

[Federal Register: March 26, 2007 (Volume 72, Number 57)]
[Notices]               
[Page 14145-14149]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26mr07-97]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55491; File No. SR-CBOE-2006-95]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Order Granting Accelerated Approval 
of Proposed Rule Change as Modified by Amendment Nos. 1 and 2 Thereto 
To List for Trading Options on the Vanguard[supreg] Emerging Markets 
Exchange Traded Fund

March 19, 2006.
    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 November 30, 2006, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule

[[Page 14146]]

change as described in Items I and II below, which Items have been 
substantially prepared by the Exchange. The Exchange submitted 
Amendment No. 1 to the proposed rule change on December 6, 2006. The 
Exchange submitted Amendment No. 2 to the proposed rule change on 
February 28, 2007. The Commission is publishing this notice and order 
to solicit comments on the proposal, as amended, from interested 
persons and to approve the proposed rule change, as modified by 
Amendment Nos. 1 and 2, on an accelerated basis.
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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 list and trade options on the 
Vanguard[supreg] Emerging Markets Exchange Traded Fund (``Fund 
Options''). The text of the proposed rule change is available on the 
Exchange's Web site (http://www.cboe.org/legal), at the Office of the 

Secretary, CBOE 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 Exchange included statements 
concerning the purpose of, and basis for, the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item III 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of this rule change is to obtain approval to list for 
trading on the Exchange options on the Vanguard[supreg] Emerging 
Markets Exchange Traded Fund (``Fund'') on a pilot basis for six months 
to commence on the date of approval and through six months after that 
date. The Exchange currently has in place initial listing and 
maintenance standards set forth in CBOE Rules 5.3.06 and 5.4.08, 
respectively (``Listing Standards'') that are designed to allow the 
Exchange to list funds structured as open-end investment companies, 
such as the Fund, without having to file for Commission approval to 
list for trading options on the fund.\3\ The request for approval is 
based on the Exchange's determination that the Fund meets substantially 
all of the Listing Standards requirements, and for the requirements 
that are not met, sufficient mechanisms exist that would provide the 
Exchange with adequate surveillance and regulatory information with 
respect to the Fund.
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    \3\ CBOE Rules 5.3.06 and 5.4.08 set forth the initial listing 
and maintenance standards for registered investment companies (or 
series thereof) organized as open-end management investment 
companies, unit investment trust or other similar entities traded on 
a national securities exchange or through the facilities of a 
national securities exchange (``Exchange Traded Funds''). See 
Exchange Act Release, No. 34-40166 (July 2, 1998), 63 FR 37430 (July 
10, 1998) (approval order for SR-CBOE-97-45, predating U.S. 
Securities and Exchange Commission's (``Commission'') adoption of 
Rule 19b-4(e) of the Securities Exchange Act of 1934 (``New Product 
Release''). See Exchange Act Release No. 34-40761 (Dec. 8, 1998), 63 
FR 70952 (Dec. 22, 1998)).
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    As provided in the Fund's most recent prospectus, dated November 
10, 2006, the Fund is an open-end investment company that is designed 
to hold a portfolio of securities that tracks the Morgan Stanley 
Capital International, Inc. Emerging Markets Index (``MSCI Emerging 
Markets Index'' or ``Index''), which includes approximately 850 common 
stocks of companies located in 25 emerging markets around the world.\4\ 
The Fund employs a ``passive management''--or indexing--investment 
approach by investing substantially all (normally about 95%) of its 
assets in the common stocks that comprise the MSCI Emerging Markets 
Index while employing a form of sampling to reduce risk.
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    \4\ As provided by Morgan Stanley Capital International, Inc. 
(``MSCI''), which is the entity that created and currently maintains 
the Index, the Index is a capitalization-weighted index whose 
component securities are adjusted for available float and must meet 
objective criteria for inclusion in the Index. The Index aims to 
capture 85% of the publicly available total market capitalization in 
each emerging market included in the Index. As of September 29, 
2006, the Index was comprised of 852 constituents with the top five 
constituents representing the following weights: 5.01%, 4.09%, 
1.82%, 1.79%, and 1.76%. The Index is rebalanced quarterly, 
calculated in U.S. Dollars on a real time basis, and disseminated 
every 60 seconds during market trading hours.
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    As of January 31, 2007, the Fund was comprised of 862 securities 
and the ten largest holdings in the fund made up 18.5% of the total 
assets in the Fund.\5\ The security with the greatest individual weight 
of 5.4% is OAO Gazprom ADRSamsung Electronics Co LTD GDR Registered, a 
South KoreanRussian security. The security with the smallest weight is 
Thanachart Capital Public Company Ltd., Metropolitan Bank & Trust Coa 
Thai security, at less than 0.01%. As of January 31, 2007, the largest 
markets covered in the Fund were South Korea (14.9%), Taiwan (12.3%), 
Russia (9.9%), Brazil (10.7%) and South Africa (8.5%).
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    \5\ The ten largest holdings are: (1) OAO Gazprom ADR, (2) 
Samsung Electronics Co., Ltd., (3) China Mobile (Hong Kong), Ltd., 
(4) America Movil SA de CV, (5) Lukoil Sponsored ADR; (6) Taiwan 
Semiconductor Manufacturing Co., Ltd., (7) Petroleo Brasileiro SA 
Pfd (8) Hon Hai Precision Industry Co., Ltd., (9) Cemex SA CPO, and 
(10) Petroleo Brasileiro SA. See https://flagship.vanguard.com/VGApp/hnw/FundsSnapshot?FundId=0964&FundIntExt=INT
.

