[Federal Register Volume 66, Number 207 (Thursday, October 25, 2001)]
[Notices]
[Pages 54041-54044]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-26865]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44950; File No. SR-NASD-00-02]


Self-Regulatory Organizations; Notice of Filing of Amendments to 
Proposed Rule Change by National Associatioan of Securities Dealers, 
Inc. Amending NASD Code of Arbitration Rules 10335 and 10205(h) 
Relating to Injunctive Relief

October 18, 2001.
    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 December 18, 2000, May 17, 2001 and August 10, 2001, the National 
Association of Securities Dealers, Inc. (``NASD'' or ``Association''), 
through its wholly owned subsidiary, NASD Dispute Resolution, Inc. 
(``NASD Dispute Resolution'') filed with the Securities and Exchange 
Commission (``Commission'') Amendment No. 3, Amendment No. 4 and 
Amendment No. 5 to the proposed rule change respectively, as described 
in Items I, II, and III below, which items have been prepared by NASD 
Dispute Resolution.\3\ On April 7, 2000, the proposed rule change, 
which incorporated Amendment No. 1 and Amendment No. 2,\4\ was 
published for comment in the Federal Register.\5\ The Commission is 
publishing this notice to solicit comments on Amendment Nos. 3, 4, and 
5 from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Laura Leedy Gansler, Counsel, NASD Dispute 
Resolution to Katherine A. England, Assistant Director, Division of 
Market Regulation (``Division''), Commission, dated December 18, 
2000 (``Amendment No. 3''); letter from Laura Leedy Gansler, 
Counsel, NASD Dispute Resolution to Florence Harmon, Senior Special 
Counsel, Division, Commission, dated May 17, 2001 (``Amendment No. 
4''); and letter from Laura Leedy Gansler, Counsel, NASD Dispute 
Resolution to Florence Harmon, Senior Special Counsel, Division, 
Commission, dated August 10, 2001 (``Amendment No. 5'').
    \4\ See letters from Patrice Gliniecki, Vice President and 
Deputy General Counsel, NASD Dispute Resolution, to Katherine A. 
England, Assistant Director, Division, Commission, dated March 7, 
2000 (``Amendment No. 1'') and March 24, 2000 (A``Amendment No. 
2'').
    \5\ See Securities Exchange Act Release No. 42606 (April 3, 
2000), 65 FR 18405 (April 7, 2000) (``Original Proposal'').
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    NASD Dispute Resolution is proposing to amend Rules 10335 and 
10205(h) of the Code of Arbitration Procedure of the NASD (``Code''), 
to simplify and clarify the procedures for obtaining injunctive relief 
in certain disputes subject to arbitration. Below is the text of the 
proposed rule change. Changes to the proposed rule text added since the 
proposed rule change was published in the Federal Register on April 7, 
2000 are in italics; deletions from the previously published rule 
change are in brackets.\6\
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    \6\ NASD Disputes Resolution represents that the proposal, and 
all amendments thereto are available at its web site, 
www.nasdadr.com.
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Rules of the Association

* * * * *
10000.  Code of Arbitration Procedure
* * * * *
10300.  Uniform Code of Arbitration

Rule 10335. Temporary Injunctive Orders; Requests for Permanent 
Injunctive Relief

    (a) Temporary Injunctive Orders.
    (1) In industry or clearing disputes required to be submitted to 
arbitration pursuant to Rule 10201, parties may seek a temporary 
injunctive order, as defined in paragraph (a)(2) of this Rule, from a 
court of competent jurisdiction. Parties to a pending arbitration may 
seek a temporary injunctive order from a court of competent 
jurisdiction even if another party has already field a claim arising 
from the same dispute in arbitration pursuant to this paragraph, 
provided that an arbitration hearing on a request for permanent 
unjunctive relief pursuant to paragraph (b) of this Rule has not yet 
begun [commenced].
    (2) For purposes of this Rule, temporary injunctive order means a 
temporary restraining order, preliminary injunction or other form of 
initial, temporary injunctive relief.
    (3) A party seeking a temporary injunctive order from a court with 
respect to an industry or clearing dispute required to be submitted to 
arbitration pursuant to Rule 10201 shall simultaneously file with the 
Director a Statement of Claim requesting permanent injunctive and all 
other relief with respect to the same dispute in the manner specified 
under this Code[, and shall simultaneously]. The party seeking 
temporary injunctive relief shall also serve the Statement of Claim 
requesting permanent injunctive and all other relief on all other 
parties in the same manner and at the same time as the Statement of 
Claim is filed with the Director. Filings and service under this Rule 
shall [may] be made by facsimile, overnight delivery service or 
messager. Service shall be made on all parties at the same time and in 
the same manner, unless

