[Federal Register Volume 77, Number 81 (Thursday, April 26, 2012)]
[Notices]
[Pages 24999-25003]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-10028]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66841; File No. SR-OCC-2012-06]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing and Order Granting Accelerated Approval of Proposed 
Rule Change Relating to Revised DCO Rules

April 20, 2012.
    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 April 10, 2012, The Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change described in Items I and II below, which items 
have been prepared primarily by OCC. The Commission is publishing this 
Notice and Order to solicit comments on the proposed rule change from 
interested persons and to approve the proposed rule change 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 Terms of Substance of 
the Proposed Rule Change

    The proposed rule change would ensure compliance with final 
regulations of the Commodity Futures Trading Commission (``CFTC'') 
applicable to derivatives clearing organizations (``DCOs'') that become 
effective on May 7, 2012.

II. Self-Regulatory Organization's Statement of Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, OCC included statements 
concerning the purpose 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. OCC 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 Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The purposes of the proposed changes to OCC's By-Laws and Rules are 
(a) to ensure compliance with certain regulations recently promulgated 
by the CFTC that become effective on May 7, 2012, and (b) to put in 
place a minor rule violation plan (``MRV Plan''), within the meaning of 
Exchange Act

[[Page 25000]]

Rule 19d-1(c)(2).\3\ The CFTC's final regulations implement statutory 
``core principles'' applicable to DCOs as those core principles were 
amended by the Dodd-Frank Act.
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    \3\ 17 CFR 240.19d-1(c)(2).
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The Final DCO Regulations
    On October 18, 2011, the CFTC held an open meeting at which it 
issued final regulations implementing many of the new statutory core 
principles for DCOs enacted under the Dodd-Frank Act. On December 20, 
2011, OCC filed a rule change implementing changes designed to bring it 
into compliance with certain of these final regulations that went into 
effect on January 9, 2012. This rule filing was approved by the 
Commission on an accelerated basis on January 3, 2012.\4\ The majority 
of the remaining regulations go into effect on May 7, 2012. While OCC 
is already in compliance with most of the final regulations that go 
into effect on May 7, 2012, OCC believes it appropriate to amend and 
clarify certain of its rules to ensure compliance with the CFTC's rules 
as described herein.
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    \4\ See Exchange Act Release No. 34-66081, 77 FR 1116 (January 
9, 2012).
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1. Clearing Members' Ability To Meet Clearing Fund Assessments
    Final CFTC Rule 39.11(d)(2)(i) states that a DCO must have rules 
``requiring that its clearing members have the ability to meet an 
assessment within the time frame of a normal end-of-day variation 
settlement cycle.'' [Emphasis added.] While OCC By-Laws Article VIII, 
Section 6 provides that ``whenever an amount is paid out of the 
Clearing Fund contribution of a Clearing Member * * * such Clearing 
Member shall be liable promptly to make good the deficiency in its 
contribution resulting from such payment,'' it does not require that 
clearing members have the ability to meet an assessment within any 
particular time period. [Emphasis added.] OCC is therefore proposing 
that Article VIII, Section 6 of OCC's By-Laws be amended to require 
that each clearing member must have, and at all times maintain, the 
ability to meet any clearing fund assessment by 9:00 a.m. Central Time 
on the first business day following the day on which OCC notifies the 
clearing member of such assessment. Additionally, OCC is proposing to 
amend Article VIII, Section 7 of OCC's By-Laws to clarify when a 
withdrawing clearing member is definitively deemed to no longer be a 
clearing member and hence will no longer be subject to charges against 
its clearing fund contribution or be obligated to make further 
contributions.
2. Clearing Member Financial Resources Requirements
    CFTC Rule 39.12(a)(2)(i) states that a DCO must have participation 
requirements that ``require clearing members to have access to 
