that the proposed rule change 
erroneously assumed that a BPA would be signed prior to the completion 
of the allocation.\47\ the NYC letter suggested that the allocation may 
be completed (and investors be given notice of the allocations) prior 
to the signing of the BPA.\48\ In response, the MSRB amended its 
proposal to include that any allocations made prior to the signing of 
the BPA in a negotiated offering or the official award of the bonds in 
a competitive sale must be subject to execution of a BPA or the award, 
as appropriate. Furthermore, investors must also be notified of this 
fact.\49\
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    \47\ NYC Letter at 1.
    \48\ Id. at 2.
    \49\ Amendment No. 1 at 51977.
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    In cases where the BPA is signed before the commitment wire is 
sent, the Commission believes 24 hours should give the senior syndicate 
manager enough time to complete the allocation of securities. The 
Commission understands that there are occasions, however, when a deal 
is so complex that it takes longer than 24 hours after the commitment 
wire is sent to complete the process (e.g., production and verification 
of final numbers, final sizing of the bond sale) so that a BPA may be 
signed. The Commission, therefore, supports the amended language which 
recognizes this exception,\50\ but protects investors by requiring full 
disclosure of the deal's status. Thus, investors will be aware that the 
deal could be subject to market fluctuations or may not even be 
finalized.
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    \50\ In these situations, the Commission notes that senior 
syndicate managers should consult the MSRB's rules and 
interpretations concerning the sending of confirmations prior to the 
signing of the BPA or the date of the award. Amendment No. 1 at 
51977.
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V. Conclusion

    For the above reasons, the Commission believes that the proposed 
rule change is consistent with the provisions of the Act, and in 
particular with Section 15B(b)(2)(C).
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\51\ that the proposed rule change and Amendment No. 1 (SR-MSRB-97-
15), are hereby approved.

    \51\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\52\
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    \52\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-32324 Filed 12-3-98; 8:45 am]
BILLING CODE 8010-01-M