Document ID: SEC-2006-1683-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: New York Stock Exchange LLC
Posted Date: 2006-12-26T05:00Z

[Federal Register: December 26, 2006 (Volume 71, Number 247)]
[Notices]               
[Page 77432-77435]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26de06-79]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54944; File No. SR-NYSE-2006-69]

 
Self-Regulatory Organizations; New York Stock Exchange LLC; Order 
Granting Accelerated Approval to Proposed Rule Change and Amendment No. 
1 Thereto Relating to the Listing and Trading of Exchange-Traded Notes 
of Barclays Bank PLC Linked to the Performance of the MSCI India 
Equities Index

December 15, 2006.

I. Introduction

    On August 24, 2006, the New York Stock Exchange LLC (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to list and trade exchange-traded notes 
(``Notes'') of Barclays Bank PLC (``Barclays'') linked to the 
performance of the MSCI India Total Return IndexSM 
(``Index''). On November 8, 2006, the Exchange submitted Amendment No. 
1.\3\ The proposed rule change, as amended, was published for comment 
in the Federal Register on November 28, 2006 for a 15-day comment 
period.\4\ The Commission received one comment regarding the 
proposal.\5\ This order approves the proposed rule change, as amended, 
on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaced and superseded the Exchange's 
original submission in its entirety.
    \4\ See Securities Exchange Act Release No. 54800 (November 21, 
2006), 71 FR 68864.
    \5\ See letter from Claire P. McGrath, Senior Vice President and 
General Counsel, American Stock Exchange LLC (``Amex''), to Nancy M. 
Morris, Secretary, Commission, dated December 8, 2006.
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II. Description of the Proposal

    Under Section 703.19 of the Listed Company Manual (``Manual''), the 
Exchange may, subject to Commission approval of a submission pursuant 
to Section 19(b) of the Act, approve for listing and trading securities 
not otherwise covered by the criteria of Sections 1 and 7 of the 
Manual, provided the issue is suited for auction market trading. 
Accordingly, the Exchange proposes to list and trade, under Section 
703.19 of the Manual, the Notes, which are linked to the performance of 
the Index.\6\
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    \6\ Barclays intends to issue the Notes under the name 
``iPathSM Exchange-Traded Notes.''
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    In its proposal, the Exchange described the structure and features 
of the Notes, including early redemption and default provisions, as 
well as the underlying index, applicable trading rules and surveillance 
procedures. Key aspects of the proposal are noted below.

The Notes

    The Notes are a series of debt securities of Barclays that provide 
for a cash payment at maturity or upon earlier redemption at the 
holder's option based on the performance of the Index, subject to 
applicable fees and expenses. The original issue price of each Note 
will be $50. The Notes will trade on the Exchange's equity trading 
floor, and the Exchange's existing equity trading rules will apply to 
trading in the Notes. Holders of the Notes will not receive any 
interest payments from the Notes, and the Notes will not have a minimum 
principal amount that will be repaid. Accordingly, payment on the Notes 
prior to or at maturity may be less than the original issue price of 
the Notes. The

[[Page 77433]]

Notes will have a term of 30 years. The Notes are not callable.
    Holders of the Notes at maturity will receive a payment equal to 
the initial issue price of their Notes times an index factor minus an 
investor fee (``Cash Payment''). The ``index factor'' on any given day 
will be equal to the closing value of the Index on that day divided by 
the initial index level. The investor fee will be equal to 0.89 percent 
per year times the principal amount of holders' Notes times the index 
factor, calculated on a daily basis. Thus, each day until maturity or 
early redemption, the investor fee will increase by an amount equal to 
0.89 percent times the principal amount of holders' Notes times the 
index factor on that day (or, if such day is not a trading day, the 
index factor on the immediately preceding trading day) divided by 365. 
Subject to certain restrictions,\7\ the Notes may be redeemed prior to 
maturity. Unless otherwise permitted by Barclays,\8\ Notes may only be 
redeemed in aggregations of 50,000. Upon redemption, a Note holder will 
receive the applicable Cash Payment less a redemption charge. The 
investor fee and the redemption charge are the only fees holders will 
be charged in connection with their ownership of the Notes.
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    \7\ Generally, the Notes may only be redeemed once each week on 
a ``Redemption Date,'' which is the third business day following a 
weekly ``Valuation Date.'' Unless there is a market disruption 
event, a Valuation Date is each Thursday from the first Thursday 
after issuance of the Notes until the last Thursday before maturity 
of the Notes. See Notice, 71 FR at 68864-65.
    \8\ The Exchange states that any such reduction will be applied 
on a consistent basis for all holders of Notes at the time the 
reduction becomes effective.
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The MSCI India Total Return Index \SM\

