[Federal Register Volume 68, Number 204 (Wednesday, October 22, 2003)]
[Notices]
[Pages 60426-60430]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-26588]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48627; File No. SR-NASD-2003-130]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of a Proposed Rule Change and Amendment 
Nos. 1 and 2 Thereto by the National Association of Securities Dealers, 
Inc. Relating to Amendments to Its Recently Adopted Rules Regarding 
Shareholder Approval for Stock Option or Purchase Plans or Other Equity 
Compensation Arrangements

October 14, 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 August 18, 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'' or ``SEC'') the proposed rule change as 
described in Items I and II below, which Items have been prepared by 
Nasdaq. On October 2, 2003, Nasdaq filed Amendment No. 1 to the 
proposed rule change.\3\ On October

[[Page 60427]]

7, 2003, Nasdaq filed Amendment No. 2 to the proposed rule change.\4\ 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons and is approving the 
proposal, as amended, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from John D. Nachmann, Senior Attorney, Nasdaq, 
to Katherine A. England, Assistant Director, Division of Market 
Regulation (``Division''), Commission, dated October 2, 2003 
(``Amendment No. 1''). In Amendment No. 1, Nasdaq replaced the terms 
``compensation committee'' or ``compensation committee comprised of 
a majority of independent director'' throughout NASD Rule 4350(i) 
and IM-4350-5 with the phrase ``independent compensation 
committee.'' This proposed change is to conform Nasdaq's description 
of compensation committee to that of NYSE's description in Section 
303A(8) of the NYSE's Listed Company Manual. In addition, in 
Amendment No. 1, Nasdaq requested accelerated approval of the 
proposed rule change, as amended.
    \4\ See letter from John D. Nachmann, Senior Attorney, Nasdaq, 
to Katherine A. England, Assistant Director, Division, Commission, 
dated October 7, 2003 (``Amendment No. 2''). In Amendment No. 2, 
Nasdaq made technical corrections to the proposed rule text.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq has filed with the Commission a proposed rule change 
relating to amendments to its recently adopted rules regarding 
shareholder approval for stock option or purchase plans or other equity 
compensation arrangements.
    The text of the proposed rule change, as amended, is below. 
Proposed new language is in italics; proposed deletions are in 
brackets.
* * * * *

Rule 4350. Qualitative Listing Requirements for Nasdaq National Market 
and Nasdaq SmallCap Market Issuers Except for Limited Partnerships

    (a)-(h) No change
    (i) Shareholder Approval
    (1) Each issuer shall require shareholder approval prior to the 
issuance of designated securities under subparagraph (A), (B), (C), or 
(D) below:
    (A) when a stock option or purchase plan is to be established or 
materially amended or other equity compensation arrangement made or 
materially amended, pursuant to which options or stock may be acquired 
by officers, directors, employees, or consultants, except for:
    (i) No change
    (ii) tax qualified, non-discriminatory employee benefit plans 
(e.g., plans that meet the requirements of Section 401(a) or 423 of the 
Internal Revenue Code) or parallel nonqualified plans, provided such 
plans are approved by the issuer's independent compensation committee 
or a majority of the issuer's independent directors; or plans that 
merely provide a convenient way to purchase shares on the open market 
or from the issuer at fair market value; or
    (iii) No change
    (iv) issuances to a person not previously an employee or director 
of the company, provided such issuances are approved by either the 
issuer's independent compensation committee [comprised of a majority of 
independent directors] or a majority of the issuer's independent 
directors. Promptly following an issuance of any employment inducement 
grant in reliance on this exception, a company must disclose in a press 
release the material terms of the grant, including the recipient(s) of 
the grant and the number of shares involved.
    (B)-(D) No change
    (2)-(6) No change
    (j)-(l) No change

IM-4350-5. Shareholder Approval for Stock Option Plans or Other Equity 
Compensation Arrangements

