[Federal Register Volume 64, Number 169 (Wednesday, September 1, 1999)]
[Notices]
[Pages 47878-47881]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-22697]



[[Page 47878]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41783; File No. SR-AMEX-99-13]


Self-Regulatory Organizations; Order Granting Accelerated 
Approval to a Proposed Rule Change and Amendment Nos. 1 and 2 and 
Notice of Filing and Order Granting Accelerated Approval to Amendment 
No. 3 by the American Stock Exchange LLC Relating to Specialist Capital 
Requirements

August 23, 1999.

I. Introduction

    On April 2, 1999, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') submitted to 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 Amex Rule 950(h) to 
revise the minimum financial requirement for options specialists. In 
addition, the Amex proposes to revise Amex Rule 950(h), Commentary .01 
to codify the Amex's procedures for calculating the minimum financial 
requirement for specialists that maintain a book in both equities and 
options (an ``equity/option book''). On June 11, 1999, July 16, 1999, 
and August 23, 1999, the Amex filed with the Commission Amendment Nos. 
1, 2, and 3 to the proposal.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 revised the proposal to: (1) Provide an 
example comparing the financial requirements for options specialists 
under the rules of the Amex, the Pacific Exchange, and the Chicago 
Board Options Exchange; and (2) provide examples demonstrating the 
calculation of the capital requirements for joint equity/options 
specialists. See letter from Scott G. Van Hatten, Legal Counsel, 
Derivatives and Securities, Amex, to Richard Strasser, Division of 
Market Regulation (``Division''), Commission, dated June 10, 1999 
(``Amendment No. 1''). Amendment No. 2 to the proposal provides two 
charts setting forth specialist financial requirements as of two 
dates in May 1999. See letter from Scott G. Van Hatten, Legal 
Counsel, Derivatives and Securities, Amex, to Richard Strasser, 
Division, Commission, dated July 23, 1999 (``Amendment No. 2''). 
Amendment No. 3 indicates that the changes to Commentary .01 are a 
codification of the Amex's current procedures for calculating the 
minimum financial requirement for a specialist that maintains an 
equity/options book. See letter from Claire P. McGrath, Vice 
President and Special Counsel, Derivative Securities, Amex, to 
Richard Strasser, Assistant Director, Division, Commission, dated 
August 23, 1999. See also telephone conversation among Claire P. 
McGrath, Vice President and Special Counsel, Derivative Securities, 
Amex, James McNeal, Amex, and Yvonne Fraticelli, Special Counsel, 
Division, Commission, on August 23, 1999 (``August 23 
Conversation'').
    In addition, the Amex filed a letter describing financial 
safeguards applicable to specialists, including the clearing firm 
guarantee of specialists' transactions (for specialists who are not 
self-clearing), the Amex's daily review of each specialist's 
financial condition, and the procedures the Amex follows when the 
Exchange determines that a specialist is approaching the early 
warning financial requirement level (120% of the minimum specialist 
financial requirement). See letter from Scott G. Van Hatten, Legal 
Counsel, Derivatives and Securities, Amex, to Richard Strasser, 
Assistant Director, Division, Commission, dated June 10, 1999 
(``June 10 Letter'').
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    Notice of the proposed rule change and Amendment Nos. 1 and 2 were 
published for comment in the Federal Register on August 9, 1999.\4\ To 
date, the Commission has received no comment letters regarding the 
proposal. This order approves the proposal and Amendment Nos. 1, 2, and 
3 to the proposal on an accelerated basis.
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    \4\ See Securities Exchange Act Release No. 41682 (August 2, 
1999), 64 FR 43233.
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II. Description of the Proposal