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    The Exchange believes that Vanguard's stated investment policies 
prevent the Fund from being excessively weighted in any single security 
or small group of securities and significantly reduces concerns that 
trading in the Fund could become a surrogate for trading in 
unregistered securities.
    Shares of the Fund (``Fund Shares'') are issued in exchange for an 
``in kind'' deposit of a specified portfolio of securities, together 
with a cash payment, in minimum size aggregation of 100,000 shares 
(each, a ``Creation Unit''), as set forth in the Fund's prospectus.\6\ 
The Fund issues and sells Fund Shares in Creation Unit sizes through a 
principal underwriter on a continuous basis at the net asset value per 
share next determined after an order to purchase Fund Shares and the 
appropriate securities are received. Following issuance, Fund Shares 
are traded on an exchange like other equity securities, and equity-
trading rules apply. Likewise, redemption of Fund Shares is made in 
Creation Unit size and ``in kind,'' with a portfolio of securities and 
cash exchanged for Fund Shares that have been tendered for redemption.
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    \6\ See Exchange Act Release No. 34-44990, n. 16 (Oct. 25, 
2001), 66 FR 56869 (Nov. 13, 2001) (approval order for SR-Amex-2001-
45, noting that local restrictions on transfers of securities to and 
between certain kinds of investors exist in certain foreign markets 
that preclude in-kind creation and redemptions of Exchange-Traded 
Funds).
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    The Exchange notes that the maintenance Listing Standards set forth 
in Rule 5.4.08 for open-end investment companies do not include 
criteria based on either the number of shares or other units 
outstanding or on their trading volume. As explained in SR-CBOE-97-
03,\7\ the absence of such criteria is justified on the ground that 
since it should always be possible to create additional shares or other 
interests in open-end investment companies at their net asset value by 
making an in-kind deposit of the securities that comprise the 
underlying index or portfolio, there is no limit on the available 
supply of such shares or interests. This, in turn, should make it 
highly unlikely that the market for listed, open-end investment company 
shares could be capable of

[[Page 14147]]

