
[Federal Register: October 27, 2010 (Volume 75, Number 207)]
[Notices]               
[Page 66173-66176]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27oc10-120]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63150; File No. SR-FINRA-2009-058]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Amendment No. 1 to a Proposed Rule 
Change and Order Granting Accelerated Approval of Proposed Rule Change, 
as Modified by Amendment No. 1, To Adopt FINRA Rule 2232 (Customer 
Confirmations) in the Consolidated FINRA Rulebook and To Delete NASD 
Rule 2230, NASD IM-2110-6 and Incorporated NYSE Rule 409(f)

October 21, 2010.

I. Introduction

    On August 24, 2009, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') (f/k/a National Association of Securities Dealers, 
Inc. (``NASD'')) filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Exchange Act'' or ``Act'') \1\ and 
Rule 19b-4 thereunder,\2\ a proposed rule change to adopt FINRA Rule 
2232 (Customer Confirmations) in the

[[Page 66174]]

consolidated FINRA rulebook and to delete NASD Rule 2230, NASD IM-2110-
6 and Incorporated NYSE Rule 409(f). The proposed rule change was 
published for comment in the Federal Register on September 21, 2009.\3\ 
The Commission received three comments in response to the proposed rule 
change.\4\ On September 16, 2010, FINRA responded to the comments \5\ 
and filed Amendment No. 1 to the proposed rule change.\6\ The 
Commission is publishing this notice and order to solicit comments on 
Amendment No. 1 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.
    \3\ See Securities Exchange Act Release No. 60669 (September 14, 
2009), 74 FR 48107 (September 21, 2009) (``Notice'').
    \4\ See letter from Tamara K. Salmon, Senior Associate Counsel, 
Investment Company Institute (``ICI''), dated October 9, 2010 (``ICI 
Letter''); letter from Jonathan Feigelson, Senior Vice President, 
General Counsel, TIAA-CREF, dated October 13, 2009 (``TIAA-CREF 
Letter''); and letter from Clifford E. Kirsch and Susan S. Krawcyzk, 
Sutherland Asbill & Brennan on behalf of the Committee of Annuity 
Insurers (``CAI''), dated October 13, 2009 (``CAI Letter'').
    \5\ See letter from Adam H. Arkel, Assistant General Counsel, 
FINRA, dated September 16, 2010 (``FINRA's Response'').
    \6\ See Amendment No. 1 dated September 16, 2010 (``Amendment 
No. 1''). The text of Amendment No. 1 is available on FINRA's Web 
site at http://www.finra.org/, at the principal office of FINRA, and 
on the Commission's Internet Web site (http://sec.gov/rules/
sro.shtml).
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II. Description of the Proposed Rule Change

    As part of the process of developing a new Consolidated FINRA 
Rulebook,\7\ FINRA proposed to adopt a new, consolidated customer 
confirmation rule by adopting FINRA Rule 2232 (Customer Confirmations) 
and deleting NASD Rule 2230, NASD IM-2110-6 and NYSE Rule 409(f).\8\
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    \7\ The current FINRA rulebook consists of: (1) FINRA Rules; (2) 
NASD Rules; and (3) rules incorporated from NYSE (``Incorporated 
NYSE Rules'') (together, the NASD Rules and Incorporated NYSE Rules 
are referred to as the ``Transitional Rulebook''). While the NASD 
Rules generally apply to all FINRA members, the Incorporated NYSE 
Rules apply only to those members of FINRA that are also members of 
the NYSE (``Dual Members''). The FINRA Rules apply to all FINRA 
member firms, unless such rules have a more limited application by 
their terms. For more information about the rulebook consolidation 
process, see Information Notice, March 12, 2008 (Rulebook 
Consolidation Process).
    \8\ For convenience, the Incorporated NYSE Rules are referred to 
as the ``NYSE Rules.''
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A. Background