    The Amex proposes to amend Amex Rule 950(h) and Commentary .01 to 
revise the minimum financial requirements for options specialists and 
to codify in Commentary .01 the Amex's procedures for calculating the 
minimum financial requirement for a specialist that maintains an 
equity/options book. Currently, Amex Rule 950(h), which incorporates by 
reference the specialist financial requirements set forth in Amex Rule 
171,\5\ requires a registered options specialist to maintain cash or 
liquid assets equal to the greater of $600,000 or an amount sufficient 
to assume a position of 60 units (i.e., 60 option contracts 
representing 6,000 shares) of the highest priced puts and calls for 
each option in which the specialist is registered.\6\ The Amex proposes 
to revise Amex Rule 950(h) to provide that the minimum financial 
requirement for an options specialist will be $600,000 plus $25,000 for 
each option issue in excess of the initial ten issues in which the 
specialist is registered.
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    \5\ Amex Rule 171, ``Specialist Financial Requirements,'' 
requires every registered specialist to maintain a cash or liquid 
asset position in the amount of $600,000 or an amount sufficient to 
assume a position of 60 trading units of each security in which the 
specialist is registered, whichever is greater.
    \6\ The ``cost to carry'' 60 option contracts is determined 
pursuant to Rule 15c3-1a(b)(2)(iii)(C) under the Act, which provides 
that a broker or dealer that is long puts or calls must deduct 50 
percent of the market value of the net long put and call positions 
in the same options series.
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    For a specialist that maintains an equity/options book, the minimum 
$600,000 financial requirement specified in Amex Rule 171 will apply to 
the entirety of the specialist's business, in both equities and 
options, provided that the financial requirement for neither the equity 
allocation nor the options allocation exceeds $600,000.\7\ Thus, the 
minimum financial requirement for a specialist allocated one equity and 
one option would be $600,000, provided that the financial requirement 
for neither the equity allocation nor the options allocation exceeded 
$600,000.\8\
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    \7\ See proposed Amex rule 950(h), Commentary .01.
    \8\ See Amendment No. 1, supra note 3.
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    For an equity/option book where the financial requirement for 
either the equity allocation or the options allocation exceeds 
$600,000, the specialist's minimum financial requirement will be 
calculated by combining the requirements of Amex Rules 171 and 950(h). 
For example, a specialist with three equity allocations and two options 
allocations, whose financial requirement for the three equity 
allocations exceeded $600,000, would be required to maintain capital 
sufficient to assume a position of 60 trading units of each equity 
allocation plus $50,000 for the two options allocations. A specialist 
allocated 11 options and one equity security would be required to 
maintain capital of $625,000 for the 11 options allocations plus any 
additional amount over $600,000 required to assume a position of 60 
trading units of the equity security.\9\
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    \9\ See Amendment No. 1, supra note 4. Thus, in this example, if 
the cost to assume a position of 60 trading units in the equity 
allocation is $700,000, then the specialist's minimum financial 
requirement would be $725,000.
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    The Amex recently compared its financial requirements for options 
specialists to the capital requirements of other exchanges. For 
example, the Amex notes that a Lead Market Maker (``LMM'') on the 
Pacific Exchange (``PCX'') that performs the function of an Order Book 
Official (``OBO'') must maintain minimum net capital of $500,000 plus 
$25,000 for each issue over five issues for which the LMM performs the 
function of an OBO.\10\ An LMM that does not perform the function of an 
OBO must maintain minimum net capital of $350,000 plus $25,000 for each 
issue over eight issues that has been allocated to the LMM.\11\ The 
Chicago Board Options Exchange (``CBOE'') currently requires a 
Designated Primary Market Maker (``DPM'') to maintain cash or liquid 
assets equal to the greater of $100,000 or an amount sufficient to 
assume a position of 20 trading units of each security in which the DPM 
holds an appointment.\12\ The Philadelphia Stock Exchange (``PHLX'') 
requires an options

[[Page 47879]]