[[Page 54042]]

the parties agree otherwise. A party obtaining a court-issued temporary 
injunctive order shall notify the Director and the other parties of the 
issuance of the order within one business day.
    (4) Unless otherwise stated, for purposes of computation of time 
under any paragraph of this Rule, any reference to days means calendar 
days, including Saturdays, Sundays or any NASD holiday. However, if a 
party must provide notice or a response to the Director and the day on 
which that notice or response to the Director must be given falls on a 
Saturday, Sunday or any NASD holiday, then the time period is extended 
until the next business day.
    (b) Hearing on Request for Permanent Injunctive Relief.
    (1) Scheduling of Hearing.
    If a court issues a temporary injunctive order, an arbitration 
hearing on the request for permanent injunctive relief shall begin 
[commence] within 15 days of the date the court issues the temporary 
injunctive order. If the 15th day falls on a Saturday, Sunday, or NASD 
holiday, the 15-day period shall expire on the next business day. 
Unless the parties agree otherwise, a hearing lasting more than one day 
shall be held on consecutive days when reasonably possible. The 
Director shall provide to all parties notice of the date, time and 
place of the hearing at least three days prior to the beginning 
[commencement] of the hearing.
    (2) Composition of Arbitration Panel.
    The hearing on the request for permanent injunctive relief shall be 
heard by a panel of three arbitrators, who shall either be all non-
public arbitrators as defined in Rule 10308(a)(4), or, if the 
underlying dispute would be heard by a public arbitrator or panel 
consisting of a majority of public arbitrators under Rule 10202, a 
majority of public arbitrators as defined in Rule 10308(a)(5).
    (3) Selection of Arbitrators and Chairperson.
    (A) (i) In cases in which all of the members of the arbitration 
panel are non-public under paragraph (b)(2) of this Rule, the Director 
shall generate and provide to the parties a list of seven arbitrators 
from a national roster of arbitrators. The Director shall send to the 
parties the employment history for the past 10 years for each listed 
arbitrator and other background information. At least [a majority] 
three of the arbitrators listed shall be lawyers [specializing in] with 
experience litigating cases involving injunctive relief.
    (ii) Each party may exercise one strike to the arbitrators on the 
list. Within three days of receiving the list, each party shall inform 
the Director which arbitrator, if any, it wishes to strike, and shall 
rank the remaining arbitrators in order of preference. The Direct shall 
consolidate the parties' rankings, and shall appoint arbitrators based 
on the order of rankings on the consolidated list, subject to the 
arbitrators' availability and disqualification.
    (B) (i) In cases in which the panel of arbitrators consists of a 
majority of public arbitrators under paragraph (b)(2) of this Rule, the 
Director shall generate and provide to the parties a list of nine 
arbitrators from a national roster of arbitrators. The Director shall 
send to the parties employment history for the past 10 years for each 
listed arbitrator and other background information. At least a majority 
of the arbitrators listed shall be [(1)] public arbitrators [and (2)], 
and at least four of the arbitrators listed shall be lawyers 
[specializing in] with experience litigating cases involving injunctive 
relief.
    (ii) Each party may exercise two strikes to the arbitrators on the 
list. Within three days of receiving the list, each party shall inform 
the Director which arbitrators, if any, it wishes to strike, and shall 
rank the remaining arbitrators in order of preference. The Director 
shall consolidate the parties' rankings, and shall appoint arbitrators 
based on the order of rankings on the consolidated list, subject to the 
arbitrators' availability and disqualification.
    (C) (i) Each party shall inform the Director of its preference of 
chairperson of the arbitration panel by the close of business on the 
next business day after receiving notice of the panel members.
    (ii) If the parties do not agree on a chairperson within that time, 
the Director shall select the chairperson. In cases in which the panel 
consists of a majority of public arbitrators, the Director shall select 
a public arbitrator as chairperson. [shall be one of the public 
arbitrators who is a lawyer specializing in] with experience litigating 
cases involving injunctive relief. [In cases in which the panel 
consists of non-public arbitrators, the chairperson shall be a lawyer 
specializing in injunctive relief.] Whenever possible, the Director 
shall select as chairperson the lawyer [specializing in] with 
experience litigating cases involving injunctive relief whom the 
parties have ranked the highest.
    (D) The Director may exercise discretionary authority and make any 
decision that is consistent with the purposes of this Rule and Rule 
10308 to facilitate the appointment of arbitration panels and the 
selection of chairperson.
    (4) Applicable Legal Standard.
    The legal standard for granting or denying a request for permanent 
injunctive relief is that of the state where the events upon which the 
request is based occurred, or as specified in an enforceable choice of 
law agreement between the parties.
    (5) Effect of Pending Temporary Injunctive Order.
    Upon a full and fair presentation of the evidence from all relevant 
parties on the request for permanent injunctive relief, the panel may 
prohibit the parties from seeking an extension of any court-issued 
temporary injunctive order remaining in effect, or, if appropriate, 
order the parties jointly to move to modify or dissolve any such order. 
In the event that a panel's order conflicts with a pending court order, 
the panel's order will become effective upon expiration of the pending 
court order.
    (2) Fees, Costs and Expenses, and Arbitrator Honorarium.
    (A) The parties shall jointly bear [the] reasonable travel-related 
costs and expenses incurred by arbitrators who are required to travel 
to a hearing location other than their primary hearing location(s) in 
order to participate in [of the arbitrators appointed to hear] the 
hearing on the request for permanent injunctive relief. [The 
arbitrators shall not reallocate such costs and expenses among the 
parties.] The arbitrators may reallocate such costs and expenses among 
the parties in the award.
    (B) The party seeking injunctive relief shall pay the expedited 
hearing fees pursuant to Rule 10205(h), or, where both sides seek such 
relief, both parties shall pay such fees. In either event, however, the 
arbitrator(s) [shall have the authority to] may reallocate such fees 
among the parties in the award.
    (C) Notwithstanding any other provision in the Code, the 
chairperson of the panel hearing a request for permanent injunctive 
relief pursuant to this Rule shall receive an honorarium of $375 for 
each single session, and $700 for each double session, of the hearing. 
Each other member of the panel shall receive an honorarium of $300 for 
each single session, and $600 for each double session, of the hearing. 
The parties shall equally pay the difference between these amounts and 
the amounts panel members and the chairperson receive under the Code 
pursuant to IM-10104. The arbitrators [shall not] may reallocate such 
amount among the parties in the award.
    (c) Hearing on Damages or other Relief.
    (1) Upon completion of the hearing on the request for permanent 
relief, the

