[Federal Register Volume 68, Number 187 (Friday, September 26, 2003)]
[Notices]
[Pages 55691-55695]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-24381]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48502; File No. SR-NYSE-2002-35]


Self-Regulatory Organizations; Notice of Filing of Amendment No. 
4 to a Proposed Rule Change by the New York Stock Exchange, Inc. 
Relating to Business Continuity and Contingency Planning

September 17, 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 September 15, 2003, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') filed with the Securities and Exhange Commission 
(``Commission'') Amendment No. 4 \3\ to the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
by the Exchange. The NYSE submitted the original proposed rule change 
to the Commission on August 16, 2002, and it was published in the 
Federal Register on September 9, 2002.\4\ The NYSE subsequently 
submitted amendments to the proposed rule change on January 13, 2003; 
\5\ March 7, 2003; \6\ and March 27, 2003.\7\ Amendment No. 3 
incorporated and replaced Amendments Nos. 1 and 2 in their entirety. 
The Commission published Amendment No. 3 for comment in the Federal 
Register on April 3, 2003.\8\ In response to comments received, the 
NYSE is proposing this Amendment No. 4. 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 from Darla C. Stuckey, Corporate Secretary, NYSE, 
to Katherine A. England, Division of Market Regulation 
(``Division''), Commission, dated September 11, 2003 (``Amendment 
No. 4'').
    \4\ Securities Exchange Act Release No. 46443 (August 30, 2002), 
67 FR 57264 (``Original Notice'').
    \5\ See letter from Darla C. Stuckey, Corporate Secretary, NYSE, 
to Nancy Sanow, Division, Commission, dated January 10, 2003 
(``Amendment No. 1'').
    \6\ See letter from Darla C. Stuckey, Corporate Secretary, NYSE, 
to Katherine A. England, Division, Commission, dated March 6, 2003 
(``Amendment No. 2'').
    \7\ See letter from Darla C. Stuckey, Corporate Secretary, NYSE, 
to Katherine A. England, Division, Commission, dated March 26, 2003 
(``Amendment No. 3'').
    \8\ Securities Exchange Act Release No. 47584 (March 27, 2003), 
68 FR 16334.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is filing with the Commission amendments to proposed 
new NYSE Rule 446 (``Business Continuity and Contingency Plans''). The 
proposed rule would require members and member organizations to 
develop, maintain, review, and update business continuity and 
contingency plans relating to an emergency or significant business 
disruption.
    Below is the text of the proposed rule change, as amended. The base 
text is that provided in Amendment No. 3. Language added by Amendment 
No. 4 is in italics; language deleted by Amendment No. 4 is in 
brackets.
* * * * *

Business Continuity and Contingency Plans

New Rule 446

    (a) Members and member organizations must develop and maintain a 
written business continuity and contingency plan establishing 
procedures relating to an emergency or significant business disruption. 
Such procedures must be reasonably designed to enable members and 
member organizations [to continue their businesses in the event of a 
future significant business disruption] to meet their existing 
obligations to customers. In addition, such procedures must address 
their existing relationships with other broker-dealers, and counter-
parties. Members and member organizations must make such plan available 
to the Exchange upon request.
    (b) Members and member organizations must conduct, at a minimum, a 
yearly review of their business continuity and contingency plan to 
determine whether any modifications are necessary in light of changes 
to the member's or member organization's operations, structure, 
business or location. In the event of a material change to a member's 
or member organization's operations, structure, business or location, 
the member or member organization must promptly update its business 
continuity and contingency plan.
    (c) The elements that comprise a business continuity and 
contingency plan shall be tailored to the size and needs of a member or 
member organization [so as to enable the member or member organization 
to continue its business in the event of a future significant business 
disruption]. Each plan, however, must, at a minimum, address, if 
applicable:
    (1) Books and records back-up and recovery (hard copy and 
electronic);
    (2) identification of all mission critical systems and back-up for 
such systems;
    (3) financial and operational risk assessments;
    (4) alternate communications between customers and the firm;
    (5) alternate communications between the firm and its employees;
    (6) alternate physical location of employees;
    (7) critical business constituent, bank and counter-party impact;
    (8) regulatory reporting; [and]
    (9) communications with regulators; and

