Document ID: SEC-2009-0614-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Proposed Rule Change Relating to NYSE Arca Equities Rule 7.10 Governing Clearly Erroneous Executions
Posted Date: 2009-05-05T04:00Z

[Federal Register Volume 74, Number 85 (Tuesday, May 5, 2009)]
[Notices]
[Pages 20767-20771]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-10288]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59838; File No. SR-NYSEArca-2009-36]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Proposed Rule Change Relating to NYSE Arca Equities Rule 7.10 
Governing Clearly Erroneous Executions

April 28, 2009.
    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 27, 2009, NYSE Arca, Inc. (``NYSE Arca'' 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 
Items have been prepared by the Exchange. 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 amend NYSE Arca Equities Rule 7.10 
governing clearly erroneous executions. The text of the proposed rule 
change is attached as Exhibit 5 to the 19b-4 form. A copy of this 
filing is available on the Exchange's Web site at www.nyse.com, at the 
Exchange's principal office 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 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 those 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
    The Exchange proposes to amend NYSE Arca Rule 7.10 in order to 
improve the Exchange's rule regarding clearly erroneous executions. The 
proposed changes are part of a market-wide effort designed to provide 
transparency and finality with respect to clearly erroneous executions. 
This effort seeks to achieve consistent results for participants across 
U.S. equities exchanges while maintaining a fair and orderly market, 
protecting investors and protecting the public interest. The proposed 
changes are more fully discussed below.
Definition
    The Exchange will maintain the meaning of the definition of a 
clearly erroneous execution, but proposes to add clarifying language 
with respect to cancelled trades. The proposed change identifies that a 
transaction made in clearly erroneous error and agreed to be canceled 
by both parties or determined by the Corporation to be clearly 
erroneous will be removed ``from the Consolidated Tape.'' \3\ A trade 
will only be removed from the Consolidated Tape when the determination 
is deemed final and any applicable appeals have been exhausted.
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    \3\ For purposes of this Rule, ``removed from the Consolidate 
Tape'' means that a subsequent message will be sent to the 
Consolidated Tape indicating that a previously executed trade has 
been cancelled.
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ETP Holder Initiated Review Requests
    The Exchange proposes to amend NYSE Arca Rule 7.10(b) to update the 
procedures for requesting a review of a clearly erroneous transaction. 
First, the proposed rule would require that requests for review be made 
only by electronic mail (``email'') or other electronic means specified 
from time to time by the Exchange. Under the current policy the 
Exchange also allows requests to be made via telephone and facsimile. 
Requiring requests for review to be made via email creates a standard 
format that can easily be logged and tracked. The Exchange will publish 
the email address or other electronic means to be used for all clearly 
erroneous filings in a circular distributed to Equity Trading Permit 
(``ETP'') Holders.\4\
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    \4\ NYSE Arca Rule 1.1(n) defines an ETP Holder as a ``sole 
proprietorship, partnership, corporation, limited liability company 
or other organization in good standing that has been issued an 
ETP.''
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    The Exchange further proposes that requests for review must be 
received by

[[Page 20768]]

