[Federal Register Volume 78, Number 204 (Tuesday, October 22, 2013)]
[Notices]
[Pages 62855-62858]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-24635]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70626; File No. SR-EDGX-2013-36]


Self-Regulatory Organizations; EDGX Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Amend 
EDGX Rules 3.2, 13.3, and Adopt Rule 12.14, Front Running of Block 
Transactions To Conform With the Rules of Other Self-Regulatory 
Organizations

October 8, 2013.
    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, 2013, EDGX Exchange, Inc. (the ``Exchange'' or 
``EDGX'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments 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 Substance 
of the Proposed Rule Change

    The Exchange proposes to: (i) Amend Rule 3.22, Proxy Voting; (ii) 
amend Rule 13.3, Forwarding of Issuer Materials; and (iii) adopt new 
Rule 12.14, Front Running of Block Transactions, to conform with the 
rules of the Financial Industry Regulatory Authority, Inc. (``FINRA'') 
for purposes of an agreement between the Exchange and FINRA pursuant to 
Rule 17d-2 under the Act.\3\ All of the changes described herein are 
applicable to EDGX Members. The text of the proposed rule change is 
available on the Exchange's Internet Web site at www.directedge.com, at 
the Exchange's principal office, and at the Public Reference Room of 
the Commission.
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    \3\ 17 CFR 240.17d-2.
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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 self-regulatory organization 
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 self-regulatory organization 
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
    Pursuant to Rule 17d-2 under the Act,\4\ the Exchange and FINRA 
entered into an agreement to allocate regulatory responsibility for 
common rules (the ``17d-2 Agreement''). The 17d-2 Agreement covers 
common members of the Exchange and FINRA and allocates to FINRA 
regulatory responsibility, with respect to common members, for the 
following: (i) examination of common members of the Exchange and FINRA 
for compliance with federal securities laws, rules and regulations and 
rules of the Exchange that the Exchange has certified as identical or 
substantially similar to FINRA rules; (ii) investigation of common 
members of EDGX and FINRA for violations of federal securities laws, 
rules or regulations, or Exchange rules that the Exchange has

[[Page 62856]]

