[Federal Register Volume 68, Number 199 (Wednesday, October 15, 2003)]
[Notices]
[Pages 59432-59435]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-26040]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-26204; File No. 812-12722]


The Lincoln National Life Insurance Company, et al.; Notice of 
Application

October 8, 2003.
AGENCY: Securities and Exchange Commission (the ``Commission'').

ACTION: Notice of application for an order pursuant to Section 11(a) of 
the Investment Company Act of 1940 (the ``Act'') approving the terms of 
an exchange offer to issued and outstanding variable annuity contracts.

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Applicants: The Lincoln National Life Insurance Company (``Lincoln 
Life'') and Lincoln National Variable Annuity Account C (``Account 
C'').

Filing Date: The application was filed on December 13, 2001, and 
amended and restated on September 22, 2003.

Summary of Application: Applicants request an order approving the terms 
of a proposed offer of exchange of MultiFund[reg] 5 (with contract 
value death benefit), an existing variable annuity contract issued by 
Lincoln Life and made available through Variable Annuity Account C 
(``New Contract''), for MultiFund[reg] 2, 3, and 4 (with contract value 
death benefit), outstanding annuity contracts issued by Lincoln Life 
and made available through Variable Annuity Account C (``Old 
Contracts'').

Hearing or Notification of Hearing: An order granting the amended and 
restated application will be issued unless the Commission orders a 
hearing. Interested persons may request a hearing by writing to the 
Secretary of the Commission and serving Applicants with a copy of the 
request, personally or by mail. Hearing requests must be received by 
the Commission by 5:30 p.m. on November 3, 2003, and should be 
accompanied by proof of service on Applicants in the form of an 
affidavit or, for lawyers, a certificate of service. Hearing requests 
should state the nature of the requester's interest, the reason for the 
request, and the issues contested. Persons may request notification of 
a hearing by writing to the Secretary of the Commission.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, DC 20549-0609. Applicants, c/o Mary Jo 
Ardington, Esq., Counsel, The Lincoln National Life Insurance Company, 
1300 S. Clinton Street, P.O. Box 1110, Fort Wayne, Indiana 46801-1110. 
Copy to Judith A. Hasenauer, Esq., Blazzard, Grodd & Hasenauer, P.C., 
Federal Tower, Suite 500, 1600 S. Federal Highway, Pompano Beach, 
Florida 33062.

FOR FURTHER INFORMATION CONTACT: Ellen J. Sazzman, Senior Counsel, or 
Lorna J. MacLeod, Branch Chief, Office of Insurance Products, Division 
of Investment Management, at (202) 942-0670.

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee from 
the Public Reference Branch of the Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0102 (tel. (202) 942-8090).

