[Federal Register Volume 65, Number 105 (Wednesday, May 31, 2000)]
[Notices]
[Pages 34759-34762]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-13530]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42816, File No. S7-966]


Program for Allocation of Regulatory Responsibilities Pursuant to 
Rule 17d-2; Notice of Filing and Order Granting Approval of Amendment 
to the Plan for the Allocation of Regulatory Responsibilities Among the 
American Stock Exchange LLC, the Chicago Board Options Exchange, Inc., 
the Chicago Stock Exchange, Inc., the International Securities Exchange 
LLC, the National Association of Securities Dealers, Inc., the New York 
Stock Exchange, the Pacific Exchange, Inc., and the Philadelphia Stock 
Exchange, Inc.

May 23, 2000.
    Notice is hereby given that the Securities and Exchange Commission 
(``SEC'' or ``Commission'') has issued on Order, pursuant to Sections 
17(d) \1\ and 11A(a)(3)(B) \2\ of the Securities Exchange Act of 1934 
(``Act''), granting approval of an amendment to the plan for allocating 
regulatory responsibility filed pursuant to Rule 17d-2 of the Act,\3\ 
by the American Stock Exchange LLC (``Amex''), the Chicago Board 
Options Exchange, Inc. (``CBOE''), the Chicago Stock Exchange, Inc. 
(``CHX''), the International Securities Exchange LLC (``ISE''), the 
National Association of Securities Dealers, Inc. (``NASD''), the New 
York Stock Exchange (``NYSE''), the Pacific Exchange, Inc. (``PCX''), 
and the Philadelphia Stock Exchange, Inc. (``Phlx'') (collectively the 
``SRO participants'').
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    \1\ 15 U.S.C. 78q(d).
    \2\ 15 U.S.C. 78k-1(a)(3)(B).
    \3\ 17 CFR 240.17d-2.
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I. Introduction

    Section 19(g)(1) of the Act,\4\ among other things, requires every 
national securities exchange and registered securities association 
(``SRO'') to examine for, and enforce, compliance by its members and 
persons associated with its members with the Act, the rules and 
regulations thereunder, and the SRO's own rules, unless the SRO is 
relieved of this responsibility pursuant to Section 17(d) or 19(g)(2) 
\5\ of the Act. Without this relief, the statutory obligation of each 
individual SRO could result in a pattern of multiple examinations of 
broker-dealers that maintain memberships in more than one SRO (``common 
members''). This regulatory duplication would add unnecessary expenses 
for common members and their SROs.
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    \4\ 15 U.S.C. 78s(g)(1).
    \5\ 15 U.S.C. 78s(g)(2).
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    Section 17(d)(1) of the Act was intended, in part, to eliminate 
unnecessary multiple examinations and regulatory duplication.\6\ With 
respect to a common member, Section 17(d)(1) authorizes the Commission, 
by rule or order, to relieve an SRO of the responsibility to receive 
regulatory reports, to examine for and enforce compliance with 
applicable statutes, rules and regulations, or to perform other 
specified regulatory functions.
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    \6\ Securities Acts Amendments of 1975, Report of the Senate 
Committee on Banking, Housing, and Urban Affairs to Accompany S. 
249, S. Rep. No. 94-75, 94th Cong., 1st Session. 32 (1975).
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    To implement Section 17(d)(1), the Commission adopted two rules: 
Rule 17d-1 and Rule 17d-2 under the Act.\7\ Rule 17d-1, adopted on 
April 20, 1976,\8\ authorizes the Commission to name a single SRO as 
the designated examine authority (``DEA'') to examine common members 
for compliance with the financial responsibility requirements imposed 
by the Act, or by Commission or SRO rules. When an SRO has been named 
as a common member's DEA, all other SROs to which the common member 
belongs are relieved of the responsibility to examine the firm for 
compliance with applicable financial responsibility rules.
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    \7\ 17 CFR 240.17d-1 and 17 CFR 240.17d-2.
    \8\ Securities Exchange Act Release No. 12352 (April 20, 1976), 
41 FR 18809 (May 3, 1976).
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    On its face, Rule 17d-1 deals only with an SRO's obligations to 
enforce broker-dealer's compliance with the financial responsibility 
requirements. Rule 17d-1 does not relieve an SRO from its obligation to 
examine a common member for compliance with its own rules and 
provisions of the federal securities laws governing matters other than 
financial responsibility, including sales practices, and trading 
activities and practices.
    To address regulatory duplication in these other areas, on October 
28, 1976, the Commission adopted Rule 17d-2 under the Act.\9\ This rule 
permits SROs to propose joint plans allocating regulatory 
responsibilities with respect to common members. Under paragraph (c) of 
Rule 17d-2, the Commission may declare such a plan effective if, after 
providing for notice and comment, it determines that the plan is 
necessary or appropriate in the public interest and for the protection 
of investors, to foster cooperation and coordination among the SROs, to 
remove impediments to and foster the development of a national market 
system and a national clearance and settlement system, and in 
conformity with the factors set forth in Section 17(d) of the Act. 
Commission approval of a plan filed pursuant to Rule 17d-2 relieves an 
SRO of those regulatory responsibilities allocated by the plan to 
another SRO.
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    \9\ Securities Exchange Act Release No. 12935 (October 28, 
1976), 41 FR 49093 (November 8, 1976).
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II. The Plan

