

[Federal Register: April 26, 2007 (Volume 72, Number 80)]
[Notices]               
[Page 20902-20905]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26ap07-99]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55648; File No. SR-Amex-2007-09]

 
Self-Regulatory Organizations; American Stock Exchange LLC; 
Notice of Filing and Order Granting Accelerated Approval of Proposed 
Rule Change as Modified by Amendment No. 1 Thereto Relating to the 
Listing and Trading of Options on Vanguard Emerging Markets ETF

April 19, 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 January 19, 2007, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule 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 
March 23, 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 No. 
1, 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 (``Fund Options'') 
on the Vanguard Emerging Markets ETF. The text of the proposed rule 
change is available on the Amex's Web site at http://www.amex.com, the 

Office of the Secretary, the Amex 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 Emerging Markets ETF 
(the ``Fund'') (symbol: VWO) on a pilot basis for six (6) months to 
commence on the date of approval. Commentary .06 to Amex Rule 915 and 
Commentary .07 to Amex Rule 916, respectively (the ``Listing 
Standards'') establish the Exchange's initial listing and maintenance 
standards. The Listing Standards permit the Exchange to list funds 
structured as open-end investment companies (such as the Fund), unit 
investment trust (``UITs'') or other similar entities, without having 
to file for approval with the Commission to list for trading options on 
such funds.\3\ The Exchange submits that the Fund meets substantially 
all of the Listing Standard 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\ Commentary .06 to Amex Rule 915 sets forth the initial 
listing and maintenance standards for shares or other securities 
(``Exchange-Traded Fund Shares'') that are principally traded on a 
national securities exchange or through the facilities of a national 
securities exchange and reported as a national market security, and 
that represent an interest in a registered investment company 
organized as an open-end management investment company, a unit 
investment trust or other similar entity.
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    The Fund is an open-end investment company designed to hold a 
portfolio of securities which tracks the performance of the MSCI 
Emerging Markets Index (the ``Index'' or ``Select Index'').\4\ The Fund 
employs a ``representative sampling'' methodology to track the Index, 
which means that the Fund invests in a representative sample of 
securities in the Index that have a similar investment profile as the 
Index.\5\ Securities selected by the Fund have aggregate investment 
characteristics (based on market capitalization and industry 
weightings), fundamental characteristics (such as return variability, 
earnings valuation and yield) and liquidity measures similar to those 
of the Index.
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    \4\ The Emerging Markets Index includes approximately 848 equity 
components of companies located in emerging markets around the 
world. As of February 28, 2007, the largest markets covered in the 
Index were South Korea, Taiwan, Brazil, China and Russia (which made 
up 15.7%, 12.4%, 10.5%, 10.5% and 10.0%, respectively, of the 
Index's market capitalization). MSCI (http://www.msci.com) calculates and 

maintains the Emerging Markets 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. The 
Index is rebalanced quarterly, calculated in U.S. Dollars on a real 
time basis, and disseminated every 60 seconds during market trading 
hours.
    \5\ As of February 28, 2007, the Fund was comprised of 863 
securities and had total net assets of $13.5 billion. OAO Gazprom 
ADR had the greatest individual weight at 4.16%. The aggregate 
percentage weighting of the top 10 securities in the Fund was 18.1%.
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    The Index provides exposure to 25 emerging market countries in 
Europe, Asia, Africa, and Latin America. As of February 28, 2007, the 
Emerging Markets Index consisted of companies representing Argentina, 
Brazil, Chile, China, Colombia, the Czech Republic, Egypt, Hungary, 
India, Indonesia, Israel, Jordan, Malaysia, Mexico, Morocco, Pakistan, 
Peru, the Philippines, Poland, Russia, South Africa, South Korea, 
Taiwan, Thailand, and Turkey. MSCI periodically adjusts the list of 
included countries to keep pace with the evolution in world markets 
(such adjustments made on a forward-looking basis, so past performance 
of the Emerging Markets Index always reflects actual country 
representation during the relevant period).
    The Fund generally invests at least 95% of its assets in the common 
stocks included in the Index. In order to improve portfolio liquidity 
and give the Fund additional flexibility to comply with the 
requirements of the U.S. Internal Revenue Code and other regulatory 
requirements and to manage future corporate actions and index changes 
in smaller markets, the Fund also has the authority to invest the 
remainder of its assets in securities that

