[Federal Register Volume 73, Number 195 (Tuesday, October 7, 2008)]
[Notices]
[Pages 58694-58698]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-23689]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 28428; 813-00355]


HLHZ Investments II, LLC and Houlihan, Lokey, Howard & Zukin, 
Inc.; Notice of Application

September 30, 2008.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application for an order under sections 6(b) and 
6(e) of the Investment Company Act of 1940 (the ``Act'') granting an 
exemption from all provisions of the Act, except section 9 and sections 
36 through 53, and the rules and regulations under the Act. With 
respect to sections 17 and 30 of the Act, and the rules and regulations 
thereunder, and rule 38a-1 under the Act, the exemption is limited as 
set forth in the application.

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    Summary of Application: Applicants request an order to exempt 
certain limited liability companies and other investment vehicles 
established primarily for the benefit of eligible employees of 
Houlihan, Lokey, Howard & Zukin, Inc. (``HLHZ'') and its affiliates 
from certain provisions of the Act. Each limited liability company or 
other investment vehicle will be an ``employees' securities company'' 
within the meaning of section 2(a)(13) of the Act.
    Applicants: HLHZ Investments II, LLC (the ``Initial Fund'') and 
HLHZ.
    Filing Dates: The application was filed on August 26, 2004 and 
amended on November 17, 2004, March 14, 2008, and June 20, 2008. 
Applicants have agreed to file an amendment during the notice period, 
the substance of which is reflected in this notice.
    Hearing or Notification of Hearing: An order granting the 
application will be issued unless the Commission orders a hearing. 
Interested persons may request a hearing by writing to the Commission's 
Secretary and serving applicants with a copy of the request, personally 
or by mail. Hearing requests should be received by the Commission by 
5:30 p.m. on October 27, 2008, 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 
writer's interest, the reason for the request, and the issues 
contested. Persons who wish to be notified of a hearing may request 
notification by writing to the Commission's Secretary.

ADDRESSES: Secretary, Securities and Exchange Commission, 100 F Street, 
NE., Washington, DC 20549-1090; Applicants, 1930 Century Park West, Los 
Angeles, CA 90067-6802.

FOR FURTHER INFORMATION CONTACT: Laura J. Riegel, Senior Counsel, at 
(202) 551-6873 or Julia Kim Gilmer, Branch Chief, at (202) 551-6821 
(Division of Investment Management, Office of Investment Company 
Regulation).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee at the 
Commission's Public Reference Room, 100 F Street, NE., Washington, DC 
20549-1520 (telephone (202) 551-5850).

Applicants' Representations

    1. HLHZ is an investment banking firm organized under the laws of 
the State of California. HLHZ provides a range of investment banking 
services, including mergers and acquisitions, financing, financial 
opinions and advisory services and financial restructuring. HLHZ and 
its ``affiliates,'' as defined in rule 12b-2 under the Securities 
Exchange Act of 1934 (the ``1934 Act''), are referred to collectively 
as ``HLHZ Group'' and each entity within HLHZ Group is referred to 
individually as a ``HLHZ Group entity.''
    2. The Initial Fund is a California limited liability company. HLHZ 
Group may offer in the future other investment vehicles identical in 
all material respects to the Initial Fund (other than investment 
objectives and strategies and form of organization) (together with the 
Initial Fund, the ``Funds''). Each Fund will be a limited liability 
company or other investment vehicle formed as an ``employees' security 
company'' within the meaning of section 2(a)(13) of the Act. Each Fund 
will operate as a non-diversified, closed-end management company. The 
Funds have been or will be established primarily for key employees of 
the HLHZ Group as part of a program designed to create capital building 
opportunities that are competitive with those at other investment 
banking firms and to facilitate its recruitment of high caliber 
professionals.
    3. Each Fund will have a managing member or general partner 
(``Manager'') that is an HLHZ Group entity and that will manage, 
operate, and control such Fund. The Manager will be registered as an 
investment adviser under the Investment Advisers Act of 1940 (the 
``Advisers Act'') if required by applicable law. HLHZ, the Manager of 
the Initial Fund, is exempt from registration as an investment adviser 
under the Advisers Act. The Manager will be authorized to delegate 
investment management responsibility to a HLHZ Group entity or a 
committee of HLHZ Group employees. The ultimate responsibility for the 
Funds' investments will remain with the Manager. The Manager may be 
entitled to receive compensation or a performance-based fee (a 
``carried interest'').\1\
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    \1\ A ``carried interest'' is an allocation to the Manager based 
on net gains in addition to the amount allocable to such entity in 
proportion to its capital contributions. A Manager that is 
registered as an investment adviser under the Advisers Act may 
charge a carried interest only if permitted by rule 205-3 under the 
Advisers Act. Any carried interest paid to a Manager that is not 
registered under the Advisers Act will comply with section 205(b)(3) 
of the Advisers Act, with the Fund treated as a business development 
company solely for purposes of that section.