certified as identical or substantially identical to a FINRA rule; and 
(iii) enforcement of compliance by common members with the federal 
securities laws, rules and regulations, and the rules of the Exchange 
that the Exchange has certified as identical or substantially similar 
to FINRA rules.\5\
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    \4\ 17 CFR 240.17d-2.
    \5\ See Securities and Exchange Release No. 61698 (March 12, 
2010), 75 FR 13151 (March 18, 2010) (approving File No. 10-196).
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    The 17d-2 Agreement included a certification by the Exchange that 
states that the requirements contained in certain Exchange rules are 
identical to, or substantially similar to, certain FINRA rules that 
have been identified as comparable. To conform with comparable FINRA 
rules for purposes of the 17d-2 Agreement, the Exchange proposes to: 
(i) Amend Rule 3.22, Proxy Voting; (ii) amend Rule 13.3, Forwarding of 
Issuer Materials; and (iii) adopt new Rule 12.14, Front Running of 
Block Transactions.
Rule 3.22, Proxy Voting and Rule 13.3, Forwarding of Issuer Materials
    The Exchange proposes to amend Rules 3.22 and 13.3 concerning proxy 
voting and forwarding of proxy materials to align these rules with 
FINRA Rule 2251.\6\ Section 957 of the Dodd-Frank Act amended Section 
6(b) of the Act \7\ to require the rules of each national securities 
exchange prohibit any member organization that is not the beneficial 
owner of a security registered under Section 12 of the Act \8\ from 
granting a proxy to vote the security in connection with certain 
stockholder votes, unless the beneficial owner of the security has 
instructed the member organization to vote the proxy in accordance with 
the voting instructions of the beneficial owner. The stockholder votes 
covered by Section 957 include any vote with respect to: (i) The 
election of a member of the board of directors of an issuer (other than 
an uncontested election of a director of an investment company 
registered under the Investment Company Act); (ii) executive 
compensation; or (iii) any other significant matter, as determined by 
the Commission, by rule. The Exchange carries out the requirements of 
Section 957 of the Dodd-Frank Act under paragraph (a) to Exchange Rule 
3.22 which prohibits a Member from giving a proxy to vote stock that is 
registered in its name, unless: (i) Such Member is the beneficial owner 
of such stock; (ii) such proxy is given pursuant to the written 
instructions of the beneficial owner; or (iii) such proxy is given 
pursuant to the rules of any national securities exchange or 
association of which it is a member provided that the records of the 
Member clearly indicate the procedure it is following.
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    \6\ Similarly, on September 30, 2011, BATS Y-Exchange, Inc. 
(``BYX'') amended their Rule 13.3 to align it with FINRA Rule 2251. 
See Securities Exchange Act Release No. 65448 (September 30, 2011), 
76 FR 62103 (October 6, 2011) (Notice of Filing and Order Granting 
Accelerated Approval of Proposed Rule Change to Amend BYX Rule 13.3 
to Prohibit Members from Voting Uninstructed Shares on Certain 
Matters and to Align BYX Rule 13.3, Concerning the Forwarding of 
Proxy and Other Material and Proxy Voting, with FINRA Rule 2251).
    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78l.
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    Similarly, the Exchange proposes to add new paragraph (c) to Rule 
3.22, based entirely on FINRA Rule 2251(d), to explicitly state that a 
Member may give a proxy to vote any stock registered in its name if 
such Member holds such stock as executor, administrator, guardian, 
trustee, or in a similar representative or fiduciary capacity with 
authority to vote. Proposed paragraph (c) would also state that a 
Member that has in its possession or within its control stock 
registered in the name of another Member and that desires to transmit 
signed proxies pursuant to the provisions of Rule 13.3, shall obtain 
the requisite number of signed proxies from such holder of record. 
Lastly, proposed paragraph (c) would also state that, notwithstanding 
the foregoing: (1) any Member designated by a named Employee Retirement 
Income Security Act of 1974 (as amended) (``ERISA'') Plan fiduciary as 
the investment manager of stock held as assets of the ERISA Plan may 
vote the proxies in accordance with the ERISA Plan fiduciary 
responsibilities if the ERISA Plan expressly grants discretion to the 
investment manager to manage, acquire, or dispose of any plan asset and 
has not expressly reserved the proxy voting right for the named ERISA 
Plan fiduciary; and (2) any designated investment adviser may vote such 
proxies.
    To promote consistency with FINRA Rule 2251, the Exchange proposes 
to add language to the existing text of Rule 13.3 to state that for 
beneficial owners, the proxy materials or other materials to be 
forwarded on behalf of an issuer can be sent to the beneficial owner's 
designated investment adviser, if applicable. In conjunction with this 
change, the Exchange proposes to adopt the definition of ``designated 
investment adviser'' set forth in FINRA Rule 2251(f) as Interpretation 
and Policy .01 to Rule 3.22.
    The Exchange also proposes modifying the text of Rule 13.3, which 
currently would require forwarding of proxy material but which does not 
explicitly reference such material, to add such an explicit reference. 
The Exchange further proposes to modify the text of Rule 13.3 to 
reference ``security holders,'' rather than stockholders, in the 
initial sentence, to ensure that the coverage of the rule applies to 
all securities, including debt securities to the extent applicable, and 
not just equity securities. The Exchange also proposes to incorporate 
certain language from FINRA Rule 2251 that provides additional detail 
regarding the material that must be provided to beneficial owners in 
the event of a proxy solicitation. Specifically, Rule 13.3 as amended 
would state that in the event of a proxy solicitation, materials 
provided pursuant to the Rule shall include a signed proxy indicating 
the number of shares held for such beneficial owner and bearing a 
symbol identifying the proxy with proxy records maintained by the 
Member, and a letter informing the beneficial owner (or the beneficial 
owner's designated investment adviser) of the time limit and necessity 
for completing the proxy form and forwarding it to the person 
soliciting proxies prior to the expiration of the time limit in order 
for the shares to be represented at the meeting. The Rule would also 
require a Member to furnish a copy of the symbols to the person 
soliciting the proxies and shall also retain a copy thereof pursuant to 
the provisions of Exchange Act Rule 17a-4. Finally, the Exchange 
proposes to modify the title of Rule 13.3 to include a reference to 
proxy voting.
    The Exchange believes that these changes will help to avoid 
confusion among Members of the Exchange that are also members of FINRA 
by further aligning the Exchange's rules with FINRA Rule 2251. The 
proposed changes to Rules 3.22 and 13.3 are designed to enable the 
Exchange to incorporate Rules 3.22 and 13.3 into the 17d-2 Agreement, 
further reducing duplicative regulation of Members that are also 
members of FINRA.
Rule 12.14, Front Running of Block Transactions
    The Exchange proposes to adopt new Rule 12.14, Front Running of 
Block Transactions, which would require that Members and persons 
associated with a Member shall comply with FINRA Rule 5270 as if such 
Rule were part of the Exchange's Rules. The proposed rule text is 
substantially the same as IM-2110-3 of the Nasdaq Stock Market LLC 
(``Nasdaq''), which has been approved by the Commission.\9\ FINRA Rule 
5270

