[Federal Register Volume 68, Number 51 (Monday, March 17, 2003)]
[Notices]
[Pages 12726-12729]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-6245]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47481; File No. SR-NASD-2003-29]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the National Association of 
Securities Dealers, Inc. Regarding the Automated Confirmation 
Transaction Service (``ACT'') Workstation

March 11, 2003.
    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 March 3, 2003, the National Association of Securities Dealers, Inc. 
(``NASD'' or ``Association''), through its subsidiary, The Nasdaq Stock 
Market, Inc. (``Nasdaq'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I, II and III below, which Items have been prepared by Nasdaq. 
Nasdaq filed the proposal pursuant to section 19(b)(3)(A) of the 
Act,\3\ and rule 19b-4(f)(6) thereunder,\4\ which renders the proposal 
effective upon filing with the Commission.\5\ 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).
    \5\ Nasdaq provided the Commission with notice of its intent to 
file the proposed rule change on January 9, 2003. Nasdaq has asked 
the Commission to waive the 30-day operative delay. See Rule 19b-
4(f)(6)(iii). 17 CFR 240.19b-4(f)(6)(iii). The Commission has 
decided not to waive the 30-day operative delay.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes to introduce a new product known as the ACT 
Workstation. The text of the proposed rule change is below. Proposed 
new language is in italics; proposed deletions are in brackets.
6100. AUTOMATED CONFIRMATION TRANSACTION SERVICE (ACT)
6110. Definitions
    (a)-(g) No change.
    (h) The terms ``Gross Dollar Thresholds'' or ``Super Caps'' in the 
risk management application of ACT shall mean the daily dollar amounts 
for purchases and sales that a clearing broker establishes in the ACT 
system for each correspondent executing broker that may be raised or 
lowered on an inter-day or intra-day basis. If the value of a 
correspondent's trades, including those aggregated from transactions in 
all automated systems owned and operated by the Association or its 
subsidiaries, equals or exceeds [the] any gross dollar threshold[s], 
the system will alert the clearing broker.
    (i)-(k) No change.
    (l) The term ``Pre-alert'' shall mean the alert notifying the 
correspondent executing broker and the clearing broker that the 
correspondent executing broker has equaled or exceeded 70% of [the] any 
purchase or sale gross dollar amount[s]. The Association reserves the 
right to modify the percentage of the pre-alert as necessary and upon 
prior notification to the ACT Participants.
    (m)-(n) No change.
    (o) The term ``Single Trade Limit'' shall mean the pre-established 
dollar amount [established by the Association] for a single trade that 
enables an ACT clearing firm to review the trade before it is obligated 
to clear the trade. When a correspondent executing broker negotiates a 
trade that equals or exceeds the Single Trade Limit, its clearing 
broker shall have a period of fifteen (15) minutes to review and agree 
or decline to act as principal for clearing that trade. [Initially, the 
Single Trade Limit shall be set at $1,000,000.] The Association 
reserves the right to modify the [dollar amount of the Single-Trade 
Limit or the] time frame for clearing broker review as necessary and 
upon prior notification to the ACT Participants.
    (p) No change.
6120. Participation in ACT
    (a) No change.
    (b)(1)-(3) No change.
(4) Clearing Broker Obligations
    (A) No change.
    (B) ACT clearing brokers may utilize the ACT Risk Management 
functions upon execution of the ACT Participant Risk Management 
Agreement. Clearing brokers that utilize[d] the ACT Risk Management 
functions may establish for each correspondent executing broker daily 
Gross Dollar Thresholds and may raise or lower the thresholds on an 
inter-day or intra-day basis. ACT clearing brokers will receive a 
system alert when a correspondent executing broker equals or exceeds 
[its] any gross dollar threshold[s], and will also receive a system 
pre-alert when a correspondent executing broker equals or exceeds 70% 
of [the] any daily threshold[s].
    (C) For trades effected by a correspondent executing broker that 
equal or exceed [the ACT system's] a Single Trade Limit [of 
$1,000,000], clearing brokers have fifteen (15) minutes from the time 
of trade report input to ACT to review the trade and accept or decline 
to act as principal to the trade. If the clearing broker does not make 
an affirmative acceptance or declination of the trade report within 
fifteen (15) minutes, the trade report will be subject to [normal ACT 
processing and the clearing broker will be obligated to act as 
principal for the trade] processing in accordance with the pre-
established criteria described in Rule 6150(b)(6).
* * * * *
6150. ACT Risk Management Functions
    (a) No change.
    (b) If a clearing broker voluntarily uses ACT risk management, the 
ACT system will provide the following risk management capabilities to 
clearing brokers that have executed an ACT Participant Risk Management 
Agreement:
(1) Trade File Scan
    Clearing brokers will be able to scan the trading activities of 
their correspondent executing brokers through a Nasdaq terminal.