[[Page 54043]]

panel, may, if necessary, set a date for any subsequent hearing on 
damages or other relief, which shall be held before the same panel or 
arbitrators and which shall include, but not be limited to, the same 
record.
    (2) The parties shall jointly bear [the] reasonable travel-related 
costs and expenses [of the arbitrators resulting from] incurred by 
arbitrators who are required to travel to a hearing location other than 
their primary hearing location(s) in order to participate in any 
subsequent hearings on damages or other relief. The arbitrators [shall 
not] may reallocate such costs and expenses among the parties in the 
award.
    (d) Unchanged.
* * * * *

10200.  INDUSTRY AND CLEARING CONTROVERSIES

10205.  Schedule of Fees for Industry and Clearing Controversies
    (a)-(k) Unchanged.

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

    NASD Dispute Resolution has filed three amendments to the proposed 
rule change since it was published for comment by the Commission on 
April 7, 2000.\7\ In the amendments filed with the Commission, NASD 
Dispute Resolution included statements concerning the purpose of and 
basis for the amendments to 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 Dispute Resolution has prepared summaries, set forth in Sections 
A, B, and C below, of the most significant aspects of such statements.
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    \7\ See Amendment No. 3, Amendment No. 4 and Amendment No. 5, 
supra note 3.
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A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Rule 10335 of the Code is a pilot rule providing procedures for 
obtaining interim and permanent injunctive relief in arbitration. The 
pilot rule is currently due to expire on January 4, 2002. The purpose 
of the proposed rule change is to streamline the process for obtaining 
injunctive relief, and to expedite the disposition of the merits of 
cases in which injunctive relief is ordered.
    The Commission published the proposed rule change for comment on 
April 7, 2000.\8\ On December 19, 2000, NASD Dispute Resolution filed 
Amendment No. 3 and a Response to Comments responding to a majority of 
the comment letters.\9\ On December 21, 2000, NASD Dispute Resolution 
filed a second Response to Comments responding to the remaining comment 
letters subsequently received by NASD Dispute Resolution.\10\ Since 
then, NASD Dispute Resolution has amended the proposed rule change 
twice more in response to comments from the Commission staff.\11\ The 
amendments to the proposed rule change made since the proposed rule 
change was published for comment are summarized below.
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    \8\ See note 5.
    \9\ See Amendment No. 3 for a detailed summary of the comments 
and NASD Dispute Resolutions' response, supra note 3.
    \10\ See supra note 5.
    \11\ See Amendment No. 4 and Amendment No. 5, supra note 3.
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Panel Composition

