[Federal Register Volume 68, Number 212 (Monday, November 3, 2003)]
[Notices]
[Pages 62334-62337]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-27593]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48708; File No. SR-Amex-2003-91]


Self-Regulatory Organizations; American Stock Exchange LLC; 
Notice of Filing and Order Granting Accelerated Approval of Proposed 
Rule Change Relating to the Listing and Trading of Notes Based on the 
Morgan Stanley Technology Index

October 28, 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 October 22, 2003, the American Stock Exchange LLC (``Amex'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I and II below, which the 
Amex has prepared. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons and is 
approving the proposal on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240. 19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Amex proposes to list and trade, under Section 107A of the Amex 
Company Guide, senior non-convertible debt securities (``Notes'') of 
Morgan Stanley, the return on which is based on the performance of the 
Morgan Stanley Technology Index.

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 Amex 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. The Amex 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Under Section 107A of the Amex Company Guide, the Amex may approve 
for listing and trading securities that cannot be readily categorized 
under the listing criteria for common and preferred stocks, bonds, 
debentures, or warrants.\3\ The Amex proposes to list for trading Notes 
based on the Morgan Stanley Technology Index.\4\ The Technology Index 
will be determined, calculated and maintained solely by the Amex.\5\ 
The Notes will conform to the listing guidelines under Section 107A of 
the Amex Company Guide \6\ and the continued listing guidelines under 
Sections 1001-1003 of the Amex Company Guide.\7\
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    \3\ See Securities Exchange Act Release No. 27753 (March 1, 
1990), 55 FR 8626 (March 8, 1990) (order approving File No. SR-Amex-
89-29).
    \4\ The Morgan Stanley Technology Index is an equal-dollar 
weighted index consisting of thirty-five (35) securities designed to 
measure the performance of a cross-section of highly capitalized 
U.S. companies that are active in nine technology subsectors: (i) 
computer services; (ii) design software; (iii) server software; (iv) 
PC software and new media; (v) networking and telecommunications 
equipment; (vi) server hardware; (vii) server hardware; (viii) PC 
hardware and peripherals; and (ix) specialized systems and semi-
conductors.
    \5\ As further described in the prospectus, the Amex is solely 
responsible for calculating and maintaining the Technology Index in 
consultation with Morgan Stanley & Co., Inc. These duties, among 
others, include changes to the Index due to annual reconstitutions 
and adjustments. The Amex has re-submitted a letter dated August 29, 
1995 from Morgan Stanley to the Commission that describes the role 
of the Amex with respect to the calculation and maintenance of the 
Technology Index, and has further represented that the same 
methodology will apply with respect to the Notes that are the 
subject of this proposed rule change. See Memorandum from Jeffrey P. 
Burns, Associate General Counsel, Amex, to Patrick M. Joyce, Special 
Counsel, Commission, dated October 21, 2003.
    \6\ The initial listing standards for the Notes require: (1) a 
minimum public distribution of one million units; (2) a minimum of 
400 shareholders; (3) a market value of at least $4 million; and (4) 
a term of at least one year. In addition, the listing guidelines 
provide that the issuer have assets in excess of $100 million, 
stockholder's equity of at least $10 million, and pre-tax income of 
at least $750,000 in the last fiscal year or in two of the three 
prior fiscal years. In the case of an issuer which is unable to 
satisfy the earning criteria stated in Section 101 of the Amex 
Company Guide, the Amex will require the issuer to have the 
following: (1) assets in excess of $200 million and stockholders' 
equity of at least $10 million; or (2) assets in excess of $100 
million and stockholders' equity of at least $20 million.
    \7\ The Amex's continued listing guidelines are set forth in 
Sections 1001 through 1003 of Part 10 to the Amex Company Guide. 
Section 1002(b) of the Amex Company Guide states that the Amex will 
consider removing from listing any security where, in the opinion of 
the Amex, it appears that the extent of public distribution or 
aggregate market value has become so reduced to make further 
dealings on the Amex inadvisable. With respect to continued listing 
guidelines for distribution of the Notes, the Amex will rely, in 
part, on the guidelines for bonds in Section 1003(b)(iv). Section 
1003(b)(iv)(A) provides that the Amex will normally consider 
suspending dealings in, or removing from the list, a security if the 
aggregate market value or the principal amount of bonds publicly 
held is less than $400,000.
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    The Notes are senior non-convertible debt securities of Morgan 
Stanley that will have a term of not less than one year nor more than 
ten years. The ``Initial Index Value'' is the value of the Technology 
Index on the date the Notes are priced for the initial sale to the 
public. At maturity the holder of Notes will be entitled to receive an 
amount based upon an ``Average Index Value,'' which will be determined 
by calculating the arithmetic average of the ``Closing Index Value'' on 
each of three (3) trading days on which no market disruption event 
occurs, beginning on or after December 23, 2004. The Notes will not 
have a minimum principal amount that will be repaid and, accordingly, 
payments on the Notes prior to or at maturity may be less than the 
original issue price of the Notes. The Notes are not callable by the 
issuer.
    The ``Redemption Amount,'' which is the payment that a holder or 
investor will receive at maturity of the Note, will be based on whether 
the Average Index Value is greater or less than the Initial Index 
Value. If the Average Index Value is greater than the Initial Index 
Value, a holder of the Notes will receive a Redemption Amount in cash 
equal to $10 plus the ``Leveraged Upside Payment.'' The Leveraged 
Upside Payment is equal to $10 multiplied by

