[Federal Register Volume 66, Number 3 (Thursday, January 4, 2001)]
[Notices]
[Pages 830-834]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-154]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43765; File No. SR-NASD-99-46]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the National Association of Securities Dealers, Inc., 
Requiring Registration of Chief Compliance Officers

December 21, 2000.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on September 20, 1999, the National Association of Securities Dealers, 
Inc. (``NASD'' or ``Association''), through its wholly-owned 
subsidiary, NASD Regulation, Inc. (``NASD Regulation''), filed with the 
Securities and Exchange Commission (``SEC'' or ``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by NASD Regulation. NASD Regulation filed

[[Page 831]]

Amendment Nos. 1 \3\ and 2 \4\ to the proposed rule change on December 
11, 2000 and December 6, 2000, respectively. The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter dated October 28, 1999, from Alden S. Adkins, 
Senior Vice President and General Counsel, NASD Regulation, to 
Katherine A. England, Assistant Director, Division of Market 
Regulation (``Division''), Commission (``Amendment No. 1''). 
Amendment No. 1 clarifies that if a person becomes a chief 
compliance officer for the first time after the effective date of 
the proposed rule change for a dual New York Stock Exchange and NASD 
member, that person may elect to take the New York Stock Exchange 
Series 14 exam, and would not be required to take NASD Series 24 
exam.
    \4\ See Letter dated December 1, 2000, from Alden S. Adkins, 
Senior Vice President and General Counsel, NASD Regulation, to Jack 
Drogin, Assistant Director, Division, Commission (``Amendment No. 
2''). Amendment No. 2 limits the grandfathering provision of the 
proposed rule change to individuals who have been designated as 
chief compliance officers on Schedule A of Form BD for at least two 
years immediately prior to the effective date of the proposed rule 
change and who have not been subject within the previous ten years 
to: (1) Any statutory disqualification as defined in Section 
3(a)(39) of the Act; (2) a suspension; or (3) the imposition of a 
fine of $5,000 or more for a violation of any provision of any 
securities law or regulation, or any agreement with or rule or 
standard of conduct of any securities governmental agency, 
securities self-regulatory organization, or as imposed by any such 
regulatory or self-regulatory organization in connection with a 
disciplinary proceeding.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    NASD Regulation is proposing to amend NASD Rule 1022(a) to require 
chief compliance officers to register with the NASD as general 
securities principals. Below is the text of the proposed rule change. 
Proposed new language is in italics; proposed deletions are in 
brackets.