    The proposed rule change originally required that a majority of 
arbitrators hearing requests for permanent injunctive relief be lawyers 
specializing in injunctive relief. A number of commenters expressed the 
view that this requirement was overly vague, would result in more 
arbitrators with a bias in favor of member firms and would give the 
staff too much discretion in determining who met the criteria. In 
response, NASD Dispute Resolution amended the proposed rule change to 
provide that a majority of arbitrators hearing a request for permanent 
injunctive relief be lawyers ``with experience litigating cases 
involving'' injunctive relief, rather than lawyers ``specializing in'' 
injunctive relief. In response to additional comments from the 
Commission staff based on commenters' concerns about panel composition, 
the proposed rule change was further amended to provide that less than 
a majority of the arbitrators listed would be required to be lawyers 
with experience litigating cases involving injunctive relief. 
Therefore, the proposed rule now provides that at least three of seven, 
or four of nine, rather than a majority, of the listed arbitrators in 
non-public and public cases, respectively, shall be lawyers with 
experience litigating cases involving injunctive relief.\12\
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    \12\ See letter from John W. Shaw and Jeffrey A. Ziesman, 
Berkowitz, Feldmiller, Stanton, Brandt, Williams & Stueve, LLP, 
counsel to Sutro & Co. Incorporated, to Secretary, Commission, dated 
April 28, 2000 (``Sutro Comment Letter''), and letter from Dan 
Jamieson, Public Investor, to Jonathan Katz, Secretary, Commission, 
dated May 1, 2000.
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Allocation of Fees and Costs

    In order to fill a panel to hear requests for permanent relief 
within the shortened time frame provided by the proposed rule, 
arbitrators will occasionally be required to travel to hearing 
locations other than their primary hearing location. The proposed rule 
change originally provided that the parties would jointly bear the 
travel-related costs and expenses of the arbitrators hearing the 
request for permanent relief or any subsequent hearing on other relief, 
as well as the additional honoraria required by the rule, and 
prohibited arbitrators from reallocating costs and expenses among the 
parties.
    In response to comments, NASD Dispute Resolution amended the text 
of the proposed rule change to delete all prohibitions on reallocation 
of the costs, expenses, fees, and honoraria. In addition, the proposed 
rule change was amended to expressly provide that the arbitrators may 
reallocate these costs, expenses, and honoraria in the award. NASD 
Dispute Resolution also amended the provisions relating to travel costs 
and expenses to clarify that the parties are only responsible for 
reasonable travel-related costs and expenses incurred by arbitrators 
who are required to travel to a hearing location other than their 
primary hearing location(s) in order to participate in the hearing on 
the request for permanent injunctive relief or subsequent hearings on 
other forms of relief.

Appointment of Arbitrators

    At the suggestion of the Commission staff, NASD Dispute Resolution 
amended the proposed rule change to make clear that certain procedures 
in Rule 10308 under the Code for providing parties with background 
information regarding the listed arbitrators, and for appointing 
arbitrators based on the consolidated list of the parties' rankings, 
apply in the context of the proposed rule. Specifically, the proposed 
rule change now provides that the Director shall send to the parties 
the employment history for each listed arbitrator for the past 10 years 
and other background information. This language mirrors language in 
Rule 10308(b)(6) under the Code. The proposed rule change also now 
provides that once the lists are ranked and returned by the parties, 
the Director shall consolidate the parties' rankings and shall appoint 
arbitrators based on the order of rankings on the consolidated list, 
subject to availability and disqualification. This language

[[Page 54044]]

mirrors language in Rule 10308(c)(3) and (c)(4) under the Code.

