Document ID: SEC-2007-1187-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Depository Trust Co.
Posted Date: 2007-08-24T04:00Z

[Federal Register: August 24, 2007 (Volume 72, Number 164)]
[Notices]               
[Page 48709-48712]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24au07-130]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56277; File No. SR-DTC-2007-04]

 
Self-Regulatory Organizations; The Depository Trust Company; 
Order Granting Approval of a Proposed Rule Change Relating to a Policy 
Statement on the Eligibility of Foreign Securities

August 17, 2007.

I. Introduction

    On April 19, 2007, The Depository Trust Company (``DTC'') filed 
with the Securities and Exchange Commission (``Commission'') proposed 
rule change SR-DTC-2007-04 pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'').\1\ Notice of the proposal 
was published in the Federal Register on June 28, 2007.\2\ One comment 
letter

[[Page 48710]]

was received.\3\ For the reasons discussed below, the Commission is 
granting approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 55940 (June 21, 2007), 
72 FR 35532.
    \3\ Letter from Noland Cheng, Chairman, Operations Committee, 
Securities Industry and Financial Markets Association (July 17, 
2007).
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II. Description

    The proposed rule change adds a new Policy Statement on the 
Eligibility of Foreign Securities to DTC's rules.\4\ The purpose of the 
Policy Statement is to set forth in a single place and in an accessible 
manner the criteria and procedures for making the securities of foreign 
issuers (``Foreign Securities'') eligible for deposit and book-entry 
transfer through the facilities of DTC in accordance with the 
Securities Act of 1933 (``Securities Act'') \5\ and the rules and 
regulations of the Commission thereunder. For purposes of the Policy 
Statement, (1) The term ``security'' has the meaning provided in 
section 2(a)(1) of the Securities Act,\6\ (2) the term ``foreign 
issuer'' has the meaning provided in Rule 405 under the Securities Act, 
which and includes both a ``foreign government'' and a ``foreign 
private issuer'' as defined in Rule 405,\7\ and (3) capitalized terms 
that are used but not otherwise defined in the Policy Statement have 
the meanings given to such terms in the Rules of DTC.
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    \4\ Policy Statements are used by DTC to clarify and consolidate 
the Rules of DTC with respect to the subject of a Policy Statement. 
A Policy Statement is a part of the Rules of DTC. As such, pursuant 
to Rule 2, Section 1 of the DTC Rules and the Participants Agreement 
that participants enter into with DTC, a Policy Statement is binding 
on DTC participants.
    \5\ 15 U.S.C. 77 et seq.
    \6\ 15 U.S.C. 77b(a)(1).
    \7\ 17 CFR 230.405. The term foreign issuer means any issuer 
which is a foreign government, a national of any foreign country or 
a corporation or other organization incorporated or organized under 
the laws of any foreign country.
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    The Policy Statement covers both Foreign Securities deposited with 
DTC at the time that such Foreign Securities are first distributed 
(referred to as ``new issues'' in the DTC system) and Foreign 
Securities deposited with DTC subsequent to the time that such Foreign 
Securities are first distributed (referred to as ``older issues'' in 
the DTC system). The criteria and procedures for making new issues of 
Foreign Securities eligible for deposit and book-entry transfer through 
the facilities of DTC have previously been codified by DTC. The 
criteria and procedures for making older issues of Foreign Securities 
eligible for deposit and book-entry transfer through the facilities of 
DTC have not previously been codified by DTC. Accordingly, what would 
be new in the Policy Statement are the criteria and procedures for 
making older issues of unregistered Foreign Securities DTC-eligible.\8\ 
These older issues are generally securities that are freely tradable 
outside the U.S. over the counter or on foreign exchanges or are traded 
in the U.S. over the counter subject to the resale restrictions of the 
Securities Act.
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    \8\ Registered securities, whether new issues or older issues, 
whether foreign or domestic, can always be made DTC-eligible.
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    The proposed rule change, as it relates to older issues of 
unregistered Foreign Securities, represents an extension with no 
material change in arrangements that now apply to new issues of 
unregistered Foreign Securities, including securities that may be 
resold without registration under the Securities Act pursuant to 
Regulation S or Rule 144A. By establishing the criteria and procedures 
for a wider but not fundamentally different range of unregistered 
Foreign Securities to be DTC-eligible, the proposed rule change, should 
increase the transparency and reduce the risk and cost of transactions 
in these securities.
    At the present time, purchases and sales of older issues of 
unregistered Foreign Securities by U.S. investors typically settle 
through foreign intermediaries and central securities depositories in 
multiple jurisdictions. By having these transactions settle at DTC, 
U.S. investors and intermediaries would be able to benefit from (1) DTC 
risk management controls approved by the Commission, (2) a more visible 
and less complicated settlement process, and (3) greater control over 
settlement costs with fees determined by the user-representative board 
of directors of DTC.
    In all cases and circumstances, participants of DTC would be 
responsible for determining that their deposit of older issues of 
unregistered Foreign Securities with DTC and that their transactions in 
such securities through the facilities of DTC, are in compliance with 
the Rules of DTC and the federal securities laws.