    Employee ownership of company stock can be an effective tool to 
align employee interests with those of other shareholders. Stock option 
plans or other equity compensation arrangements can also assist in the 
recruitment and retention of employees, which is especially critical to 
young, growing companies, or companies with insufficient cash resources 
to attract and retain highly qualified employees. However, these plans 
can potentially dilute shareholder interests. As such, Rule 
4350(i)(1)(A) ensures that shareholders have a voice in these 
situations, given this potential for dilution.
    Rule 4350(i)(1)(A) requires shareholder approval when a plan or 
other equity compensation arrangement is established or materially 
amended. For these purposes, a material amendment would include, but 
not be limited to, the following:
    (1) any material increase in the number of shares to be issued 
under the plan (other than to reflect a reorganization, stock split, 
merger, spinoff or similar transaction);
    (2) any material increase in benefits to participants, including 
any material change to: (i) permit a repricing (or decrease in exercise 
price) of outstanding options, (ii) reduce the price at which shares or 
options to purchase shares may be offered, or (iii) extend the duration 
of a plan;
    (3) any material expansion of the class of participants eligible to 
participate in the plan; and
    (4) any expansion in the types of options or awards provided under 
the plan.
    While general authority to amend a plan would not obviate the need 
for shareholder approval, if a plan permits a specific action without 
further shareholder approval, then no such approval would generally be 
required. However, if a plan contains a formula for automatic increases 
in the shares available (sometimes called an ``evergreen formula''), or 
for automatic grants pursuant to a dollar-based formula (such as annual 
grants based on a certain dollar value, or matching contributions based 
upon the amount of compensation the participant elects to defer), such 
plans cannot have a term in excess of ten years unless shareholder 
approval is obtained every ten years. However, plans that do not 
contain a formula and do not impose a [no] limit on the number of 
shares available for grant would require shareholder approval of each 
grant under the plan. A requirement that grants be made out of treasury 
shares or repurchased shares will not alleviate these additional 
shareholder approval requirements.
    As a general matter, when preparing plans and presenting them for 
shareholder approval, issuers should strive to make plan terms easy to 
understand. In that regard, it is recommended that plans meant to 
permit repricing use explicit terminology to make this clear.
    Rule 4350(i)(1)(A) provides an exception to the requirement for 
shareholder approval for warrants or rights offered generally to all 
shareholders. In addition, an exception is provided for tax qualified, 
non-discriminatory employee benefit plans as well as parallel 
nonqualified plans [\1\] as these plans are regulated under the 
Internal Revenue Code and Treasury Department regulations. An equity 
compensation plan that provides non-U.S. employees with substantially 
the same benefits as a comparable tax qualified, non-discriminatory 
employee benefit plan or parallel nonqualified plan that the issuer 
provides to its U.S. employees, but for features necessary to comply 
with applicable foreign tax law, are also exempt from shareholder 
approval under this section.
    Further, there is an exception for inducement grants to new 
employees because in these cases a company has an arm's length 
relationship with the new employees. Inducement grants for these 
purposes include grants of options or stock to new employees in 
connection with a merger or acquisition. The rule requires that such 
issuances must be approved by the issuer's independent compensation 
committee or a majority of the issuer's independent directors. The rule 
further requires that promptly following an issuance of any employment 
inducement grant in reliance on this exception, a company

[[Page 60428]]