[[Page 62335]]

200% of the percentage increase in the value of the Technology Index 
Notes, subject to a maximum payment amount (or ``Capped Amount'') 
determined at the time of issuance. The calculation of this Redemption 
Amount is set forth below:
[GRAPHIC] [TIFF OMITTED] TN03NO03.000

    If the Average Index Value is less than or equal to the Initial 
Index Value, a holder of the Notes will receive a Redemption Amount in 
cash equal to the principal amount multiplied by an ``Index Performance 
Factor.'' This Index Performance Factor is the relationship between the 
Average Index Value and the Initial Index Value, and will be a number 
equal or less than 1.0. The calculation of this Redemption Amount is 
set forth below:
[GRAPHIC] [TIFF OMITTED] TN03NO03.001

    The Redemption Amount in this case would accordingly be less than 
or equal to $10 for each $10 principal amount of the Notes.
    The Notes are cash-settled in U.S. dollars and do not give the 
holder any right to receive a portfolio security or any other ownership 
right or interest in the portfolio of securities comprising the 
Technology Index. The Notes are designed for investors who want to 
participate in or gain exposure to the companies involved in various 
technology subsectors and who are willing to forego market interest 
payments on the Notes during such term. The Commission has previously 
approved the listing of options on the Technology Index.\8\
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    \8\ See Securities Exchange Act Release Nos. 36283 (September 
26, 1995), 60 FR 51825 (October 3, 1995) (approving the listing of 
options on the Morgan Stanley High Technology 35 Index); and 41472 
(June 2, 1999), 64 FR 31331 (June 10, 1999) (approving a reduction 
in the Morgan Stanley High Technology Index Value).
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    As of October 14, 2003, the market capitalization of the securities 
that would represent the Technology Index would range from a high of 
$314.4 billion to a low of $3.14 billion. The average monthly trading 
volume of the securities comprising the Index for the last six months, 
as of the same date, ranged from a high of 742.5 million shares to a 
low of 36.02 million shares. The aggregate market capitalization of all 
securities in the Index was approximately $1.714 trillion. The Amex 
would continue to calculate and disseminate the value of the Notes 
every fifteen seconds over the Consolidated Tape Association's Network 
B.
    Because the Notes are linked to an equity index, the Amex's 
existing equity floor trading rules would apply to the trading of the 
Notes. First, pursuant to Amex Rule 411, the Amex would impose a duty 
of due diligence on its members and member firms to learn the essential 
facts relating to every customer prior to trading the Notes.\9\ Second, 
the Notes would be subject to the equity margin rules of the Amex.\10\ 
Third, the Amex would, prior to trading the Notes, distribute a 
circular to the membership providing guidance with regard to member 
firm compliance responsibilities (including suitability 
recommendations) when handling transactions in the Notes and 
highlighting the special risks and characteristics of the Notes. With 
respect to suitability recommendations and risks, the Amex would 
require members, member organizations and employees thereof 
recommending a transaction in the Notes: (1) To determine that such 
transaction is suitable for the customer, and (2) to have a reasonable 
basis for believing that the customer can evaluate the special 
characteristics of, and is able to bear the financial risks of, such 
transaction. In addition, Morgan Stanley will deliver a prospectus in 
connection with the initial purchase of the Notes.
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    \9\ Amex Rule 411 requires that every member, member firm or 
member corporation use due diligence to learn the essential facts, 
relative to every customer and to every order or account accepted.
    \10\ See Amex Rule 462 and Section 107B of the Amex Company 
Guide.
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    The Amex represents that its surveillance procedures are adequate 
to properly monitor the trading of the Notes. Specifically, the Amex 
will rely on its existing surveillance procedures governing equities, 
which have been deemed adequate under the Act. Because the Index is 
maintained by a broker-dealer or an affiliate of a broker-dealer, it is 
imperative that there be a functional separation, such as a firewall, 
between the trading desk of the broker-dealer and the research persons 
responsible for maintaining the Index. Morgan Stanley has represented 
to the Commission that such a firewall exists. Moreover, because Morgan 
Stanley presents Amex with a list of potential component replacements, 
it is imperative that both Morgan Stanley and Amex have policies that 
prohibit the distribution of material, non-public information by its 
employees. Morgan Stanley and Amex have represented that they have 
policies that prohibit the distribution of material, non-public 
information by their employees.
2. Statutory Basis
    The Amex believes that the proposed rule change is consistent with 
Section 6(b) of the Act \11\ and furthers the objectives of Section 
6(b)(5) of the Act \12\ 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.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Amex does not believe that the proposed rule change will impose 
any burden on competition.

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

    The Amex did not receive any written comments on the proposed rule 
change.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the

[[Page 62336]]

public in accordance with the provisions of 5 U.S.C. 552, will be 
available for inspection and copying at the Commission's Public 
Reference Room. Copies of such filing will also be available for 
inspection and copying at the principal office of the Amex. All 
submissions should refer to the File No. SR-Amex-2003-91 and should be 
submitted by November 24, 2003.

