
[Federal Register: June 16, 2010 (Volume 75, Number 115)]
[Notices]               
[Page 34196-34199]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16jn10-113]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62256; File No. SR-EDGX-2010-02]

 
 Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by EDGX Exchange, Inc. Relating to Direct Edge, Inc.

June 10, 2010.
    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 June 3, 2010, EDGX Exchange, Inc. (the ``Exchange'' or ``EDGX'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``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\ 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

    EDGX proposes to make changes to its corporate structure to provide 
that it will be a wholly-owned subsidiary of Direct Edge, Inc. 
(``DEI'') instead of Direct Edge Holdings, LLC (``DE Holdings'').
    The proposed Certificate of Incorporation of DEI (``DEI 
Certificate'') is attached as Exhibit 5A, the proposed Bylaws of DEI 
(``DEI Bylaws'') are attached as Exhibit 5B, and the Amended and 
Restated Bylaws of EDGX (``EDGX Bylaws'') are attached as Exhibit 5C.
    The text of the proposed rule change is available on the Exchange's 
Web site http://www.directedge.com, on the Commission's Internet Web 
site at http://www.sec.gov, at the principal office of the Exchange, 
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 and 
discussed any comments it received on the proposed rule change. The 
text of these 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 aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
Background
    On March 12, 2010, the Commission granted the Form 1 exchange 
registration applications of EDGX and its affiliate exchange, EDGA 
Exchange, Inc. (``EDGA'').\3\
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    \3\ See Securities and Exchange Release No. 61698 (March 12, 
2010), 75 FR 13151 (March 18, 2010) (approving File Nos. 10-194 and 
10-196) (the ``Order'').
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    As provided in the Form 1 application, EDGX and Direct Edge ECN, 
LLC d/b/a DE Route (``DE Route''), the Exchange's routing broker/
dealer, are wholly-owned subsidiaries of DE Holdings.\4\ EDGX Bylaws 
identify this ownership structure.\5\ Any changes to the EDGX Bylaws, 
including any change in the provision that identifies DE Holdings as 
the initial owner of EDGX, must be filed with and approved by the 
Commission pursuant to Section 19 of the Act.\6\ As part of a general 
corporate reorganization, EDGX is now proposing to create a new 
corporation, DEI, which will be owned by DE Holdings. DEI will, in 
turn, own the Exchange and be both an operating and holding company. 
All of the equity of EDGX is proposed to be transferred to DEI. In 
turn, DE Holdings will be the sole stockholder of DEI and thus, DEI 
will be a wholly-owned subsidiary of DE Holdings. The self-regulatory 
functions of EDGX will, however, continue to remain with EDGX. As 
stated above, DE Route will continue to be owned directly by DE 
Holdings.
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    \4\ DE Holdings is a limited liability company overseen by a 
board of managers. Ownership in DE Holdings is represented by 
limited liability membership interests. EDGA is also a wholly-owned 
subsidiary of DE Holdings.
    \5\ EDGA Bylaws, Article I., Section kk.
    \6\ See 15 U.S.C. 78s. See also Order at note 77 and 
accompanying text.
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    In connection with this corporate reorganization, the Exchange is 
filing these documents with the Commission as part of Exhibit 5: (i) 
The proposed DEI Certificate is attached as Exhibit 5A; (ii) the 
proposed DEI Bylaws are attached as Exhibit 5B; and (iii) the EDGX 
Bylaws are attached as Exhibit 5C.
    As the primary focus of this rule filing is to focus on those 
provisions that are directly related to the Exchange's ability to 
perform its regulatory responsibilities following the transaction 
described above, the Exchange's discussion will focus on the relevant 
provisions of the documents mentioned above.
Preservation of Self-Regulatory Function of EDGX
    Section 7.7 of the DE Holdings' Fourth Amended and Restated Limited 
Liability Company Operating Agreement (the ``DE Holdings LLC 
Agreement'') identifies certain corporate actions that require the 
approval of DE Holdings' Board of Managers and the members of DE 
Holdings. The Sixth Article of the DEI Certificate provides that any 
action requiring the approval of the DE Holdings Board of Managers and/
or