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[[Page 58695]]

    4. Interests in the Funds (``Interests'') will be offered without 
registration in reliance on section 4(2) of the Securities Act of 1933 
(the ``1933 Act'') or Regulation D under the 1933 Act (``Regulation 
D''). Interests will be sold only to ``Eligible Employees,'' ``Eligible 
Consultants'' or ``Qualified Entities,'' in each case as defined below, 
or to HLHZ Group entities. Prior to offering Interests in a Fund to an 
Eligible Employee or Eligible Consultant (either, an ``Eligible 
Participant'') or a Qualified Entity, the Manager must reasonably 
believe that each Eligible Participant that is required to make an 
investment decision with respect to whether or not to participate in a 
Fund, on behalf of itself or its related Qualified Entity, will be a 
sophisticated investor capable of understanding and evaluating the 
risks of participating in such Fund without the benefit of regulatory 
safeguards. All investors in a Fund will be ``Members'' and all Members 
in a Fund other than the Manager will be ``Participants.''
    5. An ``Eligible Employee'' is an individual who is a current or 
former employee, officer, or director of HLHZ Group and (a) meets the 
standards of an ``accredited investor'' under rule 501(a)(5) or 
501(a)(6) of Regulation D or (b) is one of 35 individuals who are 
``knowledgeable employees,'' as defined in rule 3c-5(a)(4) under the 
Act (with the Fund treated as though it were a ``covered company'' for 
purposes of the rule) (such individuals, ``Non-Accredited Investors''). 
A Fund may not have more than 35 Non-Accredited Investors.
    6. An ``Eligible Consultant'' is a natural person or entity that a 
HLHZ Group entity has engaged on retainer to provide services and 
professional expertise on an ongoing basis as regular consultants or 
business or legal advisors and shares a community of interest with the 
HLHZ Group and HLHZ Group employees and (a) meets the standards of an 
``accredited investor'' under rule 501(a)(5) or 501(a)(6) of Regulation 
D, if a natural person or (b) meets the standards of an ``accredited 
investor'' under rule 501(a), if an entity.
    7. In the discretion of a Manager and at the request of an Eligible 
Employee, Interests may be assigned to a Qualified Entity of an 
Eligible Employee or purchased by the Qualified Entity. A ``Qualified 
Entity'' is (a) a trust of which the trustee, grantor and/or 
beneficiary is an Eligible Employee, or (b) a partnership, limited 
liability company, corporation or other entity controlled by an 
Eligible Employee or Eligible Consultant, which trust or other entity 
meets the standards of an ``accredited investor'' under rule 501(a) of 
Regulation D.
    8. The terms of a Fund will be fully disclosed to each Eligible 
Participant and, if applicable, to each Qualified Entity at the time 
they are invited to participate in a Fund. Each Eligible Participant 
and applicable Qualified Entity will receive a copy of the Fund's 
organizational documents prior to investment in the Fund. The Manager 
of each Fund will send Participants audited financial statements of the 
Fund as soon as practicable after the end of the Fund's fiscal year. In 
addition, the Manager will send a report to each Participant of the 
Fund setting forth the tax information necessary for the preparation of 
the Participant's federal and state income tax returns.
    9. Interests in a Fund will be non-transferable except with the 
prior written consent of the Manager. No person will be admitted into a 
Fund unless the person is an Eligible Participant, a Qualified Entity, 
or an HLHZ Group entity. No sales load will be charged in connection 
with the sale of Interests.
    10. The Initial Fund has the right, but not the obligation, to 
purchase all or any portion of the Interests of a Member who ceases to 
be a current employee, officer or director of HLHZ Group for any 
reason. The repurchase price for all or any portion of an Interest will 
be based on a preset book-value based formula set forth in the 
operating documents. The Manager of any Fund will have the absolute 
right to purchase any Interest from any Member, for a value determined 
by a formula set forth in the Fund's partnership or operating 
agreements, subscription agreements or similar documents, if the 
Manager determines in good faith that the Member's continued ownership 
of the Interest jeopardizes the Fund's status as an ``employees' 
securities company'' under the Act.
    11. A Fund may invest its portfolio investments directly or 
indirectly through other pooled investment vehicles (including a 
limited partnership or limited liability company).\2\ Subject to the 
terms of the applicable operating agreement, a Fund will be permitted 
to enter into transactions involving (a) a HLHZ Group entity, (b) a 
Fund investment, or (c) any Member or person or entity affiliated with 
a Member. Prior to entering into any of these transactions, the Manager 
must determine that the terms are fair to the Members.
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    \2\ Applicants are not requesting any exemption from any 
provision of the Act or any rule thereunder that may govern the 
eligibility of a Fund to invest in an entity relying on section 
3(c)(1) or section 3(c)(7) of the Act or any such entity's status 
under the Act.
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    12. A Fund will not borrow from any person if such borrowing would 
cause any person not named in section 2(a)(13) of the Act to own 
outstanding securities of the Fund (other than short-term paper). A 
Fund will not lend funds to any HLHZ Group entity.
    13. A Fund will not acquire any security issued by a registered 
investment company if immediately after the acquisition, the Fund will 
own more than 3% of the outstanding voting stock of the registered 
investment company.