must disclose in a press release the material terms of the grant, 
including the recipient(s) of the grant and the number of shares 
involved.
    In addition, plans or arrangements involving a merger or 
acquisition do not require shareholder approval in two situations. 
First, shareholder approval will not be required to convert, replace or 
adjust outstanding options or other equity compensation awards to 
reflect the transaction. Second, shares available under certain plans 
acquired in acquisitions and mergers may be used for certain post-
transaction grants without further shareholder approval. This exception 
applies to situations where the party which is not a listed company 
following the transaction has shares available for grant under pre-
existing plans that meet the requirements of this Rule 4350(i)(1)(A). 
These shares may be used for post-transaction grants of options and 
other equity awards by the listed company (after appropriate adjustment 
of the number of shares to reflect the transaction), either under the 
pre-existing plan or arrangement or another plan or arrangement, 
without further shareholder approval, provided: (1) The time during 
which those shares are available for grants is not extended beyond the 
period when they would have been available under the pre-existing plan, 
absent the transaction, and (2) such options and other awards are not 
granted to individuals who were employed by the granting company or its 
subsidiaries at the time the merger or acquisition was consummated. 
Nasdaq would view a plan or arrangement adopted in contemplation of the 
merger or acquisition transaction as not pre-existing for purposes of 
this exception. This exception is appropriate because it will not 
result in any increase in the aggregate potential dilution of the 
combined enterprise. In this regard, any additional shares available 
for issuance under a plan or arrangement acquired in a connection with 
a merger or acquisition would be counted by Nasdaq in determining 
whether the transaction involved the issuance of 20% or more of the 
company's outstanding common stock, thus triggering the shareholder 
approval requirements under Rule 4350(i)(1)(C).
    Inducement grants, tax qualified non-discriminatory benefit plans, 
and parallel nonqualified plans are subject to approval by either the 
issuer's independent compensation committee [comprised of a majority of 
independent directors,] or a majority of the issuer's independent 
directors. It should also be noted that a company would not be 
permitted to use repurchased shares to fund option plans or grants 
without prior shareholder approval.
    For purposes of Rule 4350(i)(1)(A) and IM-4350-5, the term 
``parallel nonqualified plan'' means a plan that is a ``pension plan'' 
within the meaning of the Employee Retirement Income Security Act 
(``ERISA''), 29 U.S.C. 1002 (1999), that is designed to work in 
parallel with a plan intended to be qualified under Internal Revenue 
Code Section 401(a), to provide benefits that exceed the limits set 
forth in Internal Revenue Code Section 402(g) (the section that limits 
an employee's annual pre-tax contributions to a 401(k) plan), Internal 
Revenue Code Section 401(a)(17) (the section that limits the amount of 
an employee's compensation that can be taken into account for plan 
purposes) and/or Internal Revenue Code Section 415 (the section that 
limits the contributions and benefits under qualified plans) and/or any 
successor or similar limitations that may thereafter be enacted. 
However, a plan will not be considered a parallel nonqualified plan 
unless: (i) It covers all or substantially all employees of an employer 
who are participants in the related qualified plan whose annual 
compensation is in excess of the limit of Code Section 401(a)(17) (or 
any successor or similar limitation that may hereafter be enacted); 
(ii) its terms are substantially the same as the qualified plan that it 
parallels except for the elimination of the limitations described in 
the preceding sentence; and, (iii) no participant receives employer 
equity contributions under the plan in excess of 25% of the 
participant's cash compensation.
    [The term ``parallel nonqualified plan'' means a plan that is a 
``pension plan'' within the meaning of the Employee Retirement Income 
Security Act (``ERISA''), 29 U.S.C. 1002 (1999), that is designed to 
work in parallel with a plan intended to be qualified under Internal 
Revenue Code Section 401(a), to provide benefits that exceed the limits 
set forth in Internal Revenue Code Section 402(g) (the section that 
limits an employee's annual pre-tax contributions to a 401(k) plan), 
Internal Revenue Code Section 401(a)(17) (the section that limits the 
amount of an employee's compensation that can be taken into account for 
plan purposes) and/or Internal Revenue Code Section 415 (the section 
that limits the contributions and benefits under qualified plans) and/
or any successor or similar limitations that may thereafter be enacted. 
However, a plan will not be considered a parallel nonqualified plan 
unless: (i) it covers all or substantially all employees of an employer 
who are participants in the related qualified plan whose annual 
compensation is in excess of the limit of Code Section 401(a)(17) (or 
any successor or similar limitation that may hereafter be enacted); 
(ii) its terms are substantially the same as the qualified plan that it 
parallels except for the elimination of the limitations described in 
the preceding sentence; and, (iii) no participant receives employer 
equity contributions under the plan in excess of 25% of the 
participant's cash compensation.]
* * * * *

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, 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 III 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
    NASD Rule 4350(i)(1)(A) generally requires shareholder approval 
when a stock option or purchase plan is established or materially 
amended or other arrangement made pursuant to which options or stock 
may be acquired by officers, directors, employees or consultants. This 
Rule, however, provides that shareholder approval is not required for 
employment inducement grants made to new employees. Nasdaq believes 
that shareholder approval is not required for employment inducement 
grants because a company has an arm's length relationship with the new 
employees in these cases. Although shareholder approval is not required 
for employment inducement grants, they can only be made upon approval 
of the issuer's independent compensation committee or a majority of the 
issuer's independent directors. Nasdaq is proposing to also require an 
issuer to promptly disclose in a press release the material terms of 
employment inducement grants, including the recipients of the grants 
and the number of shares involved. Nasdaq believes that such disclosure 
would provide transparency to investors and reduce the potential for 
abuse of

