[Federal Register Volume 77, Number 201 (Wednesday, October 17, 2012)]
[Notices]
[Pages 63914-63917]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-25433]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68039; File No. SR-NSX-2012-15]


Self-Regulatory Organizations; National Stock Exchange, Inc.; 
Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto 
Amending NSX Rule 15.5 To Comply With the Requirements of Exchange Act 
Rule 10C-1

October 11, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on September 26, 2012, National Stock Exchange, Inc. 
(``NSX[supreg]'' or the ``Exchange'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change, as 
described in Items I, II, and III below, which filing was amended and 
replaced in its entirety by Amendment No. 1 on October 10, 2012, which 
Items have been prepared by the Exchange. The Commission is publishing 
this notice to solicit comment on the proposed rule change from 
interested persons.
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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 the 
Substance of the Proposed Rule Change

    The Exchange is proposing to amend NSX Rule 15.5 to incorporate 
additional listing standard requirements applicable to issuers of 
equity securities listed on the Exchange as required by the provisions 
of Section 952 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act of 2010 (the ``Dodd-Frank Act''), which added Section 
10C to the Securities Exchange Act of 1934, as amended (``Exchange 
Act''), and Exchange Act Rule 10C-1 which implements these 
requirements.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://www.nsx.com, at the principal office of the 
Exchange, and at the Commission's Public Reference Room.

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 Exchange 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 IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant parts of such 
statements.

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

1. Purpose
    This Amendment No. 1 to SR-NSX-2012-15 (the ``Filing'') amends and 
replaces in its entirety the Filing as originally submitted on 
September 26, 2012. The Exchange is proposing Amendment No. 1 to (i) 
reflect the approval of the Filing by the Executive Committee of the 
Exchange's Board of Directors and the Regulatory Oversight Committee, 
(ii) amend the rule text to propose transition periods under NSX Rule 
15.5(b), and add corresponding language to the Purpose section, (iii) 
propose to exempt small business [sic] as defined under Exchange Act 
Rule 12b-2 and clarify [sic] basis for other proposed exemptions to NSX 
Rule 15.5 and (iv) remedy editorial inconsistencies in the rule text. 
[sic]
    The Dodd-Frank Act \3\ added Section 10C to the Exchange Act.\4\ 
Section 10C requires the Commission to adopt rules directing the 
national securities exchanges and national securities associations to 
prohibit the listing of any equity security of an issuer that is not in 
compliance with Section 10C's compensation committee and compensation 
adviser requirements. On June 20, 2012, the SEC adopted Rule 10C-1 to 
implement the requirements of Section 10C, which directs the national 
securities exchanges to adopt listing rules effectuating the 
compensation committee and compensation adviser requirements of Section 
10C.\5\
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    \3\ Public Law 111-203, 124 Stat. 1900 (2010).
    \4\ 15 U.S.C. 78j-3.
    \5\ Release Nos. 33-9330; 34-67220 (June 20, 2012); 77 FR 38422 
(June 27, 2012) (``Adopting Release'').
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    The Exchange is proposing to amend NSX Rule 15.5 in accordance with 
Exchange Act Rule 10C-1 to: (i) Prohibit the listing or continued 
listing of an equity security for a listed company that is not in 
compliance with the requirements set forth in NSX Rule 15.5, (ii) 
clarify the definition of ``independence'' as applicable to members of 
the ``compensation committee'', (iii) clarify the definition of the 
term compensation committee as used in NSX Rule 15.5, (iv) authorize 
the compensation committee to retain, compensate and oversee the work 
of the compensation advisers, and (v) require a compensation committee 
to consider the independence of a compensation adviser prior to 
retaining their services.