manipulation, since whenever the market price for such shares departs 
from net asset value, arbitrage will occur. Similarly, since the Fund 
meets all of the requirements of the Listing Standards, except as 
described below, the Exchange believes that the same analysis applies 
to the Fund.
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    \7\ See Securities Exchange Act Release No. 40166 (July 2, 
1998), 63 FR 37430 (July 10, 1998).
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    The Exchange has reviewed the Fund and determined that it satisfies 
the Listing Standards, except for the requirement set forth in CBOE 
Rule 5.3.06(A), which requires the Fund to meet the following 
condition: ``any non-U.S. component securities of the index or 
portfolio on which the Units are based that are not subject to 
comprehensive surveillance agreements do not in the aggregate represent 
more than 50% of the weight of the index or portfolio.'' The Exchange 
currently has in place comprehensive surveillance sharing agreements 
(``CSSA'') with foreign exchanges that cover 48.10% of the securities 
in the Fund. One of the foreign exchanges on which component securities 
of the Fund are traded and with which the Exchange does not have a CSSA 
is the Bolsa Mexicana de Valores (``Bolsa''). The percentage of the 
weight of the Fund represented by these securities is 6.60%.
    The Exchange notes that the Commission recently approved the 
listing and trading of options on the iShares MSCI Emerging Markets 
Index Fund on a on a pilot basis \8\ and permitted the Exchange to rely 
on the memorandum of understanding executed by the Commission and the 
CNBV, dated as of October 18, 1990 (``MOU'') for purposes of satisfying 
its surveillance and regulatory responsibilities for the component 
securities in the Fund that trade on the Bolsa until the Exchange is 
able to secure a surveillance agreement with the Bolsa.\9\
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    \8\ See Exchange Act Release No. 34-53621 (April 10, 2006), 71 
FR 79568 (April 14, 2006) (approving 60 day pilot listing and 
trading, until June 9, 2006); see also Exchange Act Release No. 34-
53960 (June 1, 2006), 71 FR 33322 (June 8, 2006) (continuation of 
pilot program for additional 90 days, until September 7, 2006); see 
also Exchange Act Release No. 34-54347 (Aug. 22, 2006), 71 FR 51242 
(Aug. 29, 2006) (continuation of pilot program for additional 90 
days, until December 7, 2006); see also Exchange Act Release No. 34-
54876 (Dec. 5, 2006), 71 FR 74968 (Dec. 13, 2006) (continuation of 
pilot program for additional six months, until June 7, 2007).
    \9\ The CNBV is the successor to the Comision Nacional y de 
Valores of Mexico, which was merged with the Mexican Banking 
Commission in April 1995 to form the CNBV. See Exchange Act Release 
No. 36415, at n.23 (Oct. 25, 1995), 60 FR 55620 (Nov. 1, 1995) 
(approval order for SR-CBOE-95-045). The Bolsa falls within the 
regulatory oversight of CNBV.
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    Specifically, in connection with the listing and trading of options 
on the iShares MSCI Emerging Markets Index Fund, the Exchange contacted 
the Bolsa with a request to enter into a CSSA. In response, the Bolsa 
expressed a willingness to enter into a surveillance sharing agreement 
but indicated that it was unable to provide certain information that is 
required as part of a CSSA. As a result of being unable to secure a 
CSSA with the Bolsa, the Exchange requested permission to rely for a 
pilot period on the MOU and the Exchange agreed to use its best efforts 
that during this period to obtain a CSSA with the Bolsa, which would 
reflect the following: (1) Express language addressing market trading 
activity, clearing activity, and customer identify; (2) the Bolsa's 
reasonable ability to obtain access to and produce requested 
information; and (3) based on the CSSA and other information provided 
by the Bolsa, the absence of existing rules, law or practices that 
would impede the Exchange from obtaining foreign information relating 
to market activity, clearing activity, or customer identity, or in the 
event such rules, laws, or practices exist, they would not materially 
impede the production of customer or other information.
    On other occasions, the Commission has been willing to allow an 
exchange to rely on a memorandum of understanding entered into between 
regulators in the event that the exchanges themselves cannot enter into 
a CSSA. For example, the Exchange previously attempted to enter into a 
CSSA with the Bolsa around the time the Exchange sought approval to 
list for trading options on the CBOE Mexico 30 Index in 1995, which was 
comprised of stocks trading on the Bolsa.\10\ Since the Bolsa was 
unable to provide a CSSA, the Commission allowed the Exchange to rely 
on the MOU between the SEC and CNBV.
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    \10\ See Exchange Act Release No. 36415 (Oct. 25, 1995), 60 FR 
55620 (Nov. 1, 1995) (approval order for SR-CBOE-95-045).
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    The Commission noted in the Approval Order regarding the CBOE 
Mexico 30 Index that, in cases where it would be impossible to secure a 
CSSA, the Commission has relied in the past on surveillance sharing 
agreements between the relevant regulators. The Commission further 
noted in the Approval Order that, pursuant to the terms of the MOU, it 
was the Commission's understanding that both the Commission and the 
CNBV could acquire information from and provide information to the 
other, similar to that which would be required in a CSSA between 
exchanges. Therefore, should CBOE need information on Mexican trading 
in the component securities of the CBOE Mexico 30 Index, the Commission 
could request such information from the CNBV under the MOU.
    The practice of relying on surveillance agreements between 
regulators when a foreign exchange was unable or unwilling to provide a 
CSSA was affirmed by the Commission in the Commission's New Product 
Release.\11\ In the New Product Release, the Commission noted that if 
securing an information sharing agreement is not possible, an exchange 
should contact the Commission prior to listing a new derivative 
securities product. The Commission also noted that the Commission might 
determine instead that it is appropriate to rely on a memorandum of 
understanding between the Commission and the foreign regulator.
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    \11\ See n. 4, supra.
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    Given the Exchange's current inability to enter into a CSSA with 
the Bolsa, the Exchange requests permission to rely on a pilot basis on 
the MOU entered into between the Commission and the CNBV for purposes 
of satisfying its surveillance and regulatory responsibilities for the 
component securities in the Fund that trade on the Bolsa until the 
Exchange is able to secure a CSSA with the Bolsa. The Exchange believes 
this request is reasonable because the Commission has already 
acknowledged that the MOU permits both the Commission and the CNBV to 
acquire information from and provide information to the other, which is 
similar to that which would be required in a surveillance sharing 
agreement between exchanges.
    Additionally, if the Commission approves the listing of the Fund on 
a pilot basis, during this period, the Exchange represents that it will 
continue its efforts to obtain a CSSA with the Bolsa. The Exchange also 
represents that it will regularly update the Commission on the status 
of its discussions with the Bolsa. The Commission's approval of this 
request would otherwise render the Fund compliant with all of the 
Listing Standards.\12\
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    \12\ The Exchange notes that the component securities of the 
Fund change periodically. Therefore, the Exchange may in fact have 
in place CSSAs that would otherwise cover the percent weighting 
requirements set forth in the Listing Standards for securities not 
trading on the Bolsa. In this event, the Fund would satisfy all of 
the Listing Standards and reliance on an approval order for the Fund 
would be unnecessary.