Categories of Foreign Securities Eligible for DTC Services

    Under the Policy Statement, the following categories of Foreign 
Securities will be eligible for DTC book-entry delivery services as and 
to the extent set forth below.\9\
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    \9\ The categories of Foreign Regulation S Securities, Foreign 
Rule 144A Securities, Foreign Restricted Securities, and Foreign 
Other Eligible Securities are not all mutually exclusive. For 
example, (i) Foreign Regulation S Securities may be resold to 
qualified institutional buyers (as defined in Rule 144A) pursuant to 
Rule 144A, (ii) Foreign Rule 144A Securities may be resold in 
offshore transactions (as defined in Regulation S) pursuant to 
Regulation S, and (iii) Foreign Regulation S Securities and Foreign 
Rule 144A Securities that are restricted securities (as defined in 
Rule 144) may be resold pursuant to Rule 144.
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    (1) Foreign Securities that are registered under the Securities Act 
(``Registered Foreign Securities'') will be eligible for all DTC 
services.
    (2) Foreign Securities that are exempt from registration under the 
Securities Act pursuant to an exemption that does not involve any 
resale restrictions (``Exempt Foreign Securities'') will be eligible 
for all DTC services.
    (3) Foreign Securities that may be offered and sold without 
registration under the Securities Act pursuant to Regulation S 
(``Foreign Regulation S Securities'') \10\ will be eligible for all DTC 
services. This includes Category 1 securities, Category 2 securities, 
and Category 3 securities under Regulation S.\11\
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    \10\ 17 CFR 230.901 through 905.
    \11\ Category 1 of the primary offering safe harbor of 
Regulation S includes the securities of foreign issuers for which 
there is no substantial U.S. market in the subject securities, 
securities being offered by foreign (or domestic) issuers in 
overseas directed offerings, securities of foreign governments and 
securities being offered by foreign issuers pursuant to employee 
benefit plans. Category 2 of the primary offering safe harbor of 
Regulation S includes the equity securities of reporting foreign 
issuers, the debt securities of foreign (or domestic) reporting 
issuers, and the debt securities of nonreporting foreign issuers 
even if there is substantial U.S. market interest in the subject 
securities. Category 3 of the primary offering safe harbor of 
Regulation S includes the equity securities of non-reporting foreign 
issuers with substantial U.S. market interest in the subject 
securities. 17 CFR 230.903.
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    (4) Foreign Securities that may be resold without registration 
under the Securities Act pursuant to Rule 144A (``Foreign Rule 144A 
Securities'') \12\ will be eligible for all DTC services. If such 
Foreign Rule 144A Securities are not investment grade securities (i.e., 
nonconvertible debt securities or nonconvertible preferred stock rated 
in one of the top four categories by a nationally recognized 
statistical rating agency), then to be eligible for DTC services such 
Foreign Rule 144A Securities will have to be securities designated for 
inclusion in a system of a self-regulatory organization approved by the 
Commission for the reporting of quotation and trade information on Rule 
144A transactions (``SRO Rule 144A System'').\13\
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    \12\ 17 CFR 230.144A.
    \13\ For the requirement that securities other than investment 
grade securities be designated for inclusion in a Self Regulatory 
Organization (``SRO'') Rule 144A System approved by the Commission, 
see Securities Exchange Act Release No. 33327 (December 13, 1993), 
58 FR 67878 (December 22, 1993) (File No. SR-DTC-90-06) (Order 
Approving a Proposed Rule Change by DTC Relating to the Eligibility 
of Rule 144A Securities at DTC).
    The original SRO Rule 144A System approved by the Commission was 
the Private Offerings, Resales, and Trading through Automated 
Linkages (``PORTAL'') Market System operated by the National 
Association of Securities Dealers, Inc. (``NASD''). For a 
description of the PORTAL Market System and the relationship between 
the PORTAL Market System and DTC, see Securities Exchange Act 
Release Nos. 27956 (April 27, 1990), 55 FR 18781 (May 4, 1990) (File 
No. SR-NASD-88-23) (Order Approving Proposed Rule Change and Notice 
of Filing and Order Granting Accelerated Approval to Amendments to 
Proposed Rule of NASD Relating to the Operation of the PORTAL 
Market) and 33326 (December 13, 1993), 58 FR 66388 (December 22, 
1993) (File No. SR-NASD-91-5) (Order Approving a Proposed Rule 
Change Relating to the Operation of the PORTAL Market).
    In 2001, the Commission approved an NASD proposed rule change to 
require PORTAL participants to submit trade reports of secondary 
market transactions in PORTAL equity securities through the NASD 
Automated Confirmation and Transaction Service (``ACT'') and PORTAL 
high-yield debt securities through the NASD Trade Reporting and 
Comparison Entry Service (``TRACE'') and to redefine the PORTAL 
Market System to include ACT and TRACE. Securities Exchange Act 
Release No. 44042 (March 6, 2001), 66 FR 14969 (March 13, 2001) 
(File No. SR-NASD-99-66) (Order Approving Proposed Rule Change 
Relating to the Implementation of Mandatory Trade Reporting for 
PORTAL Securities). As a result, ACT and TRACE are each an SRO Rule 
144A System for purposes of the DTC Rule 144A eligibility 
requirement.
    On July 31, 2007, the Commission approved a proposed rule change 
by The NASDAQ Stock Market LLC (``Nasdaq'') to reestablish a 
quotation and trading system, The PORTAL Market, for securities that 
are designated by Nasdaq as PORTAL securities. The system would 
allow PORTAL Participants to trade with one another in a closed 
system. Securities Exchange Act Release No. 56172, 72 FR 44196 
(August 7, 2007) (File No. SR-NASDAQ-2006-065).