[[Page 20903]]

are not included in the Index or in ADRs and GDRs representing such 
securities. The Fund may invest up to 10% of its assets in other 
exchange-traded funds or registered management investment companies 
that seek to track the performance of equity securities of constituent 
countries of the Index. The Fund is not permitted to concentrate its 
investments (i.e., hold 25% or more of its total assets in the stocks 
of a particular industry or group of industries), except that, to the 
extent practicable, the Fund will concentrate to approximately the same 
extent that the Index concentrates in the stocks of such particular 
industry or group of industries. The Exchange believes that these 
requirements and policies prevent the Fund from being excessively 
weighted in any single security or small group of securities and 
significantly reduce concerns that trading in the Fund could become a 
surrogate for trading in unregistered securities.
    Shares of the Fund (the ``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 size of 150,000 shares 
(each, a ``Creation Unit''), as set forth in the Fund's prospectus. 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.
    The Exchange notes that the maintenance listing standards set forth 
in Commentary .07 to Amex Rule 916 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. 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 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.
    The Exchange has reviewed the Fund and determined that it satisfies 
the listing standards except for the requirement set forth in 
Commentary .06(b)(i) to Amex Rule 915, which requires the Fund to meet 
the following condition: ``any non-U.S. component stocks in the index 
or portfolio on which the Fund Shares 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.'' Currently, the 
Exchange has in place comprehensive surveillance agreements covering 
48.89% of the stocks comprising the Index. One of the foreign exchanges 
on which component securities of the Fund are traded and with which the 
Exchange does not have a surveillance agreement is the Bolsa Mexicana 
de Valores (``Bolsa''). The percentage of the weight of the Fund 
represented by these securities is 6.3%.
    The Exchange notes that the Commission recently approved the 
listing and trading of options on the iShares MSCI Emerging Markets 
Index Fund on a pilot basis and permitted the Exchange to rely on the 
memorandum of understanding executed by the Commission and the NVBV, 
dated as of October 18, 1990 (the ``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.
    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 comprehensive surveillance sharing 
agreement. Although the officials at the Bolsa expressed an interest to 
enter into such comprehensive surveillance sharing agreement (a 
``CSSA''), to date, the Exchange has been unable to do so. 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 during this period to secure a CSSA with 
the Bolsa, which would reflect the following: (i) Express language 
addressing market trading activity, clearing activity, and customer 
identity; (ii) Bolsa's reasonable ability to obtain access to and 
produce requested information; and (iii) based on the comprehensive 
surveillance agreement and other information provided by Bolsa, the 
absence of existing rules, laws, or practices that would impede the 
Exchange from 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. We note that in the past the Commission 
has relied on a memorandum of understanding between the relevant 
regulators where it would be impossible to secure an effective CSSA.\6\
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    \6\ See Securities Exchange Act Release No. 40761 (December 8, 
1998), 63 FR 70952 (December 22, 1998) (the ``New Product 
Release''), at note 101.
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    The Exchange notes that 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 
surveillance agreement with Bolsa as part of seeking approval to list 
and trade options on the Mexico Index.\7\ Additionally, the Chicago 
Board Options Exchange, Incorporated (the ``CBOE'') also previously 
attempted to enter into a surveillance agreement with Bolsa at or about 
the time when the CBOE sought approval to list for trading options on 
the CBOE Mexico 30 Index in 1995, which was comprised of stocks trading 
on Bolsa.\8\ Since, in both instances, Bolsa was unable to provide a 
surveillance agreement, the Commission previously allowed the Exchange 
and the CBOE to rely on the MOU. The Commission noted in the respective 
approval orders that in cases where it would be impossible to secure an 
agreement, the Commission relied in the past on surveillance sharing 
agreements between the relevant regulators. The Commission further 
noted in the respective approval orders 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 surveillance 
sharing agreement between exchanges, and therefore, should the Exchange 
or the CBOE need information on Mexican trading in the component 
securities of the Mexico Index or the CBOE Mexico 30 Index, the 
Commission could request such information from the CNBV under the MOU.
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    \7\ See Securities Exchange Act Release No. 34500 (August 8, 
1994) 50 FR 41534 (August 12, 1994).
    \8\ See New Product Release; supra note 6.
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    The Exchange is also aware that the Commission recently permitted 
the