the Exchange within 30 minutes of the execution time for orders 
initially routed to and executed on the Exchange. The Exchange proposes 
that ETP Holders submit certain essential identifying information with 
the request including the time of the transaction(s), security 
symbol(s), number of shares, price(s), side (bought or sold), and 
factual basis for believing that the trade is clearly erroneous. The 
current rule requires requests for review to be received within 15 
minutes of the execution and does not specify what information is 
required. The Exchange believes that 30 minutes is an appropriate time 
frame that offers the requesting party sufficient time to gather and 
submit all required information.
    The proposed rule also requires the Exchange to notify the 
counterparty to a trade upon receipt of a timely filed request for 
review that satisfies the numerical guidelines set forth within the 
Rule. This proposed language eliminates the requirement that 
counterparties be notified of every request for a ruling and instead 
requires notice only when a request is filed in a timely manner and 
satisfies the Numerical Guidelines. This change alleviates the burden 
on the Exchange of notifying the counterparty when a request for review 
does not merit a ruling.
    The Exchange proposes to amend NYSE Arca Rule 7.10 to allow an 
Officer of the Corporation or such other employee designee 
(``Officer'') of NYSE Arca to request additional information from each 
party to a transaction under review. Parties to the review will have 30 
minutes from the time of the request to provide additional supporting 
information.
Routed Executions
    The Exchange proposes to give other market centers an additional 30 
minutes from the receipt of their participant's timely filing to 
request a ruling, but no longer than 60 minutes from the time of the 
execution under review. This provision accounts for those executions 
initially directed to an away market center and subsequently routed by 
that away market center to the Exchange.
    For example, assume an order is initially routed by a participant 
to Market Center A and subsequently routed to NYSE Arca where the order 
is executed at a price outside of the Numerical Guidelines. This 
provision generally requires Market Center A to file with the Exchange 
within 30 minutes from the time it receives its participant's timely 
filed request for review. This provision caps the filing deadline for 
an away market center at 60 minutes from the time of the execution 
under review.
Threshold Factors
    Currently, the Exchange's Clearly Erroneous Execution rule does not 
identify specific numeric guidelines for determining what constitutes a 
clearly erroneous transaction. The current rule simply provides that 
``an Officer of the Corporation shall review the transaction and 
determine whether it is clearly erroneous, with a view toward 
maintaining a fair and orderly market and the protection of investors 
and the public interest.'' \5\ In practice, the Exchange currently 
incorporates the informal guidelines set forth in the Clearly Erroneous 
Execution policy published on its website.\6\ The Exchange proposes 
adding certain numerical thresholds to the Rule that explicitly state 
what constitutes a clearly erroneous execution.
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    \5\ NYSE Arca Rule 7.10(b).
    \6\ http://www.nyse.com/pdfs/Arca_Erroneous_Execution.pdf.
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Numerical Guidelines
    The proposed numerical guidelines state that a transaction executed 
during the Core Trading Session \7\ or the Opening \8\ and Late Trading 
Session \9\ may be found to be clearly erroneous only if the price of 
the transaction to buy is greater, or less in the case of a sale, than 
the reference price by an amount that equals or exceeds the numerical 
guidelines for a particular transaction category. The Reference Price 
shall be equal to the Consolidated Last Sale immediately prior to the 
execution under review, unless unusual circumstances are present. The 
proposed guidelines for sales between $0.00 and $25.00 are 10% for the 
Core Trading Session and 20% for the Opening and Late Trading Sessions. 
The proposed guidelines for sales between $25.01 and $50.00 are 5% for 
the Core Trading Session and 10% for Opening and Late Trading Sessions. 
The proposed guidelines for sales greater than $50.00 are 3% for the 
Core Trading Session and 6% for Opening and Late Trading Sessions. A 
filing involving five or more securities by the same ETP Holder will be 
aggregated into a single filing called a ``Multi-Stock Event.'' In the 
case of a Multi-Stock Event, the proposed guidelines are 10% for the 
Core Trading Session and 10% for the Opening and Late Trading Sessions. 
In the case of Leveraged ETF/ETN securities, the above guidelines are 
to be multiplied by the leverage multiplier of the security. Executions 
that do not meet or exceed the Numerical Guidelines will not be 
eligible for review under this section. The following chart summarizes 
the proposed Numerical Guidelines.
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    \7\ The Core Trading Session begins for each security at 
``6:30:00 am (Pacific Time) or at the conclusion of the Market Order 
Auction, whichever comes later, and conclude at 1:00:00 pm (Pacific 
Time).'' NYSE Arca Rule 7.34(a)(2).
    \8\ The Opening Session begins at ``1:00:00 am (Pacific Time) 
and conclude[s] at the commencement of the Core Trading Session.'' 
NYSE Arca Rule 7.34(a)(1).
    \9\ The Late Trading Session begins ``following the conclusion 
of the Core Trading Session and conclude[s] at 5:00:00 pm (Pacific 
Time).'' NYSE Arca Rule 7.34(a)(3).