[[Page 34197]]

members of DE Holdings pursuant to Section 7.7 of the DE Holdings LLC 
Agreement shall require the approval of the stockholders of DEI (DE 
Holdings is the sole stockholder of DEI). The Sixth Article of the DEI 
Certificate further provides that, notwithstanding such approval, 
nothing contained in Section 7.7 of the DE Holdings LLC Agreement shall 
be applicable where the application of such provision or provisions 
would interfere with the effectuation of any decisions by the Board of 
Directors of DEI (``Board'') relating to regulatory functions of the 
Exchange (including disciplinary matters) or the structure of the 
market that the Exchange regulates, or would interfere with the ability 
of the Exchange to carry out its responsibilities under the Act or to 
oversee the structure of the market that the Exchange regulates.\7\ 
This Sixth Article of the DEI Certificate further provides that these 
responsibilities shall include the ability of the Exchange as an SRO:
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    \7\ See DEI Certificate, Article VI., Section 2.
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     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 mechanisms of a 
free and open market and a national market system; and
     To protect investors and the public interest.\8\
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    \8\ Id.
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    In addition, the DEI Bylaws provide that, for so long as DEI 
controls the Exchange, the Board, officers, employees and agents of DEI 
must give due regard to the preservation of independence of the self-
regulatory function of the Exchange and must not interfere with its 
regulatory functions (including disciplinary matters) or the ability of 
the Exchange to carry out its responsibilities under the Act.\9\
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    \9\ See DEI Bylaws, Article VII, Section 7.1.
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    These provisions, as well as the associated notice and rule filing 
requirements with respect to any person or entity that may acquire an 
interest in DEI (as described below), will serve to protect the 
integrity of the Exchange's self-regulatory responsibilities and the 
SEC's oversight responsibilities. These provisions will also ensure 
that, although DEI will not itself carry out any regulatory functions, 
its activities with respect to the Exchange will be consistent with, 
and not interfere with the self-regulatory obligations of the Exchange.
Ownership Limitations and Changes in Ownership
    The DE Holdings LLC Agreement includes restrictions on the ability 
to own and vote shares of the capital stock of DE Holdings.\10\ The DE 
Holdings LLC Agreement states that no person may own, directly or 
indirectly, of record or beneficially, units of interest in the 
ownership of DE Holdings (``Units'') representing more than a 40% 
interest in DE Holdings.\11\ In addition, the DE Holdings LLC Agreement 
prohibits members of EDGX or EDGA (``Exchange Members''), either alone 
or together with their related persons, from owning, directly or 
indirectly, of record or beneficially, Units representing a percentage 
interest in DE Holdings of more than 20%.\12\ Furthermore, no person, 
other than International Securities Exchange Holdings, Inc., either 
alone or together with its related persons, may vote or cause the 
voting of Units representing more than a 20% interest in DE 
Holdings.\13\ If any member of DE Holdings purports to transfer Units 
in violation of the ownership limits, or to vote or cause the voting of 
Units in violation of the voting limits, then DE Holdings has the right 
to redeem such Units for the lesser of the fair market value or the 
book value of the Units.\14\ In addition, DE Holdings will not honor 
any vote that would violate the voting limitations, and any Units that 
would violate the voting limitation will not be entitled to vote to the 
extent of the violation.\15\
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    \10\ See the Order at 13156.
    \11\ See DE Holdings LLC Agreement, Article XII., Section 
12.1(a)(1).
    \12\ See DE Holdings LLC Agreement, Article XII., Section 
12.1(a)(2).
    \13\ See DE Holdings LLC Agreement, Article XII., Section 
12.1(a)(3).
    \14\ See DE Holdings LLC Agreement, Article XII., Section 12.3.
    \15\ See DE Holdings LLC Agreement, Article XII., Section 12.4.
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    These voting and ownership restrictions in the DE Holdings LLC 
Agreement are unaffected by the proposed change in corporate structure 
whereby DEI will become an operating and holding company for the 
Exchange. Further, such restrictions will effectively be carried over 
into the new corporate structure because the DEI Certificate provides 
that the sole stockholder of DEI will be DE Holdings \16\ and as 
discussed below, the EDGX Bylaws indicate that DEI will be the sole 
owner of EDGA.\17\ In addition, for so long as DEI indirectly or 
directly controls EDGA, any amendment to the ownership requirements in 
the DEI Certificate, including the provision identifying DE Holdings as 
the sole stockholder of DEI, shall be submitted to the Board of 
Directors of EDGX for a determination as to whether such amendment must 
be filed with, or filed with and approved by, the SEC before such 
amendment can become effective and in such event, such amendment shall 
not be effective until filed with, or filed with and approved by, the 
SEC, as the case may be.\18\
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    \16\ See DEI Certificate, Article VIII., Section 4.
    \17\ See EDGX Bylaws, Article I., Section kk.
    \18\ See DEI Certificate, Article VIII, Section 3.
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    The Exchange proposes to amend its bylaws to require that the sole 
stockholder of the Exchange will be DEI.\19\ Any changes to the EDGX 
Bylaws, including any change in the provision that identifies DEI as 
the sole owner of EDGX, must be filed with and approved by the 
Commission pursuant to Section 19 of the Act.\20\ This ownership 
requirement, together with the DE Holdings' and DEI's voting and 
ownership restrictions described above, is designed to prevent any 
Exchange Member or other person from exercising undue control over the 
operation of the Exchange through DEI and further assures that the 
Exchange and the Commission will be able to carry out their respective 
regulatory obligations under the Act. The Exchange believes that these 
requirements should minimize the potential that a person could 
improperly interfere with or restrict the ability of the Commission or 
the Exchange to effectively carry out their respective regulatory 
oversight responsibilities under the Act.
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    \19\ See EDGX Bylaws, Article I., Section kk.
    \20\ See 15 U.S.C. 78s. See also Order at note 77 and 
accompanying text.
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Jurisdiction and Regulatory Oversight
    The DEI Certificate and DEI Bylaws will contain several provisions 
designed to protect the independence of the self-regulatory function of 
the Exchange.
    DEI's officers and directors are deemed to be the officers and 
directors of the Exchange.\21\ Article VII of the DEI Bylaws further 
states that DEI's Board and its officers, employees, and agents shall 
give due regard to the preservation of independence of the self-
regulatory function of the Exchange and shall not interfere with the 
effectuation of any decisions by the Exchange's Board of Directors 
relating to its regulatory functions (including disciplinary matters) 
or which would interfere with the ability of the Exchange to carry out 
its responsibilities under the Act.\22\ In

