
[Federal Register: December 1, 2009 (Volume 229, Number 74)]
[Notices]               
[Page 62863-62866]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01de09-148]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61048; File No. SR-NYSE-2009-112]

 
Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by New York Stock Exchange LLC Rescinding Information Memoranda 
04-27 and 07-66 and Issuing a New Information Memo Concerning the 
Exchange's Gap Quote Policy

November 23, 2009.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that on November 9, 2009, the New York Stock Exchange LLC 
(``NYSE'' or the ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 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 rescind NYSE Information Memoranda 
(``Information Memo'') 04-27 and 07-66 and issue a new Information Memo 
that provides updated parameters for, and guidance on the application 
of, the Exchange's Gap Quote Policy (the ``Policy''). The text of the 
proposed rule change is available at the Exchange, the Commission's 
Public Reference Room, and http://www.nyse.com.

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 self-regulatory organization 
included statements concerning the purpose of, and basis for, the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of those statements may be examined at 
the places specified in Item IV 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule changes is to rescind Information 
Memos 04-27 and 07-66 and issue a new Information Memo that provides 
updated parameters for, and guidance on the application of, the 
Policy.\4\
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    \4\ The Exchange's corporate affiliate, NYSE Amex LLC (``NYSE 
Amex''), has submitted an identical companion filing updating its 
Gap Quote Policy governing equities trading. See SR-NYSE-Amex-2009-
82. The proposed new Information Memo will be jointly issued by both 
the Exchange and NYSE Amex.
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    The principal change to the Policy is a reduction in the minimum 
size (from at least 10,000 shares to at least 5,000) and value (from 
$200,000 or more to $100,000 or more) requirements for publishing a gap 
quote. In addition, the Exchange proposes to clarify certain aspects of 
the Policy related to setting the price of the gap quote. Finally, the 
Exchange proposes adding language clarifying or reminding members of 
certain aspects of the Policy and other technical or non-substantive 
changes.
    In order to ensure an orderly transition to usage of the new 
parameters, the Exchange proposes that these changes be made operative 
within ten business days after the approval of this filing.
Background
    The purpose of the Policy, described in greater detail below, is to 
provide public notice of order imbalances for securities, facilitate 
price discovery, and minimize short-term price dislocation, by allowing 
for the entry of offsetting orders or the cancellation of orders on the 
side of an imbalance.
    An order imbalance may occur when the Exchange receives a sudden 
influx of orders for a particular security on the same side of the 
market within a short time interval, or when one or more large-size 
orders for a security are entered, and there is insufficient offsetting 
interest.
    When an imbalance in a security exists, the Policy provides that 
the Designated Market Maker (``DMM'') for the security should widen the 
spread between the bid and offer--a process known as ``gapping the 
quote.'' \5\ The use of a gap quote signals the existence of the 
imbalance to the market in order to attract contra-side liquidity and 
mitigate volatility.
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    \5\ The current version of the Policy contained in Information 
Memo 07-66 refers to ``specialists'' and ``specialist member 
organizations.'' In accordance with the Exchange's adoption of its 
New Market Model (``NMM''), the Exchange refers herein to ``DMMs'' 
and ``DMM Units.'' See Securities Exchange Act Release No. 58845 
(October 24, 2008), 73 FR 64379 (October 29, 2008) (SR-NYSE-2008-46) 
(approving the NMM).
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    Gap quotes occur more frequently in securities that are illiquid or 
thinly traded than in securities that are very liquid or heavily 
traded.\6\
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    \6\ Currently, it is not cost-effective for the Exchange to 
implement stock-specific gap quote procedures.
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History
    In 2004, the Exchange updated its policies and procedures for 
gapping the quote, which had previously been implemented in 1994.\7\ 
The Exchange announced the updated policy through a new Information 
Memo 04-27 (June 9, 2004), which it also filed with the Commission.\8\ 
In 2007, the Exchange changed the minimum size and value requirements 
for use of gap quotes to at least 10,000 shares or $200,000, and 
updated the policies and procedures to reflect technical changes to the 
market and Exchange systems.\9\
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    \7\ See Information Memo 94-32 (August 9, 1994).
    \8\ See Securities Exchange Act Release No. 50237 (August 24, 
2004), 69 FR 53123 (August 31, 2004) (SR-NYSE-2004-37) (concerning 
Information Memo 04-27).
    \9\ See Information Memo 07-66 (July 5, 2007). This Information 
Memo was not filed with the Commission.
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The Current Policy
    Under the current Policy, a gapped quotation consists of, on one 
side, a bid or offer for the amount representing the amount of the 
imbalance in the market priced at the price of the last sale, and, on 
the side of the market opposite the imbalance, an offer or bid for 100 
shares, priced at the price at which the DMM believes the stock would 
trade if