    NASD and NYSE rules set forth certain basic requirements with 
respect to confirmations of transactions with customers.\9\
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    \9\ The proposed rule change addresses basic customer 
confirmation requirements. FINRA rules separately set forth 
confirmation requirements that are specific to certain types of 
financial products, such as the requirements set forth in FINRA Rule 
2360 (adopted as part of FINRA's set of consolidated rules 
addressing index warrants, options and security futures). See 
Securities Exchange Act Release No. 58932 (November 12, 2008), 73 FR 
69696 (November 19, 2008) (Approval Order).
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1. NASD Rule 2230
    NASD Rule 2230 provides that a member, at or before the completion 
of each transaction \10\ with a customer shall, give or send to the 
customer written notification (i.e., confirmation) disclosing: (a) 
Whether the member is acting as a broker for the customer, as a dealer 
for its own account, as a broker for some other person, or as a broker 
for both the customer and some other person; and (b) in any case in 
which the member is acting as a broker for the customer or for both the 
customer and some other person, either the name of the person from whom 
the security was purchased or to whom it was sold for the customer and 
the date and time when the transaction took place or the fact that such 
information will be furnished upon the request of the customer, and the 
source and amount of any commission or other remuneration received or 
to be received by the member in connection with the transaction.
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    \10\ Exchange Act Rule 10b-10(d)(2) states that the term 
``completion of the transaction'' has the meaning set forth in 
Exchange Act Rule 15c1-1. The Rule 15c1-1 definition of ``completion 
of the transaction'' depends on whether the customer is purchasing 
or selling the security, the time when payment is made and the 
status of the custody/delivery of the security.
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    When NASD Rule 2230 was adopted in 1939 \11\ its requirements 
essentially duplicated those set forth in Exchange Act Rule 15c1-4 as 
originally adopted by the Commission. The primary difference between 
the two rules was that the scope of Rule 15c1-4 was restricted to over-
the-counter transactions while the NASD rule by its terms extended to 
all member transactions with customers.\12\ In 1977, the Commission 
rescinded Rule 15c1-4 and adopted Exchange Act Rule 10b-10, indicating 
that it would apply ``regardless of the manner in which a broker-dealer 
conducts its business or the marketplace where transactions are 
effected.'' \13\ Since then, the Commission has amended Rule 10b-10 
several times.\14\
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    \11\ NASD Rule 2230, formerly designated as Section 12 of the 
NASD Rules of Fair Practice, was adopted as part of FINRA's original 
rulebook. See Certificate of Incorporation and By-Laws, Rules of 
Fair Practice and Code of Procedure for Handling Trade Practice 
Complaints of National Association of Securities Dealers, Inc. 
(August 8, 1939).
    \12\ See Securities Exchange Act Release No. 1330 (August 4, 
1937).
    \13\ See Securities Exchange Act Release No. 13508 (May 5, 1977) 
(Securities Confirmations: Final Rule).
    \14\ See, e.g., Securities Exchange Act Release No. 19687 (April 
18, 1983), 48 FR 17583 (April 25, 1983) (Securities Confirmations: 
Final Rule Amendments) (requiring, among things, disclosure to 
investors of certain yield and call feature information in 
connection with transactions in debt securities); Securities 
Exchange Act Release No. 34962 (November 10, 1994), 59 FR 59612 
(November 17, 1994) (Confirmation of Transactions: Final Rule 
Amendments) (generally requiring, among other things, disclosure if 
a debt security is not rated by a nationally recognized statistical 
rating organization, disclosure if a broker-dealer is not a member 
of the Securities Investor Protection Corporation, and disclosure 
with respect to the availability of information with respect to 
transactions in collateralized debt securities); Securities Exchange 
Act Release No. 46471 (September 6, 2002), 67 FR 58302 (September 
13, 2002) (Confirmation Requirements for Transactions of Security 
Futures Products Effected in Futures Accounts: Final Rule 
Amendments) (adopting, among others, requirements regarding 
transactions in securities futures products); Securities Exchange 
Act Release No. 51808 (June 9, 2005), 70 FR 37496 (June 29, 2005) 
(Regulation NMS: Final Rules and Amendments) (making conforming 
amendments to Rule 10b-10 in connection with the adoption of 
Regulation NMS).
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2. NASD IM-2110-6
    NASD IM-2110-6 requires that any member providing a customer 
confirmation pursuant to Exchange Act Rule 10b-10 in connection with 
any transaction in callable common stock \15\ must disclose on the 
confirmation that the security is callable common stock and that a 
customer may contact the member for more information concerning the 
security.
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    \15\ Callable common stock is stock that is subject to being 
called away from a shareholder, either by the issuer or by a third 
party.
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    When IM-2110-6 was adopted in 2000, FINRA noted that an investor 
purchasing callable common stock is subject to unique risks not 
typically associated with ownership of common stock, even when such 
stock is called away at a premium.\16\ FINRA also stated that the 
ability of an issuer's common stock to be called away from a 
shareholder generally is a material fact to an investor. Accordingly, 
in adopting the IM, FINRA stated that high standards of commercial 
honor and just and equitable principles of trade would require members 
to provide the disclosures as set forth in the IM. FINRA further 
emphasized that the disclosure of the call feature on the confirmation 
in no way relieves a member of its obligation to consider the callable 
nature of the security when complying with any applicable suitability 
obligations.
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    \16\ See Securities Exchange Act Release No. 42761 (May 5, 
2000), 65 FR 30459 (May 11, 2000) (Approval Order). See also NASD 
Notice to Members 00-33 (May 2000) (Callable Common Stock).

