Document ID: SEC-2007-0328-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2007-03-05T05:00Z

[Federal Register: March 5, 2007 (Volume 72, Number 42)]
[Notices]               
[Page 9807-9810]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr05mr07-90]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55346; File No. SR-NASD-2007-014]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change To Make Conforming Changes to the Rules Relating to the 
NASD/NSX TRF, NASD/BSE TRF, and NASD/NYSE TRF Consistent With the New 
Requirements of Regulation NMS

February 26, 2007.
    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 February 12, 2007, the National Association of Securities Dealers, 
Inc. (``NASD'') 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 substantially prepared by NASD. 
NASD has filed the proposal as a ``non-controversial'' rule change 
pursuant to Section 19(b)(3)(A) of the Act \3\ and Rule 19b-4(f)(6) 
thereunder,\4\ which renders it effective upon filing with the 
Commission. 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.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD proposes (1) amendments to the transaction reporting rules 
relating to the NASD/NSX Trade Reporting Facility (``NASD/NSX TRF''), 
the NASD/BSE Trade Reporting Facility (``NASD/BSE TRF''), and the NASD/
NYSE Trade Reporting Facility (``NASD/NYSE TRF'') (collectively 
referred to herein as the ``Subject TRFs'') consistent with the new 
requirements of Regulation NMS under the Act;\5\ and (2) technical 
amendments to conform, to the extent practicable, the reporting rules 
of the Subject TRFs to the reporting rules of the NASD/Nasdaq Trade 
Reporting Facility (``NASD/Nasdaq TRF'') and NASD's Alternative Display 
Facility (``ADF''). The text of the proposed rule change is available 
at NASD, the Commission's Public Reference Room, and http://www.nasd.com
.

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    \5\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496 (June 29, 2005) (``Regulation NMS Adopting 
Release'').
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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, NASD 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. NASD 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
Background
    On June 29, 2005, the Commission published its release adopting 
Regulation NMS,\6\ which established new substantive rules designed to 
modernize and strengthen the regulatory structure of the U.S. equities 
markets. Pursuant to Regulation NMS, the Commission, among other 
things, adopted Rule 611 (``Order Protection Rule'') to establish 
protection against trade-throughs for NMS stocks.\7\
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    \6\ Id.
    \7\ NMS stock is defined in Rule 600(b)(47) of Regulation NMS as 
``any NMS security other than an option.'' Rule 600(b)(46) of 
Regulation NMS defines NMS security as ``any security or class of 
securities for which transaction reports are collected, processed, 
and made available pursuant to an effective transaction reporting 
plan, or an effective national market system plan for reporting 
transactions in listed options.''
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    In general, the Order Protection Rule requires a trading center 
(which includes national securities exchanges, self-regulatory 
organization (``SRO'') trading facilities, alternative trading systems, 
OTC market makers, and block positioners) to establish, maintain, and 
enforce written policies and procedures that are reasonably designed to 
prevent trade-throughs on that trading center of protected quotations 
and, if relying on an exception, that are reasonably designed to assure 
compliance with the terms of the exception. There currently are nine 
exceptions and two exemptions to the Order Protection Rule.\8\ In

[[Page 9808]]