[[Page 62864]]

no contra side interest developed or no cancellations occurred as a 
result of the gapped quotation. The resulting quote is shown as either 
``100 x size'' or ``size x 100,'' depending on the side of the 
imbalance.
    To qualify for a gapped quotation, the size of the imbalance must 
be 10,000 shares or more, or have a market value of $200,000 or more. 
Depending on the trading characteristics of an individual stock, 
including its average daily trading volume and its average volatility, 
a gapped quotation may not be appropriate every time the stock crosses 
these thresholds, but rather may only become appropriate when the 
imbalance amount or value reaches some higher level that is more 
consistent with the stock's trading characteristics.
    When a DMM has determined that a gapped quotation is appropriate, 
the DMM must follow these procedures:
     Prior to publishing the gapped quotation, the DMM must 
honor the displayed quotation on the side opposite the imbalance by 
executing a portion of the imbalance amount against the displayed 
amount at the bid (for sell imbalances) or offer (for buy imbalances). 
The DMM should complete all related Display Book reports and check the 
status of the order imbalance. Note that the requirement to honor the 
displayed bid or offer does not apply if the exposed quote results from 
a Liquidity Replenishment Point (``LRP'') being reached through trading 
and the quote has a quote condition of non-firm.
     Gap quotations are typically used after a security has 
reached a high or low LRP. In such instances, the trade that triggered 
the LRP will have hit the firm bid or taken the firm offer on the 
Display Book prior to the posting of a gap quote and the Display Book 
will issue the related execution reports.
     The DMM's pricing determination for the gapped quotation 
should take account of executable orders, e-Quotes and verbal interest 
in the Crowd at prices better than the price of the 100-share bid or 
offer. If the imbalance interest is limited as to price, the price on 
the 100-share side cannot exceed that limit price.
     The DMM must publish the gapped quotation, using the Gap 
Quote Template in the Display Book, as follows:
    [cir] On the side of the imbalance, the bid or offer price, as 
appropriate, (which is generated by the Display Book) will be the price 
of the last sale. The DMM must input a size of at least 10,000 shares 
or a market value of at least $200,000 and record the badge number of 
the Floor broker representing the imbalance. If a number of brokers' 
interest makes up the imbalance, the badge number of the broker with 
the most significant interest should be used. If the imbalance is 
caused by an influx of system orders, the DMM must record ``1'' as the 
badge number.
    [cir] On the side opposite the imbalance, the DMM must show the 
possible extent of price impact in the bid or offer price by bidding or 
offering for 100 shares (one round lot) at the price at which the DMM 
believes the stock would trade if no contra side interest developed or 
no cancellations occurred as a result of the gapped quotation.
    Following publication, the DMM must immediately contact a senior-
level Floor Official (i.e. Executive Floor Governor, Floor Governor, 
Executive Floor Official or Senior Floor Official). The required Floor 
Official Approval Form documenting the consultation must be completed 
within a reasonable period of time after the intraday imbalance has 
been resolved.
     Following the publication of the gapped quote, the DMM 
should, where feasible or necessary due to conditions in the security 
or in the market, attempt to contact known contra-side parties to 
solicit participation to offset the imbalance. Brokers are expected to 
monitor conditions in securities where have interest or potential 
interest and should not rely on the DMM to contact them to advise of 
intraday order imbalances.
     During the term of the gapped quotation, the DMM must 
continue to permit the entry and cancellation of orders in the Display 
Book and not implicitly freeze the Book.
    The gapped quotation is required to remain in place for a 
reasonable amount of time to permit interested parties to respond to 
the order imbalance. What constitutes a ``reasonable time'' is 
determined by the unique circumstances of each gapped quotation 
situation, but as a general guideline, gapped quotations are in place 
for at least 30 seconds unless offsetting interest is received earlier 
and generally should not last more than two minutes. As soon as the DMM 
receives offsetting interest that permits a trade within the stock's 
normal trading characteristics, the DMM must trade out of the gap quote 
to return to a fast market.
Role of the Senior-level Floor Official
    As noted above, DMMs must consult with a senior-level Floor 
Official in connection with a gapped quotation. The senior-level Floor 
Official is responsible for monitoring the gapped quotation. As a 
result of this consultation, the senior-level Floor Official may 
determine that a gapped quotation is no longer necessary because the 
DMM can execute the orders immediately without undue price dislocation, 
or may determine to maintain the gap quote but for no more than two 
minutes, or may determine to halt trading in the stock due to the size 
and extent of the imbalance. If the senior-level Floor Official 
determines that the stock should be halted, he or she must declare a 
non-regulatory order imbalance halt in trading to address the imbalance 
rather than continue the gapped quotation.
Display Book Support for Gapping the Quote
    The Gap Quote Template in the Display Book facilitates the DMM's 
compliance with the Policy. When using the Gap Quote Template, the DMM 
or DMM trading assistant must enter the correct size or dollar value 
(i.e. 10,000 shares or more, or a value of $200,000 or more), as well 
as the badge number of the Floor broker who is most responsible for the 
imbalance if that information is known to the DMM. If the imbalance is 
the result of order flow through the System, the DMM or trading 
assistant must enter the number `1' in the badge number field. If the 
user fails to comply with either of those requirements, the Display 
Book prompts the user for the necessary information.
Prohibited Use of the Gap Quote Template
    The Gap Quote Template is to be used only when the DMM is gapping 
the quote in conformity with the Policy. Use of the Gap Quote Template 
for other purposes, such as to make the market slow to clean up a cross 
trade, or to manage trading immediately following the Opening or in 
advance of the Closing trade, is inappropriate. Misuse of the Gap Quote 
Template may result in violations of the limit order display rule and/
or the firm quote rule, and as such may subject the DMM and/or the DMM 
Unit to disciplinary action by the Exchange. In addition, DMM Units are 
required to have adequate policies and procedures in place to ensure 
appropriate use of the Gap Quote Template.
Proposed changes
1. Reduced minimum size and value requirements
    As noted above, the principal change to the Policy proposed by the 
Exchange is reduction of the minimum size and value requirements.
    The Exchange proposes to reduce the minimum size and value 
requirements for the use of a gap quote under the Policy to at least 
5,000 shares or a