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[[Page 14148]]

2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act \13\ and the rules and regulations under the Act applicable to 
a national securities exchange and, in particular, the requirements of 
Section 6(b) of the Act.\14\ Specifically, the Exchange believes the 
proposed rule change is consistent with the Section 6(b)(5) \15\ 
requirements that the rules of an exchange be designed to promote just 
and equitable principles of trade, to prevent fraudulent and 
manipulative acts and, in general, to protect investors and the public 
interest.
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    \13\ 15 U.S.C. 78a et seq.
    \14\ 15 U.S.C. 78(f)(b).
    \15\ 15 U.S.C. 78(f)(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. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, 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-CBOE-2006-95 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-CBOE-2006-95. 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 such 
filing also will be available for inspection and copying at the 
principal offices 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-CBOE-2006-95 and should be submitted on or before April 
16, 2007.

IV. Commission's Findings and Order Granting Accelerated Approval of 
the Proposed Rule Change

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\16\ In 
particular, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(5) of the Act,\17\ which requires that an 
exchange have rules designed, among other things, 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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    \16\ In approving this rule change, the Commission notes that it 
has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \17\ 15 U.S.C. 78f(b)(5).
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    The listing of the Fund Options does not satisfy CBOE Rule 
5.3.06(A), which requires that: ``any non-U.S. component securities of 
the index or portfolio on which the Units are based that are not 
subject to comprehensive surveillance agreements do not in the 
aggregate represent more than 50% of the weight of the index or 
portfolio.'' Although the Commission has been willing to allow an 
exchange to rely on a memorandum of understanding entered into between 
regulators where the listing SRO finds it impossible to enter into an 
information sharing agreement, it is not clear that that CBOE has 
exhausted all avenues of discussion with foreign markets, including 
Bolsa, in order to obtain such an agreement. Indeed, with regard to 
Bolsa, conditions may have changed in the time period since CBOE last 
raised the issue with Bolsa in 1995 such that Bolsa now would be able 
to entering a comprehensive surveillance agreement with CBOE.
    Consequently, the Commission has determined to approve CBOE's 
listing and trading of Fund Options for a six-month pilot period during 
which time CBOE may rely on the MOU with respect to Fund components 
trading on Bolsa. During this period, the Exchange has agreed to use 
its best efforts to obtain a comprehensive surveillance agreement with 
Bolsa, which shall reflect the following: (1) Express language 
addressing market trading activity, clearing activity, and customer 
identify; (2) the Bolsa's reasonable ability to obtain access to and 
produce requested information; and (3) based on the CSSA and other 
information provided by the Bolsa, the absence of existing rules, law 
or practices that would impede the Exchange from obtaining foreign 
information relating to market activity, clearing activity, or customer 
identity, or in the event such rules, laws, or practices exist, they 
would not materially impede the production of customer or other 
information.
    The Exchange also represents that it will regularly update the 
Commission on the status of its negotiations with Bolsa. In approving 
the proposed rule change, the Commission notes that CBOE currently has 
in place surveillance agreements with foreign exchanges that cover 
48.10% of the securities in the Fund and that the Index upon which the 
Fund is based appears to be a broad-based index.
    The Exchange has requested accelerated approval of the proposed 
rule change. The Commission finds good cause, consistent with Section 
19(b)(2) of the Act,\18\ for approving this proposed rule change before 
the thirtieth day after the publication of notice thereof in the 
Federal Register. The Exchange has agreed to use its best efforts to 
obtain a comprehensive surveillance agreement with the Bolsa during a 
six-month pilot period in which the Exchange will rely on the MOU.
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    \18\ 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,\19\ that the

[[Page 14149]]

proposed rule change (SR-CBOE-2006-95), as modified by Amendment Nos. 1 
and 2, be, and it hereby is approved on an accelerated basis for a six-
month pilot period ending on September 19, 2007.
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    \19\ Id.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-5423 Filed 3-23-07; 8:45 am]

BILLING CODE 8010-01-P