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

    After careful consideration, the Commission finds that the proposed 
rule change 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.\13\ The Commission finds that this proposal is similar to 
several approved notes whose value is linked to an equity index 
currently listed and traded on the Amex.\14\ Accordingly, the 
Commission finds that the listing and trading of the Notes based on the 
Technology Index are consistent with the Act and will promote just and 
equitable principles of trade, foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, and, in general, protect investors and the public interest 
consistent with Section 6(b)(5) of the Act.\15\
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    \13\ 15 U.S.C. 78f(b)(5).
    \14\ See Securities Exchange Act Release Nos. 47911 (May 22, 
2003), 68 FR 32558 (May 30, 2003) (approving the listing and trading 
of notes (Wachovia TEES) linked to the S&P 500); 47983 (June 4, 
2003), 68 FR 35032 (June 11, 2003) (approving the listing and 
trading of a CSFB Accelerated Return Notes linked to S&P 500); 48152 
(July 10, 2003), 68 FR 42435 (July 17, 2003) (approving the listing 
and trading of a UBS Partial Protection Note linked to the S&P 500); 
48151 (July 10, 2003), 68 FR 42438 (July 17, 2003) (approving the 
listing and trading of Merrill Lynch Accelerated Return Notes linked 
to the performance of the Amex Biotechnology Index); and 48486 
(September 11, 2003), 68 FR 54758 (September 18, 2003) (approving 
the listing and trading of CSFB contingent principal protection 
notes linked to the S&P 500).
    \15\ 15 U.S.C. 78f(b)(5). In approving this rule, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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    As described more fully above, at maturity, the holder of a Note 
will receive an amount based upon the Average Index Value of the 
Technology Index. Specifically, at maturity, the holder of a Note will 
be entitled to receive a payment based on whether the Average Index 
Value is greater or less than the Initial Index Value. If the Average 
Index Value is greater than the Initial Index Value, the holder of the 
Notes will receive an amount in cash equal to $10 plus the Leveraged 
Upside Payment. The Leveraged Upside Payment is equal to $10 multiplied 
by 200% of the percentage increase in the value of the Technology 
Index, subject to the Capped Amount. If the Average Index Value is less 
than or equal to the Initial Index Value, a holder of the Notes will 
receive a Redemption Amount in cash equal to the principal amount 
multiplied by the Index Performance Factor. The Index Performance 
Factor is the relationship between the Average Index Value and the 
Initial Index Value and will be a number equal or less than 1.0, and 
accordingly will be less than or equal to $10 for each $10 principal 
amount of the Notes.
    The Notes will provide investors who are willing to forego market 
interest payments during the term of the Notes with a means to 
participate or gain exposure to the Technology Index, subject to a cap.
    The Commission notes that the Notes are not leveraged on the 
downside, non-principal protected instruments. The Notes are debt 
instruments whose price will be derived and based upon the value of the 
Technology Index. The Notes do not have a minimum principal amount that 
will be repaid at maturity, and the payments of the Notes prior to or 
at maturity may be less than the original issue price of the Notes. 
Thus, if the value of the Technology Index has declined at maturity, 
the holder of the Note will receive less than the original public 