    The Exchange provided detailed description of the Index in its 
proposal.\9\ In summary, the Index is a free float-adjusted market 
capitalization index that is designed to measure the market 
performance, including price performance and income from dividend 
payments, of Indian equity securities. The Index is currently comprised 
of the top 68 companies by market capitalization listed on the National 
Stock Exchange of India (``NSE''). The Index is calculated by Morgan 
Stanley Capital International Inc. (``MSCI'') and is denominated in 
U.S. dollars.\10\
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    \9\ See Notice, 71 FR at 68866-68.
    \10\ As the Commission has previously stated, when a broker-
dealer, or a broker-dealer's affiliate such as MSCI, is involved in 
the development and maintenance of a stock index upon which a 
product such as iShares is based, the broker-dealer or its affiliate 
should have procedures designed specifically to address the improper 
sharing of information. See Securities Exchange Act Release No. 
52178 (July 29, 2005), 70 FR 46244 (August 8, 2005) (SR-NYSE-2005-
41). In this proposal, the Exchange states that MSCI has implemented 
procedures to prevent the misuse of material, non-public information 
regarding changes to component stocks in the MSCI Indexes.
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    The Index is calculated and updated continuously until the market 
closes and is published as end of day values in U.S. dollars using the 
exchange rate published by WM Reuters at 4 p.m. on the previous day. 
The Index is reported by Bloomberg, L.P. under the ticker symbol 
``NDEUSIA.'' The Index is static during the Exchange trading day.
    Generally, the prices used to calculate the MSCI Indexes are the 
official exchange closing prices or those figures accepted as such. 
MSCI uses the foreign exchange rates published by WM Reuters at 4 p.m. 
London time.\11\
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    \11\ MSCI monitors exchange rates independently and may, under 
exceptional circumstances, elect to use an alternative exchange rate 
if the WM Reuters rate is believed not to be representative for a 
given currency on a particular day.
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Pricing Information Regarding the Notes

    An intraday value (``Indicative Value'') meant to approximate the 
intrinsic economic value of the Notes, updated to reflect changes in 
currency exchange rates, will be calculated and published by a third-
party service provider via the facilities of the Consolidated Tape 
Association at least every fifteen seconds throughout the NYSE trading 
day on each day on which the Notes are traded on the Exchange. The 
Indicative Value will not reflect changes in the prices of securities 
included in the Index resulting from trading on other markets after the 
close of trading on the NSE, but will be updated to reflect changes in 
the exchange rate between the U.S. dollar and the Indian rupee. 
Additionally, Barclays or an affiliate will calculate and publish the 
closing Indicative Value of the Notes on each trading day at http://www.ipathetn.com.
 The last sale price of the Notes will also be 

disseminated over the Consolidated Tape, subject to a 20-minute delay.