1022. Categories of Principal Registration

(a) General Securities Principal
    Each person associated with a member who is included within the 
definition of principal in Rule 1021, and each person designated as a 
Chief Compliance Officer on Schedule A of Form BD, shall be required to 
register with the Association as a General Securities Principal and 
shall pass an appropriate qualification examination before such 
registration may become effective unless [his] such person's activities 
are so limited as to qualify [him] such person for one or more of the 
limited categories of principal registration specified hereafter. A 
person whose activities in the investment banking or securities 
business are so limited is not, however, precluded from attempting to 
become qualified for registration as a General Securities Principal, 
and if qualified, may become so registered. Each person seeking to 
register and qualify as a General Securities Principal must, prior to 
or concurrent with such registration, become registered, pursuant to 
the Rule 1030 Series, either as a General Securities Representative or 
as a Limited Representative-Corporate Securities. A person who has been 
designated as a Chief Compliance Officer on Schedule A of Form BD for 
at least two years immediately prior to [insert effective date of 
proposed rule change] and who has not been subject within the last ten 
years to any statutory disqualification as defined in Section 3(a)(39) 
of the Act; a suspension; or the imposition of a fine of $5,000 or more 
for violation of any provision of any securities law or regulation, or 
any agreement with or rule or standard of conduct of any securities 
governmental agency, securities self-regulation organization, or as 
imposed by any such regulatory or self-regulatory organization in 
connection with a disciplinary proceeding shall be required to register 
as a General Securities Principal, but shall be exempt from the 
requirement to pass the appropriate Qualification Examination. If such 
person has acted as a Chief Compliance Officer for a member whose 
business is limited to the activities described in Rule 1022(d)(1)(A) 
or Rule 1022(e)(2), he or she shall be exempt from the requirement to 
pass the appropriate Qualification Examination only if he or she 
registers as a Limited Principal pursuant to Rules 1022(d) or Rule 
1022(e), as the case may be, and restricts his or her activities as 
required by such registration category. A Chief Compliance Officer who 
is subject to the Qualification Examination requirement shall be 
allowed a period of 90 calendar days following [insert effective date 
of proposed rule change] within which to pass the appropriate 
Qualification Examination for Principals.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, NASD Regulation included 
statements concerning the purpose of, and basis for, the proposed rule 
change and discussed any comments it received on the proposed rule 
change. The text of these statements may be examined at the places 
specified in Item IV below. NASD Regulation has prepared summaries, set 
forth in Sections A, B, and C below, of the most significant aspects of 
such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to require the chief 
compliance officer designated on Schedule A of a member's Form BD to be 
registered as a principal. Some chief compliance officers may already 
be registered as a principal due to other NASD rule requirements. For 
example, NASD Rule 3010(a)(8) requires each member to designate and 
specifically identify to the NASD one or more principals who are 
required to review the member's supervisory system, procedures, and 
inspections implemented by the member and take appropriate action 
reasonably designed to achieve the member's compliance with applicable 
securities laws and regulations. For some members, the chief compliance 
officer is one of these designated principals. For other members, the 
chief compliance officer may already be registered as a principal 
because he or she is an officer of the member or otherwise engaged in 
the member's investment banking or securities business in a manner that 
requires principal registration under NASD Rule 1021.
    For other members, however, chief compliance officers may not be 
registered. Rule 1021(a), which sets forth the requirements for 
principal registration, states that a member ``may'' make or maintain 
an application for principal registration for certain personnel, 
including compliance personnel. The negative implication of this 
provision is that compliance personnel are not required to be 
registered, but that a member may choose whether to register an 
individual with compliance responsibilities. Some members have chosen 
not to register any compliance personnel.
    NASD Regulation believes that the chief compliance officer of a 
member, as designated on Schedule A of the Form BD, should be 
registered as a principal. Chief compliance officers generally advise 
registered representatives and other principals on compliance issues 
and devise compliance systems and procedures for the firm as a whole. 
As such, a chief compliance officer should be able to demonstrate his 
or her knowledge through a qualifications

[[Page 832]]