Applicants' Legal Analysis

    1. Section 6(b) of the Act provides, in part, that the Commission 
will exempt employees' securities companies from the provisions of the 
Act to the extent that the exemption is consistent with the protection 
of investors. Section 6(b) provides that the Commission will consider, 
in determining the provisions of the Act from which the company should 
be exempt, the company's form of organization and capital structure, 
the persons owning and controlling its securities, the price of the 
company's securities and the amount of any sales load, how the 
company's funds are invested, and the relationship between the company 
and the issuers of the securities in which it invests. Section 2(a)(13) 
defines an employees' securities company as any investment company all 
of whose securities (other than short-term paper) are beneficially 
owned (a) by current or former employees, or persons on retainer, of 
one or more affiliated employers, (b) by immediate family members of 
such persons, or (c) by such employer or employers together with any of 
the persons in (a) or (b).
    2. Section 7 of the Act generally prohibits an investment company 
that is not registered under section 8 of the Act from selling or 
redeeming its securities. Section 6(e) provides that, in connection 
with any order exempting an investment company from any provision of 
section 7, certain provisions of the Act, as specified by the 
Commission, will be applicable to the company and other persons dealing 
with the company as though the company were registered under the Act. 
Applicants request an order under sections 6(b) and 6(e) of the Act 
exempting the Funds from all provisions of the Act, except section 9 
and sections 36 through 53 of the Act, and the rules and regulations 
under the Act. With respect to sections 17 and 30 of the Act, and the 
rules and regulations

[[Page 58696]]