Listing Criteria

    In its proposal, the Exchange stated that the Notes will conform to 
the initial listing standards for equity securities under Section 
703.19 of the Manual insofar as (i) Barclays is an affiliate of 
Barclays PLC,\12\ which is an Exchange-listed company in good standing, 
(ii) the Notes will have a minimum life of one year, (iii) the minimum 
public market value of the Notes at the time of issuance will exceed $4 
million, (iv) there will be at least one million Notes outstanding, and 
(v) there will be at least 400 holders at the time of issuance.
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    \12\ Though not an Exchange-listed company itself, Barclays 
would exceed the Exchange's earnings and minimum tangible net worth 
requirements in Section 102 of the Manual. Additionally, Barclays 
has informed the Exchange that the original issue price of the 
Notes, when combined with the original issue price of all other 
iPath securities offerings of the issuer that are listed on a 
national securities exchange (or association), does not exceed 25 
percent of the issuer's net worth.
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    As detailed in its proposal, the Exchange will delist the Notes 
under the following circumstances:
     If, following the initial twelve month period from the 
date of commencement of trading of the Notes, (a) the Notes have more 
than 60 days remaining until maturity and there are fewer than 50 
beneficial holders of the Notes for 30 or more consecutive trading 
days, (b) fewer than 100,000 Notes remain issued and outstanding, or 
(c) the market value of all outstanding Notes is less than $1,000,000.
     If the Index closing value ceases to be calculated or 
available during the time the Notes trade on the Exchange on at least a 
15 second basis through one or more major market data vendors.\13\
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    \13\ Telephone conference between John Carey, Assistant General 
Counsel, NYSE, and Brian Trackman, Special Counsel, Division of 
Market Regulation, Commission, on December 15, 2006 (``Telephone 
Conference'') (clarifying scope of delisting condition).
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     If, during the time the Notes trade on the Exchange, the 
Indicative Value ceases to be available through the facilities of the 
Consolidated Tape Association or a major market data vendor on a 15 
second delayed basis.\14\
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    \14\ Telephone Conference (clarifying how dissemination must 
occur).
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     If such other event shall occur or condition exists which 
in the opinion of the Exchange makes further dealings on the Exchange 
inadvisable.
    In addition, the Exchange will file a proposed rule change pursuant 
to Rule 19b-4 under the Act, seeking approval to continue trading the 
Notes and unless approved, the Exchange will commence delisting the 
Notes, if
     A successor or substitute index is used in connection with 
the Notes. The filing will address, among other things, the listing and 
trading characteristics of the successor or substitute index and the 
Exchange's surveillance procedures applicable thereto.
     At any time the most heavily weighted component stock in 
the Index exceeds 25 percent of the weight of the Index or the five 
most heavily weighted component stocks exceed 60 percent of the weight 
of the Index.
     MSCI substantially changes the index methodology.
    The Exchange prohibits the initial and/or continued listing of any 
security

[[Page 77434]]

that is not in compliance with Rule 10A-3 under the Act.\15\
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    \15\ 17 CFR 240.10A-3.
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Trading Rules

    The Exchange's existing equity trading rules will apply to trading 
of the Notes. The Notes will trade between the hours of 9:30 a.m. and 4 
p.m. ET and will be subject to the equity margin rules of the 
Exchange.\16\
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    \16\ See NYSE Rule 431.
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Trading Halts

    With regard to trading of the Notes, the Exchange represents that, 
if the Index Value or the Indicative Value is not being disseminated as 
required, the Exchange may halt trading during the day on which the 
interruption to the dissemination of the Index Value or the Indicative 
Value first occurs. If the interruption to the dissemination of the 
Index Value or the Indicative Value persists past the trading day in 
which it occurred, the Exchange will halt trading no later than the 
beginning of the trading day following the interruption.

Suitability

    Pursuant to Exchange Rule 405, the Exchange will impose a duty of 
due diligence on its members and member firms to learn the essential 
facts relating to every customer prior to trading the Notes.\17\ With 
respect to suitability recommendations and risks, the Exchange will 
require members, member organizations and employees thereof 
recommending a transaction in the Notes: (i) To determine that such 
transaction is suitable for the customer, and (ii) to have a reasonable 
basis for believing that the customer can evaluate the special 
characteristics of, and is able to bear the financial risks of, such 
transaction.
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    \17\ NYSE Rule 405 requires that every member, member firm or 
member corporation use due diligence to learn the essential facts 
relative to every customer and to every order or account accepted.
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Information Memorandum

    The Exchange will, prior to trading the Notes, distribute an 
information memorandum to the membership providing guidance with regard 
to member firm compliance responsibilities (including suitability 
recommendations) when handling transactions in the Notes. The 
information memorandum will note to members language in the prospectus 
used by Barclays in connection with the sale of the Notes regarding 
prospectus delivery requirements for the Notes. Specifically, in the 
initial distribution of the Notes,\18\ and during any subsequent 
distribution of the Notes, NYSE member organizations will deliver a 
prospectus to investors purchasing from such distributors.
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    \18\ The Registration Statement reserves the right to make 
subsequent distributions of these Notes.
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    The information memorandum will discuss the special characteristics 
and risks of trading this type of security. Specifically, the 
information memorandum, among other things, will discuss what the Notes 
are, how the Notes are redeemed, applicable Exchange rules, 
dissemination of information regarding the Index value and the 
Indicative Value, exchange rate, trading information, and applicable 
suitability rules. The information memorandum will also notify members 
and member organizations about the procedures for redemptions of Notes 
and that Notes are not individually redeemable but are redeemable only 
in aggregations of at least 100,000 Notes.
    The information memorandum will also discuss any exemptive or no-
action relief under the Act provided by the Commission staff.