    On September 8, 1983, the Commission approved the SRO participants' 
plan for allocating regulatory responsibilities pursuant to Rule 17d-
2.\10\ The plan reduces regulatory duplication for a large number of 
firms currently members of two or more of the SRO participants by 
allocating regulatory responsibility for certain option-related sales 
practice matters to one of the SRO participants.
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    \10\ Securities Exchange Act Release No. 20158 (September 8, 
1983), 48 FR 41256 (September 14, 1983).
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    Under the plan, the SRO participant responsible for conducting 
options-related sales practice examinations of a firm, and 
investigating options-related customer complaints and terminations for 
cause of associated persons of that firm, is known as the firm's 
``Designated Options Examining Authority'' (``DOEA''). Under the plan, 
only the Amex, the CBOE, the NASD and the NYSE are DOEAs. Pursuant to 
the plan, any other SRO of which the firm is a

[[Page 34760]]

member is relieved of these responsibilities during the period the firm 
is assigned to a DOEA.

III. Proposed Amendment to the Plan

    On May 8, 2000, the parties submitted a proposed amendment to the 
plan. The primary purpose of the amendment is to include the ISE as an 
SRO participant, and to update the corporate names of three of the 
current SRO participants. The text of the proposed amended 17d-2 plan 
is as follows (additions are italicized; deletions are bracketed):
    Agreement among the American Stock Exchange [Inc.] LLC, the Chicago 
Board Options Exchange, Inc., the [Midwest] Chicago Stock Exchange, 
Inc., the International Securities Exchange LLC, the National 
Association of Association of Securities Dealers, Inc., the New York 
Stock Exchange, the Pacific [Stock] Exchange Inc. [Incorporated], and 
the Philadelphia Stock Exchange, Inc., Pursuant to Rule 17d-2 under the 
Securities Exchange Act of 1934.
    The Agreement, among the American Stock Exchange [Inc.] LLC, the 
Chicago Board Options Exchange, Inc., the [Midwest] Chicago Stock 
Exchange, Inc., the International Securities Exchange LLC, the National 
Association of Securities Dealers, Inc., the New York Stock Exchange, 
the Pacific [Stock] Exchange Inc. [Incorporated], and the Philadelphia 
Stock Exchange, Inc., hereinafter collectively referred to as the Self-
Regulatory Organizations (``SROs''), is made this 8th day of May, 2000 
pursuant to the provisions of SEC Rule 17d-2 under the Securities 
Exchange Act of 1934, which calls for agreements among self-regulatory 
organizations for plans to allocate regulatory responsibility.
    WHEREAS, the SROs, are desirous of allocation regulatory 
responsibilities with respect to their common members (member of two or 
more of the SROs) for compliance with rules relating to the conduct by 
broker-dealers of accounts for options trading; and
    WHEREAS, the SROs are desirous of executing a plan for this purpose 
pursuant to the provisions of Rule 17d-2 and filing such plan with the 
Securities and Exchange Commission (``Commission'') for its approval,
    NOW, THEREFORE, in consideration of the mutual covenants contained 
hereafter, the SROs agree as follows:
    I. The SRO identified in Exhibit A hereto as Designated Options 
Examining Authority (``DOEA'') for a common member will assume, except 
as noted below, inspection, examination and enforcement responsibility 
for such common member with respect to compliance by such member and 
persons associated with such member with (i) the rules of the SROs 
related to the conduct of accounts for option trading, and (ii) the 
provisions of the Securities Exchange Act of 1934 and the rules and 
regulations thereunder insofar as they apply to the conduct of accounts 
for options trading. Such responsibility in hereinafter referred to as 
the DOEA's ``Regulatory Responsibility.'' It is explicitly understood 
that the DOEA's Regulatory Responsibility does not include, and each of 
the SROs shall (unless allocated pursuant to SEC Rule 17d-2 otherwise 
than under this Agreement) retain full responsibility for:
    (i) Surveillance and enforcement with respect to trading activities 
or practices involving its own marketplace, including without 