------------------------------------------------------------------------
 
------------------------------------------------------------------------
Reference Price:              Core Trading Session  Opening and Late
 Consolidated Last Sale        Numerical             Trading Session
                               Guidelines (Subject   Numerical
                               transaction's %       Guidelines (Subject
                               difference from the   transaction's %
                               Consolidated Last     difference from the
                               Sale):                Consolidated Last
                                                     Sale):
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Between $0.00 and $25.00....  10%.................  20%
Between $25.01 and $50.00...  5%..................  10%
Greater than $50.00.........  3%..................  6%
Multi-Stock Event--Filings    10%.................  10%
 involving five or more
 securities by the same ETP
 Holder will be aggregated
 into a single filing.
Leveraged ETF/ETN securities  Core Trading Session  Core Trading Session
                               Numerical             Numerical
                               Guidelines            Guidelines
                               multiplied by the     multiplied by the
                               leverage multiplier   leverage multiplier
                               (i.e. 2x).            (i.e. 2x)
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[[Page 20769]]

    Establishing Numerical Guidelines within the Rule brings regulatory 
transparency and consistency in the application of the rules of the 
Exchange. These Numerical Guidelines represent the general consensus 
approach and were developed based on the collective experiences of a 
market-wide group. The Exchange believes that the Thresholds 
established are fair and appropriate and apply evenly to all 
participants.
Unusual Circumstances
    NYSE Arca further proposes that in Unusual Circumstances the 
Exchange may, in its discretion and with a view toward maintaining a 
fair and orderly market, use a Reference Price other than the 
consolidated last sale. Unusual Circumstances may include periods of 
extreme market volatility, sustained illiquidity, or widespread system 
issues. Other Reference Prices that the Exchange may use would include 
the consolidated inside price, the consolidated opening price, the 
consolidated prior close, or the consolidated last sale prior to a 
series of executions.
    The following example explains the use of a Reference Price equal 
to the consolidated last sale prior to a series of executions.
    ABC has a consolidated last sale of $10.00. During the Core Trading 
Session Customer A enters a market order to buy 10,000 shares, although 
it had intended a market order for 1,000 shares. The size of the order 
is such that the order sweeps the NYSE Arca Book, which reflects 1,000 
shares of liquidity offered at each of following prices. Executions 
occur, moving through the depth of Book, as follows:
Trade 1--1000 shares @ $10.00 (9000 remaining)
Trade 2--1000 shares @ $10.20 (8000 remaining)
Trade 3--1000 shares @ $10.40 (7000 remaining)
Trade 4--1000 shares @ $10.60 (6000 remaining)
Trade 5--1000 shares @ $10.80 (5000 remaining)
Trade 6--1000 shares @ $11.00 (4000 remaining)
Trade 7--1000 shares @ $11.20 (3000 remaining)
Trade 8--1000 shares @ $11.40 (2000 remaining)
Trade 9--1000 shares @ $11.60 (1000 remaining)
Trade 10--1000 shares @ $11.80 (complete)
    Thus, to be eligible for review, a transaction must be at a price 
that is at least 10% higher than the consolidated last sale prior to 
the series of executions. Customer A could request a ruling for trades 
6 through 10, priced at $11.00 and above, but trades 
1 through 5 would not be eligible for review.
    Under the proposed rule the Exchange may also use a higher 
numerical guideline if, after market participants have been alerted to 
erroneous activity, the price of the security returns toward its prior 
trading range but continues to trade beyond the price it would have 
normally been broken.
Joint Market Rulings
    In the interest of achieving consistency across markets, the 