[[Page 60429]]

this exception from the shareholder approval requirements.
    Nasdaq further proposes to clarify IM-4350-5, which provides 
interpretative guidance regarding shareholder approval for stock option 
plans or other equity compensation arrangements. As previously 
mentioned, NASD Rule 4350(i)(1)(A) requires, in part, shareholder 
approval when a stock option or purchase plan is materially amended. 
IM-4350-5 currently provides that while general authority to amend a 
plan does not obviate the need for shareholder approval, if a plan 
permits a specific action without further shareholder approval, then no 
such approval would generally be required. Stock option plans that 
contain a formula for automatic increases in the shares available or 
for automatic grants pursuant to a dollar-based formula, however, 
cannot have a term in excess of ten years unless shareholder approval 
is obtained every ten years. Nasdaq proposes to amend IM-4350-5 to 
clarify that plans that do not contain a formula and do not impose a 
limit on the number of shares available for grant would require 
shareholder approval of each grant under the plan. This change will 
provide greater transparency regarding the shareholder approval 
requirements for material changes to stock option plans.
    In addition, Nasdaq proposes to clarify IM-4350-5 with respect to 
tax qualified, non-discriminatory employee benefit plans and parallel 
nonqualified plans. These plans are excepted from the shareholder 
approval requirements because they are regulated under the Internal 
Revenue Code and Treasury Department regulations. Nasdaq proposes to 
clarify IM-4350-5 by stating that an equity compensation plan that 
provides non-U.S. employees with substantially the same benefits as a 
comparable tax qualified, non-discriminatory employee benefit plan or 
parallel nonqualified plan that the issuer provides to its U.S. 
employees, but for features necessary to comply with applicable foreign 
tax law, are also exempt from the shareholder approval requirements. 
This change will provide greater transparency for issuers regarding tax 
qualified, non-discriminatory employee benefit plans and parallel 
nonqualified plans for their non-U.S. employees.
    Nasdaq also proposes to make a change to the terms ``compensation 
committee'' and ``compensation committee comprised of a majority of 
independent directors'' by replacing these terms with ``independent 
compensation committee.''
    Lastly, Nasdaq proposes to move the text of footnote 1 of IM-4350-5 
into the text of the IM in order to provide greater clarity of the IM 
in the NASD Manual.
2. Statutory Basis
    Nasdaq believes that the proposed rule change, as amended, is 
consistent with Section 15A of the Act,\5\ in general, and furthers the 
objectives of Section 15A(b)(6) of the Act,\6\ in particular, in that 
it is designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and, 
in general, to protect investors and the public interest. Specifically, 
the proposed rule change will strengthen shareholder approval 
requirements with respect to stock option and purchase plans and 
provide greater transparency for investors as well as issuers and their 
counsel.
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    \5\ 15 U.S.C. 78o-3.
    \6\ 15 U.S.C. 78o-3(b)(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.

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. 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 
filing will also be available for inspection and copying at the 
principal office of the NASD. All submissions should refer to file 
number SR-NASD-2003-130 and should be submitted by November 12, 2003.