[[Page 62865]]

market value of $100,000 or more. The Exchange believes that these 
lower thresholds better reflect current market conditions, which have 
changed significantly since the Exchange last issued guidance on the 
Policy in 2007. The Exchange believes that the current parameters are 
generally too high in light of current market conditions, where the 
average size of trades is smaller and average stock prices are lower. 
As a result the current parameters inhibit DMMs from using gap quotes 
to facilitate price discovery and minimize short-term price dislocation 
to the degree warranted by the market for particular securities. Based 
on an analysis of historical market conditions, the Exchange believes 
that lowering the gap quote size and value requirements will increase 
the use of gap quotes in line with current market conditions, providing 
greater transparency and efficiency and reducing volatility. The 
Exchange does not believe, however, that lowering these requirements 
will cause an increase in the use of gap quotes to such a degree that 
would negatively impact the quality of the Exchange market.
    In addition, the Exchange proposes to add language clarifying that, 
notwithstanding meeting the minimum size and value requirements, an 
imbalance must also be anticipated to cause a significant price 
dislocation in the stock at issue in order to qualify under the Policy. 
The Exchange believes it is important to emphasize that whether a gap 
quote is appropriate depends on the characteristics of a security as 
much as on the minimum requirements.
2. Setting the price of the gap quote
    In addition, the Exchange proposes to clarify certain aspects of 
the Policy related to setting the price of the gap quote.
    Currently, DMMs are instructed to set the price of a gap quote ``at 
the price at which the DMM believes the stock would trade if no contra 
side interest developed or no cancellations occurred[.]'' The Exchange 
proposes to clarify this guidance to provide that the DMM should 
published the gap quote at the price where the DMM ``reasonably 
anticipates'' the stock would trade if no contra side interest 
developed or no cancellations occurred.
    The Exchange also proposes to clarify that the Policy still 
requires a DMM to take into account, ``to the extent known,'' 
executable orders, e-Quotes and verbal interest in the Crowd (on the 
side of the market opposite the imbalance) at prices better than the 
price of the 100-share bid or offer when making his or her pricing 
determination. If the imbalance is known to be limited as to price, the 
DMM should not set the gap quote higher than that limit price.
    The Exchange also proposes adding a provision reminding the DMMs 
that, at the time they publish a gap quote, they should set the price 
of the gap quote such that it would likely result in a trade of at 
least the minimum size of 5,000 shares or $100,000 in value.
3. Other technical or non-substantive changes
    The Exchange also proposes additional technical or non-substantive 
changes:
     The Exchange proposes to change the requirement that the 
DMM honor the ``displayed'' quote on the opposite side of the imbalance 
before publishing the gap quote to a requirement that the DMM honor the 
``protected'' quote, consistent with the terminology of Regulation NMS. 
The Exchange believes that, given its new minimum and non-displayed 
liquidity options, use of the word ``displayed'' could be 
misleading.\10\
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    \10\ A Minimum Display Order requires a portion of the shares in 
the order to be displayed when the interest is at or becomes the 
Exchange Best Bid or Offer (``Exchange BBO'') and, upon execution, 
this amount is replenished at that price point until the entire 
order is either filled or canceled. Minimum Display Orders are 
eligible to participate in both electronic and manual transactions, 
such as gap quote situations.
    A Non-Displayed Reserve Order does not require the display of 