addition, the Order Protection Rule requires trading centers to surveil 
regularly to ascertain the effectiveness of the policies and procedures 
adopted pursuant to Rule 611 of Regulation NMS and take prompt action 
to remedy deficiencies in such policies and procedures.
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    \8\ See 17 CFR 242.611; Securities Exchange Act Release Nos. 
54389 (August 31, 2006), 71 FR 52829 (September 7, 2006) (Order 
Granting an Exemption for Qualified Contingent Trades from Rule 
611(a) of Regulation NMS) and 54678 (October 31, 2006), 71 FR 65018 
(November 6, 2006) (Order Exempting Certain Sub-Penny Trade-Throughs 
from Rule 611 of Regulation NMS).
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    On November 6, 2006, the Commission approved the establishment of 
the NASD/NSX TRF.\9\ On December 13, 2006, the Commission approved the 
establishment of the NASD/BSE TRF.\10\ On February 1, 2007, NASD filed 
for immediate effectiveness a proposed rule change relating to the 
establishment of the NASD/NYSE TRF.\11\ The Subject TRFs provide 
members additional mechanisms for reporting locked-in trades in 
exchange-listed securities executed otherwise than on an exchange.
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    \9\ See Securities Exchange Act Release No. 54715 (November 6, 
2006), 71 FR 66354 (November 14, 2006) (SR-NASD-2006-108). The NASD/
NSX TRF commenced operation for the reporting of over-the-counter 
trades in Nasdaq-listed securities on November 27, 2006 and is 
expected to expand to the reporting of over-the-counter trades in 
all exchange-listed securities in the first quarter of 2007.
    \10\ See Securities Exchange Act Release No. 54931 (December 13, 
2006), 71 FR 76409 (December 20, 2006) (SR-NASD-2006-115). The NASD/
BSE TRF will commence operation upon successful completion of system 
testing and certification (currently anticipated to be in the first 
quarter of 2007).
    \11\ See Securities Exchange Act Release No. 55325 (February 21, 
2007) (SR-NASD-2007-011). The NASD/NYSE TRF will commence operation 
upon successful completion of system testing and certification 
(currently anticipated to be in the first quarter of 2007).
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    Neither NASD, generally, nor any of the NASD Trade Reporting 
Facilities, specifically, qualifies as a trading center within the 
meaning of Regulation NMS. Thus, the provisions of the Order Protection 
Rule requiring trading centers to establish, maintain, and enforce 
written policies and procedures that are reasonably designed to prevent 
trade-throughs on that trading center of protected quotations in NMS 
stocks are not applicable to NASD. However, NASD has a responsibility 
to enforce requirements under the Act that apply to activity within its 
regulatory authority. Thus, unlike exchanges that have direct 
Regulation NMS obligations with respect to the SRO trading facilities, 
NASD has indirect Regulation NMS obligations with respect to all over-
the-counter market activity, including post-trade regulation for 
compliance with the Order Protection Rule with respect to trading 
centers that trade report through an NASD Trade Reporting Facility. 
Such regulation includes monitoring for whether trading centers are 
reporting trades to an NASD Trade Reporting Facility that are trade-
throughs of protected quotes and whether such trade-throughs are 
permissible under one of the specific exceptions and exemptions under 
the Order Protection Rule.
Proposed Amendments To Align the Rules of the Subject TRFs With 
Regulation NMS
    NASD proposes to amend Rule 4632C relating to the NASD/NSX TRF, 
Rule 4632D relating to the NASD/BSE TRF, and Rule 4632E relating to the 
NASD/NYSE TRF to require reporting members to append applicable 
modifiers to last-sale transaction reports with respect to trades that 
fall within the exceptions and exemptions from Rule 611 of Regulation 
NMS. The proposed amendments are substantially similar to amendments to 
the transaction reporting requirements relating to the ADF, which were 
approved by the Commission on September 28, 2006,\12\ and the NASD/
Nasdaq TRF, which were filed for immediate effectiveness on January 8, 
2007.\13\
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    \12\ See Securities Exchange Act Release No. 54537 (September 
28, 2006), 71 FR 59173 (October 6, 2006) (SR-NASD-2006-091). See 