thereunder, and rule 38a-1 under the Act, the exemption is limited as 
set forth in the application.
    3. Section 17(a) generally prohibits any affiliated person of a 
registered investment company, or any affiliated person of an 
affiliated person, acting as principal, from knowingly selling or 
purchasing any security or other property to or from the company. 
Applicants request an exemption from section 17(a) to permit: (a) An 
HLHZ Group entity, acting as principal, to engage in any transaction 
directly or indirectly with any Fund or any company controlled by such 
Fund; and (b) any Fund to invest in or engage in any transaction with 
any HLHZ Group entity, acting as principal, (i) in which the Fund, any 
company controlled by the Fund, or any HLHZ Group entity has invested 
or will invest, or (ii) with which the Fund, any company controlled by 
the Fund, or any HLHZ Group entity is or will become otherwise 
affiliated.
    4. Applicants state that an exemption from section 17(a) is 
consistent with the policy of each Fund and the protection of 
investors. Applicants state that the Members in each Fund will be fully 
informed of the possible extent of the Fund's dealings with the HLHZ 
Group. Applicants also state that, as experienced professionals 
employed in investment banking, securities, or investment management 
businesses, Members in each Fund will be able to understand and 
evaluate the attendant risks. Applicants assert that the community of 
interest among Members and HLHZ Group is the best insurance against any 
risk of abuse.
    5. Section 17(d) of the Act and rule 17d-1 under the Act prohibit 
any affiliated person or principal underwriter of a registered 
investment company, or any affiliated person of such person or 
principal underwriter, acting as principal, from participating in any 
joint arrangement with the company unless authorized by the Commission. 
Applicants request relief under rule 17d-1 to permit affiliated persons 
of each Fund, or affiliated persons of such persons, to participate in 
any joint arrangement in which the Fund or a company controlled by the 
Fund is a participant.
    6. Applicants state that compliance with section 17(d) would cause 
a Fund to forego investment opportunities simply because a Participant 
in such Fund or other affiliated person of the Fund (or any affiliated 
person of the affiliated person) also had, or contemplated making, a 
similar investment. Applicants also submit that the types of investment 
opportunities considered by a Fund often require each participant to 
make available funds in an amount that may be substantially greater 
than that available to the Fund alone. Applicants contend that, as a 
result, the only way in which a Fund may be able to participate in such 
opportunities may be to co-invest with other persons, including its 
affiliates. Applicants assert that the flexibility to structure co-
investments and joint transactions in the context of employees' 
securities companies will not involve abuses of the type section 17(d) 
and rule 17d-1 were designed to prevent.
    7. Section 17(f) of the Act designates the entities that may act as 
investment company custodians, and rule 17f-2 under the Act allows an 
investment company to act as self-custodian, subject to certain 
requirements. Applicants request an exemption from section 17(f) and 
rule 17f-2 to permit the following exceptions from the requirements of 
rule 17f-2: (a) A Fund's investments may be kept in the locked files of 
the Manager for purposes of paragraph (b) of the rule; (b) for purposes 
of paragraph (d) of the rule, (i) employees of the Manager will be 
deemed to be employees of the Funds, (ii) officers of the Manager and 
the Manager of a Fund will be deemed to be officers of the Fund, and 
(iii) the members of the board of managers or directors of the Manager 
will be deemed to be the board of directors of the Fund; and (c) in 
place of the verification procedures under paragraph (f) of the rule, 
verification will be effected quarterly by two employees of the 
Manager. With respect to certain Funds, applicants expect that many of 
their investments will be evidenced only by partnership or operating 
agreements, subscription agreements or similar documents, rather than 
by negotiable certificates that could be misappropriated. Applicants 
believe that these instruments are most suitably kept in the Manager's 
files, where they can be referred to as necessary.
    8. Section 17(g) and rule 17g-1 generally require the bonding of 
officers and employees of a registered investment company who have 
access to its securities or funds. Rule 17g-1 requires that a majority 
of directors who are not interested persons (``independent directors'') 
take certain actions and give certain approvals relating to fidelity 
bonding. Applicants request relief to permit the Manager's board of 
managers or directors, who may be deemed interested persons, to take 
actions and make determinations as set forth in the rule. Applicants 
state that, because all the members of a board of managers or directors 
of a Manager will be interested persons, a Fund could not comply with 
rule 17g-1 without the requested relief. Specifically, each Fund will 
comply with rule 17g-1 by having a majority of the members of the board 
of managers or directors of the Manager take such actions and make such 
approvals as are set forth in rule 17g-1. Applicants also request an 
exemption from the requirements of paragraph (g) of rule 17g-1 relating 
to the filing of copies of fidelity bonds and related information with 
the Commission and the provision of notices to the board of directors, 
paragraph (h) of rule 17g-1 relating to the appointment of a person to 
make the filings and provide notices required by paragraph (g), and an 
exemption from the requirements of paragraph (j)(3) that the Funds 
comply with the fund governance standards defined in rule 0-1(a)(7). 
Applicants state that each Fund will comply with all other requirements 
of rule 17g-1.
    9. Section 17(j) of the Act and paragraph (b) of rule 17j-1 under 
the Act make it unlawful for certain enumerated persons to engage in 
fraudulent or deceptive practices in connection with the purchase or 
sale of a security held or to be acquired by a registered investment 
company. Rule 17j-1 also requires that every registered investment 
company adopt a written code of ethics and that every access person of 
a registered investment company report personal securities 
transactions. Applicants request an exemption from the provisions of 
rule 17j-1, except for the anti-fraud provisions of paragraph (b), 
because they are unnecessarily burdensome as applied to the Funds.
    10. Applicants request an exemption from the requirements in 
sections 30(a), 30(b), and 30(e) of the Act, and the rules under those 
sections, that registered investment companies prepare and file with 
the Commission and mail to their shareholders certain periodic reports 
and financial statements. Applicants contend that the forms prescribed 
by the Commission for periodic reports have little relevance to a Fund 
and would entail administrative and legal costs that outweigh any 
benefit to the Members. Applicants request exemptive relief to the 
extent necessary to permit each Fund to report annually to its Members. 
Applicants also request an exemption from section 30(h) of the Act to 
the extent necessary to exempt the Manager of each Fund and any other 
persons who may be deemed to be members of an advisory board of a Fund 
from filing Forms 3, 4, and 5 under section 16(a) of the 1934 Act with 
respect to their ownership of Interests in the Fund.