examination and be subject to continuing education requirements.
    Under the proposed rule change, the chief compliance officer must 
be registered as a Series 24 General Securities Principal, unless the 
member's activities are limited to particular areas of the investment 
banking or securities business. In that case, the individual may apply 
for a limited principal registration. For example, if a member sells 
only mutual funds, the chief compliance officer of that member may 
apply for registration as either a Series 26 Limited Principal--
Investment Company and Variable Contracts Products or a Series 24 
General Securities Principal. Acceptable limited principal categories 
for a chief compliance officer are the Series 4 (Registered Options 
Principal), 26 (Limited Principal Investment Company and Variable 
Contracts Products), 39 (Limited Principal Direct Participation 
Programs), and 73 (Government Securities Principal), if the activities 
of the chief compliance officer's firm are limited to these areas.
    By requiring chief compliance officers to be registered, NASD 
Regulation is not creating a presumption that they are supervising the 
member's securities or investment banking business or otherwise are 
control persons. Some chief compliance officers are completely 
segregated from a member's supervisory structure. As in the past, NASD 
Regulation will determine whether a person is acting as a supervisor or 
control person by looking at the responsibilities and functions he 
performs for the member, not simply his title.
    To avoid imposing duplicative examination requirements on dual 
NASD/New York Stock Exchange (``NYSE'') members, NASD Regulation has 
determined that for purposes of chief compliance officer registration, 
it will accept the NYSE's Series 14 Compliance Official examination in 
lieu of any of the NASD principal examinations noted above. For 
example, if a person had passed the NYSE Series 14, and after the 
effective date of the rule, accepted a chief compliance officer 
position with an NASD member, then the person would not be required to 
take the Series 24 examination. In addition, if a person becomes a 
chief compliance officer for the first time after the effective date of 
the proposed rule change for a dual NASD/NYSE member, that person may 
elect to take just the NYSE Series 14 exam, and would not be required 
to take NASD Series 24 exam.\5\
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    \5\ See Amendment No. 1, supra note 3.
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    NASD Regulation currently proposes to make the rule change 
effective on July 1, 2001. A person who has been designated as a chief 
compliance officer on Schedule A of Form BD for at least two years 
immediately prior to the effective date of proposed rule change and who 
has not been subject within the last ten years to the disciplinary 
procedures described in proposed Rule 1022(a) will not have to pass the 
appropriate qualification examination. All chief compliance officers 
``grandfathered'' will be subject to continuing education requirements. 
If the chief compliance officer is registered as a Limited Principal, 
he or she will be exempt from the requirement to pass the appropriate 
qualification examination if he or she restricts his or her activities 
as required by such registration category. A chief compliance officer 
who is subject to the qualification examination requirement must pass 
the appropriate exam within 90 calendar days of the effective date of 
proposed rule change.\6\
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    \6\ See Amendment No. 2, supra note 4.
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    If a person grandfathered under this provision wishes to serve as a 
principal for any other function, he must be appropriately qualified 
and registered. The grandfather provision applies only to the chief 
compliance officer function. Any person who is listed as the chief 
compliance officer on the Form BD for the first time on or after July 
1, 2001, will be required to apply for registration, pass the required 
examinations, and participate in continuing education.
    Finally, NASD Regulation wishes to clarify an interpretive position 
related to the new chief compliance officer registration requirement. 
In Notice to Members 99-49, NASD Regulation stated that a general 
counsel of a member is not required to be registered unless he sits on 
the member's board of directors or otherwise participates in the 
management of the member's securities or investment banking 
business.\7\ NASD Regulation has determined that this interpretation 
will continue to apply after the effective date of the rule even if a 
registered chief compliance officer reports directly to the general 
counsel (i.e., the general counsel has the power to hire and fire and 
direct the activities of the chief compliance officer). NASD Regulation 
does not believe that it is necessary at this time to impose a general 
registration requirement on general counsels, or to require them to be 
registered simply because registered persons may report to them.
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    \7\ The Notice to Members further explained that an employee of 
a member who sits on its board of directors is generally presumed to 
be involved in the day-to-day management of the member's business 
and therefore is required to be registered as a principal. If the 
general counsel or corporate secretary is not a director but has 
management-level responsibilities for supervising any aspect of the 
member's investment banking or securities business, he would have to 
be registered as a principal. Management responsibilities in this 
context would include serving as a voting member of the firm's 
executive, management, or operations committees. A general counsel 
may participate in such committees' activities without triggering a 
registration requirement if he only provides counsel to the 
committee and does not vote.
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2. Statutory Basis
    NASD Regulation believes that the proposed rule change, as amended, 
is consistent with the provisions of section 15A(b)(6) of the Act,\8\ 
which requires, among other things, that the Association's rules be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade and, in general, to 
protect investors and the public interest. NASD Regulation believes 
that adding this registration requirement will help protect investors 
and the public interest by ensuring that chief compliance officers can 
demonstrate their knowledge about compliance matters and stay up-to-
date with industry requirements through continuing education.
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    \8\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD Regulation does not believe that the proposed rule change, as 
amended, will result in any burden on competition that is not necessary 
or appropriate in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The proposed rule change was published for comment in NASD Notice 
to Members 99-51. NASD Regulation received sixty-one comments in 
response to the Notice. Thirty-seven commenters favored registration of 
chief compliance officers \9\ and 15 were

[[Page 833]]