offering price of the Note. Accordingly, the level of risk involved in 
the purchase or sale of the Notes is similar to the risk involved in 
the purchase or sale of traditional common stock. Because the final 
rate of return of the Notes is derivatively priced, based on the 
performance of the 35 common stocks underlying the Technology Index, 
and because the Notes are instruments that do not guarantee a return of 
principal, there are several issues regarding the trading of this type 
of product. However, for the reasons discussed below, the Commission 
believes that the Amex's proposal adequately addresses the concerns 
raised by this type of product.
    The Commission notes that the Amex's rules and procedures that 
address the special concerns attendant to the trading of hybrid 
securities will be applicable to the Notes. In particular, by imposing 
the hybrid listing standards, suitability, disclosure, and compliance 
requirements noted above, the Amex, in the Commission's view, has 
addressed adequately the potential problems that could arise from the 
hybrid nature of the Notes. The Amex will require members, member 
organizations and employees thereof recommending a transaction in the 
Notes to: (1) determine that such transaction is suitable for the 
customer and (2) have a reasonable basis for believing that the 
customer can evaluate the special characteristics, and bear the 
financial risks, of such transaction.
    Moreover, the Commission notes that the Amex will distribute a 
circular to its membership calling attention to the specific risks 
associated with the Notes. The Commission also notes that Morgan 
Stanley will deliver a prospectus in connection with the initial sales 
of the Notes. In addition, the Commission notes that Amex will 
incorporate and rely upon its existing surveillance procedures 
governing equities. The Commission believes that the Exchange has 
appropriate surveillance procedures in place to detect and deter 
potential manipulation for similar index-linked products.
    Because Morgan Stanley presents Amex with a list of potential 
component replacements, it is imperative that Morgan Stanley and Amex 
have policies that prohibit the distribution of material, non-public 
information by their employees. Morgan Stanley and Amex have 
represented that they have policies that prohibit the distribution of 
material, non-public information by their employees. Moreover, because 
the Index is maintained by a broker-dealer or an affiliate of a broker-
dealer, it is imperative that there be a functional separation, such as 
a firewall, between the trading desk of the broker-dealer and the 
research persons responsible for maintaining the Index. Morgan Stanley 
has represented to the Commission that such a firewall exists.
    In approving the product, the Commission recognizes that the 
Technology Index is an equal-dollar index comprised of 35 component 
stocks designed to measure the performance of a cross-section of highly 
capitalized U.S. companies that are active in nine technology 
subsectors: (i) Computer services; (ii) design software; (iii) server 
software; (iv) PC software and new media; (v) networking and 
telecommunications equipment; (vi) server hardware; (vii) server 
hardware; (viii) PC hardware and peripherals; and (ix) specialized 
systems and semi-conductors. As of October 14, 2003, the market 
capitalization of the securities that would represent the Technology 
Index would range from a high of $314.4 billion to a low of $3.14 
billion. The average monthly trading volume of the securities 
comprising the Index for the