[[Page 34198]]

addition, the DEI Bylaws further provide that DEI shall comply with the 
U.S. federal securities laws and rules and regulations thereunder and 
shall cooperate with the SEC and the Exchange.\23\ The DEI Bylaws also 
provide that DEI's officers, directors, employees and agents shall be 
deemed to agree to (i) comply with the U.S. federal securities laws and 
the rules and regulations thereunder; and (ii) to cooperate with the 
SEC and the Exchange in respect of the SEC's oversight responsibilities 
regarding the Exchange and the self-regulatory functions and 
responsibilities of the Exchange. In addition, DEI shall take 
reasonable steps necessary to cause its officers, directors, employees 
and agents to so cooperate.\24\
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    \21\ See DEI Bylaws, Article V., Section 5.8(b).
    \22\ See DEI Bylaws, Article VII., Section 7.1.
    \23\ See DEI Bylaws, Article VII., Section 7.2.
    \24\ Id.
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    Furthermore, DEI and its officers, directors, employees and agents 
will be deemed to irrevocably submit to the jurisdiction of the U.S. 
federal courts, the SEC, and the Exchange for purposes of any suit, 
action, or proceeding pursuant to the U.S. federal securities laws or 
the rules or regulations thereunder relating to or arising out of the 
activities of the Exchange.\25\ In addition, those same parties shall 
be deemed to waive and agree not to assert by way of motion, as a 
defense or otherwise in any such suit, action, or proceeding any claims 
that they are not personally subject to the jurisdiction of the United 
States federal courts, the SEC, and the Exchange that the suit, action, 
or proceeding is an inconvenient forum or that the venue of the suit, 
action, or proceeding is improper, or that the subject matter of that 
suit, action or proceeding may not be enforced in or by such courts or 
agency.\26\
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    \25\ See DEI Bylaws, Article VII., Section 7.3.
    \26\ Id.
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    These provisions ensure that, should an occasion arise that 
requires regulatory cooperation or jurisdictional submission from DEI, 
such cooperation will be forthcoming and uncontested.
Books and Records
    The Bylaws of DEI contain a number of provisions designed to ensure 
that the Exchange has sufficient access to the books and records of 
DEI. According to the DEI Bylaws, the books and records of DEI are 
deemed to be the books and records of the Exchange to the extent they 
are related to the operation or administration of the Exchange.\27\ In 
addition, for as long as DEI controls the Exchange, DEI's books and 
records shall be subject at all times to inspection and copying by the 
SEC and the Exchange, provided that such books and records are related 
to the operation or administration of the Exchange.\28\
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    \27\ See DEI Bylaws, Article V., Section 5.8(b).
    \28\ Id.
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    The DEI Bylaws also provide that, to the fullest extent permitted 
by applicable law, all confidential information pertaining to the self-
regulatory function of the Exchange (including but not limited to 
disciplinary matters, trading data, trading practices and audit 
information) contained in the books and records of the Exchange that 
shall come into the possession of DEI shall:
     Be retained in confidence by DEI, its stockholders, 
officers, directors, employees and agents; and
     Not be used for any non-regulatory purposes.\29\
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    \29\ See DEI Bylaws, Article V., Section 5.8(a).
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    The foregoing, however, shall not limit or impede the rights of the 
SEC or the Exchange to access and examine such confidential information 
pursuant to the federal securities laws and the rules and regulations 
thereunder, or to limit or impede the ability of any DEI stockholders, 
officers, directors, employees or agents to disclose such confidential 
information to the SEC or the Exchange.\30\ DEI's books and records 