Applicants' Representations

    1. Lincoln Life is a stock life insurance company that was founded 
in 1905 under Indiana law, and is a wholly-owned subsidiary of Lincoln 
National Corporation (``LNC''), which is also organized under Indiana 
law. LNC's primary businesses are insurance and financial services. 
Lincoln Life is Account C's depositor within the meaning of the Act.
    2. Lincoln Life is the principal underwriter of the contracts 
issued by Lincoln Life through Account C. Lincoln Life is registered as 
a broker-dealer under the Securities Exchange Act of 1934.
    3. Account C was established on June 3, 1981, as an insurance 
company separate account under Indiana law. Account C is a segregated 
investment account and, as such, its assets may not be charged with 
liabilities resulting from any other business that Lincoln Life may 
conduct. Income, gains, and losses, whether realized or not, from 
assets allocated to Account C are, in accordance with applicable 
annuity contracts, credited to or charged against Account C, and 
without regard to any other income, gains, or losses of Lincoln Life. 
Account C satisfies the definition of a separate account under the 
federal securities law. Account C is registered on Form N-4 under the 
Act as a unit investment trust (File No. 811-3214).
    4. Account C funds the MultiFund[reg] Series of Variable Annuity 
Contracts including the MultiFund[reg] 2, 3, 4, and 5 Contracts 
(``MultiFund[reg] Contracts''). Certain MultiFund[reg] Contracts have 
been offered and sold for a number of years.
    5. There are four MultiFund[reg] Contracts which are the subject of 
this Application: MultiFund[reg] 2, MultiFund[reg] 3, MultiFund[reg] 4 
and MultiFund[reg] 5, all with the contract value death benefit. The 
MultiFund[reg] 2, 3, and 4 Contracts issued through Account C have been 
registered under the Securities Act of 1933 pursuant to a registration 
statement on Form N-4 (File No. 33-25990). The MultiFund[reg] 5 
Contract issued through Account C has been registered under the 
Securities Act of 1933 pursuant to a registration statement on Form N-4 
(File No. 333-68842).
    6. The MultiFund[reg] Contracts are flexible premium deferred 
annuity contracts under which contract owners may make one or more 
purchase payments over a period of time (called the ``accumulation 
period''). During the accumulation period, based upon the contract 
owner's instructions, such purchase payments are allocated to the 
selected subaccounts of Account C and/or Lincoln Life's general 
account. To the extent that an owner selects one or more subaccounts, 
his or her investment in the contract will vary with the investment 
performance of the selected subaccounts. To the extent that an owner 
selects the general account, Lincoln Life guarantees that the amount 
allocated to the general account will be credited with a minimum 
interest rate and Lincoln Life may credit additional interest that it 
may declare from time to time.
    7. A contract owner can elect to receive annuity payments under his 
or her contract. Under a contract, annuity payments are based upon the 
life of an annuitant and in some cases the lives of two (or joint) 
annuitants. Annuity options are available on a variable basis (i.e., 
funded by Account C) and/or on a fixed basis (i.e., funded through 
Lincoln Life's general account). The contracts incorporate other 
features, some of which are described more fully below under the 
discussion of the specific contract.
    8. The minimum purchase payment for MultiFund[reg] 2, 3, and 4 
Contracts is $3000 for nonqualified contracts and $1000 for qualified 
contracts. The MultiFund[reg] 2, 3 and 4 Contracts impose a surrender 
charge of up to 7% of any amount by which purchase payments withdrawn 
in any year exceed 15% of purchase payments. (However, this 15% 
withdrawal exception does not apply to a surrender of a contract.) The 
surrender charge associated with each

[[Page 59433]]