limitation its rules relating to the rights and obligations of 
specialists and other market makers;
    (ii) Registration pursuant to its applicable rules of broker-
dealers' associated persons as registered options principals, senior 
registered options principals, and compliance registered options 
principles; and
    (iii) The discharge of its duties and obligations as a Designated 
Examining Authority pursuant to SEC Rule 17d-1.
    Furthermore, the DOEA's Regulatory Responsibility does not include 
evaluation of option-related advertising, responsibility for which 
shall remain with the SRO to which a common member submits same for 
approval. Except as otherwise expressly provided herein, only the DOEA 
will discharge Regulatory Responsibility under this Agreement.
    II. For purposes of this Agreement, the term ``Enforcement 
Responsibility, '' as used in the first sentence of Section I, shall 
mean the conduct of disciplinary proceedings to determine whether 
violations of pertinent laws, rules or regulations by common members 
and persons associated therewith have occurred. Such proceedings shall 
be conducted by the DOEA, except as noted below, pursuant to its 
applicable procedures. In instances where the DOEA does not have 
jurisdiction over an alleged violation of rules, it shall refer the 
matter to the SRO which has such jurisdiction. The SRO to which such 
referral is made shall conduct the appropriate proceedings pursuant to 
its applicable procedures. Apparent violations of another SRO's rules 
discovered by the DOEA pursuant to the performance of its Regulatory 
Responsibility, but which rules are not within the scope of the DOEA's 
Enforcement Responsibility, shall be referred to the relevant SRO for 
enforcement proceedings as such other SRO deems appropriate. However, 
nothing contained herein shall preclude the DOEA in its discretion from 
requesting another SRO to conduct an enforcement proceeding on a matter 
for which it has Enforcement Responsibility. If such other SRO agrees 
to do so, the Enforcement Responsibility in such case shall be deemed 
transferred to such other SRO. The SROs each agree, upon request, to 
make available promptly all relevant files, records and/or witnesses 
necessary to assist another SRO in an investigation or enforcement 
proceeding.
    III. Notwithstanding the Regulatory Responsibility of the DOEA, the 
SROs recognize that each of them may continue to maintain an available 
and appropriate mechanism for considering and acting upon request for 
extensions of time for option transactions pursuant to Regulation T of 
the Federal Reserve Board. Such extension requests may thus continue to 
be considered and acted upon by each SRO. However, nothing herein shall 
restrict the right of any SRO to enter in an agreement with another SRO 
relative to the granting of Regulation T Extensions. The DOEA will 
supply all information with respect to relevant Regulation T 
enforcement actions to other SROs of which such common member is a 
member.
    IV. This Agreement shall be administered by a committee known as 
the Options Self-Regulatory Council (``Council'') which shall be 
composed of one representative designated by each of the SROs. Each SRO 
shall also designate one or more persons as its alternate 
representative(s). In the absence of the representative of an SRO, such 
alternate representative shall have the same powers, duties and 
responsibilities as the representative. Each SRO shall file with the 
Chairman of the Council a list identifying its representative and 
alternative representative. Each SRO may, at any time, by notice to the 
Chairman of the Council, replace its representative and/or its 
alternate representative on such Council. A majority of the full 
Council shall constitute a quorum and, unless specifically otherwise 
required, the affirmative vote of a majority of the Council members 
present (in person, by telephone or by written consent) shall be 
necessary to constitute action by the Council. On the first Monday of 
October in each year, the Council shall elect one member of the Council 
to serve as Chairman and another to serve as Vice Chairman (to 
substitute for the Chairman in the event of his unavailability). In 
each case, such official shall take office effective January 1 of the 
next following calendar year and hold such office through December