Composition of Compensation Committees

    Section 10C(a)(1) of the Exchange Act required the Commission to 
adopt rules directing each national securities exchange registered 
under Section 6 of the Exchange Act, and certain national securities 
associations registered pursuant to Section 15A of the Exchange Act, to 
establish listing standards requiring a listed company's compensation 
committee to be comprised of independent members of the board of 
directors. Section 10C(a)(3) of the Exchange Act and Exchange Act Rule 
10C-1(b) require Exchanges to adopt an independence standard for 
members of a compensation committee after considering the following 
factors: (i) The director's source of compensation including fees 
derived from consulting or other advisory or compensatory fees paid by 
the listed company to the director and listed company (ii) whether the 
director is affiliated with the listed company, a subsidiary of the 
listed company, or an affiliate of a subsidiary of the listed company.
    NSX Rule 15.5 ``Other Listing Standards'' currently requires listed 
companies to have a compensation committee that is composed entirely of 
independent directors. The Exchange now proposes to amend paragraph (a) 
of Rule 15.5 \6\ in accordance with Exchange

[[Page 63915]]

Act Rule 10C-1 to prohibit the listing or continued listing of any 
equity security of a listed company that is not in compliance with the 
listing requirements set forth in NSX Rule 15.5 [sic]. The Exchange has 
defined a compensation committee in NSX Rule 15.5(d) as ``a committee 
that oversees executive compensation, whether or not such committee 
performs other functions or is formally designated as a compensation 
committee.''
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    \6\ The Commission notes that the reference to paragraph (a) is 
incorrect as there have been no changes to paragraph (a). Further, 
the Commission notes that the changes are contained in Rule 15.5(d).
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    The Exchange's amendments also clarify the definition of 
``independence'' as it pertains to members of the compensation 
committee in NSX Rule 15.5(d)(5)(a) by expressly enumerating relevant 
factors that a listed company's board of directors must consider 
including (i) the source of compensation of a member of the 
compensation committee, including any consulting [sic] advisory or 
other compensatory fee paid by the listed company to such member, and 
(ii) whether a member of the compensation committee is affiliated with 
the listed company, a subsidiary of the listed company or an affiliate 
of a subsidiary of the listed company. The Exchange believes this 
requirement will benefit investors by ensuring that the members of the 
company's compensation committee that oversees executive compensation 
are not subject to conflicts of interest.

Authority of Compensation Committee To Retain Advisers

    Section 10C(f) of the Exchange Act also required the Commission to 
adopt rules directing the national securities exchanges to establish 
listing standards which provide a compensation committee with the 
authority, in its sole discretion, to hire compensation consultants or 
outside legal counsel (``Compensation Advisers''). The compensation 
committee may only retain the Compensation Adviser after considering 
certain independence factors.\7\
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    \7\ 17 CFR 240.10C-1(b)(4).
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    Exchange Act Rule 10C-1(b)(2) provides that the compensation 
committee must be directly responsible for the appointment, 
compensation and oversight of the work of any Compensation Adviser 
retained by the compensation committee. Exchange Act Rule 10C-1(b)(3) 
also requires the listed company to provide appropriate funding, as 
determined by the compensation committee, for payment of reasonable 
compensation to such Compensation Adviser retained by the compensation 
committee. However, the compensation committee must consider, prior to 
retaining the Compensation Adviser, independence factors that are 
consistent with Exchange Act Rule 10C-1(b)(4) including: (i) Whether 
the Compensation Adviser's employer provides other services to the 
listed company; (ii) the amount of fees the listed company has paid to 
the Compensation Adviser's employer as a percentage of the total 
revenue of the person that employs the Compensation Advisor; (iii) the 
policies and procedures designed to prevent conflicts of interest of 
the person that employs the Compensation Adviser; (iv) any business or 
personal relationship between compensation committee member and the 
Compensation Adviser; (v) whether the Compensation Adviser owns any of 
the listed company's stock; and (vi) any business or personal 
relationship between the Compensation Adviser or the Compensation 
Adviser's employer and any executive officer of the listed company.
    The Exchange is proposing to amend NSX Rule 15.5(d)(5)(i)(b) [sic] 
to require the compensation committee's written charter to authorize 
the compensation committee in its sole discretion, to (i) retain a 
Compensation Adviser but only after considering certain factors 
regarding independence, and (ii) have direct responsibility for the 
appointment, compensation and oversight of the work performed by any 
Compensation Adviser on behalf of the compensation committee.
    The Exchange also proposes to add NSX Rule 15.5(d)(5)(b)(i)(F) 
which will require a compensation committee to consider the 
independence factors set forth in Exchange Act Rule 10C-1(b)(4) prior 
to retaining a Compensation Advisor including: (i) Whether the 
Compensation Adviser's employer provides other services to the listed 
company; (ii) the amount of fees the listed company has paid to the 
Compensation Adviser's employer as a percentage of the total revenue of 
the person that employs the Compensation Advisor; (iii) the policies 
and procedures designed to prevent conflicts of interest of the person 
that employs the Compensation Adviser; (iv) any business or personal 
relationship between compensation committee member and the Compensation 
Adviser; (v) whether the Compensation Adviser owns any of the listed 
company's stock; and (vi) any business or personal relationship between 
the Compensation Adviser or the Compensation Adviser's employer and any 
executive officer of the listed company. The Exchange finds these 
proposed changes are appropriate in order to ensure that the 
compensation committee's decisions are not inappropriately biased 
towards the listed company's management.