any portion of the order. Non-Displayed Reserve Orders entered by 
Off-Floor participants are not included in the published quote and 
are not eligible for participation in manual transactions. Non-
Displayed Orders entered by Floor brokers, however, are eligible to 
participate in manual transactions and will be displayed to the DMM 
in such circumstances unless the Floor broker designates the order 
as ``Do Not Display.'' DMM Non-Displayed Reserve interest is 
eligible to participate in manual transactions since there is no 
anonymity to protect in that instance.
    For more information concerning these order types, see 
Information Memo 08-57 (November 14, 2008) (describing key features 
of the New Market Model adopted by the Exchange).
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     The Exchange proposes to update the Policy to reflect that 
Display Book now automatically completes certain reports that were, in 
the past, manually completed by DMMs.
     The Exchange proposes to add language reminding members 
and member organizations that only the badge number of the relevant 
Floor broker or brokers--and not Floor Officials--should be entered 
into the Gap Quote Template in accordance with the Policy.
     The Exchange proposes to add Staff Governors to the list 
of qualifying senior-level Floor Officials who may oversee a gap quote 
publication.\11\ In addition, to provide the DMM with greater 
flexibility, the Exchange proposes to change the guidance for 
contacting senior-level Floor Officials from ``immediately'' following 
publication of the gap quote to ``as soon as possible.''
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    \11\ ``Staff Governors'' are designated pursuant to NYSE Rule 
46(b)(v), which permits the Exchange Chairman to ``designate such 
number of qualified NYSE Euronext employees'' as needed, who shall 
be permitted to take any action assigned to or required of a Floor 
Governor as prescribed under Exchange rules.
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     The Exchange proposes to add language clarifying that, 
while the DMM should attempt to obtain price discovery using 
appropriate Display Book tools, he or she should not leave any Display 
Book templates open for an extended duration of time so as not to 
implicitly freeze the Book and shut out interest. DMMs must balance the 
need for accurate price discovery with that of trying to attract contra 
side interest and trade out of the gap quote as soon as possible. The 
DMM should also, in consultation with a senior-level Floor Official, 
consider updating the initial gap quote if necessary to attract 
sufficient contra side interest.
     The Exchange proposes to add language reminding members 
and member organizations that the gap quote procedures may not be 
initiated after trading has closed. Instead, where there is a 
significant imbalance in a security at the close of trading, members 
and member organizations should use the other procedures provided under 
Exchange rules when attempting to mitigate the imbalance. See, e.g., 
NYSE Rule 123C(8).
     The Exchange proposes to add a summary of the options 
available to a DMM when publishing a gap quote to include: (1) Trading 
out of the gap quote by executing contra side interest against the 
imbalance (allowing for any cancellations); (2) updating the gap quote 
in consultation with a senior-level Floor Official; or (3) in 
consultation with a senior-level Floor Official, requesting an order 
imbalance trading halt in the security at issue.
     In view of the current market conditions and the lower 
minimum size and value requirements, the Exchange proposes to amend the 
original example it included in the Policy (in Information Memo 07-66) 
to reflect the changed parameters and to add a second example to 
clarify how the Policy works when an LRP is reached as opposed to when 
it is implemented following an influx of orders from the Floor.
     The Exchange proposes to substitute new screenshots of the 
Gap