specialist exempt from Securities Exchange Act Rule 15c3-1 to maintain 
a minimum of $75,000 in net liquid assets, and requires an equity and 
options specialist exempt from Securities Exchange Act Rule 15c3-1 to 
maintain a minimum of $100,000 in net liquid assets.\13\
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    \10\ See PCX Rule 6.82(h), Commentary .04.
    \11\ See PCX Rule 6.82(c)(11).
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    The Amex submits that the cost to Amex options specialists to 
satisfy the Amex's financial requirements has been increasing relative 
to the financial requirements for competing options specialists or 
market makers at other exchanges. The Amex maintains that its current 
financial requirements effectively reduce the number of options issues 
that may be allocated to an Amex options specialist and provide an 
incentive for Amex members to consider moving their business operations 
to exchanges with less restrictive financial requirements. The Exchange 
believes that the proposed rule change is necessary to address any 
increase in the number of options issues traded on the Exchange that 
may occur as a result of competitive marketplace conditions. The 
Exchange believes that the proposed change in the specialist financial 
requirement will help to ensure that Amex options specialists continue 
to maintain adequate capital reserve while remaining competitive with 
their counterparts at other exchanges.
    In addition, the Amex believes that because the financial 
requirements for specialists do not consider the extent to which a 
specialist maintains a hedged position in his registered options, the 
recent increases in premiums for some stock options have caused 
specialist financial requirements to increase dramatically beyond the 
level of risk associated with a specialist's market making activities.
    The following charts illustrate the fluctuations in the capital 
requirement for an options specialist as calculated under the Amex's 
current rule and the impact of premium appreciation on the specialist's 
minimum financial requirements.14 Both charts are based on 
actual capital requirements for options traded on the Amex. The 
calculations in the first chart are based on premiums for six options 
as of the close of business on May 6, 1999, while the calculations in 
the second chart show the premiums for the same options as of the close 
of business on May 13, 1999.

                                                     Week 1
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                                                         Call                         Put
                   Option                   ----------------------------------------------------------   Total
                                              Premium      Requirement     Premium      Requirement
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1..........................................    56\7/8\  $5,687.50 x \60/    67\1/4\  $6,725.00 x \60/   $372,375
                                                                      2\                           2\
2..........................................    14\1/2\   1,450.00 x \60/     7\5/8\   762.50 x \60/2\     66,375
                                                                      2\
3..........................................     4\1/8\   412.50 x \60/2\         17    1,700 x \60/2\     63,375
4..........................................          9   900.00 x \60/2\     5\1/4\   525.00 x \60/2\     42,750
5..........................................    15\1/4\   1,525.00 x \60/     5\1/4\   525.00 x \60/2\     61,500
                                                                      2\
6..........................................    58\1/2\   5,850.00 x \60/    33\5/8\  33,362.50 x \60/    276,375
                                                                      2\                           2\
                                                                                                      ----------
    Total..................................  .........  ................  .........  ................    882,750
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                                                     Week 2
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                                                         Call                         Put
                   Option                   ----------------------------------------------------------   Total
                                              Premium      Requirement     Premium      Requirement
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1..........................................    75\3/8\  $7,537.50 x \60/    55\3/4\  $5,575.00 x \60/   $393,375
                                                                      2\                           2\
2..........................................    13\7/8\   1,387.50 x \60/    16\1/8\   1,612.50 x \60/     90,000
                                                                      2\                           2\
3..........................................     5\1/4\   525.00 x \60/2\    22\1/4\   2,225.00 x \60/     82,500
                                                                                                   2\
4..........................................     9\1/8\   912.50 x \60/2\     8\3/8\   837.50 x \60/2\     52,500
5..........................................    14\7/8\   1,487.50 x \60/     8\3/8\   837.50 x \60/2\     69,750
                                                                      2\
6..........................................    61\3/4\   6,175.00 x \60/    39\7/8\   3,987.50 x \60/    304,875
                                                                      2\                           2\
                                                                                                      ----------
    Total..................................  .........  ................  .........  ................    993,000
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    The Amex notes that, under the proposal, a specialist's financial 
requirement would not fluctuate with the premiums of the highest priced 
option series, but would change only when the specialist unit 
voluntarily changes the number of option issues it trades. Thus, the 
proposal will allow options specialists to maintain relative control 
over their level of financial requirements by determining their 
respective number of options allocations.
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    \12\ See CBOE Rule 8.80, Interpretation and Policy .01. The CBOE 
has filed a proposal with the Commission that would require a DPM to 
maintain: (1) Net liquidating equity in its DPM account of not less 
than $100,000; and (2) net capital sufficient to comply with 
Securities Exchange Act Rule 15c3-1. See Securities Exchange Act 
Release No. 41325 (April 22, 1999), 64 FR 23691 (May 3, 1999) 
(notice of filing of File No. SR-CBOE-98-54). The Commission has not 
acted on the CBOE's proposal.
    \13\ See PHLX Rule 703.
    14 See Amendment No. 2, supra note 3.
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    The Exchange also notes the presence of various safeguards, 
including circuit breakers, the Amex's daily review of specialist 
capital reserves, and the Exchange's early warning signals, which 
trigger a more intense level of surveillance of Exchange specialists 
during volatile market situations.\15\
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    \15\ The Amex's June 10 Letter describes additional safeguards 
relating to specialists' financial requirements. Among other things, 
the June 10 Letter notes that a specialist unit that is not self-
clearing maintains an agreement with a clearing firm that guarantees 
the specialist's transactions. A specialist that is self-clearing 
guarantees directly to the National Securities Clearing Corporation 
and the Options Clearing Corporation all transactions effected by 
its specialists on the Amex floor. In addition, the June 10 Letter 
states that the Amex reviews all specialist financial requirements 
each day and contacts the specialist's principal(s) to request the 
deposit of additional funds on any day when the specialist 
approaches the early warning financial requirement level (120% of 
the minimum specialist financial requirement). If the specialist is 
unable to deposit additional capital, the Amex obtains a written 
guarantee from the specialist's clearing firm stating that the 
clearing firm will guarantee the specialist's transactions. The 
process of obtaining a written guarantee serves to notify the 
clearing firm of the specialist's current financial condition. 
Finally, the Amex notes that the Exchange may reallocate the 
specialist's allocation to another specialist unit if the specialist 
fails to satisfy the Amex's financial requirement. See June 10 
Letter, supra note 3.