Filing and Service of Statement of Claim

    NASD Dispute Resolution amended the proposed rule change to clarify 
that when parties file a Statement of Claim in arbitration pursuant to 
paragraph (a)(3) of the proposed rule, the Statement of Claim must 
include requests for all permanent relief, whether injunctive or 
otherwise. The same provision was also amended to clarify that service 
under the rule must be made on all parties at the same time and in the 
same manner, unless the parties agree otherwise, and that the Statement 
of Claim must be filed with the Director in the same manner as it is 
served on the other parties. The provision was also amended to clarify, 
because of the short time frames provided by the rule, that service and 
filings under the rule must be either by facsimile, overnight delivery 
service or messenger. These changes reflect the intent of the original 
rule filing and are merely intended to remove any ambiguity from the 
original filing.

Consecutive Hearing Days

    To further ensure prompt presentation of evidence in such cases, 
the proposed rule was amended to provide that, to the extent possible, 
hearings on requests for permanent injunctive relief lasting more than 
one day would be held on consecutive days, unless the parties agree 
otherwise.
    (b) Timing of Requests for Temporary Injunctive Orders in Court: 
The proposed rule provides that parties to a pending arbitration may 
seek temporary injunctive relief in court even if another party has 
already filed a claim arising from the same dispute in arbitration, 
provided that an arbitration hearing on the request for permanent 
injunctive relief has not yet begun. NASD Dispute Resolution amended 
this provision to clarify that this provision refers to the arbitration 
hearing on the merits of the request for permanent injunctive relief, 
and not to any pre-hearing conferences related to the hearing on the 
request for permanent injunctive relief.
    (c) Commence v. Begin: At the request of the Commission staff, NASD 
Dispute Resolution replaced the word ``commence'' with the word 
``begin,'' or the appropriate form thereof, throughout the proposed 
rule to respond to a commenter's request to clarify that the relevant 
provisions refer to the arbitration hearing on the merits.\13\
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    \13\ See Sutro Comment Letter, supra note 12.
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2. Statutory Basis
    NASD Dispute Resolution believes that the proposed rule change as 
amended is consistent with the provisions of Section 15A(b) of the 
Exchange Act,\14\ in general, and furthers the objectives of Section 
15A(b)(6),\15\ in particular, which requires, among other things, that 
the Association's rules must 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. The NASD believes that it is in the best interest of 
investors and the parties involved in intra-industry disputes to 
provide for fast and efficient resolution of requests for temporary 
injunctive relief, and to provide clear and simple rules governing the 
integration of court-ordered relief with the arbitration of the 
underlying disputes.
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    \14\ 15 U.S.C. 78o-3(b).
    \15\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD Dispute Resolution 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, as 
amended.

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

    The NASD submitted Amendment No. 3, Amendment No. 4 and Amendment 
No. 5 to the proposed rule change (``Current Amendments'') in response 
to written comments it received on the Original Proposal. Written 
comments regarding the Current Amendments were neither solicited nor 
received.

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 the self-regulatory organization 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.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment Nos. 3, 4, and 5, including whether 
Amendment Nos. 3, 4, and 5 are consistent with the Act. The Commission 
notes in particular that, under the proposal, the parties shall jointly 
bear the reasonable travel-related costs and expenses resulting from 
any subsequent hearings on damages or other relief. In addition, the 
parties shall equally pay the difference between the honorarium under 
proposed paragraph (b)(6)(C) of Rule 10335 and the amounts the 
arbitrators are otherwise entitled to receive under the Code. The 
arbitrators may reallocate these costs and expenses among the parties. 
The Commission seeks comments on this fee structure, including whether 
the proposal is consistent with the Act which, among other things, 
prohibits the imposition of inappropriate and unnecessary burdens on 
competition \16\ and requires that fees and charges be reasonable and 
equitably allocated.\17\
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    \16\ See 15 U.S.C. 78o-3(b)(9).
    \17\ See 15 U.S.C. 78o-3(b)(5).
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    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 such filing will also be available for 
inspection and copying at the principal office of the NASD. All 
submissions should refer to File No. SR-NASD-00-02 and should be 
submitted by November 15, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-26865 Filed 10-24-01; 8:45 am]
BILLING CODE 8010-01-M