sufficient financial resources to meet obligations arising from 
participation in the [DCO] in extreme but plausible market 
conditions.'' [Emphasis added.] In order to avoid any doubt about OCC's 
compliance with this rule, OCC is proposing to amend Interpretation and 
Policy .01 of Article V, Section 1 of its By-Laws, add a new Rule 
301(d), add an Interpretation and Policy .11 to Rule 305 and add an 
Interpretation and Policy .02 to Rule 1102 to more closely address the 
requirements of the referenced CFTC Rule.
3. Clearing Member Operational Capacity Requirements
    CFTC Rule 39.12(a)(3) requires a DCO to have participation 
requirements that ``require clearing members to have adequate 
operational capacity to meet obligations arising from participation in 
the [DCO] * * * [that] include * * * the ability to process expected 
volumes and values of transactions cleared by a clearing member within 
required time frames, including at peak times and on peak days; the 
ability to fulfill collateral, payment, and delivery obligations 
imposed by the [DCO]; and the ability to participate in default 
management activities under the rules of the [DCO] and in accordance 
with [CFTC Rule 39.16].'' [Emphasis added.] OCC is proposing to amend 
Article V, Section 1, Interpretation .02, add a new Rule 214(d), add a 
new Interpretation and Policy .12 to Rule 305, and add new 
Interpretation and Policy .02 to Rule 1102 to more closely address the 
requirements of the referenced CFTC Rule. OCC is also proposing to add 
a new Rule 214(c) to require clearing members to have adequate 
personnel arrangement to ensure their ability to meet the requirements 
of clearing membership, and to provide OCC with a list of such 
personnel.
4. Clearing Member Reporting Requirements
    CFTC Rule 39.12(a)(5)(i) states that a DCO must ``require all 
clearing members, including non-futures commission merchants, to 
provide to the [DCO] periodic financial reports that contain any 
financial information that the [DCO] determines is necessary to assess 
whether participation requirements are being met on an ongoing basis.'' 
Further, under Rule 39.12(a)(5)(i)(B), a DCO must require non-FCM 
clearing members to make these periodic financial reports available to 
the CFTC upon request or, alternatively, a DCO may provide such 
financial reports directly to the CFTC upon CFTC request. All of OCC's 
non-FCM clearing members are either registered U.S. broker-dealers or 
``non-U.S. Clearing Members'' subject to comparable regulation in their 
home jurisdictions. OCC Rule 306 generally requires that financial 
reports required to be filed pursuant to regulations applicable to such 
clearing members also be filed with OCC, and Rule 306(b) requires non-
U.S. Clearing Members to file such financial reports with OCC at such 
times as OCC may specify. OCC therefore believes that the financial 
reports it currently receives from non-FCM clearing members fulfill the 
requirement of Rule 39.12(a)(5)(i). However, in order to avoid any 
doubt about OCC's compliance with this rule, OCC is proposing to add 
language to Rule 306(a) to expressly provide that OCC may require 
clearing members to make financial reports for the purpose of assessing 
whether the clearing member is meeting OCC's participation requirements 
on an ongoing basis. With respect to the requirement of Rule 
39.12(a)(5)(i)(B), OCC has determined that, for the convenience of its 
non-FCM clearing members, it will provide the financial reports filed 
by them to the CFTC (upon the CFTC's request). OCC is proposing to 
state this policy in a new Interpretation and Policy .03 to OCC Rule 
306. OCC is also proposing to amend Interpretation and Policy .02 to 
OCC Rule 306 to parallel the changes being proposed to Rule 306(a) 
discussed above.
    CFTC Rule 39.12(a)(5)(ii) requires a DCO to adopt rules that 
``require clearing members to provide to the [DCO], in a timely manner, 
information that concerns any financial or business developments that 
may materially affect the clearing members' ability to continue to 
comply with participation requirements.'' While OCC Rule 215 already 
requires a clearing member to give OCC prompt written notice of any 
change of organization or ownership structure, and certain other OCC 
Rules have notice requirements that address portions of this new 
requirement, OCC is proposing to amend OCC Rule 215 to more closely 
address the requirements of the referenced CFTC Rule, as well as to 
expand the notice requirement in Rule 215(a)(4) to include changes in 
clearing member's jurisdiction of organization or incorporation, in