[[Page 55692]]

    (10) how the member or member organization will assure customers 
prompt access to their funds and securities in the event the member or 
member organization determines it is unable to continue its business.
    To the extent that any of the above items is not applicable, the 
member's or member organization's business continuity and contingency 
plan must specify the item(s) and state the rationale for not including 
each such item(s) in its plan. If a member or member organization 
relies on another entity for any of the above-listed categories or any 
mission critical system, the member's or member organization's business 
continuity and contingency plan must address this relationship.
    (d) Each member or member organization must disclose to its 
customers how its business continuity and contingency plan addresses 
the possibility of a future significant business disruption and how the 
member or member organization plans to respond to events of varying 
scope. At a minimum, such disclosure must be made in writing to 
customers at account opening, posted on the Internet website of the 
member or member organization (if applicable) and mailed to customers 
upon request.
    (e)[(d)] The term ``mission critical system,'' for purposes of this 
Rule, means any system that is necessary, depending on the nature of a 
member's or member organization's business, to ensure prompt and 
accurate processing of securities transactions, including order taking, 
entry, execution, comparison, allocation, clearance and settlement of 
securities transactions, the maintenance of customer accounts, access 
to customer accounts and the delivery of funds and securities.
    (f)[(e)] The term ``financial and operational risk assessments,'' 
for purposes of this Rule, means a set of written procedures that allow 
members and member organizations to identify changes in their 
operational, financial, and credit risk exposure.
    (g)[(f)] Members and member organizations must designate a senior 
officer, as defined in Rule 351(e), to approve the Plan, who shall also 
be responsible for the required annual review, as well as an Emergency 
Contact Person(s). Such individuals must be identified to the Exchange 
(by name, title, mailing address, e-mail address, telephone number, and 
facsimile number). Prompt notification must be given to the Exchange of 
any change in such designations.
* * * * *

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 NYSE included statements 
concerning the purpose of and basis for the proposed rule change, as 
amended, 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 NYSE 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 this filing is to amend SR-NYSE-2002-35, a proposed 
new rule that would require members and member organizations to 
develop, maintain, review, and update business continuity and 
contingency plans (``BCPs''), which establish procedures relating to an 
emergency or significant business disruption. As discussed in more 
detail below, the proposed amendments to the filing are the result of 
written comments received to the filing and conversations with 
Commission staff.
    A similar proposal has been submitted by the National Association 
of Securities Dealers (``NASD'').\9\
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    \9\ See Securities Exchange Act Release No. 46444 (August 30, 
2002), 67 FR 57257 (September 9, 2002) (notice of original NASD 
proposal relating to business continuity planning); Securities 
Exchange Act Release No. 47441 (March 4, 2003), 68 FR 11432 (March 
10, 2003) (notice of Amendment Nos. 1, 2, and 3 to NASD proposal).
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Background