Compensation Committee Funding

    The Exchange is proposing to add paragraph (c) under NSX Rule 
15.5(d)(5) which requires each listed company to provide the 
compensation committee with appropriate funding for the reasonable 
compensation of Compensation Advisers retained by the compensation 
committee. The level of appropriate funding and compensation is 
determined by the compensation committee.

Exempted Listed Companies

    Exchange Act Rule 10C-1(b)(5) \8\ provides an automatic exemption 
from the application of the entirety of Exchange Act Rule 10C-1 for 
controlled companies and smaller reporting companies, and Exchange Act 
Rule 10C-1(b)(1)(iii)(A) \9\ provides an automatic exemption from the 
compensation committee independence requirements for limited 
partnerships, companies in bankruptcy, open-end management investment 
companies registered under the Investment Company Act of 1940 (``1940 
Act''). Exchange Act Rule 10C-1(b)(1)(iii)(A) also exempts from the 
compensation committee independence requirements any foreign private 
issuer that discloses in its annual report filed with the SEC the 
reasons that the foreign private issuer does not have an independent 
compensation committee and [sic] any small business or small 
organization as defined by Exchange Act Rule 12b-2 [sic].\10\
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    \8\ 17 CFR 240.10C-1(b)(5).
    \9\ 17 CFR 240.10C-1(b)(1)(iii)(A).
    \10\ 17 CFR 240.12b-2.
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    The Exchange proposes that its existing exemptions from the 
compensation-related listing rules remain unchanged. The Exchange's 
current listing rules provide exemptions for; (i) controlled companies; 
(ii) limited partnerships and companies in bankruptcy; (iii) closed-end 
and open-end funds registered under the 1940 Act; (iv) passive business 
organizations in the form of trusts (such as royalty trusts), 
derivatives and special purpose securities (such as those described in 
NSX Rule 15.5(a)(1)), and issuers whose only listed equity security is 
a preferred stock. The Exchange notes that these categories of issuers 
typically: (i) Are externally managed and do not directly employ 
executives (e.g., limited partnerships that are managed by their 
general partner or closed-end funds

[[Page 63916]]