Exchange proposes that, in events that involve other markets, the 
Exchange would have the ability to use a different Reference Price and/
or Numerical Guideline. In these instances the Reference Price would be 
determined based on a consensus among the Exchanges where the 
transactions occurred. Furthermore, when a ruling is made across 
markets, the Exchange may determine that the ruling is not eligible for 
appeal because immediate finality is necessary to maintain a fair and 
orderly market and to protect investors and the public interest.
Additional Factors
    The proposed amendments to NYSE Arca Rule 7.10 also enumerate some 
additional factors that an Officer may consider when determining 
whether an execution is clearly erroneous. These factors include, but 
are not limited to, system malfunctions or disruptions, volume and 
volatility for the security, derivative securities products that 
correspond to greater than 100% in the direction of a tracking index, 
news released for the security, whether trading in the security was 
recently halted/resumed, whether the security is an IPO, whether the 
security was subject to a stock-split, reorganization, or other 
corporate action, overall market conditions, Opening and Late Session 
executions, validity of the consolidated tapes trades and quotes, 
consideration of primary market indications, and executions 
inconsistent with the trading pattern in the stock. Each additional 
factor shall be considered with a view toward maintaining a fair and 
orderly market, the protection of investors and the public interest.
Numerical Guidelines Applicable to Volatile Market Opens
    The Exchange proposes to give the Exchange the ability to expand 
the Numerical Guidelines applicable to transactions occurring between 
9:30 a.m. and 10 a.m. based on the disseminated value of the S & P 500 
Futures at 9:15 a.m. When the S & P Futures are up or down 3% at 9:15 
a.m., the Numerical Guidelines are doubled. When the S & P Futures are 
up or down 5% at 9:15 a.m., the Numerical Guidelines are tripled. The 
Exchange believes that the S&P 500 futures contract is an appropriate 
and reliable barometer of market activity prior to the market opening 
due to its broad based market coverage and deep liquidity. Using the 
S&P 500 Futures disseminated value at 9:15 a.m. as the barometer of 
market activity, the Exchange is providing a transparent means of 
offering adjusted guidelines in times of volatile market activity.
Outlier Transactions
    The proposed amendments to NYSE Arca Rule 7.10 provide that an 
Officer may consider requests for review received after thirty minutes, 
but not longer than sixty minutes after the execution in question in 
the case of an Outlier Transaction. An Outlier Transaction is a 
transaction where, (1) the execution price of the security is greater 
than three times the current Numerical Guidelines, or (2) the execution 
price of the security breaches the 52-week high or low, in which case 
the Exchange may consider Additional Factors to determine if the 
transaction qualifies for review or if the Corporation shall decline to 
act.
Review Procedures
Initial Determination
    The Exchange proposes removing language that currently allows an 
Officer to modify one or more of the terms of a transaction under 
review. Under the proposed rule, the Officer of the Exchange will only 
have the authority to break the trades or rule to let the trades stand. 
This change attempts to remove the subjectivity from the rule that is 
necessitated by an adjustment.
    The Exchange also proposes adding language stating that a 
determination shall be made generally within 30 minutes of receipt of 
the complaint, but in no case later than the start of Core Trading on 
the following trading day. Rulings made outside of 30 minutes by an 
Officer will not fail for lack of timeliness. The guideline simply 
provides participants an appropriate expectation that a ruling will 
generally be made within 30 minutes, and in no case later than the 
start of Core Trading on the following trading day.
Appeals
    The Exchange proposes to amend the appeals procedure for trades 
that are deemed to be clearly erroneous. First,

[[Page 20770]]