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3. NYSE Rule 409(f)
    NYSE Rule 409(f) requires that confirmation of all transactions in 
securities admitted to dealings on the NYSE--whether over-the-counter 
or on an exchange--sent by members or member organizations to their 
customers, must clearly set forth with a suitable legend the settlement 
date of each transaction. The rule provides that this requirement also 
applies to confirmations or reports from an organization to a 
correspondent, but does not apply to reports made by floor brokers to 
the member organization from which the orders were received. The rule 
further contains a general cross-reference instructing members to refer 
to Exchange Act Rule 10b-10.

B. Proposal

    As discussed in the Notice, the proposed rule change would delete 
current NASD Rule 2230 from the FINRA rulebook and replace it with 
proposed FINRA Rule 2232, which would streamline and combine basic 
customer confirmation requirements in the NASD and NYSE Rules. 
Specifically:
     Proposed FINRA Rule 2232 would provide that confirmations 
must be given or sent to customers in conformity with the requirements 
of Exchange Act Rule 10b-10. FINRA believes that incorporating by 
reference the requirements of Rule 10b-10, as opposed to replicating 
Rule 10b-10's detailed requirements in FINRA's rule, would make the 
proposed rule clear and serve the interests of regulatory efficiency.
     The proposed rule change would delete NASD IM-2110-6 from 
the FINRA rulebook and transfer its requirements to proposed FINRA Rule 
2232. Proposed FINRA Rule 2232 would expand the coverage of those 
requirements to make clear that the requirement to disclose that the 
security is callable (and that further information is available from 
the member) applies to any callable equity security,\17\ not just 
callable common stock. As stated in the Notice, FINRA believes that, 
from the standpoint of investor protection, this change is necessary to 
ensure that the rule covers, for instance, callable preferred 
stock.\18\
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    \17\ Exchange Act Section 3(a)(11) defines the term ``equity 
security'' to include, among others, ``any stock or similar 
security.''
    \18\ As noted by FINRA in the Notice, Exchange Act Rule 10b-
10(a)(4) requires that, in the case of any transaction in a debt 
security subject to redemption before maturity, the confirmation 
must include a statement to the effect that the debt security may be 
redeemed in whole or in part before maturity, that such a redemption 
could affect the yield represented and that additional information 
is available upon request.
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     The proposed rule would include the requirement in NYSE 
Rule 409(f) to disclose the settlement date of the transaction, with 
two changes. First, consistent with FINRA's investor protection 
mission, the requirement to disclose the settlement date of the 
transaction would include all transactions in securities, not just 
NYSE-listed securities. Second, because the proposed rule would address 
customer confirmations, the elements of the NYSE rule addressing 
member-to-member communications would, consistent with the parameters 
of Exchange Act Rule 10b-10, be deleted.
    FINRA will announce the implementation date of the proposed rule 
change in a Regulatory Notice to be published no later than 90 days 
following Commission approval. The implementation date will be no later 
than 240 days following Commission approval.