opposed.\10\ Nine commenters did not take a specific position on 
requiring chief compliance officer registration.\11\ Some of the 
commenters who opposed the proposed rule change stated that it is not 
necessary for chief compliance officers to demonstrate their knowledge 
through examinations because they could not obtain the position unless 
they were competent and/or that the expenses associated with 
registration would be burdensome.\12\ One commenter stated that 
continuing education programs are already available to compliance 
personnel.\13\ Another commenter stated that the rule would create a 
presumption that the chief compliance officer is a control person.\14\
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    \9\ Letters from A.G. Edwards & Sons, Inc. (``A.G. Edwards''); 
American Equity Capital, Inc. (``American Equity''); Atlantic 
Capital Management, LLC (Atlantic); BMS International (``BMS''); 
Burke, Christensen & Lewis Securities, Inc. (``Burke, 
Christensen''); California Association of Independent Broker-Dealers 
(``CAIBD''); Centennial Securities Co. (``Centennial''); 
Consolidated Financial Investments, Inc. (``Consolidated 
Financial''); Corporate Network Brokerage Services, Inc. 
(``Corporate Network''); Melissa Crockett (``Crockett''); Davenport 
& Company, LLC (``Davenport''); Dreyfus Brokerage Services 
(``Dreyfus''); Robert A. Eder, Sr. (``Eder''); FAS Wealth Management 
Services, Inc. (``FAS Wealth Management''); Fulcrum Financial 
Advisors, Inc. (``Fulcrum''); H.C. Wainwright & Co., Inc. 
(``Wainwright''); Jackson Securities, Inc. (``Jackson''); John 
Hancock Mutual Life Insurance Company (``John Hancock''); Lynn 
Junkin (``Junkin''); Betty Kabanek; Don Katz (``Katz''); Keystone 
Brokerage, Inc. (``Keystone''); Andrew J. Lenza (``Lenza''); Liberty 
Funds Distributor, Inc. (``Liberty Funds''); Lincoln Investment 
Planning, Inc. (``Lincoln Investment''); Larry Lowman (``Lowman''); 
Mid-Florida Equities, Inc. (``Mid-Florida Equities''); MidSouth 
Capital Incorporated (``MidSouth Capital''); 
[email protected]; MML Investors Services, Inc. 
(``MML''); Nalico Equity; Linda K. Parker (``Parker''); Regions 
Investment Company, Inc. (``Regions''); Althea Roberts 
(``Roberts''); SIA Self-Regulation and Supervisory Practices 
Committee (``SIA Committee''); Tradition, Inc. (``Tradition''); and 
Unified Management Corporation (``Unified Management'').
    \10\ Letters from Branch Cabell & Co., Inc. (``Branch Cabell''); 
Charles Schwab & Co., Inc. (``Schwab''); Mark Geregach (``Geregach); 
George T. Goldman; Mark Horin (``Horin''); Knight Securities, L.P. 
(``Knight Securities''); Eric D. Koval (``Koval''); 
[email protected]; Joel Martin McTague (``McTague''); Orrick, 
Herrington & Sutcliffe, LLP; Princeton Equity Securities, Inc.; St. 
Bernard Financial Services, Inc.; Syndicated Capital; John Tubman; 
and Robert Woeber (``Woeber'').
    \11\ Letters from DMA Management and Regulatory Consulting; 
Donald W. Gendron (``Gendron''); Investment Company Institute 
(``ICI''); Eileen Miotke; Bill Mullally; NBC Capital Markets Group, 
Inc.; Nationwide Life Insurance Company; Lisa Roth; and The 
Securities Center, Inc. (``TSC''). For example, some commenters 
stated that small firms should be exempted from the requirement of 
chief compliance officer registration. See Letters from Gendron and 
TSC.
    \12\ See Letters from Branch Cabell; Horin; Koval; Schwab; and 
Woeber.
    \13\ See Letter from Geregach.
    \14\ See Letter from Knight Securities.
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    NASD Regulation does not believe that the incremental effort 
required for a chief compliance officer to pass examinations to 
demonstrate his knowledge would be burdensome. As noted above, some 
chief compliance officers already are registered as principals, so no 
additional requirement is being imposed on them. Also, NASD Regulation 
does not believe that the cost associated with registering at most one 
more person for each member is unduly burdensome. Furthermore, required 
annual continuing education programs will assist the chief compliance 
officer in staying current with regulatory requirements and 
developments. Finally, as stated above, NASD Regulation will not 
presume that a chief compliance officer is a supervisor or control 
person just by virtue of his title.
    Twenty-six commenters favored using the Series 24 General 
Securities Principal registration category (or a limited principal 
category as appropriate); \15\ four commenters were opposed.\16\ Only 
nine commenters favored the creation of a new examination,\17\ while 14 
commenters opposed it.\18\ NASD Regulation determined not to create a 
new examination because it believes that the Series 24 is suitable for 
testing knowledge of compliance matters, some chief compliance officers 
have already taken and passed it, and the development costs associated 