    [sbull] August 2002 Filing
    On August 16, 2002, the Exchange filed with the Commission proposed 
new NYSE Rule 446 that would require members and member organizations 
to establish and maintain business continuity and contingency 
plans.\10\ The Original Notice was published for comment in the Federal 
Register on September 9, 2002.\11\
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    \10\ On August 7, 2002, the NASD filed a similar proposal. See 
Securities Exchange Act Release No. 46444 (August 30, 2002), 67 FR 
57257 (September 9, 2002) (SR-NASD-2002-108).
    \11\ See supra note 4.
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    [sbull] Amendment Nos. 1 and 2
    The Commission received three comment letters in response to the 
original proposals of the NYSE and the NASD relating to business 
continuity planning.\12\ The Exchange filed Amendment Nos. 1 and 2 that 
responded to these comments.
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    \12\ One commenter submitted a single letter that addressed both 
proposals. See letter from Melvyn Musson, Edward D. Jones & Co. 
(``Edward Jones''), to Jonathan G. Katz, Commission, dated September 
30, 2002. A second commenter submitted two letters that addressed 
each proposal separately. See letters from Jerry W. Klawitter, 
Securities Industry Association and Bond Market Association, to 
Margaret H. McFarland, Deputy Secretary, Commission, dated September 
30, 2002 (``SIA/BMA Letter 1''). A third commenter submitted a 
letter that addressed only the NASD proposal. See letter from 
Frances M. Stadler, Investment Company Institute, to Jonathan G. 
Katz, Secretary, Commission, dated September 30, 2002.
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    [sbull] Amendment No. 3
    Upon consideration of subsequent comments received from the staff 
of the Commission concerning proposed NYSE Rule 446, the Exchange filed 
Amendment No. 3 on March 27, 2003, to, among other things, clarify the 
intent of the proposal. Amendment No. 3 incorporated and replaced 
Amendment Nos. 1 and 2 in their entirety and was published in the 
Federal Register on April 3, 2003.\13\ The Commission received one 
comment letter in response to the NYSE's Amendment No. 3,\14\ and three 
comment letters in response to the comparable amendment filed by 
NASD.\15\
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    \13\ See supra note 8.
    \14\ See letter from Securities Industry Association and the 
Bond Market Association to Jonathan G. Katz, Secretary, Commission, 
dated April 24, 2003 (``SIA/BMA Letter 2'').
    \15\ See letter from Securities Industry Association and the 
Bond Market Association to Jonathan G. Katz, Secretary, Commission, 
dated March 31, 2003; letter from Thomas K. Heard, A.G. Edwards & 
Sons, Inc. to Jonathan G. Katz, Secretary, Commission, dated March 
31, 2003 (``A.G. Edwards Letter''); letter from Melvyn Musson, 
Edward Jones, to Jonathan G. Katz, Secretary, Commission, dated 
March 28, 2003.
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    [sbull] Business Constituent, Bank and Counter-party Impact
    Proposed NYSE Rule 446(c)(7) would require that a member's or 
member organization's BCP address ``business constituent, bank and 
counter-party impact.'' A commenter asked for clarification of this 
category.\16\ Under this proposed category, members and member 
organizations would be required to establish procedures that assess the 
impact that a significant business disruption would have on business 
constituents (businesses with which a member or member organization has 
an on-going commercial relationship pertaining to the support of the 
member's or member organization's operating activities), banks 
(lenders), and counter-parties (such as other broker-dealers or 
institutional customers). In addition, members and member organizations

[[Page 55693]]

would be required to provide for alternative actions or arrangements 
with respect to their contractual relationships with business 
constituents, banks, and counter-parties upon the occurrence of a 
material business disruption to either party. The Exchange's 
Information Memo announcing adoption of the rule would provide the 
guidance described above with regard to clarification of this 
requirement.
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    \16\ See SIA/BMA Letter 1.
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    As discussed in more detail below, the proposed amendments to this 
provision of the rule received additional comments upon its publication 
in the Federal Register. The Exchange is responding to those comments 
in this Amendment No. 4.
    [sbull] BCPs Should be Reasonably Designed to Enable a Firm to 
Continue its Business
    As originally proposed, a literal reading of proposed NYSE Rule 
446, could have suggested that the rule would require members and 
member organizations to create, maintain, and periodically review a BCP 
that would have to be effective in enabling them to continue their 
business in the event of a future significant business disruption.
    While the Exchange did not intend to propose a rule which limits 
the scope of its members' and member organizations' responsibilities in 
establishing such plans, the rule text did not make clear the NYSE's 
intention when it first proposed the Rule `` that members and member 
organizations should be obligated to develop a business continuity and 
contingency plan that is reasonably designed, in light of particular 
characteristics of the firm, to allow the firm to recover as early as 
practicable in the event of a future significant business interruption.
    Amendment No. 3, as proposed, made clear that the rule would 
require the creation of not only a written business continuity and 
contingency plan, but also a reasonably effective plan, to enable a 
firm to recover as early as practicable in the event of a future 
significant business interruption.