[[Page 62337]]

last six months, as of the same date, ranged from a high of 742.5 
million shares to a low of 36.02 million shares. The aggregate market 
capitalization of all securities in the Index was approximately $1.714 
trillion. Given the compositions of the stocks underlying the 
Technology Index, the Commission believes that the listing and trading 
of the Notes that are based on the performance of the Technology Index 
should not unduly impact the market for the underlying securities 
comprising the Technology Index or raise manipulative concerns. As 
discussed more fully above, the underlying stocks comprising the 
Technology Index are highly capitalized U.S. securities.
    Furthermore, the Commission notes that the Notes depend upon the 
individual credit of the issuer, Morgan Stanley. To some extent this 
credit risk is minimized by the listing standards in Section 107A of 
the Amex Company Guide, which provide that only issuers satisfying 
substantial asset and equity requirements may issue securities such as 
the Notes. In addition, the Amex's ``Other Securities'' listing 
standards further require that the Notes have a market value of at 
least $4 million.\16\ In any event, financial information regarding 
Morgan Stanley, in addition to the information on the 35 component 
stocks comprising the Technology Index, will be publicly available.\17\
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    \16\ See Amex Company Guide Section 107A.
    \17\ The Commission notes that the 35 component stocks that make 
up the Technology Index are reporting companies under the Act, and 
the Notes will be registered under Section 12 of the Act.
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    The Commission also has a systemic concern, however, that a broker-
dealer such as Morgan Stanley, or a subsidiary providing a hedge for 
the issuer, will incur position exposure. However, as the Commission 
has concluded in previous approval orders for other hybrid instruments 
issued by broker-dealers,\18\ the Commission believes that this concern 
is minimal given the size of the Notes issuance in relation to the net 
worth of Morgan Stanley.
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    \18\ See, e.g., Securities Exchange Act Release Nos. 44913 
(October 9, 2001), 66 FR 52469 (October 15, 2001) (order approving 
the listing and trading of notes whose return is based on the 
performance of the Nasdaq-100 Index) (File No. SR-NASD-2001-73); 
44483 (June 27, 2001), 66 FR 35677 (July 6, 2001) (order approving 
the listing and trading of notes whose return is based on a 
portfolio of 20 securities selected from the Amex Institutional 
Index) (File No. SR-Amex-2001-40); and 37744 (September 27, 1996), 
61 FR 52480 (October 7, 1996) (order approving the listing and 
trading of notes whose return is based on a weighted portfolio of 
healthcare/biotechnology industry securities) (File No. SR-Amex-96-
27).
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    Finally, the Commission notes that the value of the Technology 
Index will be disseminated at least once every fifteen seconds 
throughout the trading day over the Consolidated Tape Association's 
Network B. The Commission believes that providing access to the value 
of the Technology Index at least once every fifteen seconds throughout 
the trading day is extremely important and will provide benefits to 
investors in the product.
    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication of 
notice thereof in the Federal Register. The Amex has requested 
accelerated approval because this product is similar to several other 
instruments currently listed and traded on the Amex.\19\ The Commission 
believes that the Notes will provide investors with an additional 
investment choice and that accelerated approval of the proposal will 
allow investors to begin trading the Notes promptly. Additionally, the 
Notes will be listed pursuant to Amex's existing hybrid security 
listing standards as described above. Based on the above, the 
Commission believes that there is good cause, consistent with Sections 
6(b)(5) and 19(b)(2) of the Act,\20\ to approve the proposal on an 
accelerated basis.
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    \19\ See note 14, supra.
    \20\ 15 U.S.C. 78f(b)(5) and 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\21\ that the proposed rule change (SR-Amex-2003-91), is hereby 
approved on an accelerated basis.
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    \21\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-27593 Filed 10-31-03; 8:45 am]
BILLING CODE 8010-01-P