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[[Page 47880]]

III. Discussion

    For the reasons discussed below, the Commission finds that the 
proposed rule change is consistent with the Act and the rules and 
regulations under the Act applicable to a national securities exchange. 
In particular, the Commission finds that the proposed rule change is 
consistent with the Section 6(b)(5) \16\ requirements that the rules of 
an exchange be designed to promote just and equitable principles of 
trade, to remove impediments to and perfect the mechanism of a free and 
open market, and to protect investors and the public interest.
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    \16\ 15 U.S.C. 78f(b)(5).
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    The Amex proposes to amend its rules to revise the minimum 
financial requirement for options specialists and to codify the 
Exchange's procedures for calculating the minimum financial requirement 
for specialists that maintain an equity/options book. Under the 
proposal, the minimum financial requirement for an options specialist 
will be $600,000 plus $25,000 for each option issue in excess of the 
initial ten issues in which the specialist is registered. For a 
specialist with an equity/options book, the minimum $600,000 financial 
requirement specified in Amex Rule 171 will apply to the entirety of 
the specialist's business, in both equities and options, provided that 
the financial requirement for neither the equity allocation nor the 
options allocation exceeds $600,000. If either allocation exceeds 
$600,000, the specialist's minimum financial requirement of Amex Rules 
171 and 950(h). Thus, as described more fully above, an equity/options 
specialist with a financial requirement over $600,000 for his equity 
allocation will be subject to a capital requirement of $25,000 for each 
options allocation. Similarly, an equity/options specialist with a 
financial requirement of $625,000 for his options allocation and 
$700,000 for his equity allocation will have a financial requirement of 
$725,00.\17\ The proposal will lower the minimum financial requirement 
for most Amex options specialists.\18\
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    \17\ See Amendment No. 1, supra note 3.
    \18\ See August 23 Conversation, supra note 3.
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    The Commission finds that the proposed capital requirements are 
designed to assure that Amex options specialists and specialists 
maintaining an equity/options book are capable of making deep, liquid, 
and competitive markets. Although the proposal will reduce the minimum 
financial requirement for most Amex options specialists, the Commission 
finds, based on the representatives of the Amex, that there are 
sufficient safeguards (in addition to the proposed minimum capital 
requirement) to assure that the Amex's options specialists are 
adequately capitalized. In this regard, the Amex in its June 10 Letter 
notes, first, that the transactions of a specialist unit that is not 
self-clearing are guaranteed by the specialist's clearing firm. Second, 
the Amex states that it reviews all specialist financial requirements 
each day and, on any day when it determines that a specialist is close 
to the early warning financial requirement level (120% of the minimum 
specialist financial requirement), the Amex contacts the specialist's 
principal(s) and requests the deposit of additional cash or liquid 
assets. If the specialist fails to deposit additional capital, the Amex 
contacts the specialist's clearing firm and obtains a written guarantee 
from the clearing firm that it will guarantee the specialist's 
transactions; this process ensures that the clearing firm is aware of 
the specialist's current financial condition and that the clearing 
firm's guarantee is based upon current market conditions. Third, the 
Amex believes that the proposed financial requirements will help to 
ensure that Amex specialists are able to make deep, liquid, and 
competitive markets, while competing vigorously with specialists on 
other options exchanges in multiply-traded issues.\19\
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    \19\ See June 10 Letter, supra note 3.
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    The Commission finds that the proposed financial requirements are 
comparable to the financial requirements at other options 
exchanges.\20\ Accordingly, the Commission believes that the proposal 