[[Page 58697]]

Applicants assert that, because there will be no trading market and the 
transfers of Interests will be severely restricted, these filings are 
unnecessary for the protection of investors and burdensome to those 
required to make them.
    11. Rule 38a-1 requires investment companies to adopt, implement 
and periodically review written policies reasonably designed to prevent 
violation of the federal securities law and to appoint a chief 
compliance officer. Each Fund will comply will rule 38a-1(a), (c) and 
(d), except that (a) because the Fund does not have a board of 
directors, the board of managers or directors of the Manager will 
fulfill the responsibilities assigned to the Fund's board of directors 
under the rule, (b) because the board of managers or directors of the 
Manager does not have any independent directors, approval by a majority 
of the independent directors required by rule 38a-1 will not be 
obtained; and (c) because the board of managers or directors of the 
Manager does not have any independent directors, the Fund will comply 
with the requirement in rule 38a-1(a)(4)(iv) that the chief compliance 
officer meet with the independent directors by having the chief 
compliance officer meet with the board of managers or directors of the 
Manager as constituted.

Applicants' Conditions

    Applicants agree that any order granting the requested relief will 
be subject to the following conditions:
    1. Each proposed transaction otherwise prohibited by section 17(a) 
or section 17(d) and rule 17d-1 to which a Fund is a party (the 
``Section 17 Transaction'') will be effected only if the Manager 
determines that:
    (a) The terms of the Section 17 Transaction, including the 
consideration to be paid or received, are fair and reasonable to the 
Members of such Fund and do not involve overreaching of such Fund or 
its Members on the part of any person concerned; and
    (b) The Section 17 Transaction is consistent with the interests of 
the Members of such Fund, such Fund's organizational documents and such 
Fund's reports to its Members.
    In addition, the Manager of each Fund will record and preserve a 
description of Section 17 Transactions, the Manager's findings, the 
information or materials upon which the Manager's findings are based, 
and the basis for the findings. All such records will be maintained for 
the life of the Fund and at least six years thereafter, and will be 
subject to examination by the Commission and its staff. Each Fund will 
preserve the accounts, books, and other documents required to be 
maintained in an easily accessible place for the first two years.
    2. In connection with the Section 17 Transactions, the Manager of 
each Fund will adopt, and periodically review and update, procedures 
designed to ensure that reasonable inquiry is made, prior to the 
consummation of any Section 17 Transaction, with respect to the 
possible involvement in the transaction of any affiliated person or 
promoter of or principal underwriter for such Fund, or any affiliated 
person of an affiliated person, promoter, or principal underwriter.
    3. The Manager of each Fund will not invest the funds of such Fund 
in any investment in which a ``Co-Investor'' (as defined below) has 
acquired or proposes to acquire the same class of securities of the 
same issuer, where the investment involves a joint enterprise or other 
joint arrangement within the meaning of rule 17d-1 in which such Fund 
and the Co-Investor are participants, unless any such Co-Investor, 
prior to disposing of all or part of its investment, (a) gives such 
Manager sufficient, but not less than one day's, notice of its intent 
to dispose of its investment; and (b) refrains from disposing of its 
investment unless such Fund has the opportunity to dispose of such 
Fund's investment prior to or concurrently with, and on the same terms 