III. Summary of Comment Letters and FINRA's Response

    The Commission received three comments on the proposed rule 
change,\19\ all of which objected to the settlement disclosure 
requirement of the proposed rule, particularly with respect to mutual 
fund and variable annuity transactions. Among the reasons cited for the 
objections were differences in calculating settlement dates for mutual 
fund purchases through a broker-dealer versus those purchased through a 
mutual fund's underwriter.\20\ Another commenter was of the view that 
variable annuity transactions were not a ``good fit'' because they do 
not settle like other securities transactions.\21\ One commenter also 
objected to the potential costs associated with reprogramming and 
testing automated confirmation systems to include settlement date 
information.\22\ This commenter also made a number of procedural 
objections.\23\ One commenter urged FINRA to revise the proposed rule 
to relieve broker-dealers from having to disclose the settlement date 
when that date is the same as the trade date, or considering the 
settlement date requirement to be satisfied if the trade date on the 
confirmation is the same as the settlement date.\24\ Another commenter 
indicated that there should be a two-year implementation timetable if 
the rule change is adopted as proposed.\25\
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    \19\ See supra note 4.
    \20\ See ICI Letter.
    \21\ See CAI Letter. This commenter further indicated that 
variable annuity transactions require the purchase or surrender of 
an insurance policy and as such, could not settle the way that other 
securities transactions settle.
    \22\ See TIAA-CREF Letter. In particular, this commenter stated 
that requiring the inclusion of the settlement date in customer 
confirmations would cost about $11 to 15 million dollars.
    \23\ See TIAA-CREF Letter. In addition, this commenter objected 
to FINRA not opening the proposal to comment by FINRA members and 
generally expressed its view that the proposal was inconsistent with 
the requirements of Exchange Act Rule 19b-4.
    \24\ See ICI Letter.
    \25\ See TIAA-CREF Letter.
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    In its response, FINRA clarified that it intended the settlement 
date provisions to apply only to transactions in traditional equity 
securities, whether traded on an exchange or over-the-counter where, 
according to FINRA, the disclosure of settlement date serves the 
purposes of investor protection.\26\ FINRA filed Amendment No. 1 to 
clarify this intent by limiting the settlement date provisions of the 
proposed rule to transactions in: (1) Any NMS stock as defined in Rule 
600 of Regulation NMS; \27\ and (2) any equity security subject to the 
reporting requirements of the FINRA Rule 6600 series, other than direct 
participation programs as defined in FINRA Rule 6642. FINRA stated that 
it also made other minor changes to the proposed rule in the interest 
of clarity.
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    \26\ See FINRA's Response.
    \27\ See 17 CFR 242.600.
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    FINRA also noted that with respect to considering the 
implementation costs of a proposed rule filing, in a self-regulatory 
organization rulemaking, the appropriate standard, as stated in Section 
15A(b)(9) of the Exchange Act, is that the rules do not impose any 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Exchange Act.\28\ Moreover, FINRA tailors its 
proposed rule changes as narrowly as possible to achieve the intended 
and necessary regulatory benefit. As stated in Item 4 of the proposed 
rule change, FINRA does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. FINRA also noted 
that, as required under Section 19(b)(1) of the Exchange Act,\29\ it 
submitted to the Commission a concise general statement of the basis 
and purpose of the proposed rule.\30\
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    \28\ This statement was confirmed in a telephone conversation 
with Adam Arkel of FINRA on October 19, 2010.
    \29\ 15 U.S.C. 78s(b)(1).
    \30\ See supra note 28.
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IV. Discussion and Commission Finding