Surveillance

    The Exchange's surveillance procedures will incorporate and rely 
upon existing Exchange surveillance procedures governing equities with 
respect to surveillance of the Notes.\19\ The Exchange believes that 
these procedures are adequate to monitor Exchange trading of the Notes 
and to detect violations of Exchange rules, thereby deterring 
manipulation. In this regard, the Exchange currently has the authority 
under NYSE Rule 476 to request the Exchange specialist in the Notes to 
provide NYSE Regulation with information that the specialist uses in 
connection with pricing the Notes on the Exchange, including specialist 
proprietary or other information regarding securities, options on 
securities or other derivative instruments. The Exchange believes it 
also has authority to request any other information from its members--
including floor brokers, specialists and ``upstairs'' firms--to fulfill 
its regulatory obligations.
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    \19\ The Exchange's current trading surveillances focus on 
detecting securities trading outside normal patterns. When such 
situations are detected, surveillance analysis follows and 
investigations are opened, where appropriate, to review the behavior 
of all relevant parties for all relevant trading violations.
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III. Summary of Comment

    In its comment letter,\20\ Amex noted that the NYSE intended to 
list and trade the Notes without entering into a comprehensive 
surveillance sharing agreement (``CSSA'') with the NSE or other Indian 
marketplaces. The Amex stated its belief that approval of the proposal 
would be a ``significant departure'' from existing practice and rules 
to permit derivative products like the Notes to be listed and traded 
without a CSSA. Specifically, the Amex noted that the Commission has 
generally required CSSAs between U.S. exchanges and foreign markets for 
index-linked notes and other derivative securities products. In 
addition, the Amex cited Section 107D(g)(viii) of the Amex Company 
Guide relating to index-linked securities and similar rules of other 
exchanges,\21\ which require that foreign country securities or 
American Depository Receipts (``ADRs'') that are not subject to CSSAs 
do not in the aggregate represent more than 20 percent of the weight of 
the index. The Amex further noted that other rules addressing listing 
standards for derivative products, including index options and options 
on exchange-traded funds, generally require CSSAs but are not 
consistent with regard to what percentage of underlying foreign 
securities must be subject to such agreements. Noting that more 
recently, the Commission has approved listing standards for exchange-
traded funds based on global and/or international securities indexes 
and other derivative products without requiring CSSAs, the Amex urges 
the Commission to clarify that CSSAs are not required for index-linked 
notes and index options. To the extent CSSA standards are inconsistent 
among different derivative product classes, the Amex also requests 
guidance on the proper regulatory standard.
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    \20\ See supra note 5.
    \21\ See NYSEArca Rule 5.2(j)(6)(g)(vii) and Nasdaq Rule 
4420(m)(7)(ix).
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    While the Commission appreciates these comments, we believe that 
they are outside the scope of the present rule filing, which addresses 
only a single derivative product. Rather, the Commission believes that 
the Amex's comments--particularly in regard to any perceived anomalies 
between existing exchange rules establishing derivative product listing 
standards--are best addressed in the context of a separate rule 
proposal.