also Securities Exchange Act Release No. 55088 (January 11, 2007), 
72 FR 2573 (January 19, 2007) (SR-NASD-2007-001). Unlike the ADF, an 
NASD Trade Reporting Facility (e.g., the NASD/NSX TRF) is a trade 
reporting mechanism only; it does not permit quoting. As such, not 
all of the amendments to the ADF rules are applicable to the rules 
relating to the NASD Trade Reporting Facilities.
    \13\ See Securities Exchange Act Release No. 55101 (January 12, 
2007), 72 FR 2568 (January 19, 2007) (SR-NASD-2007-002).
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    Specifically, NASD proposes to adopt new paragraph (a)(5)(C) of 
Rule 4632C, paragraph (a)(5)(F) of Rule 4632D, and paragraph (a)(5)(I) 
of Rule 4632E to require members to append a unique modifier, specified 
by NASD, to indicate whether the trade would be a trade-through of a 
protected quotation but for the trade being qualified for an exception 
or exemption from Rule 611 of Regulation NMS. Further, NASD proposes to 
adopt new paragraph (a)(5)(D) of Rule 4632C, paragraph (a)(5)(G) of 
Rule 4632D, and paragraph (a)(5)(J) of Rule 4632E to require that, for 
any trade that would be a trade-through of a protected quotation but 
for the trade being qualified for an exception or exemption from Rule 
611 of Regulation NMS, a member must append to the transaction report, 
in addition to the modifier required under new Rule 4632C(a)(5)(C), 
Rule 4632D(a)(5)(F), and Rule 4632E(a)(5)(I), respectively, a unique 
modifier, specified by NASD, that identifies the specific applicable 
exception or exemption from Rule 611 of Regulation NMS upon which the 
member is relying.\14\ As stated in the proposed rules, these modifiers 
will be used in conformity with the specifications approved by the 
Operating Committee of the relevant National Market System Plans to 
identify trades executed pursuant to an exception or exemption from 
Rule 611 of Regulation NMS. NASD, along with the respective Subject 
TRFs, will publish technical specifications regarding the specific 
modifiers required under the proposed new rules.
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    \14\ A Member using the trade report modifiers under the 
proposed new rules is responsible for ensuring that the transaction 
meets the criteria of the specific exemption or exception set forth 
in Rule 611 of Regulation NMS.
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    Additionally, NASD proposes to adopt new paragraph (a)(5)(E) of 
Rule 4632C, paragraph (a)(5)(H) of Rule 4632D, and paragraph (a)(5)(K) 
of Rule 4632E to require members to append ``[a]ny other modifier as 
specified by NASD or the Securities and Exchange Commission.'' An 
identical provision in the ADF rules was subject to notice and comment 
and approved by the Commission pursuant to SR-NASD-2006-091 and also 
was incorporated in Rule 4632 relating to the NASD/Nasdaq TRF pursuant 
to SR-NASD-2007-002. Under this proposed provision, NASD will have the 
authority to prescribe additional trade report modifiers by updating 
the Technical Specifications for the Subject TRFs without submitting a 
further proposed rule change for approval by the Commission. For 
example, such authority will be used to require additional modifiers to 
designate trades that qualify under two existing exemptions from the 
Order Protection Rule (qualified contingent trades and certain sub-
penny trade-throughs) \15\ as well as any other exemption that the 
Commission may grant in the future. This authority may also be used to 
capture additional regulatory information that NASD deems necessary 
(e.g., NASD will require more specific delineation of the Intermarket 
Sweep Order (``ISO'') exception than is required by the National Market 
System specifications).\16\ To enable members to make the necessary 
systems changes, NASD would provide at least 30 days advance written 
notice relating to any new modifiers.
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    \15\ See supra note 8.
    \16\ The National Market System specifications identify both 
types of ISO orders with a single modifier. NASD, however, intends 
to distinguish between the ISO exceptions by requiring firms to use 
a separate modifier, as defined by NASD, in instances where the 
executing firm is responsible for sweeping the market.
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    NASD also proposes to amend Rules 4632C, 4632D, and 4632E to 
expressly