[[Page 62857]]

states that no FINRA member or person associated with a member shall 
cause to be executed an order to buy or sell a security or a related 
financial instrument \10\ when such member or person associated with a 
member has material, non-public market information concerning an 
imminent block transaction \11\ in that security, a related financial 
instrument or a security underlying the related financial instrument.
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    \9\ See Securities Exchange Act Release No. 53128 (January 13, 
2006), 71 FR 3550 (January 23, 2006) (order approving Nasdaq's 
application for registration as a national securities exchange). See 
also Securities Exchange Act Release No. 58069 (June 30, 2008), 73 
FR 39360 (July 9, 2008) (SR-Nasdaq-2008-054) (Notice of Filing and 
Immediate Effectiveness). Securities Exchange Act Release No. 34-
67774 (September 4, 2012), 77 FR 55519 (September 12, 2012) 
(Approval Order).
    \10\ FINRA Rule 5270 defines the term ``related financial 
instrument'' as ``any option, derivative, security-based swap, or 
other financial instrument overlying a security, the value of which 
is materially related to, or otherwise acts as a substitute for, 
such security, as well as any contract that is the functional 
economic equivalent of a position in such security.''
    \11\ Under FINRA Rule 5270, a transaction involving 10,000 
shares or more of a security, an underlying security, or a related 
financial instrument overlying such number of shares, is generally 
deemed to be a block transaction, although a transaction of fewer 
than 10,000 shares could be considered a block transaction. A block 
transaction that has been agreed upon does not lose its identity as 
such by arranging for partial executions of the full transaction in 
portions which themselves are not of block size if the execution of 
the full transaction may have a material impact on the market.
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    FINRA Rule 5270 includes exceptions to the general prohibitions of 
the rule where a member can demonstrate that a transaction is unrelated 
to the material, non-public market information received in connection 
with the customer order. The Supplementary Material to FINRA Rule 5270 
includes an illustrative list of potentially permitted transactions as 
examples of transactions that, depending upon the circumstances, may be 
unrelated to the customer block order. These types of transactions may 
include: where the member has information barriers established to 
prevent internal disclosure of such information; actions in the same 
security related to a prior customer order in that security; 
transactions to correct bona fide errors; or transactions to offset 
odd-lot orders.
    In addition, Rule 5270 does not preclude transactions undertaken 
for the purpose of fulfilling, or facilitating the execution of, the 
customer block order. However, when engaging in trading activity that 
could affect the market for the security that is the subject of the 
customer block order, the member must minimize any potential 
disadvantage or harm in the execution of the customer's order, must not 
place the member's financial interests ahead of those of its customer, 
and must obtain the customer's consent to such trading activity. A 
member may obtain its customers' consent through affirmative written 
consent or through the use of a negative consent letter. The negative 
consent letter must clearly disclose to the customer the terms and 
conditions for handling the customer's orders; if the customer does not 
object, then the member may reasonably conclude that the customer has 
consented and the member may rely on such letter for all or a portion 
of the customer's orders. In addition, a member may provide clear and 
comprehensive oral disclosure to and obtain consent from the customer 
on an order-by-order basis, provided that the member documents who 
provided such consent and such consent evidences the customer's 
understanding of the terms and conditions for handling the customer's 
order.
    The Exchange also proposes to state in new Rule 12.14 that although 
the prohibitions in Rule 5270 are limited to imminent block 
transactions, the front running of other types of orders that place the 
financial interests of the Member or persons associated with a Member 
ahead of those of its customer or the misuse of knowledge of an 
imminent customer order may violate other Exchange rules, including 
Rule 3.1 and Rule 12.6, or provisions of the federal securities laws.
2. Statutory Basis
    The Exchange believes that proposed rule change is consistent with 
Section 6(b)(5) of the Act,\12\ which requires, among other things, 
that the Exchange's rules be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in facilitating transactions in securities, and to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system. The Exchange believes that the 
proposed rule change will further these requirements by eliminating 
duplicative and unnecessary rules and advancing the development of a 
more efficient and effective Exchange Rulebook. The proposed rule 
change would provide greater harmonization between Exchange and FINRA 
rules of similar purpose, resulting in greater uniformity and less 
burdensome and more efficient regulatory compliance. As such, the 
proposed rule change would foster cooperation and coordination with 
persons engaged in facilitating transactions in securities and would 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system.
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    \12\ 15 U.S.C. 78f(b)(5).
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Rule 3.22, Proxy Voting and Rule 13.3, Forwarding of Issuer Materials
    The Exchange believes that proposed amendments to Rules 3.22 and 
13.3 are consistent with Section 6(b)(5) of the Act,\13\ because they 
remove impediments to, and perfect the mechanism of, a free and open 
market and a national market system by providing for consistent 
regulation for Members of the Exchange that are members of other SROs 
with analogous rules.\14\ The proposed changes to Rules 3.22 and 13.3 
and proposed Interpretation and Policy .01 are consistent with FINRA 
Rule 2251. Accordingly, the Exchange believes that the proposal fosters 
cooperation because, to the extent the Exchange is able to incorporate 
Rule 13.3 into the 17d-2 Agreement as a rule in common between the 
Exchange and FINRA, then FINRA will conduct a review for compliance 
with the common rule to the extent a Member of the Exchange is also a 
member of FINRA, and the Exchange will not conduct a duplicative review 
of the same activity by that Member. Finally, the Exchange believes 
that the proposal will contribute to investor protection by defining 
important requirements to which Members must abide with respect to 
proxy solicitation, proxy voting and delivery of proxy materials.
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    \13\ Id.
    \14\ See, e.g., FINRA Rule 2251, BYX Rule 13.3, ISE Rule 421, 
NYSE Arca Rule 9.4, and Nasdaq Rule 2251.
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Rule 12.14, Front Running of Block Transactions
    The Exchange believes that new Rule 12.14 is consistent with 
Section 6(b)(5) of the Act \15\ which requires, among other things, 
that the Exchange rules be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. By incorporating FINRA Rule 5270, new Rule 12.14 
prohibits front running trading activity that the Exchange believes is 
inconsistent with just and equitable principles of trade while also 
ensuring that Members may continue to engage in transactions that do 
not present the risk of abusive trading practices that the rule is 
intended to prevent. The Exchange believes that Rule 12.14 would 
enhance the protection of customer orders by addressing various types 
of abusive

