[Federal Register Volume 67, Number 22 (Friday, February 1, 2002)]
[Notices]
[Pages 5024-5027]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-2487]



[[Page 5024]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45331; File No. SR-NYSE-2001-50]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the New York Stock Exchange, 
Inc. Extending the Pilot Program for NYSE Direct+ until December 23, 
2002

January 24, 2002.
    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 17, 2001, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') filed a proposed rule change with the Securities and 
Exchange Commission (``SEC'' or ``Commission''). The proposed rule 
change is described in Items I, II, and III below, which Items have 
been prepared by the Exchange. The Exchange filed the proposed rule 
change pursuant to section 19(b)(3)(A) of the Act,\3\ and Rule 19b-
4(f)(6) thereunder,\4\ which renders the proposed rule change effective 
upon filing with the Commission. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6). The Exchange filed the pre-filing 
notice required by Rule 19b-4(f)(6) by filing a written description 
of the proposed rule change and the text of the proposed rule change 
on November 28, 2001.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange is proposing to extend the pilot program period for 
NYSE Direct+, and all pertinent interpretations, for an additional 
year, or until December 23, 2002. No changes to previously approved 
rule language are being proposed.

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

    In its filing with the Commission, the Exchange 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. The Exchange 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
    On December 22, 2000, the Commission approved a proposed rule 
change implementing NYSE Direct+, an automatic execution facility for 
certain limit orders of 1099 shares or less, on a one year pilot basis 
ending on December 21, 2001.\5\ The Exchange has filed this proposed 
rule change to extend the NYSE Direct+ pilot program for another year, 
or until December 23, 2002.
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    \5\ Securities Exchange Act Release No. 43767 (December 22, 
2000), 66 FR 834 (January 4, 2001)(SR-NYSE-00-18).
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    The purpose of the original proposed rule change was to provide for 
the automatic execution of limit orders of 1099 shares or less (``auto 
ex'' orders) against trading interest reflected in the Exchange's 
published quotation. Under NYSE Direct+, it is not mandatory that all 
limit orders of 1099 shares be entered as auto ex orders; rather, the 
member organization entering the order or its customer if enabled by 
the member organization can choose to enter an auto ex order when such 
member organization (or customer) believes that the speed and certainty 
of an execution at the Exchange's published bid or offer price is in 
its customer's best interest. In such a case, the member organization 
enters an auto ex order priced at or above the Exchange's published 
offer price (in the case of an auto ex order to buy), or an auto ex 
order priced at or below the Exchange's published bid price (in the 
case of an auto ex order to sell). The auto ex order then receives an 
automatic execution without being exposed to the auction market, 
provided the bid or offer is still available. In any instance where, as 
specified in Rule 1000 below, the automatic execution feature is not 
available, the auto ex order will be entered for execution in the 
Exchange's auction market. Auto ex transactions are identified on the 
Consolidated Tape with a unique identifier. The Exchange's published 
bid or offer is automatically decremented to the extent of the size of 
the auto ex order to reflect the automatic execution. The contra side 
of the auto ex order execution is the trading interest reflected in the 
Exchange's bid or offer, with such interest participating in the 
execution in accordance with the Exchange's auction market principles 
of priority and parity as codified in NYSE Rule 72. Any member 
organization or a customer if enabled by the member organization that 
believed in any particular case that the customer's interests would be 
best served by affording the customer's order the opportunity for price 
improvement may enter a limit or market order by means of the SuperDOT 
system for representation in the auction market, rather than an auto ex 
order.
    The Exchange's proposal was implemented in a new series of rules, 
Rules 1000 through 1005 and a proposed amendment to Rule 13. The pilot 
program is currently available for all stocks.\6\ A description of all 
existing Exchange rules affected by NYSE Direct+, as well as the new 
series of Rules implementing NYSE Direct+ follows:
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    \6\ When initially approved, NYSE Direct+ was only implemented 
for a limited number of stocks prior to being made available for all 
stocks. See Securities Exchange Act Release No. 43767 (December 22, 
2001), 66 FR 834 (January 4, 2001) (SR-NYSE-00-18).
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Rule 13