managed by an external investment adviser); (ii) do not by their nature 
have employees (e.g., passive business organizations in the form of 
trusts or issuers of derivative or special purpose securities); or 
(iii) have executive compensation policy set by a body other than the 
board (e.g., bankrupt companies have their executive compensation 
determined by the bankruptcy court). In light of these structural 
reasons why these categories of issuers generally do not have 
compensation committees, the Exchange believes that it would be a 
significant and unnecessarily burdensome alteration in their governance 
structures to require them to comply with the proposed new requirements 
and that it is appropriate to grant them an exemption.
    The Exchange currently does not require issuers whose only listed 
security is a preferred stock to comply with NSX Rule 15.5.\11\ The 
Exchange proposes to continue to exempt these issuers from compliance 
with the proposed amended rule. The Exchange believes this approach is 
appropriate because holders of listed preferred stock have 
significantly greater protections with respect to their rights to 
receive dividends and a liquidation preference upon dissolution of the 
issuer, and preferred stocks are typically regarded by investors as a 
fixed income investment comparable to debt securities, the issuers of 
which are exempt from compliance with Exchange Act Rule 10C-1.
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    \11\ NSX Rule 15.5(a)(2).
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    While Exchange Act Rule 10C-1 exempts Smaller Reporting Companies 
from all of its requirements, Nasdaq's [sic] current listing rules do 
not include any such exemptions.\12\ Consistent with the exemption in 
Exchange Act Rule 10C-1, however, The Exchange proposes to exempt 
smaller reporting companies \13\ from compliance with the proposed new 
independence requirements with respect to compensation committee 
service.\14\ Under SEC Rule 12b-2, a smaller reporting company is 
required to test whether it continues to qualify for that status as of 
the last business day of its second quarter of each fiscal year (the 
``Smaller Reporting Company Determination Date'') and ceases as of the 
first day of the next fiscal year to be able to avail itself of the 
benefits under SEC rules applicable to smaller reporting companies. 
Consequently, the Exchange proposes to adopt a new transition provision 
applicable to companies that cease to be smaller reporting companies 
and become subject to the compensation committee independence 
requirements of proposed NSX Rule 15.5(d)(5).\15\ As proposed, a 
company that ceases to be a smaller reporting company would be 
required, if applicable, (i) to have a committee composed entirely of 
members that meet the independence requirements of proposed NSX Rule 
15.5(d)(5) within six months of the Smaller Reporting Company 
Determination Date and (ii) to comply with NSX Rule 15.5(d)(i)(F) [sic] 
as of the Smaller Reporting Company Determination Date.
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    \12\ See 17 CFR 240.10C-1(b)(5)(ii).
    \13\ As defined in SEC Rule 12b-2 and Item 10(f) of Regulation 
S-K.
    \14\ NSX Rule 15.5(d)(5)(e).
    \15\ A company that is otherwise exempt from the requirement to 
have an independent compensation committee when it ceases to be a 
smaller reporting company would not, of course, be subject to a 
transition period. See discussion infra.
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Transition Periods

    The Adopting Release contemplates that exchanges may provide 
transition periods through the exemptive authority provided to the 
exchanges under Exchange Act Rule 10C-1(b)(1)(iii).\16\ Consistent with 
the transition periods approved by the SEC for inclusion in Rule 15.5 
at the time of its original adoption,\17\ the Exchange proposes to 
amend NSX Rule 15.5(b) to provide that listed companies would have 
until the earlier of their first annual meeting after January 15, 2014, 
or October 31, 2014, to comply with the new NSX Rule 15.5(d)(5) 
compensation committees independence standards. Existing compensation 
committee independence standards would continue to apply pending the 
transition to the new independence standards. The Exchange believes 
that its prior use of a similar transition period was satisfactory and 
that it is reasonable to follow the same approach in connection with 
the proposed changes to the compensation committee independence 
standards.
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    \16\ See Adopting Release at 38444.
    \17\ See Securities Exchange Act Release No. 51691 (May 12, 
2005), 70 FR 28973 (May 19, 2005) (SR-CSE-2003-06).
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Opportunity To Cure Defects