with a new examination would have to be passed along to members.
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    \15\ See Letters from A.G. Edwards; Atlantic; BMS; Consolidated 
Financial; Corporate Network; Crockett; Eder; FAS Wealth Management; 
Fulcrum; Jackson; John Hancock; Junkin; Keystone; Lenza; Liberty 
Funds; Lincoln Investment; Lowman; Mid-Florida Equities; MidSouth 
Capital; [email protected]; MML; Parker; Regions; SIA 
Committee; Tradition; and Unified Management.
    \16\ See Letters from American Equity; Burke, Christensen; and 
CAIBD.
    \17\ See Letters from A.G. Edwards; Burke, Christensen; CAIBD; 
Centennial; Fulcrum; Lenza; Mid-Florida Equities; and Lisa Roth.
    \18\ See Letters from American Equity; Corporate Network; Eder; 
Wainwright; John Hancock; Katz; Liberty Funds; Lowman; MidSouth 
Capital; [email protected]; MML; Parker; Regions; and 
SIA Committee.
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    Nine commenters favored accepting the NYSE Series in lieu of the 
Series 24.\19\ NASD Regulation agrees with these commenters and will 
accept the NYSE examination for purposes of chief compliance officer 
registration.
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    \19\ See Letters from A.G. Edwards; Corporate Network; 
Davenport; Dreyfus; H.C. Wainwright; John Hancock; Roberts; Schwab; 
and SIA Committee.
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    Most commenters did not address the issue of whether a general 
counsel who supervises a registered chief compliance officer should be 
registered. However, nine commenters specifically favored requiring 
such a general counsel to be registered,\20\ while eight were 
opposed.\21\ Only one of the commenters in favor of general counsel 
registration offered a rationale for its position, stating that a law 
degree does not ensure knowledge of securities laws and that a general 
counsel who supervises a chief compliance officer is in effect the 
chief compliance officer himself.\22\ While NASD Regulation agrees with 
the first reason, it disagrees with the second. The fact that a chief 
compliance officer reports to another officer such as the general 
counsel does not make that officer the ``effective'' chief compliance 
officer. Commenters opposed to requiring a general counsel to register 
stated that a registration requirement could lead firms to restructure 
reporting lines, undermine the independence of the general counsel, and 
improperly interfere with the practice of law.\23\ NASD Regulation does 
not believe that a compelling reason has been offered at this time to 
impose a general registration requirement on general counsels who 
supervise chief compliance officers.
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    \20\ See Letters from A.G. Edwards; Crockett; Davenport; Eder; 
Keystone; MidSouth Capital; MML; NBC Capital Markets Group, Inc.; 
and Tradition.
    \21\ See Letters from ICI; John Hancock; Knight Securities; 
Lenza; Liberty Funds; McTague; Nationwide Life Insurance Company; 
Syndicated Capital.
    \22\ See Letter from Davenport.
    \23\ See Letters from ICI and Knight Securities.
    \24\ See Letters from A.G. Edwards; Crockett; Fulcrum; MidSouth 
Capital; Parker; and SIA Committee.
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    Six commenters opposed grandfathering current chief compliance 
officers (i.e., applying the proposed rule change prospectively 
only).\24\ NASD Regulation disagrees with these commenters. As noted 
previously, the NASD rules to date have not explicitly required chief 
compliance officer registration, and it would be unnecessarily 
burdensome to apply the new requirement immediately to all persons 
currently serving in this position. Therefore, NASD Regulation 
determined to impose the requirement only on persons who have not acted 
as chief compliance officers for at least two years immediately prior 
to the effective date of the proposed rule change and who have not been 
subject within the last ten years to the disciplinary procedures 
described in proposed Rule 1022(a).

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which NASD Regulation consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

[[Page 834]]

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposal, as 
amended, is consistent with the Act. 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 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 the filing will also be 
available for inspection and copying at the principal office of the 
NASD. All submissions should refer to the File No. SR-NASD-99-46 and 
should be submitted by January 25, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 2000.30-3(a)(12).
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Johnathan G. Katz,
Secretary.
[FR Doc. 01-154 Filed 1-3-01; 8:45 am]
BILLING CODE 8010-10-M