    Rule 13 was amended to define an auto ex order type. An auto ex 
order now includes a limit order of 1099 shares or less priced at or 
above the Exchange's published offer (in the case of an order to buy) 
or at or below the Exchange's published bid (in the case of an order to 
sell) which shall receive an automatic execution against the interest 
reflected in the published quotation, provided the size of the 
published quotation is greater than 100 shares. An auto ex order or any 
portion thereof that cannot be immediately executed shall be displayed 
as a limit order in the Exchange's auction market.
    The new rules provide as follows:

Rule 1000

    Rule 1000 states the basic operative principles providing for 
automatic execution of limit orders of 1099 shares or less against the 
Exchange's published quotation. The Rule lists six instances in which 
the automatic feature would not be available due to market situations, 
lack of depth in the published quotation, or inappropriate pricing of 
the auto ex order, as follows:
    (i) The NYSE's published quotation is non-firm (pursuant to NYSE 
Rule 60);
    (ii) The NYSE's published quotation has been gapped (pursuant to 
the Exchange's usual procedures for such situations) for a brief period 
because of an influx of orders on one side of the market, and the 
Exchange's published quotation size is 100 shares at the bid and/or 
offer;

[[Page 5025]]

    (iii) A better price exists in another ITS participating market 
center for a single-sided auto ex order;
    (iv) The NYSE's published bid or offer is 100 shares (see Rule 
1002(c));
    (v) A transaction outside the Exchange's published quotation 
pursuant to NYSE Rule 127 is in the process of being completed, in 
which case the specialist should publish a 100-share bid and/or offer; 
or
    (vi) Trading in the subject security has been halted.
    Rule 1000 provides that an auto ex order that cannot be immediately 
executed for any of the above reasons shall be automatically entered 
for execution in the Exchange's auction market. Once it is entered in 
the auction market, it will be treated the same as any other limit 
order entered onto the Exchange. The Exchange also notes that the 
provisions of proposed Rule 1000(ii) and (v) are, in effect, examples 
of proposed Rule 1000(iv) in that each relate to situations where the 
Exchange's published bid or offer will be 100 shares.
    Rule 1000(ii) provides that auto-ex orders will not be executed 
when the Exchange's published quotation has been gapped for a brief 
period. The procedure to ``gap'' a quotation involves setting the bid 
and asked prices at a spread wider than normal in a stock in order to 
alert market participants that a special situation exists. This may 
occur if a member proposes to effect a block transaction at a 
significant premium or discount from the prevailing market and the 
specialist is aware of interest on the contra side. In such situations, 
the size of the quotation is set at 100 shares by 100 shares.
    Rule 1000(v) provides that auto-ex orders will not be executed when 
an auction market execution under Exchange Rule 127 is being completed. 
Rule 127 establishes procedures for executions outside the NYSE's 
published bid or offer. During the process for completing such 
transactions, the specialist should publish a bid and/or offer that is 
100 shares.

Rule 1001

    Rule 1001(a) provides that the contra side of an auto ex execution 
shall be trading interest reflected in the Exchange's published 
quotation, consistent with the principles of priority and parity as 
codified in Exchange Rule 72.
    Rule 1001(a) also provides that it shall be the specialist's 
responsibility, after receiving a report that an auto ex order has been 
executed, to assign the appropriate number of shares to each bidder or 
offeror, consistent with the principles of Exchange Rule 72, with a 
universal contra being reported as the contra to each auto ex 
execution. Rule 1001(a) also provides that the specialist shall take 
the contra side of an auto ex execution where the interest in the 
published quotation against which the auto ex order was executed is no 
longer available.
    Rule 1001(b) provides that if the published bid or offer is not of 
sufficient depth to fill an auto ex order in its entirety, the unfilled 
balance of the order shall be displayed in the auction market.
    Rule 1001(c) provides that if executions of auto ex orders have 
traded with all trading interest reflected in the Exchange's published 
bid or offer, the Exchange shall disseminate a bid or offer at that 
price of 100 shares until the specialist requotes that market. Auto ex 
orders will not receive an automatic execution against any 100 share 
bid or offer, whether a default bid or offer or otherwise, but rather 
will be displayed in the auction market. Rule 1001(c) provides that the 
specialist shall be the contra party to any auction market interest 
seeking to trade against the 100-share default bid or offer.
    Rule 1001(d) provides that the concept of precedence based on size, 
which is codified in Rule 72, shall not apply with respect to the 
contra side of an auto ex execution, with such contra side interest 
being assigned, as noted above, in accordance with the principles of 
priority and parity in Rule 72.