shall be subject at all times to inspection and copying by (a) the SEC 
and (b) any Exchange, provided that such books and records are related 
to the operation or administration of the Exchange.\31\ In addition, 
DEI's books and records shall be maintained within the United 
States.\32\
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    \30\ Id.
    \31\ See DEI Bylaws, Article V., Section 5.8(b).
    \32\ See DEI Bylaws, Article VII., Section 7.5.
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Voting the Equity of EDGX
    Currently, the DE Holdings LLC Agreement provides that DE Holdings 
shall, in its capacity as the sole stockholder of EDGX, cause all 
outstanding equity of EDGX owned by DE Holdings and entitled to vote 
with respect to an election to be voted in accordance with the EDGA 
Bylaws.\33\ Inasmuch as DE Holdings will no longer be a stockholder of 
EDGX upon the consummation of this transaction, such requirements will 
no longer be applicable to DE Holdings.
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    \33\ See DE Holdings LLC Agreement, Article VII., Section 
7.3(b).
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    As DEI will now be the sole stockholder of EDGX, DEI shall cause 
all outstanding equity of EDGX owned by DEI and entitled to vote with 
respect to an election to be voted in accordance with the EDGX 
Bylaws.\34\ Under Section 2.15(b) of the DEI Bylaws, with respect to 
any election of directors, other than ``Owner Directors,'' \35\ or 
members of the Nominating Committee or Exchange Member Nominating 
Committee of the Exchange, DEI shall cause all outstanding equity of 
the Exchange owned by DEI and entitled to vote to elect: (i) only those 
nominees for the Nominating Committee and for the Exchange Member 
Nominating Committee that are nominated in accordance with the EDGX 
Bylaws; and (ii) only those directors nominated by the Nominating 
Committee of the Exchange. Under Section 2.15(c) of the DEI Bylaws, 
with respect to ``Owner Directors,'' DEI shall take all actions in its 
capacity as a stockholder of the Exchange to vote or consent with 
respect to matters concerning an Owner Director according to the 
written instructions of the relevant member of DE Holdings that is 
entitled to nominate such Owner Director.
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    \34\ See DEI Bylaws, Article II., Section 2.15(b).
    \35\ ``Owner Director'' is defined in Article I., Section (z) of 
the EDGA Bylaws as a Director nominated by a member of DE Holdings 
that holds at least a 15% percentage interest in DE Holdings and 
that is elected by the stockholders of the Exchange.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6 of the Act,\36\ in general, and with 
Sections 6(b)(1) and (b)(5) of the Act,\37\ in particular, in that the 
proposal enables the Exchange to be so organized as to have the 
capacity to be able to carry out the purposes of the Act and to comply 
with and enforce compliance by members and persons associated with 
members with provisions of the Act, the rules and regulations 
thereunder, and SRO rules, and 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.
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    \36\ 15 U.S.C. 78f.
    \37\ 15 U.S.C. 78f(b)(3), [sic] (5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule does not impose any burden on competition that is 
not necessary or appropriate in furtherance of the purposes of the Act.

[[Page 34199]]

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any unsolicited written comments from members or other interested 
parties.

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 Exchange 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-EDGX-2010-02 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-EDGX-2010-02. 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 Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of EDGA. 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-EDGX-2010-02 and should be 
submitted on or before July 7, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\38\
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    \38\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-14441 Filed 6-16-10; 8:45 am]
BILLING CODE 8010-01-P