    As permitted under Exchange Act Rule 10C-1(a)(3), the Exchange is 
amending Rule 15.5(d)(5)(d) to provide listed companies with a 
reasonable opportunity to cure any non-compliance with the Rule's 
compensation committee listing requirements that could result in a 
delisting of the listed company's securities. As outlined in the 
proposed rule changes, listed companies that fail to comply with the 
requirements will be subject to the delisting procedures set forth in 
Exchange Rule 15.7 unless the deficiencies are cured within forty-five 
days from the date of notification by the Exchange. However, if a 
member of the Compensation committee ceases to be independent for 
reasons outside of the member's control, that person, with notice by 
the listed company to the Exchange may remain a Compensation committee 
member of the listed company until the earlier of the next annual 
shareholders' meeting of the listed company or one year from the 
occurrence of the event that caused the member to be no longer 
independent.
    The proposed changes are intended to benefit investors by (a) 
requiring independent directors of a listed companies to oversee 
executive compensation matters, (b) consider the independence of any 
adviser to the compensation committee prior to retention, and (c) be 
responsible for the appointment, compensation, and oversight of these 
advisers.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Exchange Act and the rules and regulations thereunder applicable to 
the Exchange and, in particular, the requirements of Section 10C of the 
Exchange Act.\18\ The statutory basis for the proposed rule change is 
Section 6 of the Securities Exchange Act of 1934 (the ``Act'') \19\ in 
general, which requires the rules of an exchange 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. In addition, the Exchange 
believes the proposed rule change is consistent with Exchange Act Rules 
10C-1(b)(1), 10C-1(b)(4) and 10C-1(b)(2)(ii) \20\ requiring that the 
rules of an exchange: provide specific director independence standards; 
supply governing standards regarding the responsibility of a 
compensation committee for the appointment, supervision, and 
compensation of compensation consultants and advisers; and apply these 
standards to any directors who oversee compensation matters, in the 
absence of a formal compensation committee, on behalf of the board of 
directors.
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    \18\ 15 U.S.C. 78j-3.
    \19\ 15 U.S.C. 78fb-5.
    \20\ 17 CFR 240.10C-1(b)(1), (b)(4) and (b)(2)(ii).
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    In particular, the proposed rule change will benefit investors by

[[Page 63917]]

requiring that the independent directors of a listed company oversee 
executive compensation matters, consider uniform independence criteria 
before hiring Compensation Advisers, and have the authority to 
supervise, retain and compensate these advisers. By implementing 
Section 10C in such a manner, the proposed amended rule does not allow 
listed companies to avoid the listing standards by not having a 
specific compensation committee or another committee that performs 
similar functions.
    The proposed rule change is non-discriminatory and is applicable to 
all listed companies on the Exchange, unless specifically exempted 
under proposed Rule 15.5(a) and 15.5(d)(5)(e). The Exchange believes 
that the general exemptions from the proposed requirements that it is 
granting to foreign private issuers and smaller reporting companies are 
consistent with Section 10C and Rule 10C-1, for the reasons stated 
above in the ``Purpose'' section, including because (i) Rule 10C-
1(b)(5)(ii) explicitly exempts smaller reporting companies and (ii) 
foreign private issuers will comply with their home country law and, if 
they avail themselves of the exemption, will be required to disclose 
that fact under existing Exchange listing requirements. The Exchange 
believes it is an appropriate use of its exemptive authority under 
Exchange Act Rule 10C-1(b)(5)(i), and that it is not unfairly 
discriminatory under Section 6(b)(5) of the Act, to provide general 
exemptions under the proposed rules to issuers whose only listed class 
of equity securities on the Exchange is a preferred stock, as holders 
of listed preferred stock have significantly greater protections with 
respect to their rights to receive dividends and a liquidation 
preference upon dissolution of the issuer, and preferred stocks are 
typically regarded by investors as a fixed income investment comparable 
to debt securities, the issuers of which are exempt from compliance 
with Exchange Act Rule 10C-1. The Exchange believes that it is an 
appropriate use of its exemptive authority under Rule 10C-1(b)(5)(i), 
and that it is not unfairly discriminatory under Section 6(b)(5) of the 
Act, to provide general exemptions under the proposed rules for all of 
the other categories of issuers that are not currently subject to the 
Exchange's compensation committee requirement, for the structural 
reasons discussed in the ``Purpose'' section and because it would be a 
significant and unnecessarily burdensome alteration in their governance 
structures to require them to comply with the proposed new 
requirements.

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

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

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

    Written comments on the proposed rule change were neither solicited 
nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve the proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. 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

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-NSX-2012-15 on the subject line.

Paper Comments

     Send paper comments 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-NSX-2012-15. 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 on official business 
days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such 
filing also will be available for inspection and copying at the 
principal offices of the Exchange. 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-NSX-2012-15, and should be submitted on or before 
November 7, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-25433 Filed 10-16-12; 8:45 am]
BILLING CODE 8011-01-P