[[Page 12727]]

(2) Gross Dollar Thresholds (``Super Caps'') and Sizeable Limits
    Clearing brokers will be able to establish, on an inter-day or 
intra-day basis, gross dollar thresholds (also known as ``Super Caps'') 
for purchases and sales for their correspondent executing brokers [, 
and the ACT system will alert the clearing broker and its correspondent 
if the correspondent's trading activity equals or exceeds either 
threshold]. When any of a correspondent's gross dollar thresholds are 
exceeded, notice will be furnished to the clearing broker, and any 
trade in excess of an applicable ``sizeable limit'' that is negotiated 
by the correspondent will be subject to review by the clearing broker 
until such time as the correspondent's trading activity no longer 
exceeds a gross dollar threshold. Specifically, the clearing broker 
will have 15 minutes from execution to review any single trade 
negotiated by the correspondent that equals or exceeds the applicable 
sizeable limit in order to decide to act as principal for the trade or 
to decline to act as principal. If the clearing broker does not 
affirmatively accept or decline the ``sizeable trade,'' at the end of 
15 minutes the system will act in accordance with pre-established 
processing criteria, as described below.
    (A) ACT Workstation Users.
    (i) Clearing brokers that use the ACT Workstation may establish 
gross dollar thresholds and sizeable limits for each of their 
correspondent executing brokers. They may establish different gross 
dollar thresholds and sizeable limits for each type of security (i.e., 
Nasdaq National Market, Nasdaq SmallCap Market, Consolidated Quotations 
Service, or OTC Bulletin Board), as well as an aggregate gross dollar 
threshold and sizeable limit for all types of securities.
    (ii) Notice will be provided to all ACT Participants when a 
correspondent's aggregate gross dollar threshold is exceeded, but will 
be provided solely to the clearing broker if the gross dollar threshold 
for a type of security is exceeded.
    (iii) Clearing brokers that use the ACT Workstation may also 
establish the default processing criteria that will apply to sizeable 
trades when a correspondent's gross dollar threshold has been exceeded; 
the clearing broker may specify that after 15 minutes, if the clearing 
broker does not affirmatively accept or decline the trade, such trades 
should be either automatically declined or automatically subjected to 
normal ACT processing in which the clearing broker will act as 
principal to clear the trades.
    (B) Other ACT Risk Management Users.
    (i) Clearing brokers that do not use the ACT Workstation may 
establish aggregate gross dollar thresholds for each of their 
correspondent executing brokers, but may not establish gross dollar 
thresholds for each type of security (i.e., Nasdaq National Market, 
Nasdaq SmallCap Market, Consolidated Quotations Service, or OTC 
Bulletin Board).
    (ii) Notice will be provided to all ACT Participants when a 
correspondent's aggregate gross dollar threshold is exceeded.
    (iii) The sizeable limit is $200,000 for all clearing brokers that 
do not use the ACT Workstation. When a correspondent's aggregate gross 
dollar threshold is exceeded, no trade in excess of the sizeable limit 
will be accepted for ACT processing unless the clearing broker accepts 
the trade within 15 minutes of execution.
(3) Gross Dollar Threshold Pre-Alert
    [In addition to the gross dollar threshold alert, t]The ACT system 
will also alert the clearing broker and its correspondent when the 
correspondent's trading activity equals or exceeds 70% of [either] any 
gross dollar threshold established by the clearing broker for that 
correspondent.
(4) End of Day Recap
    Clearing brokers that access ACT through computer interface will be 
able to receive an end of day recap of all trade detail information of 
their correspondents.
(5) On-line Review
    Clearing brokers that access ACT through computer interface will be 
able to receive intra-day activity of their correspondents as it is 
reported.
(6) Single Trade Limit
    Clearing brokers will have 15 minutes from trade report input to 
ACT to review any single trade executed by their correspondent 
executing brokers that equals or exceeds [$1,000,000] a pre-established 
limit in order to decide to act as principal for the trade or to 
decline to act as principal. If, however, the clearing firm does not 
affirmatively accept or decline the trade, at the end of 15 minutes the 
system will act in accordance with pre-established processing criteria, 
as described below [subject the trade to normal ACT processing and the 
clearing firm will be obligated to act as principal to clear the 
trade].
    (A) ACT Workstation Users. Clearing brokers that use the ACT 
Workstation may establish single trade limits for each of their 
correspondent executing brokers, and may establish different limits for 
each type of security (i.e., Nasdaq National Market, Nasdaq SmallCap 
Market, Consolidated Quotations Service, or OTC Bulletin Board). Such 
clearing brokers may also establish the default processing criteria 
that will apply to trades that exceed the single trade limit after 15 
minutes if the clearing broker does not affirmatively accept or decline 
the trade; the clearing broker may specify that such trades should be 
either automatically declined or automatically subjected to normal ACT 
processing in which the clearing broker will act as principal to clear 
the trades.
    (B) Other ACT Risk Management Users. For clearing brokers that do 
not use the ACT Workstation, the single trade limit is $1,000,000. If 
such a clearing broker does not affirmatively accept or decline a trade 
that exceeds the single trade limit, at the end of 15 minutes the 
system will subject the trade to normal ACT processing and the clearing 
broker will be obligated to act as principal to clear the trade.
    [(g) Super Cap]
    [The Super Cap is set at two times the gross dollar thresholds for 
purchases and sales, but in no event less than $1,000,000. When a 
correspondent's super cap is exceeded, notice will be furnished to ACT 
participants and no trade in excess of $200,000 will be accepted for 
ACT processing unless the clearing broker accepts the trade within 15 
minutes of execution.]
* * * * *
7000. CHARGES FOR SERVICES AND EQUIPMENT
7010. System Services
    (a)-(f) No change.
    (g) Automated Confirmation Transaction Service
    The following charges shall be paid by the participant for use of 
the Automated Confirmation Transaction Service (ACT):