[[Page 25001]]

addition to changes in name or form of business organization. OCC is 
also proposing to adopt a specific schedule of fines for violation of 
OCC Rule 215 and to amend Rule 209 to allow OCC to withdraw the amounts 
of any fines payable in connection with a minor rule violation (as well 
as any fine levied in connection with a disciplinary proceeding 
pursuant to Chapter XII of the Rules), including a violation of Rule 
215, from a clearing member's bank account, provided that the Clearing 
Member has not timely contested such fines. The proposed schedule of 
fines is based on a fine schedule that has been adopted by operating 
subsidiaries of the Depository Trust & Clearing Corporation. As 
proposed, fines for violation of amended Rule 215 would be between $300 
and $1,500, depending on the number of violations within any rolling 
24-month period and the first, second and third violations of Rule 215 
would constitute ``minor rule violations'' (see below). The fourth such 
violation would result in disciplinary action under Chapter XII of 
OCC's Rules and would not constitute a minor rule violation. OCC 
believes that adopting a specific schedule of fines will provide OCC 
with greater ability to ensure compliance by clearing members.
    OCC is also proposing to amend Rule 202 to require its clearing 
members to notify OCC of any changes to the representatives who are 
authorized to act on behalf of the clearing member and to update their 
certified lists of signatures.
5. Clearing Member Customer Initial Margin
    CFTC Rule 39.13(g)(8)(ii) states that a DCO must ``require its 
clearing members to collect customer initial margin * * * from their 
customers, for nonhedge positions, at a level that is greater than 100 
percent of the [DCO's] initial margin requirements with respect to each 
product and swap portfolio. The [DCO] shall have reasonable discretion 
in determining the percentage by which customer initial margins must 
exceed the [DCO's] initial margin requirements with respect to 
particular products or swap portfolios.'' [Emphasis added.] 
Additionally, CFTC Rule 39.13(g)(8)(iii) requires each DCO to ``require 
its clearing members to ensure that their customers do not withdraw 
funds from their accounts with such clearing members unless the net 
liquidating value plus the margin deposits remaining in a customer's 
account after such withdrawal are sufficient to meet the customer 
initial margin requirements with respect to all products and swap 
portfolios held in such customer's account which are cleared by the 
[DCO].'' OCC is proposing to adopt a new Rule 602 (which had previously 
been reserved) in order to implement the requirements of CFTC Rule 
39.13(g)(8)(ii) and (iii).
6. Initial Margin--Pledged Assets
    CFTC Rule 39.13(g)(14) states that ``if a [DCO] permits its 
clearing members to pledge assets for initial margin while retaining 
such assets in accounts in the names of such clearing members, the 
[DCO] shall ensure that such assets are unencumbered and that such 
pledge has been validly created and validly perfected in the relevant 
jurisdiction.'' While OCC Rule 604(b)(4)(ii) allows pledged assets to 
be provided as margin under certain circumstances, OCC is proposing to 
add a new Interpretation and Policy .07 to Rule 604 to explicitly state 
that all assets pledged to OCC, for whatever purpose, must be free of 
any lien or other encumbrance senior to OCC's lien. OCC does not 
believe that this is a substantive amendment to its Rules, as OCC 
already takes measures to ensure that its lien over assets provided as 
initial margin is senior to all other liens or other encumbrances over 
such assets. OCC is proposing this amendment in order to avoid any 
doubt as to its compliance with the referenced CFTC Rule.
7. Clearing Member Risk Management Requirements
    CFTC Rule 39.13(h)(5)(i) requires a DCO to adopt rules that: ``(A) 
require its clearing members to maintain current written risk 
management policies and procedures, which address the risks that such 
clearing members may pose to the [DCO]; (B) ensure that it has the 
authority to request and obtain information and documents from its 
clearing members regarding their risk management policies, procedures, 
and practices, including, but not limited to, information and documents 
relating to the liquidity of their financial resources and their 
settlement procedures; and (C) require its clearing members to make 
information and documents regarding their risk management policies, 
procedures, and practices available to the [CFTC] upon [CFTC] 
request.'' OCC is proposing to adopt a new Rule 311 entitled ``Clearing 
Member Risk Management'' requiring clearing members to maintain risk 
management policies and procedures meeting the requirements of CFTC 
Rule 39.13(h)(5)(i)(A), granting OCC the authority to request and 
obtain information and documents from clearing members regarding their 
risk management policies, procedures and practices, and requiring 
clearing members to make information and documents regarding their risk 
management policies, procedures and practices available to the CFTC 
upon its request.
8. Daily Settlements
    CFTC Rule 39.14(b) requires that a DCO ``effect a settlement with 
each clearing member at least once each business day'' and that it 
``have the authority and operational capacity to effect a settlement 
with each clearing member, on an intraday basis, either routinely, when 
thresholds specified by the DCO are breached, or in times of extreme 
market volatility.'' OCC Rule 1301(c) provides OCC with the authority 
to effect intraday settlements and Interpretation and Policy .01 of 
Rule 1301 states OCC's policy of not requiring intraday variation 
payments while reserving OCC's right to require such payments from time 
to time as appropriate. However, for purposes of conforming OCC's Rules 
more closely to the regulatory language, OCC is proposing to revise 
Interpretation and Policy .01 of Rule 1301 to clarify that intraday 
variation payments will not be required ``in the ordinary course'' and 
to state that circumstances under which OCC may assert its right to 
require intraday variation payments may include, but are not limited 
to, breach of any threshold set by OCC or during times of extreme 
market volatility.
9. Implementation of the MRV Plan
    In 1984, the SEC adopted amendments to Rule 19d-1(c) under the Act 
\5\ that allow self-regulatory organizations to adopt, with SEC 
approval, plans for the disposition of minor violations of rules.\6\
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    \5\ 17 CFR 240.19d-1(c).
    \6\ See Exchange Act Release No. 21013 (June 1, 1984), 49 FR 
23828 (June 8, 1984).
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    OCC's rules currently give OCC the ability to censure, suspend, 
expel or limit the activities, functions or operations of any Clearing 
Member for any violation of OCC's By-Laws or Rules. OCC may also impose 
fines on Clearing Members for such violations.\7\ OCC's Rules have not 
historically distinguished between those violations of the Rules and 
By-Laws that are minor and do not call for the full procedural regime 
applicable to other violations and those that are not minor. With the 
amendments being proposed to Rule 215, and the inclusion of a specific 
fine schedule for violations of Rule 215, OCC now believes it is 
appropriate to put in place an MRV Plan in Rule 1201(b) that