[[Page 34761]]

31 of the calendar year in which he took office. [Notwithstanding the 
preceding relative to the election and tenure of the Chairman and Vice 
Chairman, an initial Chairman and Vice Chairman, named in Exhibit B 
hereto, shall assume such offices on the date of this Agreement is 
executed by the SROs and shall hold such position through December 31 
of the calendar year in which they first assumed office.] All notices 
and other communications for the Council shall be sent to it in care of 
the Chairman.
    V. Once appointed the DOEA of a common member, an SRO shall remain; 
the DOEA unless either (i) such SRO requests to be relieved of such 
responsibility by giving 30 calendar days written notice thereof and 
the Council accepts such request by appointing another SRO as the DOEA 
(which it shall, barring extraordinary circumstances, so do), (ii) the 
common member ceases to be a member of the DOEA in which case the 
Council shall promptly review the matter and assign another SRO as DOEA 
for such firm, or (iii) the Council, by reallocation, relieves the DOEA 
of its responsibilities. In no case may an SRO of which a common member 
is not a member be appointed such common member's DOEA. For no longer 
than the first two years of the life of this Agreement (subject to 
provisions (i) through (iii) above), the designations made in Exhibit A 
hereto shall remain in effect. Thereafter, the Council shall make 
general reallocations of common members no less frequently than 
biennially. The Council shall make such general reallocations in 
accordance with the provisions of this Agreement, shall be free in its 
discretion to retain the DOEA of any common member, and shall make such 
reallocations on the basis of parity, unless an SRO explicitly waives 
such basis. Parity, as used in this sense, means that, to the extent 
feasible, each SRO shall after a reallocation process, be the DOEA for 
the same number of firms as it was prior to such reallocation. Upon 
making a reallocation, the Council shall not reappoint an SRO as DOEA 
of a common member if any other eligible participant which has not 
served as DOEA for such common member requests appointment as such. 
Further, it is intended that appointment of DOEAs to common members 
will be rotated among those SROs which seek appointment as such, 
insofar as practicable. All determinations by the Council under this 
Section V with respect to allocating common members to a DOEA shall be 
by the affirmative vote of a majority of those Council members which 
are, at the time of such determination, DOEA of any common members; and 
Council members which are not DOEA of any common members shall not be 
entitled to vote on any such determination; provided, further, that no 
Council member shall be entitled to vote on any determination by the 
Council under this Section V affecting a specific common member if such 
common member is not a member of such Council member's SRO. For 
purposes of this Section V, the [Midwest] Chicago Stock Exchange, Inc., 
the International Securities Exchange LLC, the Pacific [Stock] 
Exchange, [Incorporated] Inc. and the Philadelphia Stock Exchange, Inc. 
shall not be considered DOEAs. An SRO which is not considered a DOEA 
for allocation purposes under Section V may apply to the Council to be 
considered a DOEA at any meeting of the Council. All determinations by 
the Council with respect to such applications shall be by the 
affirmative vote of a majority of those Council members, including non-
DOEAs, in attendance at such meeting. However, no such determinations 
by the Council shall affect existing 17d-2 agreements which 
participating SROs may have among themselves.
    VI. The DOEA shall conduct a routine inspection and examination of 
each common member allocated to it on a cycle not less frequently than 
determined by the Council. The other SROs agree that relevant 
information in their respective files relative to a common member will 
be made available to the DOEA upon request. At each quarterly meeting 
of the Council, each DOEA will report on the status of its examination 
program. In the event a DOEA believes it will not be able to complete 
the annual examination cycle for its allocated firms, it will so advise 