Transaction Related Charges:
    Comparison............................  $0.0144/side per 100 shares
                                             (minimum 400 shares;
                                             maximum 7,500 shares)
    Automated Give-Up.....................  $0.029/side
    Late Report--T+N......................  $0.288/side
    Browse/query..........................  $0.288/query*
    Terminal fee..........................  $57.00/month (ACT only
                                             terminals)

[[Page 12728]]

 
    CTCI fee..............................  $575.00/month
    [Nasdaq] WebLink ACT..................  $300/month (full
                                             functionality) or $150/
                                             month (up to an average of
                                             twenty transactions per day
                                             each month)**
    Trade reporting.......................  $0.029/side (applicable only
                                             to reportable transaction
                                             not subject to trade
                                             comparison through ACT)***
Risk Management Charges...................  $0.035/side and $17.25/month
                                             per correspondent firm
                                             (maximum $10,000/month per
                                             correspondent firm)
Corrective Transaction Charge.............  $0.25/Cancel, Error,
                                             Inhibit, Kill, or `No'
                                             portion of No/Was
                                             transaction, paid by
                                             reporting side;
                                            $0.25/Break, Decline
                                             transaction, paid by each
                                             party
ACT Workstation...........................  $525/logon/month****
 
* Each ACT query incurs the $0.288 fee; however, the first accept or
  decline processed for a transaction is free, to insure that no more
  than $0.288 is charged per comparison. Subsequent queries for more
  data on the same security will also be processed free. Any subsequent
  query on a different security will incur the $0.288 query charge.
** For the purposes of this service only, a transaction is defined as an
  original trade entry, either on trade date or as-of transactions per
  month.
*** The trade reporting service charge is applicable to those trades
  input into ACT for reporting purposes only, such as NSCC Qualified
  Special Representative reports and reports of internalized
  transactions.
**** A firm that uses ACT risk management through one or more NWII
  terminals when the ACT Workstation is introduced will be eligible to
  evaluate the ACT Workstation for a free, three-month trial period,
  provided that the firm continues to pay charges associated with its
  NWII terminal(s) during that period.