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[[Page 48711]]

    (5) Foreign Securities that may be resold without registration 
under the Securities Act pursuant to Rule 144 (``Foreign Restricted 
Securities'') \14\ will be eligible for all DTC services.
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    \14\ 17 CFR 230.144.
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    (6) Foreign Securities that may be resold without registration 
under the Securities Act pursuant to any other exemption (``Foreign 
Other Eligible Securities'') will be eligible for all DTC services. 
This shall include without limitation an exemption pursuant to 
Commission Rule 801 \15\ in connection with a rights offering or an 
exemption pursuant to Commission Rule 802 \16\ in connection with an 
exchange offer.
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    \15\ 17 CFR 230.801.
    \16\ 17 CFR 230.802.
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    Although all the foregoing categories of Foreign Securities will be 
eligible for deposit and book-entry transfer through the facilities of 
DTC, DTC will have the right adopt associated procedures to determine 
in accordance with Rule 5, Section 1 of the DTC Rules and in accordance 
with its obligations as a registered clearing agency subject to 
regulation by the Commission whether any particular issue will be 
accepted for deposit and made eligible for some or all DTC services.

Responsibilities of Issuers and Participants

    Issuers and participants will be responsible for determining that 
their deposit of Foreign Securities with DTC and that their 
transactions in Foreign Securities through the facilities of DTC are in 
compliance with the Rules of DTC and the federal securities laws. In 
particular and without limitation, issuers and participants will be 
responsible not to engage in any transactions in Foreign Securities, 
including any distribution of unregistered Foreign Securities through 
the facilities of DTC, in violation of the Securities Act and the rules 
and regulations of the Commission thereunder. These responsibilities of 
issuers and participants are based on the following.
    (1) Issuers and participants depositing Foreign Securities with DTC 
and participants engaging in transactions in Foreign Securities through 
the facilities of DTC are subject to the Rules of DTC and the federal 
securities laws.
    (2) Rule 2, Section 7 of DTC's Rules provides, ``In connection with 
their use of the Corporation's [DTC's] services, Participants and 
Pledgees must comply with all applicable laws, including all applicable 
laws relating to securities, taxation and money laundering.''
    (3) Section 7(b) of DTC's ``Operational Arrangements (Necessary for 
an Issue to Become and Remain Eligible for DTC Services)'' (``DTC 
Operational Arrangements'') which relate to book-entry only (``BEO'') 
issues being made eligible for DTC services provides:

    Issuer recognizes that DTC does not in any way undertake to, and 
shall not have any responsibility to, monitor or ascertain the 
compliance of any transactions in the Securities with the following, 
as amended from time to time: (1) any exemptions from registration 
under the Securities Act of 1933; (2) the Investment Company Act of 
1940; (3) the Employee Retirement Income Security Act of 1974; (4) 
the Internal Revenue Code of 1986; (5) any rules of any self-
regulatory organizations (as defined under the Securities Exchange 
Act of 1934); or (6) any other local, state, federal, or foreign 
laws or regulations thereunder.