the Council. The Council will undertake to remedy this situation by 
allocating selected firms and, if necessary, lengthening the cycles for 
selected firms.
    VII. The Council shall, concurrent with the execution of this 
Agreement, adopt for use by the SROs minimum option examination and 
inspection standards. Such standards will be used by the DOEA in 
discharging its Regulatory Responsibility under this Agreement. Exhibit 
C hereto is the minimum option examination and inspection standards 
adopted by the SROs.
    VIII. The DOEA will, upon request, promptly furnish a copy of the 
report of any examination made pursuant to the provisions of this 
Agreement to each other SRO of which the common member examined is a 
member.
    IX. The DOEA will, routinely, forward to each other SRO of which a 
common member is a member, copies of all communications regarding 
deficiencies noted in a report of examination conducted by the DOEA. If 
an examination conducted by a DOEA reveals no deficiencies, such fact 
will also, upon request, be communicated by the DOEA to each other SRO 
of which the common member concerned is a member.
    X. The DOEA's Regulatory Responsibility shall include 
investigations into terminations for cause of persons associated with a 
common member relating to options, unless such termination for cause is 
uniquely related to another SRO's market. In the latter instance, that 
SRO to whose market the termination for cause relates shall discharge 
Regulatory Responsibility with respect to such termination for cause. 
In connection with a DOEA's examination, investigation and/or 
enforcement proceeding regarding an option-related termination for 
cause, the other SROs of which the common member is a member shall 
furnish to the DOEA, upon request, copies of all pertinent materials 
related thereto in their possession.
    XI. It shall be the responsibility of the DOEA to discharge the 
Regulatory Responsibility relative to a written option-related customer 
complaint relevant to a common member allocated to it, unless such 
complaint is uniquely related to another SRO's market. In the latter 
instance, the DOEA shall forward the complaint to that SRO to whose 
market the complaint relates, and the latter shall discharge Regulatory 
Responsibility with respect to such complaint. If an SRO which is not 
the DOEA shall receive a customer complaint within the DOEA's 
Regulatory Responsibility, such non-DOEA shall promptly forward a copy 
of such complaint to the DOEA.
    XII. Any written notice required or permitted to be given under 
this Agreement shall be deemed given if sent by certified mail, return 
receipt requested, to each participating SRO entitled to receipt 
thereof, to the attention of the SRO representative on the Council at 
the SRO's then principal office.
    XIII. The costs incurred by each DOEA in discharging its Regulatory 
Responsibility under this Agreement are not reimbursable. However, any 
SRO participants may agree that one or more will reimburse the other(s) 
for costs.

[[Page 34762]]

    XIV. The SROs shall notify the common members of this Agreement by 
means of a uniform joint notice approved by the Council.
    XV. This Agreement may be amended in writing duly approved by each 
SRO.
    XVI. Any of the SROs may manifest its intention to cancel its 
participation in this Agreement at any time upon the giving to the 
Council of written notice thereof at least 90 calendar days prior to 
such cancellation. Upon receipt of such notice the Council shall 
allocate, in accordance with the provisions of this Agreement, those 
common members for which the petitioning party was the DOEA. Until such 
time as the Council has completed the reallocation described above, the 
petitioning SRO shall retain all its rights, privileges, duties and 
obligations hereunder.
    XVII. The cancellation of its participation in this Agreement by 
any SRO shall not terminate this Agreement as to the SROs which remain 
participants. This Agreement will only terminate when the then 
participants therein shall notify the Commission, in writing, that they 
will terminate the Agreement. Such notice shall be given at least six 
months prior to the intended date of termination.