[[Page 62866]]

Quote Template reflecting the changed parameters.
     Finally, because DMMs no longer act as agent for orders on 
the Display Book, the Exchange proposes to clarify that a failure to 
follow the Policy by a DMM would not lead to violations the Order 
Display rule and/or the Firm Quote rule under Regulation NMS, but could 
rather result in a failure to maintain a fair and orderly market or a 
failure to observe high standards of commercial honor and just and 
equitable principles of trade under NYSE Rules 104(a), 104(f) and 
2010.\12\
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    \12\ The role of DMMs and their obligations on the Exchange are 
described in Securities Exchange Act Release No. 58845 (October 24, 
2008), 73 FR 64379 (October 29, 2008) (SR-NYSE-2008-46).
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    The Exchange also proposes other non-substantive wording changes.
    The Exchange represents that it has reasonable policies and 
procedures to surveil the use of gap quotes and to detect the potential 
misuse of gap quotes in violation of Exchange rules and federal 
securities laws.
    2. Statutory Basis
    The Exchange believes that the proposed rule changes are consistent 
with, and further the objectives of, Section 6(b)(5) of the Act,\13\ in 
that they are 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. The proposed rule changes also 
support the principles of Section 11A(a)(1) \14\ of the Act in that 
they seek to ensure the economically efficient execution of securities 
transactions and fair competition among brokers and dealers and among 
exchange markets.
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    \13\ 15 U.S.C. 78f(b)(5).
    \14\ 15 U.S.C. 78k-1(a)(1).
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    The Exchange believes that the proposed updates to its Gap Quote 
Policy will better reflect current market conditions and improve 
transparency in situations where gapped quotations are used. The 
Exchange believes these changes will result in greater efficiency and 
less volatility, and a better functioning market for all participants.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (a) By order approve such proposed rule change, or
    (b) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-NYSE-2009-112 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NYSE-2009-112. 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, on official business 
days between the hours of 10 a.m. and 3 p.m. Copies of the filing also 
will be available for inspection and copying at the principal office 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-
NYSE-2009-112 and should be submitted on or before December 22, 2009.
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    \15\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
Elizabeth M. Murphy,
Secretary.
[FR Doc. E9-28615 Filed 11-30-09; 8:45 am]

BILLING CODE 8011-01-P