purchase payment declines 1% each year until it is 0% beginning after 
the seventh year after the payment was made.
    9. The MultiFund[reg] 2, 3 and 4 Contracts also impose the 
following charges: (a) A daily mortality and expense risk charge for 
contracts with the contract value death benefit at an annual rate of 
1.002% of the daily net asset value of Account C; (b) an annual 
contract maintenance charge of $25 (for MultiFund[reg] 2 only); (c) a 
charge corresponding to any applicable state premium tax or other tax 
levied by any governmental entity; and (d) fees and charges paid out of 
the assets of the underlying funds.
    10. The minimum purchase payment for the MultiFund[reg] 5 Contract 
is $25,000. This minimum payment restriction will be waived for 
participants in the exchange offer. The MultiFund[reg] 5 Contract also 
imposes a surrender charge of up to 7% of any amount by which purchase 
payments withdrawn in any year exceed 15% of purchase payments. 
(However, this 15% withdrawal exception does not apply to a surrender 
of a contract.) The surrender charge associated with each purchase 
payment declines 1% each year until it is 0% beginning after the 
seventh year after the payment was made.
    11. MultiFund[reg] 5 has four contract options with various death 
benefits. Only the contract value death benefit option is part of the 
exchange offer. In addition to the surrender charge, the MultiFund[reg] 
5 Contract option that is part of the exchange offer imposes the 
following charges: (a) A daily mortality and expense risk and 
administrative charge at an annual rate of 1.00% of the daily net asset 
value of Account C; (b) a charge corresponding to any applicable state 
premium tax or other tax levied by any governmental entity; and (c) 
fees and charges paid out of the assets of the underlying funds.
    12. Under both the MultiFund[reg] 2, 3, and 4 Contracts and the 
MultiFund[reg] 5 Contract, if the contract value death benefit option 
is in effect, the death benefit is equal to the current value of the 
contract as of the day Lincoln Life approves the claim for payment. 
However under the MultiFund[reg] 5 Contract, the death benefit would be 
payable on the death of the owner, joint owner, or, in certain 
circumstances, the annuitant, and not just on the death of the 
annuitant as under the MultiFund[reg] 2, 3, and 4 Contracts.
    13. Under the MultiFund[reg] 2, 3, and 4 Contracts, Lincoln Life 
limits transfers to no more than six per contract year although Lincoln 
Life reserves the right to waive this restriction and current practice 
is to allow up to 12 transfers per contract year. Transfers between 
subaccounts are restricted to once every 30 days, although Lincoln Life 
may waive this requirement. The minimum amount which may be transferred 
is $500 (or the entire subaccount amount if less than $500). The 
MultiFund[reg] 5 Contract has the same transfer provisions as the 
MultiFund[reg] 2, 3, and 4 Contracts except that the MultiFund[reg] 5 
Contract contractually allows up to twelve transfers per year during 
the accumulation phase, and these transfers are not limited to once 
every thirty days.
    14. The MultiFund[reg] 5 Contract has a lower guaranteed minimum 
interest rate payable on the fixed account than the MultiFund[reg] 2, 
3, and 4 Contracts. The MultiFund[reg] 2 and 3 Contracts provide that 
for contract years 6-10, the guaranteed minimum interest rate is 4% and 
for years 10 and later, the guaranteed minimum interest rate is 3.5%. 
The MultiFund[reg] 4 Contract provides for a guaranteed minimum 
interest rate of 3% in all years. After June 2, 2003, the 
MultiFund[reg] 5 Contract provides for a guaranteed minimum interest 
rate of 1.5% for the contract life in some states and 3% for the 
contract life in the remaining states.
    15. Lincoln Life now proposes to make an exchange offer to 
MultiFund[reg] 2, 3, and 4 contract owners with the contract value 
death benefit option whose contracts have a contract value of at least 
$5000 and who have remaining surrender charges equal to 2% or less of 
their current contract value. Under the exchange offer, eligible 
contract owners can elect to exchange their existing MultiFund[reg] 2, 
3, or 4 Contracts for a MultiFund[reg] 5 Contract. An immediate bonus 
credit of 2% of the contract value will be credited to the contract 
owner's contract on the issue date of the MultiFund[reg] 5 Contract.
    16. Contract owners who elect the 2% Bonus Exchange Offer will be 
issued a new MultiFund[reg] 5 Contract with the Contract Value Death 
Benefit. The current contract value will be withdrawn from the old 
contract and re-deposited into a MultiFund[reg] 5 Contract based on the 
then current allocation of contract value. Contract owners will hold 
the same share class in MultiFund[reg] 5 as in their original contract. 
Four of the existing underlying funds for MultiFund[reg] 2, 3, and 4 
Contracts are not available under the MultiFund[reg] 5 Contract. 
However, ten new fund choices are available under the MultiFund[reg] 5 
Contract that are not available under the MultiFund[reg] 2, 3, and 4 
Contracts. If a contract owner has allocated payments to one of the 
four subaccounts not available under the MultiFund[reg] 5 Contract, the 
contract owner will be required to establish a new allocation among 
subaccounts available under the MultiFund 5[reg] Contract. All contract 
owners who have accepted the exchange offer will be given the 
opportunity to change their allocations at the time of the exchange to 
any of the subaccounts available under the MultiFund[reg] 5 Contract. 
These changes in allocations do not count as transfers.
    17. The entire contract value of the new MultiFund[reg] 5 Contract 
(excluding the 2% bonus credit) will be subject to surrender charges 
under the New Contract as of the date the contract becomes effective. 
For purposes of calculating surrender charges, the contract value of 
the Old Contract (excluding the bonus credit) will be treated as a 
purchase payment. Any remaining surrender charges on the contract 
owner's MultiFund[reg] 2, 3, or 4 Contract existing prior to the time 
of the election of the exchange will be waived. All other charges of 
the new MultiFund[reg] 5 Contract will also apply.
    18. As of the effective date of the exchange offer, contract owners 
who have accepted the exchange offer will pay the MultiFund[reg] 5 
Contract charges. After the exchange, the contract owner will be 
governed by the terms of the New Contract, effective on the date the 
exchange offer is processed.
    19. The exchange offer is only available to nonqualified, IRA and 
Roth IRA annuity contracts, with at least $5000 in contract value, in 
which the named contract owner, joint owner, and annuitant are under 
age 76, and the remaining surrender charge, as a percent of the current 
contract value, is 2% or less. The exchange offer will not be made to 
contract owners who are not eligible to participate.
    20. Contract owners may cancel the new MultiFund[reg] 5 Contract 
for any reason within ten days (in some states longer) of the date of 
receipt of the new contract in accordance with the terms of the Right 
to Examine provision of the contract. No surrender charges will be 
assessed upon exercise of the Right to Examine provision or upon 
cancellation. Upon cancellation, Lincoln Life will return the contract 
value to the applicable MultiFund[reg] 2, 3, or 4 Contract. Any 
surrender charges previously waived on the MultiFund[reg] 2, 3, or 4 
Contract will be reinstated as of the date the MultiFund[reg] 2, 3, or 
4 Contract was surrendered. Lincoln Life will revoke any bonus credits 
credited to the contract value. However, Lincoln Life will assume the 
risk of investment loss on the bonus credits. In other words, the 
contract owner will be put