Amendment No. 4

    [sbull] Business Constituent, Bank, and Counter-party Impact
    As noted above, the Exchange had received comments upon the 
publication of the changes proposed in Amendment No. 3. A commenter 
suggested that the requirement to provide for alternative actions or 
arrangements places an undue burden on members and member 
organizations, might upset existing contracts, and presupposes that all 
such actions or arrangements are sufficiently critical to require 
consideration of alternatives. The commenter suggested that the 
Exchange ``remove the sentence suggesting a requirement to provide for 
alternatives so as not to confuse the goal of making assessments with 
the goal of planning alternatives.''\17\
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    \17\ See SIA/BMA Letter 2.
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    The Exchange disagrees with the commenter that the provision is 
unduly burdensome or that it might upset existing contracts. The 
provision would require only that a member or member organization 
consider and include in its BCP alternative steps that the firm would 
take in the event that a member's or member organization's critical 
business constituents, bank, or counter-parties were inaccessible. The 
rule would not mandate that a member or member organization enter into 
supplemental contracts or conditional agreements. For example, if a 
member or member organization were to determine that a 
telecommunications company was a critical business constituent, the 
member or member organization would then be required to identify 
procedures or actions that could be followed in the event that this 
business constituent was unavailable. Alternatively, the member or 
member organization could enter into a supplemental agreement with 
another telecommunications service to provide back-up services. The 
rule would permit each member or member organization to adopt an 
approach in dealing with its business constituents, banks, and counter-
parties that is best suited to the member's or member organization's 
particular operations, structure, business, and location. It would 
require a member or member organization only to assess the effect of a 
significant business disruption on its business constituents, banks, 
and counter-parties and determine appropriate actions if faced with any 
such situation.
    The Exchange, however, recognizes that certain business 
constituent, banking, and counter-party relationships might not be 
critical to a firm's business or operations. Therefore, in response to 
comments, the Exchange is amending the category of ``business 
constituent, bank, and counter-party impact'' in proposed NYSE Rule 
446(c)(7) to read, ``[c]ritical business constituents, banks, and 
counter-parties.'' Members and member organizations would be 
responsible for identifying those relationships that they deem critical 
for purposes of complying with the rule. The Exchange will consider, 
based on its experience in working with the rule following its 
adoption, whether to enumerate specific relationships that it views as 
critical to all members and member organizations.
    [sbull] BCPs Should be Reasonably Designed to Enable a Firm to 
Continue its Business
    The commenters expressed concern that the language added by 
Amendment No. 3 to proposed NYSE Rule 446(a) would create a new 
obligation on a member or member organization to continue its business 
after a significant business disruption.\18\ This is not the intention 
of the proposal. The proposal would not deprive a member or member 
organization of its autonomy to choose to cease its operations at any 
time, provided it did so in a manner consistent with applicable laws 
and Commission and Exchange rules. Nevertheless, to clarify that the 
rule would not create a new obligation for members and member 
organizations to continue their businesses, the Exchange is amending 
the proposed rule.
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    \18\ See SIA/BMA Letter 2.
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    Specifically, the proposed rule text stating that ``[s]uch 
procedures must be reasonably designed to enable the member or member 
organization to continue its business in the event of future 
significant business disruptions'' is being amended to read, ``[s]uch 
procedures must be reasonably designed to enable the member or member 
organization to meet its existing obligations to customers. In 
addition, such procedures must address its existing relationships with 
other broker-dealers and counter-parties.'' The general principle that 
firms are not required to remain in business is further recognized in a 
related amendment that the Exchange is now proposing to make with 
respect to the categories that a member's or member organization's plan 
must, at a minimum, address. In particular, following discussions with 
Commission staff and NASD staff, the Exchange is amending proposed NYSE 
Rule 446(c) to require a plan to address how a member or member 
organization would assure customers' prompt access to their funds and 
securities in the event that the member determines it is unable to 
continue its business. This new category is intended to address how 
customers holding funds or securities at the member or member 
organization would be able to access their funds and/or securities if a 
member or member organization were unable to continue its business 
following a significant business disruption.
    Commenters also questioned an amendment made by the Exchange to the 
proposed rule text. As originally proposed, Rule 446(a) would have 
required that a member or member organization have a plan identifying 
procedures ``to be followed in the event