Rule 1002

    Rule 1002 provides that auto ex orders may be entered on any day in 
a particular stock from the time the Exchange has published a bid or 
offer in that stock until 3:59 p.m., at which time the specialist is 
preparing the closing transaction in the security. If orders designated 
as auto ex are entered before a quote is published or after 3:59 p.m., 
the orders will be treated as limit orders in the auction market.

Rule 1003

    Rule 1003 provides that if a transaction is being completed in the 
auction market, and an execution involving auto ex orders is reported 
at a different price before the auction market transaction is reported, 
any tick test applicable to the auction market transaction shall be 
based on the last reported trade prior to the execution of the auto ex 
order.
    For example, assume the Exchange's published quotation is 20 bid 
for 5000 shares, with 5000 shares offered at 20.20. The last reported 
sale is 20.10, which is a plus tick. A broker in the crowd bids 20.10 
for 5000 shares, and another broker, representing a short sale order, 
agrees to trade at the 20.10 bid price. Before the trade at 20.10 is 
reported, an auto ex order to buy is automatically executed at the 
20.20 published offer price, making the trade at 20.10 a minus tick, 
which would preclude execution of the order to sell short. Rule 1003 
provides that, in this instance, the short sale tick test would be 
based on the last reported sale of 20.10, a plus tick, at the time the 
crowd brokers agreed to trade.\7\
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    \7\ Rule 1003 is not consistent with the strict application of 
last reported ``tick'' tests in Rule 10a-1 under the Act or Exchange 
Rule 440B, and, in conjunction with its initial filing of the rule, 
the Exchange sought an exemption from Rule 10a-1 for the limited 
purpose of recognizing that transactions in compliance with tick 
tests when effected would not be deemed to be violative if reported 
after an auto ex execution changed the tick. The Commission granted 
a limited exemption from Rule 10a-1 to permit floor brokers to 
effect short sales in accordance with Rule 1003 during the NYSE 
Direct+ pilot subject to certain conditions. See Letter from James 
E. Buck, Secretary and Senior Vice President, Exchange, to Larry E. 
Bergmann, Senior Associate Director, Division of Market Regulation, 
SEC, dated December 21, 2000 (``Exemption Request'') and response by 
Larry E. Bergmann to James E. Buck, dated December 22, 2000 (``Rule 
10a-1 Exemption Letter'').
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Rule 1004

    Rule 1004 provides that executions of auto ex orders shall elect 
stop orders and percentage orders electable at the price of such 
executions. The rule also provides that stop orders so elected shall be 
executed pursuant to the Exchange's auction market procedures, and 
shall not be guaranteed executions at the prices of subsequent auto ex 
executions.

Rule 1005

    Rule 1005 in part provides that auto ex orders for the same 
customer may be entered at time intervals of no less than 30 seconds 
between entry of each such order, on a per stock basis.
    Addition to Rule 476A Summary Fine List. The Exchange also obtained 
in the original pilot approval to add to the List of Rules subject to 
imposition of fines under Rule 476A procedures the failure by members 
or member organizations to comply with the provisions of Rules 1000-
1005, which implement the Exchange's NYSE Direct+ facility. 
Rule 476A provides that the Exchange may impose a fine, not to exceed 
$5,000, on any member, member organization, allied member, approved 
person, or registered or non-registered employee of a member or member 
organization for a minor violation of certain specified Exchange rules.