the Exchange will no longer accept appeal requests via facsimile. 
Similar to the proposed language for an initial request for a ruling, 
all appeal requests must be made via email.
    The current rule provides that the Exchange shall review and render 
a decision upon an appeal within a timeframe provided by the Exchange. 
The proposed rule offers more definite guidelines to ensure the 
expedient resolution of appeals. It requires the Exchange to review 
appeals as soon as practicable, but generally on the same day as the 
executions under review. Appeals received between 3 ET and the close of 
trading in the Late Trading Session should be made as soon as 
practicable, but in no case later than the trading day following the 
date of the execution under review. Appeals will not fail for lack of 
timeliness. This revised provision provides participants a reasonable 
expectation of when a ruling on appeal will generally be made.
    Further, the proposed rule declares that any determination made by 
an Officer or by the CEE Panel shall be rendered without prejudice as 
to the right of the parties to the transaction to submit their dispute 
to arbitration. This provision simply clarifies the fact that nothing 
in the proposed rule limits or impedes the rights of the parties to 
arbitrate their dispute.
System Disruption and Malfunctions
    Currently, within the System Disruptions and Malfunctions section 
of the rule, after an Officer determines that a trade was clearly 
erroneous he may declare the transaction null and void or modify the 
trade to attempt to achieve and equitable rectification of the error. 
The proposed Rule eliminates the Exchange's ability to modify a clearly 
erroneous execution. The Exchange must either uphold or nullify the 
execution based upon the findings of the Officer reviewing the 
execution.
    The proposed Rule provides that, in the event of a disruption or a 
malfunction, an Officer of the Corporation or other senior level 
employee designee will rely on the proposed numerical guidelines in 
determining whether an execution is clearly erroneous. However, the 
Officer or senior level employee may also use a lower Numerical 
Guideline if necessary to maintain a fair and orderly market, protect 
investors, and protect the public interest. The proposed rule also adds 
that actions taken under these circumstances must be taken within 30 
minutes of detection of the erroneous transaction in the ordinary case, 
and by no later than the start of the Core Trading Session on the day 
following the date of the execution under review when extraordinary 
circumstances exist.
Officers Acting on Their Own Motion
    The Exchange proposes to add a section to the Rule that will grant 
Officers the ability to act on their own motion to review potentially 
erroneous executions. Under the current rule, Officers have the ability 
to act upon their own motion only in the event of a system disruption 
or malfunction. The proposed rule would allow an Officer of the 
Corporation or other senior level employee designee to review 
executions and rely on the Numerical Guidelines, under any 
circumstance. In extraordinary circumstances an Officer or senior level 
employee may apply a lower Numerical Guideline if it is determined that 
such action is necessary to maintain a fair and orderly market or 
protect investors and the public interest. In some instances the 
Exchange may detect a single execution that breaches the Numerical 
Guidelines but is not the subject of a ruling request. This provision 
gives the Exchange the ability to review such executions. Additionally, 
in practice, clearly erroneous executions commonly involve multiple 
parties and multiple executions. In such instances, all affected 
parties may not request a ruling. The Exchange proposes this provision 
to permit an Officer to rule on a group of transactions related to the 
same occurrence or event as a whole, without a formal request for a 
ruling from every affected party.
Trade Nullification for UTP Securities that are Subject of Initial 
Public Offerings
    The proposed rule also modifies NYSE Arca's policy on trade 
nullification and for UTP securities that are subject to initial public 
offerings. Under the proposed rule, Officers must either declare an 
opening transaction null and void or decline to take action, but can no 
longer be adjusted. Furthermore, the proposed rule requires that, in 
extraordinary circumstances, the reviewing Officer may take action by 
no later than the start of Core Trading on the day following the date 
of the execution under review.
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b)\10\ of the 
Securities Exchange Act of 1934 (the ``Exchange Act''), in general, and 
furthers the objectives of Section 6(b)(5)\11\ in particular in that it 
is 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 proposed rule change provides transparency and finality for 
participants and creates consistent results across U.S. equities 
exchanges with respect to clearly erroneous executions. This proposed 
change further promotes the maintenance of a fair and orderly market, 
the protection of investors and the protection of the public interest.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

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

    No written comments were solicited or received with respect to the 
proposed rule change.

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

    Within 35 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 e-mail to rule-comments@sec.gov. Please include 
File

[[Page 20771]]

Number SR-NYSEArca-2009-36 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-NYSEArca-2009-36. This 
file number should be included on the subject line if e-mail 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 inspection 
and copying in the Commission's Public Reference Room, on official 
business days between the hours of 10 a.m. and 3 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-NYSEArca-2009-36 and should be submitted on or before 
May 26, 2009.
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    \12\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
Elizabeth M. Murphy,
Secretary.
[FR Doc. E9-10288 Filed 5-4-09; 8:45 am]
BILLING CODE 8010-01-P