IV. Discussion and Commission's Findings

    The Commission finds that the proposed rule change, as amended, is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange. In 
particular, the

[[Page 77435]]

Commission finds that the proposal, as amended, is consistent with the 
objectives of Section 6(b)(5) of the Act,\22\ which requires, among 
other things, that the Exchange's rules be designed to promote just and 
equitable principles of trade, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system and, 
in general, to protect investors and the public interest.
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    \22\ 15 U.S.C. 78f(b)(5).
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A. Surveillance

    The Commission finds that the Exchange's surveillance procedures 
are reasonably designed to monitor for trading abuses in connection 
with the Notes.
    NYSE Rule 476 requires Exchange specialists in the Notes, upon the 
Exchange's request, to provide NYSE Regulation with information that 
the specialist uses in connection with pricing the Notes on the 
Exchange, including specialist proprietary or other information 
regarding securities, options on securities or other derivative 
instruments. Furthermore, the Exchange believes it also has authority 
to request any other information from its members--including floor 
brokers, specialists and ``upstairs'' firms--to fulfill its regulatory 
obligations. The Commission also notes that the Exchange represents 
that it will delist the Notes if a new component is added to the Index 
(or pricing information is used for a new or existing component), 
unless otherwise approved for continued trading by the Commission. The 
Commission believes that these requirements provide the NYSE with the 
tools necessary to adequately surveil trading in the Notes.

B. Dissemination of Information

    The Commission believes that sufficient venues exist for obtaining 
reliable information so that holders of the Notes can monitor the value 
of their investment relative to the underlying Index.
    Information about the Index (and its components) is widely 
available through public Web sites and professional subscription 
services, including Reuters and Bloomberg. Likewise, real-time 
information about the trading of the Index components and their daily 
closing values is available through major market data vendors. The 
Index Sponsor calculates the Index continuously. The Exchange has 
represented that the daily closing value will be disseminated during 
the time the Notes trade on the Exchange. Further, while the Index is 
calculated by a broker-dealer, a number of independent sources verify 
both the intraday and closing Index values. The composition and 
calculation methodology for the Index is public and transparent.
    An Indicative Value for the Notes will be calculated and 
disseminated at least every 15 seconds throughout the NYSE trading day 
on each day on which the Notes are traded on the Exchange. In addition, 
Barclays or an affiliate will calculate and publish the closing 
Indicative Value of the Notes on each trading day at http://www.ipathetn.com
.

    If the closing level of Index or Indicative Value is not 
disseminated as described in its proposal, the Exchange may halt 
trading on which the interruption to the dissemination of the Index 
Value or the Indicative Value first occurs. If the interruption to the 
dissemination of the Index Value or the Indicative Value persists past 
the trading day in which it occurred, the Exchange will halt trading no 
later than the beginning of the trading day following the interruption.

C. Listing and Trading

    The Commission finds that the Exchange's proposed rules and 
procedures for the listing and trading of the proposed Notes are 
consistent with the Act. The Notes will trade as equity securities 
subject to NYSE rules including, among others, rules governing equity 
margins, specialist responsibilities, account opening, and customer 
suitability requirements.
    The Commission believes that the listing and delisting criteria for 
the Notes should help to maintain a minimum level of liquidity and 
therefore minimize the potential for manipulation of the Notes. The 
Exchange represents that it would file a proposed rule change pursuant 
to Rule 19b-4 under the Act,\23\ which must be approved for continued 
trading of the Notes, if (a) a successor or substitute index is used in 
connection with the Notes, (b) at any time, the most heavily weighted 
component stock in the Index exceeds 25 percent of the weight of the 
Index or the top five most heavily weighted stocks exceed 60 percent of 
the weight of the Index, or (c) the Index Sponsor (MSCI) substantially 
changes the index methodology.
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    \23\ 17 CFR 240.19b-4.
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    Finally, the Commission notes that the Information Memorandum that 
the Exchange will distribute will inform members and member 
organizations about the terms, characteristics and risks in trading the 
Notes, including their prospectus delivery obligations.

D. Accelerated Approval

    The Commission finds good cause to approve the proposed rule 
change, as amended, prior to the thirtieth day after publication for 
comment in the Federal Register. Accelerating approval of this proposal 
should benefit investors who desire to participate, through the Notes, 
in the designated Index by enabling them to begin trading the Notes 
promptly. Therefore, the Commission finds good cause, consistent with 
Section 19(b)(2) of the Act,\24\ to approve the proposed rule change on 
an accelerated basis.
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    \24\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\25\ that the proposed rule change (SR-NYSE-2006-69), be, and hereby 
is, approved on an accelerated basis.
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    \25\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\26\
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    \26\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
 [FR Doc. E6-22005 Filed 12-22-06; 8:45 am]

BILLING CODE 8011-01-P