This and other representations made by issuers to DTC pursuant to the 
DTC Operational Arrangements are mirrored in the Letter of 
Representations that DTC receives from issuers in connection with their 
deposits of BEO issues with DTC.
    (4) In 1994, in an order clarifying certain language in the Rule 
144A approval order, the Commission concurred in the position taken by 
DTC with respect to Rule 5 of DTC's Rules that ``Rule 5 does not 
require DTC to determine whether securities, when deposited at DTC, may 
be transferred lawfully by book-entry in light of the Federal 
securities law.'' \17\ The original Rule 144A order included the 
statement that Rule 5, Section 1 of DTC's Rules required DTC to 
determine whether in light of the Federal securities laws, particularly 
the provisions of Rules 144, 144A, and 145, securities when deposited 
with DTC could be lawfully transferred by book-entry. DTC filed the 
rule change in order to clarify that DTC Rule 5 does not require DTC to 
determine whether securities deposited at DTC may be transferred 
lawfully pursuant to Federal securities laws. DTC subsequently amended 
Rule 5 to delete any implication that DTC was under any statutory or 
contractual obligation to determine whether securities deposited with 
DTC could be legally transferred by book-entry.
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    \17\ Securities Exchange Act Release No. 33672 (February 23, 
1994), 59 FR 10186 (March 3, 1994) (File No. SR-DTC-93-14) (Order 
Approving Proposed Rule Change Relating to a Clarification of Rule 
5).
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DTC Procedures

    DTC implements a variety of measures designed to facilitate 
compliance by issuers and participants with their obligations to DTC 
and pursuant to the federal securities laws. With respect to new issues 
of Foreign Securities, these measures include the following.
    (1) For all Foreign Securities, DTC will require (a) from the 
Participant seeking DTC eligibility (e.g., the underwriter) an 
Eligibility Questionnaire that sets forth inter alia the basis on which 
the securities are eligible for deposit and book-entry transfer though 
the facilities of DTC and (b) from the issuer a Letter of 
Representations with representations that incorporate by reference 
substantially all of the standard representations set forth in the DTC 
Operational Arrangements.
    (2) For Foreign Regulation S Securities, DTC will require from the 
issuer a rider to the Letter of Representations with inter alia 
additional representations relating to the securities being eligible 
for resale pursuant to Regulation S and having a CUSIP or CINS 
identification number different from the CUSIP or CINS identification 
number of any registered securities of the issuer of the same class.
    (3) For Foreign Rule 144A Securities, DTC will require from the 
issuer a rider to the Letter of Representations with inter alia 
additional representations relating to the securities being eligible 
for resale pursuant to Rule 144A, having

[[Page 48712]]

a CUSIP or CINS identification number different from the CUSIP or CINS 
identification number of any registered securities of the issuer of the 
same class and whether the securities are investment grade securities 
or securities designated for inclusion in an SRO Rule 144A System.
    With respect to older issues of Foreign Securities, these measures 
include the following.\18\
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    \18\ Foreign Securities that have historically been traded only 
on foreign securities exchanges and in foreign over-the-counter 
markets can be deposited as older issues and transferred by book-
entry through the facilities of DTC, provided that they may legally 
be resold in the United States (i.e., they are registered under the 
Securities Act or they are eligible for resale in the United States 
without registration under the Securities Act).
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    (1) DTC (a) will determine that any unregistered Foreign Securities 
deposited with DTC have a CUSIP or CINS identification number that is 
different from the CUSIP or CINS identification of any registered 
securities of the issuer of the same class and (b) would confirm that 
any Foreign Rule 144A Securities deposited with DTC are investment 
grade securities or securities designated for inclusion in an SRO Rule 
144A System.
    (2) DTC will require from any participant that wishes to deposit 
any unregistered Foreign Securities with DTC or engage in any 
transactions in unregistered Foreign Securities through the facilities 
of DTC a one-time blanket Letter of Representations (``Participant 
Foreign Securities BLOR'') with inter alia representations that such 
Participant (a) will not deposit any unregistered Foreign Securities 
with DTC unless such securities are eligible for resale without 
registration under the Securities Act and (b) will not engage in any 
transactions in Foreign Securities, including any distribution of 
unregistered Foreign Securities through the facilities of DTC, in 
violation of the Securities Act and the rules and regulations of the 
Commission thereunder.\19\
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    \19\ A form of the proposed Participant Foreign Securities BLOR 
is attached as Exhibit 2 to the proposed rule change filed by DTC 
with the Commission.
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    DTC will systemically block any Participant that has not executed a 
Participant Foreign Securities BLOR from (a) depositing any 
unregistered Foreign Securities with DTC or (b) engaging in any 
transactions in unregistered Foreign Securities through the facilities 
of DTC.