[[Page 59434]]

back into the same position as if he or she had never elected the 2% 
Bonus Exchange Offer (except for market gain or loss on contract 
value). There will be no recapture of the bonus credit upon withdrawal 
or surrender except under the Right to Examine provision. The election 
of the 2% Bonus Exchange Offer will have no adverse tax consequences to 
the contract owner.
    21. Applicants represent that the exchange offer is designed to 
encourage existing contract owners to remain with Lincoln Life rather 
than surrender their contracts in exchange for a competitor's product 
offering similar benefits.
    22. Applicants propose to make the exchange offer by providing 
eligible contract owners with an Offering Document mailed directly from 
Lincoln Life. Eligible contract owners will also receive a MultiFund 5 
prospectus. The MultiFund[reg] 5 prospectus will be supplemented to 
provide disclosure specifically related to the 2% Bonus Exchange Offer. 
Eligible MultiFund[reg] 2, 3, and 4 contract owners who express an 
interest in learning the details of the offer can contact either 
Lincoln Life or their registered representative for further 
information.
    23. Registered representatives who are responsible for a contract 
owner accepting the exchange offer will be paid a commission. The 
commission is less than what the registered representative would 
receive on the sale of a new MultiFund[reg] 5 Contract.
    24. The Offering Document will advise eligible contract owners that 
the offer is designed for those contract owners who intend to continue 
to hold their contracts as long-term investments. The Offering Document 
will state that the offer is not intended for all contract owners, and 
that it is especially not appropriate for any contract owner who 
anticipates surrendering an amount of his or her contract value in 
excess of the annual free withdrawal amount (15% of purchase payments) 
within the surrender charge period. In this regard, the Offering 
Document will encourage contract owners to carefully evaluate their 
personal financial situation when deciding whether to accept or reject 
the offer. In addition, the Offering Document will explain how a 
contract owner who elects to participate in the offer may avoid the 
applicable surrender charge if no more than the annual free withdrawal 
amount (15% of purchase payments) is surrendered, and any subsequent 
purchase payments are maintained until expiration of the applicable 
surrender charge period. In this regard, the Offering Document will 
state in clear plain English that if the new contract is surrendered 
during the initial surrender charge period: (a) The benefits of the 2% 
Bonus Exchange Offer may be more than offset by the surrender charge; 
and (b) a contract owner may be worse off than if he or she had 
rejected the offer.
    25. To accept the exchange offer, an eligible contract owner must 
complete the Lincoln Life internal exchange forms, which will contain 
the pertinent information so that the exchange will comply with the 
requirements of Section 1035 of the Internal Revenue Code (``Section 
1035''). No adverse tax consequences will be incurred by those contract 
owners who accept the exchange offer. The exchanges will constitute 
tax-free exchanges pursuant to Section 1035.