will help Amex options specialists compete effectively with specialists 
at other exchanges in multiply-traded issues. Increased competition, in 
turn, should benefit investors by producing a more efficient 
marketplace.
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    \20\ For example, as noted above, an LMM on the PCX that 
performs the function of an OBO must maintain minimum net capital of 
$500,000 plus $25,000 for each issue over five issues for which the 
LMM performs the function of an OBO. An LMM that does not perform 
the function of an OBO must maintain minimum net capital of $350,000 
plus $25,000 for each issue over eight issues that has been 
allocated to the LMM. The CBOE currently requires a DPM to maintain 
cash or liquid assets equal to the greater of $100,000 or an amount 
sufficient to assume a position of 20 trading units of each security 
in which the DPM holds an appointment. The PHLX requires an option 
specialist exempt from Securities Exchange Act Rule 15c3-1 to 
maintain a minimum of $75,000 in net liquid assets, and requires an 
equity and options specialist exempt from Securities Exchange Act 
Rule 15c3-1 to maintain a minimum of $100,000 in net liquid assets.
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    The Amex also notes that under its current rule the financial 
requirement for options specialists fluctuates with the options 
premiums. The proposed capital requirement for options specialists will 
be based on the number of issues a specialist trades rather than on the 
fluctuating prices of the options premiums. This method for determining 
the minimum financial requirement has the advantages of simplifying the 
specialist's capital calculation and avoiding a significant increase in 
the capital requirement that occurs under the Amex's current rule if 
the price of the underlying stock rises dramatically.
    Finally, the Commission finds that it is reasonable for the Amex to 
codify in Amex Rule 950(h), Commentary .01, its existing procedures for 
calculating the minimum financial requirement for specialists that 
maintain an equity/options book.\21\ The Commission believes that 
codifying these provisions will clarify the Amex's procedures and help 
to ensure compliance with the Amex's financial requirements.
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    \21\ See Amendment No. 3 and August 23 Conversation, supra note 
3.
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    The Commission finds good cause for approving the proposed rule 
change and Amendment Nos. 1, 2, and 3 to the proposed rule change prior 
to the thirtieth day after the date of publication of notice of filing 
thereof in the Federal Register. The Commission finds that accelerated 
approval of the proposal will help Amex options specialists to compete 
effectively with specialists and market makers on other options 
exchanges in multiply-traded issues. The Commission finds that 
Amendment Nos. 1 and 2 clarify the Amex's proposal by providing 
examples and additional explanations of the operation of the proposed 
rule. Amendment No. 3 clarifies the Amex's proposal by indicating that 
the provisions of the proposal relating to the minimum financial 
requirement for a specialist that maintains an equity/options book 
codify the Exchange's current procedures for calculating the minimum 
financial requirement for an equity/options book. Accordingly, the 
Commission believes that granting accelerated approval of the proposal 
and Amendment Nos. 1, 2, and 3 is appropriate and consistent with 
Sections 6(b)(5) and 19(b)(2) of the Act.\22\
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    \22\ 15 U.S.C. 78f(b)(5) and 78s(b)(2).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and

[[Page 47881]]

arguments concerning Amendment No. 3, including whether Amendment No. 3 
is consistent with the Act. Persons making written submissions should 
file six copies thereof with the Secretary, Securities and Exchange 
Commission, 450 Fifth Street, N.W., Washington, D.C. 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 Room. 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-99-13 and should be 
submitted by September 22, 1999.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\23\ that the proposed rule change (SR-Amex-99-13), as amended, is 
approved on an accelerated basis.

    \23\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-22697 Filed 8-31-99; 8:45 am]
BILLING CODE 8010-01-M