[[Page 55694]]

of an emergency or significant business disruption.'' In Amendment No. 
3, the Exchange changed ``to be followed in the event of an emergency 
or significant business disruption'' to ``relating to an emergency or 
significant business disruption.'' The commenters believed that this 
new language was less clear than the language originally proposed.\19\ 
This amendment, however, intends only to reflect that a BCP might 
include information other than a list of procedures to be followed by 
the member or member organization in the event of a significant 
business disruption. For example, a BCP might reference an existing 
arrangement with another entity that permits the entity to perform 
services for the member or member organization in the event of a future 
business disruption. While this arrangement is not necessarily a 
procedure to be followed by the member or member organization in the 
event of a significant business disruption, it does reflect the 
member's or member organization's plan relating to a business 
disruption and should be included in the member's or member 
organization's BCP.
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    \19\ See SIA/BMA Letter 2; see also A.G. Edwards Letter.
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    [sbull] Disclosure Provision
    Following discussions with Commission staff and NASD staff, the 
Exchange is amending the proposed rule text to require each member or 
member organization to disclose to its customers how its business 
continuity plan addresses the possibility of a future significant 
business disruption and how the member or member organization plans to 
respond to events of varying scope. Furthermore, such disclosure must, 
at a minimum, be made in writing to customers at account opening, 
posted on the member's or member organization's Internet website (if 
the member or member organization maintains a website), and mailed to 
customers upon request.\20\
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    \20\ See proposed NYSE Rule 446(d).
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    The Exchange believes that this requirement would allow investors 
to evaluate a member's or member organization's BCP when determining 
whether to place their funds and securities at the specific entity. 
This requirement also would deter members or member organizations from 
creating plans that do not adequately address contingency planning. The 
Exchange, however, notes that members and member organizations would 
not be required to disclose their entire plans; rather, each member or 
member organization would be required to create a summary of how its 
plan addresses the possibility of significant business disruptions and 
disclose the member's or member organization's general planned 
responses to significant business disruptions. Members and member 
organizations would not need to disclose such factors as: the specific 
location of any back-up facilities; any proprietary information 
contained in plan; and the parties with whom the member has back-up 
arrangements. Members and member organizations, however, would need to 
disclose the existence of back-up facilities and arrangements.
    [sbull] Implementation Schedule
    A commenter requested that the proposal indicate the time required 
for implementation and suggested that this time be 360 days from 
publication of the final Rule in the Federal Register.\21\ The NYSE 
believes that the rule should take effect 120 days after approval by 
the Commission.
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    \21\ See SIA/BMA Letter 2.
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2. Statutory Basis
    The NYSE believes that the proposed rule change, as amended, is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange 
and, in particular, with the requirements of Section 6(b)(5) of the 
Act.\22\ Under that section, the rules of the Exchange must be designed 
to, among other things, foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in, 
securities; 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.
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    \22\ 15 U.S.C. 78f(b)(5). o0
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B. Self-Regulatory Organization's Statement on Burden on Competition

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

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

    The Exchange received written comments in response to the Original 
Notice that it responded to Amendment No. 3.\23\ The Exchange received 
comments in response to the publication of Amendment No. 3 that it has 
responded to above.\24\
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    \23\ See supra note 12.
    \24\ See supra note 14-15.
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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 with 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 Exchange 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 the foregoing, including whether the proposed rule 
change, 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 such 
filings will also be available for inspection and copying at the 
principal office of the CBOE. All submissions should refer to File No. 
SR-NYSE-2002-35 and should be submitted by October 17, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-24381 Filed 9-25-03; 8:45 am]
BILLING CODE 8010-01-P