Applicants' Legal Analysis

    1. Section 11(a) of the Act makes it unlawful for any registered 
open-end company or any principal underwriter for such company, to make 
or cause to be made an offer to the holder of a security of such 
company, or of any other open-end investment company to exchange his 
security for a security in the same or another such company on any 
basis other than the relative net asset values of the respective 
securities to be exchanged, unless the terms of the offer have first 
been submitted to and approved by the Commission or are in accordance 
with Commission rules adopted under Section 11.
    2. Section 11(c) of the Act, in pertinent part, requires that any 
offer of exchange of the securities of a registered unit investment 
trust for the securities of any other investment company be approved by 
the Commission (by order or by rule) or satisfy applicable rules 
adopted under Section 11, regardless of the basis of the exchange.
    3. Account C is registered under the Act as a unit investment 
trust. Thus, the exchange offer constitutes an offer of exchange of two 
securities, each of which is offered by a registered unit investment 
trust.
    4. According to the Commission, Congress enacted Section 11 of the 
Act to prevent ``switching,'' the practice of inducing security holders 
of one investment company to exchange their securities for those of a 
different investment company solely for the purpose of exacting 
additional selling charges.
    5. Section 11(c) of the Act requires Commission approval (by order 
or by rule) of any exchange, regardless of its basis, involving 
securities issued by a unit investment trust because investors in unit 
investment trusts were found by Congress to be particularly vulnerable 
to switching transactions. Applicants believe that the potential for 
harm to investors perceived in switching by Congress was its use to 
extract additional sales charges from those investors.
    6. Applicants represent that, as opposed to providing a means of 
extracting additional sales charges as contemplated by the prohibitions 
of Section 11, the proposed exchange offer provides enduring benefits 
to the contract owners. To the extent that a contract owner ultimately 
did not benefit from accepting the offer, it would be as a result of 
his or her own subsequent decision to surrender the exchanged contract 
in circumstances that would have been the subject of very explicit 
disclosure.
    7. Rule 11a-2, by its express terms, provides for Commission 
approval of certain types of offers of exchange of one variable annuity 
contract for another. Other than the relative net asset value 
requirement, the only other part of Rule 11a-2 that would not be 
satisfied by the proposed exchange offer is the requirement that 
payments under the existing MultiFund[reg] 2, 3, and 4 Contracts be 
treated as if they had been made under the exchanged contracts on the 
dates actually made. This provision of Rule 11a-2 is often referred to 
as a ``tacking'' requirement because it has the effecting of ``tacking 
together'' the surrender charge expiration periods of the exchanged and 
acquired contracts.
    8. Applicants believe that tacking should be viewed as a useful way 
to avoid the need to scrutinize the terms of an offer of exchange to 
make sure that there is no abuse. Tacking is not a requirement of 
Section 11. Rather, it is a creation of a rule designed to approve the 
terms of an offer of exchange ``sight unseen.'' Tacking focuses on the 
closest thing to multiple deduction of sales loads that is possible in 
a surrender charge contract--multiple exposure to sales loads upon 
surrender or redemption. If tacking and other safeguards of Rule 11a-2 
are present, there is no need for the Commission or its staff to 
evaluate the terms of the offer. The absence of tacking in this fully 
scrutinized Section 11 application will have no import in offers made 
pursuant to the rule on a ``sight unseen'' basis.
    9. No tacking is required when Lincoln Life's competitors offer 
their variable annuity contracts to owners of the MultiFund[reg] 2, 3, 
and 4 Contracts or indeed when Lincoln makes such an offer to 
competitors' contract owners. In those exchanges, unlike the offer 
proposed here, the exchanging contract owner actually must pay any 
remaining surrender charge on the exchanged

[[Page 59435]]

contract at the time of the exchange. The broker/dealers that will be 
making recommendations to their customers regarding these offers are 
required to satisfy the suitability requirements. Therefore, while 
tacking is not present, the investor protection afforded by the 
suitability requirements imposed upon the broker/dealer and the 
additional disclosure will be.
    10. By this Application, Applicants are seeking a ``level playing 
field'' to permit Lincoln to compete with offers of competitors to its 
longstanding contract owners. Absent the requested relief, there can be 
no such offers, as imposition of the Rule 11a-2 tacking requirement 
would make it unfeasible for the offers to be made.
    11. Applicants assert that approval of the terms of the exchange 
offer is warranted, among other reasons, because it will promote 
competition in the variable annuity marketplace. Such approval will 
foster competition by allowing Lincoln Life to make an offer to its own 
contract owners that would provide an attractive additional option for 
contract owners' consideration.