* * * * *

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

    In its filing with the Commission, Nasdaq included statements 
concerning the purpose of and basis for its proposal and discussed any 
comments it received regarding the proposal. The text of these 
statements may be examined at the places specified in Item IV below. 
Nasdaq 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
    ACT is an automated trade reporting and reconciliation service that 
speeds the post-execution steps of price and volume reporting, 
comparison, and clearing of trades completed in Nasdaq, OTC Bulletin 
Board, and other over-the-counter securities. ACT handles transactions 
executed through Nasdaq's automated trading systems, as well as 
transactions negotiated over the telephone. It also manages post-
execution procedures for transactions in exchange-listed securities 
that are traded in the Nasdaq InterMarket.
    An integral part of ACT is the risk management function. The ACT 
risk management function provides firms that clear for other firms with 
the capability to establish acceptable levels of credit for their 
introducing firms. ACT risk management also enables clearing brokers to 
monitor buy/sell trading activity of their introducing firms, establish 
trading thresholds, allow or inhibit large trades, add or delete 
clearing relationships, and access a real-time database of 
correspondent trading activity.\6\
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    \6\ See NASD Rule 6150.
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    On or about March 10, 2003, Nasdaq will be introducing the ACT 
Workstation, a new product that is designed to allow clearing firms to 
access the ACT risk management function without using an NWII terminal. 
In conjunction with the launch of the new product, Nasdaq is also 
making several minor modifications to the ACT risk management function, 
and offering certain enhancements to ACT risk management that will be 
available through the ACT Workstation. Following the launch of the ACT 
Workstation, however, ACT risk management will continue to be available 
through NWII terminals and WebLink ACT.\7\
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    \7\ ``WebLink ACT'' is Nasdaq's new name for ``Nasdaq ACT,'' an 
internet-based version of ACT introduced in 2001. Securities 
Exchange Act Release No. 43968 (February 15, 2001), 66 FR 11342 
(February 23, 2001) (SR-NASD-2001-05).
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    Currently, ACT risk management allows users to receive alerts when 
a correspondent broker's trading activity exceeds user-defined gross 
dollar thresholds. In addition, when a correspondent broker's trading 
activity exceeds a ``Super Cap'' equal to twice its gross dollar 
threshold, ACT provides notice of this event to all ACT participants 
and allows the clearing broker to decline trades compared through ACT 
that are in excess of $200,000 (known as ``sizeable'' trades). Nasdaq 
is combining the functionality of the gross dollar threshold and the 
Super Cap, so that the limit on sizeable trades will apply whenever a 
correspondent broker's trading activity exceeds its gross dollar 
threshold. In effect, a firm's gross dollar threshold and its Super Cap 
will be the same dollar amount. Nasdaq has made this change in response 
to requests from ACT risk management users, who view the restriction of 
sizeable trades as a more meaningful risk management tool than the 
alerts associated with gross dollar thresholds in the current system.
    Users of the ACT Workstation will be able to establish gross dollar 
thresholds and sizeable limits for their correspondent firms that vary 
based on the type of security being traded by the correspondent firm 
(i.e., Nasdaq National Market, Nasdaq SmallCap, OTC Bulletin Board, or 
CQS), as well as aggregate gross dollar thresholds and sizeable 
limits.\8\ For example, a clearing broker might establish a gross 
dollar limit of $500,000 and a sizeable limit of $200,000 for purchases 
of Nasdaq National Market securities, and lower limits of $200,000 and 
$100,000 for OTC Bulletin Board securities. If the $200,000 OTCBB limit 
was exceeded, OTCBB trades in excess of $100,000 would be subject to 
review, but trades in Nasdaq National Market securities could continue 
without review. Nasdaq believes that this enhancement, which has been 
requested by many ACT risk management users, will provide clearing 
brokers with greater flexibility in managing their exposure in markets 
with varying degrees of liquidity and risk. The clearing broker will 
receive notice when a gross dollar threshold for a particular type of 
security is exceeded, and all ACT participants will receive notice when 
an aggregate gross dollar threshold is exceeded.
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    \8\ As is currently the case, clearing brokers that use ACT risk 
management through NWII terminals or WebLink ACT will not be able to 
vary gross dollar thresholds on the basis of the type of security, 
nor will they be able to establish a sizeable limit other than 
$200,000.
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    Currently, ACT risk management imposes a ``single trade limit'' of 
$1,000,000. When a trade in excess of this amount is negotiated by a 
correspondent broker, its clearing broker has 15 minutes to decide 
whether to accept or decline the trade. If the clearing broker takes no 
action, the trade is automatically accepted for normal ACT processing. 
The ACT Workstation will allow clearing brokers to establish single 
trade limits that vary based on the type of security (i.e., Nasdaq 
National