as, and pro rata with the Co-Investor. The term ``Co-Investor'' means, 
with respect to any Fund: (a) An ``affiliated person'' (as defined in 
section 2(a)(3) of the Act) of such Fund; (b) any HLHZ Group entity; 
(c) an officer or director of HLHZ Group; (d) an entity in which the 
Manager acts as a managing member or a general partner or has a similar 
capacity to control the sale or other disposition of the entity's 
securities. The restrictions contained in this condition shall not be 
deemed to limit or prevent the disposition of an investment by a Co-
Investor: (a) To its direct or indirect wholly-owned subsidiary, to any 
company (a ``parent'') of which such Co-Investor is a direct or 
indirect wholly-owned subsidiary, or to a direct or indirect wholly-
owned subsidiary of its parent; (b) to immediate family members of such 
Co-Investor or a trust or other investment vehicle established for any 
immediate family member; (c) when the investment is comprised of 
securities that are listed on any exchange registered as a national 
securities exchange under section 6 of the 1934 Act; (d) when the 
investment is comprised of NMS stocks pursuant to section 11A(a)(2) of 
the 1934 Act and rule 600(a) of Regulation NMS thereunder; (e) when the 
investment is comprised of government securities as defined in section 
2(a)(16) of the Act; or (f) when the investment is comprised of 
securities that are listed or traded on any foreign securities exchange 
or board of trade that satisfies regulatory requirements under the law 
of the jurisdiction in which such foreign securities exchange or board 
of trade is organized similar to those that apply to a national 
securities exchange or a national market system for securities.
    4. Each Fund and the Manager will maintain and preserve, for the 
life of such Fund and at least six years thereafter, such accounts, 
books, and other documents as constitute the record forming the basis 
for the financial statements that are to be provided to the 
Participants in such Fund, and each annual report of such Fund required 
to be sent to such Participants, and agree that all such records will 
be subject to examination by the Commission and its staff. Each Fund 
shall preserve the accounts, books and other documents required to be 
maintained in an easily accessible place for the first two years after 
the inception of the Fund.
    5. The Manager will send to each Participant who had an Interest in 
a Fund, at any time during the fiscal year then ended, Fund financial 
statements that have been audited by the Fund's independent 
accountants. At the end of each fiscal year, the Manager will make a 
valuation or have a valuation made of all of the assets of a Fund as of 
such fiscal year end in a manner consistent with customary practice 
with respect to the valuation of assets of the kind held by the Fund. 
In addition, within 120 days after the end of each fiscal year of the 
Fund or as soon as practicable after the end of each fiscal year, the 
Manager shall send a report to each person who was a Participant at any 
time during the fiscal year then ended setting forth tax information 
necessary for the preparation by the Participant of his or her federal 
and state income tax returns and a report of the investment activities 
of the Fund during that year.
    6. If a Fund makes purchases or sales from or to an entity 
affiliated with the Fund by reason of an officer, director or employee 
of the HLHZ Group (a) serving as an officer, director, manager or 
investment adviser of the entity, or (b) having a 5% or more investment 
in the entity, such individual will not participate in the Fund's 
determination of whether or not to effect the purchase or sale.


[[Page 58698]]


    For the Commission, by the Division of Investment Management, 
under delegated authority.
Florence E. Harmon,
Acting Secretary.
 [FR Doc. E8-23689 Filed 10-6-08; 8:45 am]
BILLING CODE 8011-01-P