Additional Documentation

    Although the foregoing documentation for new issues and older 
issues would be provided by issuers or participants in connection with 
the deposit of Foreign Securities with DTC and as a condition to 
engaging in transactions in Foreign Securities through the facilities 
of DTC, DTC will have the right to adopt associated procedures to 
determine in accordance with Rule 5 Section 1 of the DTC Rules and its 
obligations as a registered clearing agency subject to regulation by 
the Commission whether any other or additional documentation will be 
required.

III. Comments

    The Commission received one comment to the proposed rule 
change.\20\ The comment letter was written on behalf of the Operations 
Committee of the Securities Industry and Financial Markets Association 
(``SIFMA'') and requests that the Commission approve the proposed rule 
change. SIFMA notes in its letter that the proposed rule change 
includes procedures, such as the Eligibility Questionnaire and the 
Blanket Letter of Representation, that are designed (1) to prevent DTC 
Participants from depositing unregistered Foreign Securities at DTC 
that are not eligible for resale under the Securities Act and (2) to 
prevent DTC Participants from using the facilities of DTC to engage in 
transactions in unregistered Foreign Securities that would violate the 
Securities Act and the rules and regulations thereunder. SIFMA states 
that given these procedural controls, it believes that older issues of 
unregistered Foreign Securities pose no additional risk to DTC or to 
the national clearance and settlement system and that participants and 
the markets will benefit from making a wider range of unregistered 
Foreign Securities eligible for deposit and book-entry transfer at DTC.
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    \20\ Letter from Noland Cheng, Chairman, Operations Committee, 
Securities Industry and Financial Markets Association (July 17, 
2007).
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IV. Discussion

    Section 17A(b)(3)(F) of the Act requires that the rules of a 
clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions. The proposed rule 
change expands the kinds of Foreign Securities eligible for deposit and 
book-entry transfer at DTC to include not only new issues of Foreign 
Securities but also older issues of Foreign Securities such as 
securities that currently may be freely traded outside the U.S. over 
the counter or on foreign exchanges or traded in the U.S. in the over-
the-counter market subject to the resale restrictions of the Securities 
Act. The proposed rule change also consolidates DTC's procedures for 
making Foreign Securities DTC-eligible. By allowing DTC participants to 
consolidate their positions in Foreign Securities at DTC instead of 
using the services of several custodians, DTC participants should 
benefit from the use of DTC's efficient, safe, and cost-efficient 
operations. This should be particularly true in situations where one 
DTC participant is transferring Foreign Securities to another DTC 
participant. Accordingly, we find that the proposed rule change is 
designed to promote the prompt and accurate clearance and settlement of 
securities transactions.
    While DTC states in the filing that issuers and participants will 
be responsible not to engage in any transactions in Foreign Securities, 
including any distribution of unregistered Foreign Securities through 
the facilities of DTC, in violation of the Securities Act and the rules 
and regulations of the Commission, DTC is adopting, as set forth in the 
Policy Statement, certain measures designed to facilitate compliance by 
issuers and participants with the securities laws. These measures, as 
outlined in section III of this approval order, and appear to be well 
designed to reduce the potential for the misuse of DTC's systems and 
facilities, particularly given DTC's experience with newer issuers of 
Foreign Securities. However, we expect DTC to monitor the effectiveness 
of these measures and to modify or adopt additional procedures where 
necessary.

V. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
in particular section 17A of the Act and the rules and regulations 
thereunder.\21\
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    \21\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition and 
capital formation. 15 U.S.C. 78c(f).
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    It is therefore ordered, pursuant to section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-DTC-2007-04) be and hereby 
is approved.
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    \22\ 17 CFR 200.30-3(a)(12).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\22\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-16752 Filed 8-23-07; 8:45 am]

BILLING CODE 8010-01-P