[[Page 12729]]

Market, Nasdaq SmallCap, OTC Bulletin Board, or CQS), and to specify 
the ``default'' processing to occur if the clearing broker does not 
acknowledge a trade in excess of the single-trade limit within 15 
minutes. Thus, the clearing broker may specify that these 
``blockbuster'' sized trades will be automatically declined (rather 
than automatically accepted) if the clearing broker does not act within 
15 minutes.\9\ ACT Workstation users will also be able to specify the 
default processing for sizeable trades by a firm that has exceeded its 
gross dollar threshold.
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    \9\ For clearing brokers that use ACT risk management through 
NWII terminals or WebLink ACT, the single trade limit will remain 
$1,000,000 for all types of securities, and trades in excess of the 
single trade limit will continue to be automatically accepted if the 
clearing broker does not decline them within 15 minutes.
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    The ACT Workstation will also include improvements in the system's 
graphical user interface, such as customizable screen layouts, summary 
screens, and pop-up alerts. Like an NWII terminal, the ACT Workstation 
will connect to Nasdaq through Nasdaq's application programming 
interface (``API''). In fact, firms will be able to download the ACT 
Workstation software directly to the same equipment that currently 
serves as an NWII terminal. Accordingly, transition to the new product 
will be easy for firms to achieve.
    The price for the ACT Workstation will be $525 per logon per month. 
However, for the first three months following the launch of the new 
product, Nasdaq will offer the ACT Workstation to existing NWII users 
as a complimentary service. This will allow current users to test the 
new product without having to eliminate their existing NWII terminals 
or pay simultaneously for both products.\10\ At the end of the three-
month period, users will have the option to discontinue use of either 
the NWII terminal or the ACT Workstation, or to pay for both.
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    \10\ As noted above, the ACT Workstation software can be 
downloaded to the same equipment that serves as an NWII terminal. 
Accordingly, a single computer may serve as both an NWII terminal 
and an ACT Workstation.
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2. Statutory Basis
    Nasdaq believes that the proposal is consistent with the provisions 
of Section 15A of the Act,\11\ in general, and with Sections 15A(b)(5) 
\12\ and 15A(b)(6) \13\ in particular, in that it provides for the 
equitable allocation of reasonable dues, fees and other charges among 
members and issuers and other persons using any facility or system 
which the NASD operates or controls, and promotes just and equitable 
principles of trade, fosters cooperation and coordination with persons 
engaged in regulating, clearing, settling, processing information with 
respect to, and facilitating transactions in securities, removes 
impediments to and perfects the mechanism of a free and open market and 
a national market system, and, in general, protects investors and the 
public interest.
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    \11\ 15 U.S.C. 78o-3.
    \12\ 15 U.S.C. 78o-3(5).
    \13\ 15 U.S.C. 78o-3(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq 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, as amended.

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

    Written comments were neither solicited nor received.

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

    Because the foregoing 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 it was 
filed, or such shorter time as the Commission may designate, it has 
become effective pursuant to section 19(b)(3)(A) of the Act \14\ and 
rule 19b-4(f)(6) thereunder.\15\ At any time within 60 days of the 
filing of the proposed rule change, the Commission may summarily 
abrogate such 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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    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 17 CFR 240.19b-4(f)(6).
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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 proposal 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 Association. All 
submissions should refer to file number SR-NASD-2003-29 and should be 
submitted by April 7, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-6245 Filed 3-14-03; 8:45 am]
BILLING CODE 8010-01-P