[[Page 25002]]

will meet the definition of a ``minor rule violation plan'' in Exchange 
Act Rule 19d-1(c)(2).\8\ OCC will specify which violations of the By-
Laws or Rules will constitute minor rule violations. OCC currently 
proposes to designate only a violation of Rule 215 as a minor rule 
violation. A Clearing Member that wishes to contest a minor rule 
violation may do so by providing written notice to OCC. Upon contesting 
a minor rule violation, the violation will be deemed to no longer be a 
minor rule violation and will be subject to the full provisions of 
OCC's Chapter XII rules with respect to disciplinary proceedings, 
including the procedures provided therein for answering charges levied 
against a Clearing Member, which give Clearing Members the right to a 
hearing and to be represented by counsel at such hearing. Verbatim 
transcripts of any such hearing are prepared by OCC.
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    \7\ See OCC Rule 1201.
    \8\ 17 CFR 240.19d-1(c)(2).
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    Section 17A(b)(3)(G) of the Act \9\ requires that the rules of a 
clearing agency provide that its members be appropriately disciplined 
for violation of any provision of the rules of the clearing agency by 
expulsion, suspension, limitation of activities, functions, and 
operations, fine, censure, or any other fitting sanction. Section 
17A(b)(3)(H) of the Act \10\ requires, among other things, that the 
rules of a clearing agency, in general, provide a fair procedure with 
respect to the disciplining of members. OCC believes that adopting an 
MRV Plan furthers the statutory objective of providing a fair procedure 
for disciplining Clearing Members, and will provide OCC with the 
ability to impose a meaningful sanction for those rule violations that 
do not necessarily rise to a level meriting a full disciplinary 
proceeding under Chapter XII of the Rules. Accordingly, the proposed 
changes promote the prompt and accurate clearance and settlement of 
securities transactions and are therefore consistent with the 
requirements of the Exchange Act and the rules and regulations 
promulgated thereunder applicable to OCC.
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    \9\ 15 U.S.C. 78q-1(b)(3)(G).
    \10\ 15 U.S.C. 78q-1(b)(3)(H).
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10. Other Amendments
    Several of OCC's By-Laws and Rules include now-dated references to 
the National Association of Securities Dealers, which OCC has corrected 
to refer instead to the Financial Industry Regulatory Authority. In 
addition, OCC Rule 307 includes references to a paragraph of Exchange 
Act Rule 15c3-1 \11\ that, while correct when Rule 307 was adopted, 
have since become incorrect due to the reorganization of that rule. OCC 
is amending its By-Laws and Rules to correct the foregoing references.
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    \11\ 17 CFR 240.15c3-1.
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    OCC believes the proposed changes are consistent with the 
requirements of the Act. OCC, as a DCO, is required to implement the 
proposed changes to comply with recent changes to CFTC regulations. OCC 
notes that the policies of the CEA with respect to clearing are 
comparable to a number of the policies underlying the Act, such as 
promoting market transparency for derivatives markets, promoting the 
prompt and accurate clearance of transactions, and protecting investors 
and the public interest.