[[Page 62858]]

trading that may be intended to take advantage of customer orders. As 
previously noted, the proposed rule text is substantially similar to 
Nasdaq's IM-2110-3, which has been approved by the Commission.\16\ By 
adopting Rule 12.14, the Exchange believes that imminent customer block 
orders would be better protected and that the proposed rule change will 
prevent fraudulent and manipulative acts and practices, promote just 
and equitable principles of trade, and better protect investors and the 
public interest.
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    \15\ 15 U.S.C. 78f(b)(5).
    \16\ See Securities Exchange Act Release No. 53128 (January 13, 
2006), 71 FR 3550 (January 23, 2006) (order approving Nasdaq's 
application for registration as a national securities exchange). See 
also Securities Exchange Act Release No. 58069 (June 30, 2008), 73 
FR 39360 (July 9, 2008) (SR-Nasdaq-2008-054) (Notice of Filing and 
Immediate Effectiveness). Securities Exchange Act Release No. 34-
67774 (September 4, 2012), 77 FR 55519 (September 12, 2012) 
(Approval Order).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change would 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The proposed rule change is 
not designed to address any competitive issues but rather is designed 
to provide greater harmonization among Exchange and FINRA rules of 
similar purpose, resulting in less burdensome and more efficient 
regulatory compliance for common members and facilitating FINRA's 
performance of its regulatory functions under the 17d-2 Agreement.

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

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

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

    Because the foregoing proposed rule change does not: (1) 
Significantly affect the protection of investors or the public 
interest; (2) impose any significant burden on competition; and (3) by 
its terms does not become operative for 30 days after the date of this 
filing, or such shorter time as the Commission may designate if 
consistent with the protection of investors and the public interest, 
the proposed rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \17\ and Rule 19b-4(f)(6) thereunder.\18\
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    \17\ 15 U.S.C. 78s(b)(3)(A).
    \18\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to provide the Commission 
with written notice of its intent to file the proposed rule change, 
along with a brief description and text of the proposed rule change, 
at least five business days prior to the date of filing of the 
proposed rule change, or such shorter time as designated by the 
Commission. The Exchange has met this requirement.
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    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative for 30 days after the date of filing. However, 
Rule 19b-4(f)(6)(iii) permits the Commission to designate a shorter 
time if such action is consistent with the protection of investors and 
the public interest. The Exchange has asked the Commission to waive the 
30-day operative delay so that the proposal may become operative 
immediately upon filing. The Commission believes that waiving the 30-
day operative delay is consistent with the protection of investors and 
the public interest because it will help foster consistency between the 
rulebooks of the self-regulatory organizations.\19\ Accordingly, the 
Commission hereby grants the Exchange's request and designates the 
proposal operative upon filing.
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    \19\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.

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-EDGX-2013-36 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-EDGX-2013-36. 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 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office 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-EDGX-2013-36 and should be 
submitted on or before November 12, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-24635 Filed 10-21-13; 8:45 am]
BILLING CODE 8011-01-P