Applicants' Conditions

    If the requested order is granted, Applicants consent to the 
following conditions, which are intended to support the understanding 
that the 2% Bonus Exchange Offer is being made to contract owners who 
expect to persist:
    1. The Offering document will contain concise, plain English 
statements that:
    (a) the 2% Bonus Exchange Offer is suitable only for contract 
owners who expect to hold their contracts as long term investments; and
    (b) if the new contract is surrendered during the initial surrender 
charge period:
    i. the 2% bonus may be more than offset by the surrender charge; 
and
    ii. the contract owner may be worse off than if he or she had 
rejected the exchange offer.
    2. The Offering Document will disclose in concise, plain English 
each aspect of the New Contract that will be less favorable than the 
Old Contract, including the fact that the MultiFund[reg] 5 Contract has 
a lower, guaranteed minimum interest rate for investments in the fixed 
account than the MultiFund[reg] 2, 3, and 4 Contracts.
    3. Lincoln Life will send the Offering Document directly to 
eligible contract owners. A contract owner choosing the exchange offer 
will then complete and sign an internal exchange form, which will 
prominently restate in concise, plain English the statements required 
in Condition No. 1, and will return it to Lincoln Life. If the internal 
exchange form is more than two pages long, the statements referred to 
in Condition No. 1 will be restated in a separate document, and Lincoln 
Life will obtain the contract owner's acknowledgement of receipt of 
that document.
    4. Lincoln Life will maintain the following separately identifiable 
records in an easily accessible place, for the time periods specified 
below in this Condition No. 4 for review by the Commission upon 
request:
    (a) Records showing the level of acceptances of the exchange offer 
and how these acceptances relate to the total number of contract owners 
eligible to participate in the offers (quarterly as a percentage of the 
number eligible);
    (b) Copies of any form of Offering Document and any other written 
materials or scripts for presentations by representatives regarding the 
exchange offer that Lincoln Life either prepares or approves, including 
the dates that such Offering Document and materials were used;
    (c) Records containing information about each exchange transaction 
that occurs, including the name of the contract owner, Old and New 
Contract numbers; the amount of surrender charge waived on surrender of 
the Old Contract; bonus paid; the name and CRD number of the registered 
representative soliciting the exchange, firm affiliation, branch office 
address, telephone number, and the name of the registered 
representative's broker-dealer; commission paid; the internal exchange 
form (and separate acknowledgement, if any) showing the name, date of 
birth, address, and telephone number of the contract owner and the date 
the internal exchange form (or separate acknowledgement) was signed; 
amount of contract value exchanged; and persistency information 
relating to the New Contract, including the date of any subsequent 
surrender and the amount of surrender charge paid on the surrender; and
    (d) Logs showing a record of any contract owner complaint about the 
exchange; state insurance department inquiries about the exchange; or 
litigation, arbitration or other proceeding regarding any exchange. The 
logs will include the date of the complaint or commencement of the 
proceeding, name and address of the person making the complaint or 
commencing the proceeding, nature of the complaint or proceeding, and 
the persons named or involved in the complaint or proceeding.
    Applicants will retain records specified in (a) and (d) for a 
period of six years after the date the records are created, records 
specified in (b) for a period of six years after the date of last use, 
and records specified in (c) for a period of two years after the date 
that the initial surrender charge period of the New Contract ends.

Conclusion

    For all the reasons discussed above, Applicants submit that (1) the 
2% Bonus Exchange Offer offers substantial benefits to contract owners, 
will be advantageous for the great majority of owners to whom it will 
be offered, and does not contravene any policy or purpose of Section 
11, and (2) approval of Applicants' offer of the exchange offer as 
described, and subject to the conditions set forth in this Application, 
is appropriate in the public interest and consistent with the 
protection of investors and the purposes fairly intended by the 
policies and provisions of the Act. Therefore, Applicants respectfully 
submit that the Commission should grant the approval sought by this 
Application.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-26040 Filed 10-14-03; 8:45 am]
BILLING CODE 8010-01-P