B. Self-Regulatory Organization's Statement on Burden on Competition

    OCC does not believe that the proposed rule change will have any 
impact or impose any burden on competition.

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

    OCC has not solicited and does not intend to solicit comments 
regarding this proposed rule change. OCC has not received any 
unsolicited written comments from interested parties.

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. Comments may be submitted by any of 
the following methods:
     Electronic comments may be submitted by using the 
Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml), or send an email to [email protected]. Please include 
File No. SR-OCC-2012-06 on the subject line.
     Paper comments should be sent in triplicate to Elizabeth 
M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street 
NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-OCC-2012-06. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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 Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549 on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of OCC and on OCC's Web 
site at http://www.optionsclearing.com/components/docs/legal/rules_and_bylaws/sr_occ_12_06.pdf. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-OCC-2012-06 and should be submitted on or before May 17, 
2012.

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

    Section 19(b) of the Act \12\ directs the Commission to approve a 
proposed rule change of a self-regulatory organization if it finds that 
such proposed rule change is consistent with the requirements of the 
Act and the rules and regulations thereunder applicable to such 
organization. The Commission finds that the proposed rule change is 
consistent with the requirements of the Act, in particular the 
requirements of Section 17A of the Act, and the rules and regulations 
thereunder applicable to OCC.\13\ Specifically, the Commission finds 
that the proposed rule change is consistent with Section 17A(b)(3)(F) 
of the Act which requires, among other things, that the rules of a 
clearing agency be designed to assure the safeguarding of securities 
and funds which are in the custody and control of the clearing agency 
because the proposed rule change should allow OCC to better monitor the 
financial status and risk management procedures of its clearing 
members.\14\ In addition, the Commission finds that the proposed rule 
change implementing a minor rule violation plan is consistent with the

[[Page 25003]]

requirements of Section 17A(b)(3)(G) of the Act, which requires that 
the rules of a clearing agency provide that its members be 
appropriately disciplined for violation of any provision of the rules 
of the clearing agency by expulsion, suspension, limitation of 
activities, functions, and operations, fine, censure, or any other 
fitting sanction,\15\ as well as Section 17A(b)(3)(H) which, among 
other things, requires that the rules of a clearing agency provide a 
fair procedure with respect to the disciplining of participants.\16\
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    \12\ 15 U.S.C. 78s(b).
    \13\ 15 U.S.C. 78q-1. In approving this proposed rule change, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
    \14\ 15 U.S.C. 78q-1(b)(3)(F).
    \15\ 15 U.S.C. 78q-1(b)(3)(G).
    \16\ 15 U.S.C. 78q-1(b)(3)(H).
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    In its filing, OCC requested that the Commission approve this 
proposed rule change on an accelerated basis for good cause shown. OCC 
cites as the reason for this request OCC's operation as a DCO, which is 
subject to regulation by the CFTC under the CEA. This rule change is 
being made according to regulations promulgated by the CFTC, which were 
previously subject to notice and comment. Not approving this request on 
an accelerated basis would have a significant impact on OCC's 
operations as a DCO.
    The Commission finds good cause for approving the proposed rule 
change prior to the 30th day after the date of publication of notice in 
the Federal Register because the proposed rule change allows OCC to 
implement the regulations of another federal regulatory agency, the 
CFTC, in accordance with those regulations' effective date.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (SR-OCC-2012-06) is approved on an 
accelerated basis.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012-10028 Filed 4-25-12; 8:45 am]
BILLING CODE 8011-01-P