IV. Commission Findings and Order Granting Accelerated Approval of the 
Proposed Rule Change

    After careful review, the Commission finds that the Nasdaq 
proposal, as amended, is consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to a national 
securities association.\7\ The Commission finds that the Nasdaq 
proposal, as amended, is consistent with provisions of Section 15A of 
the Act, \8\ in general, and with Section 15A(b)(6) of the Act, \9\ in 
particular, in that the it is designed to, among other things, 
facilitate transactions in securities; to prevent fraudulent and 
manipulative acts and practices; 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, and does not permit 
unfair discrimination among issuers.
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    \7\ In approving the Nasdaq proposal, as amended, the Commission 
has considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
    \8\ 15 U.S.C. 78o-3.
    \9\ 15 U.S.C. 78o-3(b)(6).
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    The Commission notes that the changes and clarifications proposed 
by Nasdaq in this proposal are similar to provisions that are currently 
in the NYSE's rule relating to shareholder approval of equity 
compensation plans, Section 303A(8) of the NYSE's Listed Company 
Manual. In particular, the Commission notes that Nasdaq proposes to 
adopt a disclosure requirement similar to the NYSE's disclosure 
requirement that, promptly following the grant of any inducement award, 
companies must disclose in a press release the material terms of the 
award, including the recipient(s) of the award and the number of shares 
involved.\10\ The Commission believes that such a disclosure 
requirement should help to provide transparency to investors and reduce 
the potential for abuse of this exception for inducement grants.
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    \10\ This disclosure would, of course, be in addition to any 
information that is required to be disclosed in annual reports filed 
with the Commission. For example, Item 201(d) of Regulation S-K [17 
CFR 229.201(d)] and Item 201(d) of Regulation S-B [17 CFR 
228.201(d)] require issuers to present `` in their annual reports on 
Form 10-K or Form 10-KSB--separate, tabular disclosure concerning 
equity compensation plans that have been approved by shareholders 
and equity compensation plans that have not been approved by 
shareholders.
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    In addition, the Commission notes that, similar to the NYSE's 
exemption

[[Page 60430]]

under Section 303A(8) of the its Listed Company Manual, Nasdaq proposes 
to adopt an exception from the shareholder approval requirements for 
equity compensation plans that provide non-U.S. employees with 
substantially the same benefits as a comparable tax qualified, non-
discriminatory employee benefit plan or parallel nonqualified plan that 
the issuer provides to its U.S. employees, but for features necessary 
to comply with applicable foreign tax law. The Commission believes that 
this change will conform Nasdaq's shareholder approval rule to that of 
the NYSE and will provide greater clarity for issuers regarding tax 
qualified, non-discriminatory employee benefit plans and parallel 
nonqualified plans for their non-U.S. employees.
    Finally, Nasdaq proposes certain changes to it current shareholder 
approval rule to provide further clarity and conformity of its rule to 
the NYSE's shareholder approval rule. One such proposed change is 
replacing the terms ``compensation committee'' and ``compensation 
committee comprised of a majority of independent directors'' with the 
term ``independent compensation committee.'' \11\ This change makes 
Nasdaq's rules consistent with similar provisions in the NYSE's 
shareholder approval rules.
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    \11\ See also proposed NASD Rule 4350(c)(3) in Amendment No. 3 
to File No. SR-NASD-2002-141 (filed on October 10, 2003) and 
Securities Exchange Act Release No. 47516 (March 17, 2003), 68 FR 
14451 (March 25, 2003), relating to the composition of the 
compensation committee.
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    The Commission finds good cause for approving the proposed rule 
change and Amendment Nos. 1 and 2 thereto prior to the thirtieth day 
after the date of publication of notice of filing thereof in the 
Federal Register. The Commission notes that Nasdaq has requested it to 
approve the proposed rule change, as amended, on an accelerated basis, 
because the proposed change, as amended, is intended to clarify 
existing Nasdaq rules. The Commission does not believe the Nasdaq's 
proposal, as amended, raises any new issues that the Commission has not 
already considered and addressed when approving similar provisions in 
the NYSE's shareholder approval rule.\12\ The Commission believes that 
granting accelerated approval of the proposal, as amended, will allow 
the proposed changes to become immediately incorporated into Nasdaq's 
shareholder approval rule and will provide more consistency and 
uniformity between the Nasdaq and NYSE's shareholder approval rules. 
Accordingly, the Commission believes that there is good cause, 
consistent with Sections 15A(b)(6) and 19(b)(2) of the Act, \13\ to 
approve the proposal and Amendment Nos. 1 and 2 thereto on an 
accelerated basis.
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    \12\ See Securities Exchange Act Release No. 48108 (June 30, 
2003), 68 FR 39995 (July 3, 2003) (order approving File Nos. SR-
NYSE-2002-46 and SR-NASD-2002-140). The Commission notes that the 
NYSE provisions were noticed for a full 21-day comment period in the 
Federal Register.
    \13\ 15 U.S.C. 78o-3(b)(6) and 78s(b)(2).
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    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (SR-NASD-2003-130) and Amendment Nos. 1 
and 2 thereto are approved on an accelerated basis.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-26588 Filed 10-21-03; 8:45 am]
BILLING CODE 8010-01-P