[[Page 9809]]

provide that, in the event that the rules require multiple modifiers on 
any given trade report, members are to report in accordance with 
guidance published by NASD regarding priorities among modifiers, if 
such guidance is provided. A Member that reports in accordance with 
such guidance would not be in violation of the trade reporting rules 
for failing to use a particular modifier.
    NASD believes that the proposed rule change is necessary to ensure 
that there is transparency relating to trades that are exempt from the 
trade-through rule and to enhance NASD's ability to examine for 
compliance with the Order Protection Rule.
Proposed Amendments to Rules of the Subject TRFs To Conform to NASD/
Nasdaq TRF and ADF Rules
    NASD proposes changes to conform, to the extent practicable, the 
reporting rules of the Subject TRFs to the NASD/Nasdaq TRF and ADF 
reporting rules. Specifically, NASD proposes to reorganize Rule 4632C 
relating to the NASD/NSX TRF, Rule 4632D relating to the NASD/BSE TRF, 
and Rule 4632E relating to the NASD/NYSE TRF and renumber paragraphs 
(a)(3) and (a)(5) of Rule 4632C, paragraphs (a)(3) and (a)(6) of Rule 
4632D, and paragraphs (a)(3) and (a)(6) of Rule 4632E, without amending 
the text of those provisions. NASD also proposes to renumber paragraphs 
(a)(4), (a)(6), and (a)(8) of Rule 4632C, paragraphs (a)(5), (a)(8), 
and (a)(10) of Rule 4632D and paragraphs (a)(5), (a)(8), and(a)(10) of 
Rule 4632E, and amend the text of those provisions to conform to the 
text of the equivalent provisions in Rule 4632 relating to the NASD/
Nasdaq TRF.
    Additionally, NASD proposes to adopt new Rules 4632C(a)(5), 
4632D(a)(5), and 4632E(a)(5) to require members to use trade report 
modifiers designated by NASD for certain enumerated transactions. As 
with the NASD/Nasdaq TRF and ADF, members will be required to include 
such modifiers on all trade reports, including reports of ``as/of'' 
trades.\17\ Consistent with SR-NASD-2007-001 and SR-NASD-2007-002, the 
proposed amendments to Rules 4632C, 4632D, and 4632E would delete the 
labels (e.g., .T or .W) for the modifiers that members are required to 
use when reporting the enumerated transactions. Thus, Rules 4632C, 
4632D, and 4632E would identify the types of transactions that must 
have a unique identifier associated with them, and such modifiers would 
be labeled in the system technical specifications rather than in the 
rules.
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    \17\ The NASD/NSX TRF currently does not accept ``as/of''trade 
reports and the rules for the NASD/BSE TRF, which have been approved 
by the Commission but are not yet effective, also do not permit the 
submission of ``as/of'' trade reports. NASD will file a separate 
proposed rule change to reflect the reporting of ``as/of'' trades to 
the NASD/NSX TRF and NASD/BSE TRF. Thus, upon the operative date of 
this proposed rule change, members will be required to append all 
applicable trade report modifiers to ``as/of'' trade reports 
submitted to the NASD/NSX TRF and the NASD/BSE TRF. NASD reminds 
members that they should mark any ``as/of'' trade report for 
publication if that trade would have been for publication had it 
been reported on trade date.
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    It should be noted that, because of differences in functionality, 
not all of the rules relating to NASD's Trade Reporting Facilities are 
identical. For example, unlike the NASD/Nasdaq TRF, the NASD/BSE TRF, 
and the NASD/NYSE TRF, pursuant to current Rule 4632C(a)(7), the NASD/
NSX TRF does not accept trade reports for Stop Stock Transactions (as 
such term is defined in Rule 4200C), transactions occurring at prices 
based on average-weighting or other special pricing formulae, or 
transactions that reflect a price different from the current market 
when the execution price is based on a prior reference point in time. 
In this proposed rule change, NASD proposes to renumber Rule 
4632C(a)(7) as 4632C(a)(8) without amending the text of the rule.
    In addition, neither the NASD/NSX TRF nor the NASD/BSE TRF will 
accept trades reported as other than regular way settlement (see Rules 
6130C(a) and 6130D(a), respectively). Thus, unlike Rule 4632(a)(5) 
relating to the NASD/Nasdaq TRF and Rule 4632E(a)(5) relating to the 
NASD/NYSE TRF, proposed Rules 4632C(a)(5) and 4632D(a)(5) do not 
include provisions pertaining to trade report modifiers for Seller's 
Option, Cash, or Next Day transactions.
    As discussed in footnote 17 above, the NASD/NSX TRF and NASD/BSE 
TRF rules currently do not provide for the submission of ``as/of'' 
trade reports; however, once the necessary system changes have been 
made, NASD will file a separate proposed rule change proposing 
amendments to Rules 4632C(a)(2)(B) and (D) and 4632D(a)(2)(B) and (D) 
that are consistent with Rule 4632(a)(2)(B) and (D) and proposed Rule 
4632E(a)(2)(B) and (D).
    NASD has filed the proposed rule change for immediate 
effectiveness. In accordance with the Regulation NMS compliance dates 
established by the Commission,\18\ NASD proposes to make the proposed 
rule change operative on the Pilot Stocks Phase Date, which is 
currently anticipated to be July 9, 2007. However, members may begin 
submitting trade reports to the Subject TRFs in compliance with the 
proposed rule change after the Trading Phase Date, which is currently 
anticipated to be March 5, 2007. This does not change in any way a 
member's responsibilities under the Regulation NMS compliance 
dates.\19\
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    \18\ See Securities Exchange Act Release No. 55160 (January 24, 
2007), 72 FR 4202 (January 30, 2007).
    \19\ NASD notes that, although the proposed rule change will not 
be operative until the Pilot Stocks Phase Date, members may be 
required to meet the Regulation NMS message format requirements for 
reporting to the Subject TRFs prior to that date. NASD will notify 
members of the date of mandatory compliance with Regulation NMS 
message formatting requirements for the Subject TRFs and on such 
date, members will be required to report in accordance with the new 
systems requirements, although the specific new modifiers proposed 
herein would continue to be voluntary until the Pilot Stocks Phase 
Date.
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2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\20\ which requires, among 
other things, that NASD 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. NASD believes that the proposed rule change 
facilitates the goals articulated in Regulation NMS, including 
providing an effective mechanism and regulatory framework for reporting 
over-the-counter transactions to NASD.
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    \20\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD does not believe that the proposed rule change will result in 
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

    Written comments were neither solicited nor received.

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

    The foregoing proposed rule change is subject to Section 
19(b)(3)(A)(iii) of the Act \21\ and Rule 19b-4(f)(6) thereunder \22\ 
because the proposal: (i) Does not significantly affect the protection 
of investors or the public interest; (ii) does not impose any 
significant burden on competition; and (iii) does not become operative 
prior to 30 days after the date

[[Page 9810]]

of filing or such shorter time as the Commission may designate if 
consistent with the protection of investors and the public interest; 
provided that NASD has given the Commission 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.\23\
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    \21\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \22\ 17 CFR 240.19b-4(f)(6).
    \23\ NASD has satisfied the five-day pre-filing requirement.
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    At any time within 60 days of the filing of such proposed rule 
change the Commission may summarily abrogate 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 e-mail to rule-comments@sec.gov. Please include 

File Number SR-NASD-2007-014 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASD-2007-014. 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. Copies of the filing 
also will be available for inspection and copying at the principal 
office of NASD. 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-
NASD-2007-014 and should be submitted on or before March 26, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-3744 Filed 3-2-07; 8:45 am]

BILLING CODE 8010-01-P