[[Page 20904]]

listing and trading of iPath Notes linked to the MSCI India Equities 
Index without a CSSA between the NYSE and the appropriate Indian 
marketplaces.\9\
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    \9\ See Securities Exchange Act Release No. 54944 (December 15, 
2006), 71 FR 77432 (December 26, 2006).
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    The practice of relying on surveillance agreements between 
regulators when a foreign exchange was unable or unwilling to provide 
an information sharing agreement was affirmed by the Commission in the 
Commission's New Product Release. The Commission noted in the New 
Product Release 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 may determine instead that it is appropriate to 
rely on a memorandum of understanding between the Commission and the 
foreign regulator.
    Currently, the Exchange has in place comprehensive surveillance 
agreements covering 48.89% of the stocks comprising the Index. In 
addition, the Index also complies with Commentary .06(b)(ii) and (iii) 
to Rule 915 which provides that component stocks of a single country 
that is not subject to comprehensive surveillance sharing be limited to 
less than 20% of the weight of the Index and component stocks in any 
two (2) countries may not represent 33% or more of the weight of the 
Index if such countries are not subject to comprehensive surveillance 
agreements. Because the Index otherwise complies with the requirements 
of Commentary .06(b) (except for the 50% test), the Exchange submits 
that the proposal is consistent with the protection of investors and 
the promotion of competition in the marketplace. A similar product, 
options on the iShares Emerging Markets Index Fund (Symbol: EEM) are 
currently listed and traded on both the Amex and CBOE. The underlying 
index for VWO and EEM are exactly the same, i.e. the MSCI Emerging 
Market Index.
    Given the Exchange's 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 and trading of 
the Fund on a pilot basis, during this period, the Exchange will 
continue its efforts to obtain a CSSA with the Bolsa. The Exchange also 
will 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.\10\ The Exchange 
believes that listing and trading options on VWO will benefit investors 
and the marketplace.
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    \10\ The Exchange notes that the component securities of the 
Fund change periodically. Therefore, the Exchange may in fact have 
in place surveillance agreements that would otherwise cover the 
percent weighting requirements set forth in the Listing Standards 
for securities not trading on 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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2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the Act 
\11\ in general and furthers the objectives of Section 6(b)(5) of the 
Act \12\ in particular in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, 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; and is not designed to 
permit unfair discrimination between customers, issuers, brokers, or 
dealers, or to regulate by virtue of any authority conferred by the Act 
matters not related to the purpose of the Act or the administration of 
the Exchange.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change does not 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 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-Amex-2007-09 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-Amex-2007-09. 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-Amex-2007-09 and should be submitted on or before May 
17, 2007.

[[Page 20905]]

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.\ 13\ In 
particular, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(5) of the Act,\ 14\ 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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    \13\ 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).
    \14\ 15 U.S.C. 78f(b)(5).
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    The listing of the Fund Options does not satisfy Commentary 
.06(b)(i) to Amex Rule 915, which requires the Fund to meet the 
following condition: ``Any non-U.S. component stocks in the index or 
portfolio on which the Fund Shares 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 Amex has exhausted all avenues of 
discussion with foreign markets, including Bolsa, in order to obtain 
such an agreement.
    Consequently, the Commission has determined to approve Amex's 
listing and trading of Fund Options for a six-month pilot period during 
which time Amex 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 
identity; (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 Amex currently has 
in place surveillance agreements with foreign exchanges that cover 
48.89% of the securities in the Fund and that the Index upon which the 
Fund is based appears to be a broad-based index. The Commission further 
notes that it recently has approved a proposed rule change by another 
SRO to list and trade options on the same product on a six-month pilot 
basis.\15\
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    \15\ Securities Exchange Act Release No. 55491 (March 19, 2007), 
72 FR 14145 (March 26, 2007).
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    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,\16\ for approving this proposed rule change before 
the thirtieth day after the publication of notice thereof in the 
Federal Register because it will enable the Exchange to immediately 
consider listing and trading the Fund Options, similar to products 
already traded on another SRO, and because it does not raise any new 
regulatory issues. 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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    \16\ 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,\17\ that the proposed rule change (SR-Amex-2007-09), as modified 
by Amendment No. 1, be, and it hereby is approved on an accelerated 
basis for a six-month pilot period ending on October 19, 2007.
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    \17\ Id.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-7956 Filed 4-25-07; 8:45 am]

BILLING CODE 8010-01-P