[[Page 5026]]

    The purpose for the proposed rule change to Rule 476A was to 
facilitate the Exchange's ability to induce compliance with all aspects 
of the above-cited rules. The Exchange believed that failure to comply 
with the requirements of these rules and procedures should be addressed 
with an appropriate sanction and sought Commission approval to add 
violations of these requirements to the Rule 476A List so as to have a 
broad range of regulatory responses available. The Exchange continues 
to believe that this would more effectively encourage compliance by 
enabling a prompt, meaningful and heightened regulatory response (e.g., 
the issuance of a fine rather than a cautionary letter) to a minor 
violation of these rules.
    The Exchange again wishes to emphasize the importance it places 
upon compliance with the above-named rules. While the Exchange, upon 
investigation, may determine that a violation of any of these rules is 
a minor violation of the type which is properly addressed by the 
procedures adopted under Rule 476A, in those instances where 
investigation reveals a more serious violation of the above-described 
rules, the Exchange will provide an appropriate regulatory response. 
This includes the full disciplinary procedures available under Rule 
476.

Interpretive Issues

    The Exchange has previously submitted for Commission approval the 
following interpretations of several NYSE rules, as well as a no action 
or interpretive position which the Exchange requested the Commission to 
adopt under its short sale rule, Rule 10a-1.\8\ The Exchange requests 
that these exemptions and interpretations be extended for an additional 
one year concurrent with the extension of the NYSE Direct+ pilot until 
December 22, 2002.\9\
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    \8\ See Exemption Request and Rule 10a-1 Exemption Letter.
    \9\ Id.
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    These matters concern situations pursuant to proposed Rule 
1001(a)(iv) where the specialist may be required to take the contra 
side of an auto ex execution against the published quotation, even 
though the specialist's interest was not part of such quotation. For 
example, the published quotation may reflect the interest of a broker 
in the Crowd whose interest is then executed in an auction market 
transaction; but before the published quotation can be updated, an auto 
ex order is executed against such quotation. In such instance, the 
specialist would be required to take the contra side of the auto ex 
execution. In other instances, the Crowd broker might cancel his or her 
interest as reflected in the published quotation, but an auto ex order 
might be executed against such quotation before it can be updated. 
Again, in such instance, the specialist would be required to take the 
contra side of the auto ex execution.
     Rule 104. Rule 104 contains the specialist's affirmative 
and negative obligations, and restricts the specialists' ability to 
purchase stock on direct plus ticks, or sell stock on direct minus 
ticks. The Exchange is proposing that any instance in which the 
specialist is effecting such a direct tick transaction only because he 
or she has been required to assume the contra side of an auto ex 
execution as described above shall be deemed to be a ``neutral'' 
transaction for purposes of Rule 104, and shall be deemed not to be in 
violation of the rule. The Exchange believed that this interpretation 
is appropriate because the specialist is not setting the price, but is 
simply being required to trade at a price set by other market 
participants.
     Rule 10a-1. Rule 10a-1 under the Act and Exchange Rule 
440B do not permit the execution of short sales on minus or zero minus 
ticks. The Exchange believes that exemptive relief from Rule 10a-1 
should continue to apply to a specialist whenever he or she is required 
to take the contra side of an auto ex execution on a minus or zero 
minus tick because of Exchange Rule 1001(a)(iv), and has an existing 
short position, or would be creating a short position by virtue of such 
execution. In particular, the Exchange believes that the situation 
where a specialist sells short on a minus or zero minus tick because he 
or she is required to become the contra-party to an executed auto ex 
trade in the limited circumstances where the interest reflected in the 
published quotation against which the auto ex order was executed is no 
longer available does not implicate the policy concerns of Rule 10a-1.
    Further, the Exchange believes that exemptive relief from Rule 10a-
1 should continue to apply to allow a floor broker to report a short 
sale that is on a minus or zero-minus tick relative to the last 
reported auto ex transaction on the NYSE at the time of the floor 
broker's report, if at the time the floor broker agreed to sell short, 
the short sale was not on a minus or zero-minus tick relative to the 
last reported sale. As with all other trades, floor brokers seeking to 
rely on Rule 1003 with respect to short sales in auction market 
transactions subject to Rule 10a-1 and Exchange Rule 440B must report 
such auction market transactions immediately upon agreement to the 
trade.\10\
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    \10\ See Exemption Request and Rule 10a-1 Exemption Letter. In 
order to verify compliance with Rule 10a-1, where an auto ex 
transaction takes place while the auction market transaction is 
being completed and the auto ex price would cause the auction market 
trade to be reported on a minus or zero-minus tick, the Floor broker 
effecting the short sale must obtain NYSE Floor Official approval 
that the transaction was agreed upon at a price in compliance with 
Rule 10a-1 and Rule 440B. Each such short sale must be reported as a 
``sold sale.'' Further, Floor brokers will not be allowed to sell 
short at a price lower than the best bid displayed in the auction 
market at the time the transaction is reported.
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     Rule 123A.40. The specialist shall not be required to fill 
any stop orders elected by an auto ex execution at the price of the 
electing sale in any instance where the specialist was required by Rule 
1001(a)(iv) to take the contra side of an auto ex execution.
     Rule 91. As the specialist does not accept an auto ex 
order for execution or act as agent for such order, the transaction 
confirmation requirements of Rule 91 shall not be applicable in any 
instance where the specialist is the contra party to an auto ex 
execution.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6(b)(5) of the Act \11\ which requires that an Exchange 
have rules that are designed to promote just and equitable principles 
of trade, to remove impediments to and perfect the mechanism of a free 
and open market and a national market system and, in general, to 
protect investors and the public interest. The proposed rule change 
also is designed to support the principles of section 11A(a)(1) of the 
Act \12\ in that it seeks to assure economically efficient execution of 
securities transactions, make it practicable for brokers to execute 
investors' orders in the best market and provide an opportunity for 
investors' orders to be executed without the participation of a dealer.
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    \11\ 15 U.S.C. 78f(b)(5).
    \12\ 15 U.S.C. 78k-1(a)(1).
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    With respect to the addition to the summary fine list under Rule 
476A, the proposed rule change also advances the objectives of section 
6(b)(6) of the Act \13\ because it provides a procedure whereby member 
organizations can be ``appropriately disciplined'' in those instances 
when a rule violation is minor in nature, but a sanction more serious 
than a warning or cautionary letter is appropriate. The proposed rule 
change provides a fair procedure for imposing such sanctions, in 
accordance with the