Limitation of Liability

    No SRO nor the Council nor any of their respective directors, 
governors, officers, employees or representatives shall be liable to 
any other participant in this Agreement for any liability, loss or 
damage resulting from or claimed to have resulted from any delays, 
inaccuracies, efforts or omissions with respect to the provision of 
Regulatory Responsibility as provided hereby or for the failure to 
provide any such Responsibility, except with respect to such liability, 
loss or damages as shall have been suffered by one or more of the SROs 
and caused by the willful misconduct of the other participants or their 
respective directors, governors, officers, employees or 
representatives. No warranties, express or implied, are made by any or 
all of the SROs or the Council with respect to any Regulatory 
Responsibility to be performed by each of them hereunder.

Relief from Responsibility

    Pursuant to Section 17(d)(1)(A) of the Securities Exchange Act of 
1934 and Rule 17d-2 promulgated pursuant thereto, the SROs join in 
requesting the Securities and Exchange Commission, upon its approval of 
this Agreement or any part thereof, to relieve those SROs which are 
from time to time participants in this Agreement which are not the DOEA 
as to a common member of any and all Regulatory Responsibility with 
respect to the matters allocated to the DOEA.
    In Witness Whereof, the SROs hereto have executed this Agreement as 
of the date and year first above written.

Exhibit A--Designated Option Examining Authorities

American Stock Exchange, LLC
Chicago Board Options Exchange, Inc.
National Association of Securities Dealers, Inc.
New York Stock Exchange, Inc.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the amended plan. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549-0609. Copies of the submission, all subsequent amendments, all 
written statements with respect to the amended plan that are filed with 
the Commission, and all written communications relating to the amended 
plan 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 at the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of each of 
the SRO participants. All submissions should refer to File No. S7-966 
and should be submitted by June 21, 2000.

V. Discussion

    The Commission continues to believe that the proposed plan is an 
achievement in cooperation among the SRO participants, and will reduce 
unnecessary regulatory duplication by allocating to the designated SRO 
the responsibility for certain options-related sales practice matters 
that would otherwise be performed by multiple SROs. The plan promotes 
efficiency by reducing costs to firms that are members of more than one 
of the SRO participants. In addition, because the SRO participants 
coordinate their regulatory functions in accordance with the plan, the 
plan promotes, and will continue to promote, investor protection.
    Under paragraph (c) of Rule 17d-2, the Commission may, after 
appropriate notice and comment, declare a plan, or any part of a plan, 
effective.\11\ In this instance, the Commission believes that 
appropriate notice and comment can take place after the proposed 
amendment is effective. The primary purpose of the amendment is to add 
the ISE as an SRO participant. By approving it today, the amendment can 
be implemented prior to the ISE beginning its operations. In addition, 
the original plan was published for comment, and no comments were 
received.\12\ The Commission does not believe that the amendment raises 
any new regulatory issues.
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    \11\ 17 CFR 240.17d-2(c).
    \12\ See supra, note 10.
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    This order gives effect to the amended plan submitted to the 
Commission that is contained in File No. S7-966. The SRO participants 
shall notify all members affected by the amended plan of their rights 
and obligations under the amended plan.
    It is therefore ordered, pursuant to Sections 17(d) and 
11A(a)(3)(B) of the Act, that the amended plan of the Amex, the CBOE, 
the CHX, the ISE, the NASD, the NYSE, the PCX, and the Phlx filed 
pursuant to Rule 17d-2 is approved.
    It is further ordered that those SRO participants that are not the 
DOEA as to a particular member are relieved of those responsibilities 
allocated to the member's DOEA under the amended plan.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(34)
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-13530 Filed 5-30-00; 8:45 am]
BILLING CODE 8010-01-M