[[Page 5027]]

requirements of sections 6(b)(7) and 6(d)(1) of the Act.\14\
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    \13\ 15 U.S.C. 78f(b)(6).
    \14\ 15 U.S.C. 78f(b)(6) and 78f(d)(1).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change 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 Exchange has neither solicited nor received written comments on 
the proposed rule change.

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

    The foregoing rule change has become effective upon filing pursuant 
to section 19(b)(3)(A)(iii) of the Act \15\ and Rule 19b-4(f)(6)\16\ 
thereunder because the proposed rule change does not (i) significantly 
affect the protection of investors or the public interest; (ii) impose 
any significant burden on competition; and (iii) become operative for 
30 days from the date on which the proposed rule change was filed, or 
such shorter time as the Commission may designate. At any time within 
60 days of the filing of a rule change pursuant to section 19(b)(3)(A) 
of the Act, the Commission may summarily abrogate the rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6).
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    The Commission finds that it is appropriate to accelerate the 
operative date of the proposed rule change and to permit the proposed 
rule change to become immediately operative because the proposal simply 
extends a previously approved pilot program until December 22, 
2002.\17\ No changes to NYSE Direct+ are being proposed at this time 
and the Commission has not received any comments on the pilot program. 
In addition, the Exchange appropriately filed a pre-filing notice as 
required by Rule 19b-4(f)(6).\18\
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    \17\ The Commission confirms that the Rule 10a-1 Exemption 
Letter remains in effect for the duration of the pilot.
    \18\ 17 CFR 240.19b-4(f)(6). For purpose only of accelerating 
the operative date of this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change 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 such filing will also be 
available for inspection and copying at the principal office of the 
Exchange. All submissions should refer to File No. SR-NYSE-2001-50 and 
should be submitted by February 22, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-2487 Filed 1-31-02; 8:45 am]
BILLING CODE 8010-01-P