    After carefully considering the proposal, as amended by Amendment 
No. 1, the comments, and FINRA's

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Response, the Commission finds that the proposed rule change is 
consistent with the requirements of the Exchange Act, and the rules and 
regulations thereunder that are applicable to national securities 
associations.\31\ In particular, the Commission believes the proposed 
rule change is consistent with the provisions of Section 15A(b)(6) of 
the Exchange Act,\32\ which requires, among other things, that FINRA 
rules must be designed to prevent fraudulent and manipulative acts and 
practices, promote just and equitable principles of trade, and in 
general, to protect investors and the public interest. The proposed 
rule change is consistent with FINRA's obligations under the Exchange 
Act to protect investors and the public interest because the proposed 
rule streamlines the rules governing broker-dealers' confirmation 
requirements by cross-referencing Exchange Act Rule 10b-10 while 
maintaining the additional disclosure requirements of NASD IM-2110-6 
(i.e., relating to callable securities) and extending the additional 
NYSE Rule 409(f) requirements (i.e., relating to settlement date) to a 
broader range of equity securities.
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    \31\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 17c(f).
    \32\ 15 U.S.C. 78o-3(b)(6).
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    The Commission believes that FINRA has adequately addressed the 
concerns raised by commenters with respect to the application of the 
settlement date provisions to mutual fund and variable annuity 
transactions. In particular, Amendment No. 1 limits the settlement date 
disclosure requirement to Regulation NMS stock and over-the-counter 
equity securities subject to the FINRA Rule 6600 series. We also 
believe that the proposed rule is consistent with the public interest 
and the protection of investors because information regarding the 
callable status of a security is generally a material fact for 
investors. Indeed, callable securities can subject investors to 
additional reinvestment risk because investors may have less attractive 
alternatives for reinvesting the proceeds if the issuer calls the 
security earlier than the investor's intended sell date, even when the 
security is called away at a premium. In addition, the disclosure of 
settlement date on a confirmation is important for investors because 
many of the rights and benefits associated with the beneficial 
ownership of a security do not confer until settlement date.\33\ 
Finally, we note that the Exchange Act does not require a cost/benefit 
analysis with respect to proposed self-regulatory organization rules 
that are filed with, and approved by, the Commission.
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    \33\ For example, an investor may not be eligible for dividend 
payments if the ex-dividend date falls between the transaction date 
and the settlement date.
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V. Accelerated Approval

    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Exchange Act,\34\ for approving the proposed rule change, as 
modified by Amendment No. 1, prior to the 30th day after publication of 
Amendment No. 1 in the Federal Register. The changes proposed in 
Amendment No. 1 respond to specific concerns raised by commenters. In 
particular, Amendment No. 1 will limit the application of the 
settlement date provisions to transactions in Regulation NMS securities 
and to over-the-counter equity securities subject to the reporting 
requirements of the FINRA Rule 6600 series, other than direct 
participation programs as defined in FINRA Rule 6642.
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    \34\ 15 U.S.C. 78s(b)(2).
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    Accordingly, the Commission finds that good cause exists to approve 
the proposal, as modified by Amendment No. 1, on an accelerated basis.

VI. 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-FINRA-2009-058 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-FINRA-2009-058. 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 filings also will be 
available for inspection and copying at the principal office of FINRA. 
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-FINRA-2009-058 
and should be submitted on or before November 17, 2010.

VII. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Exchange Act,\35\ that the proposed rule change (SR-FINRA-2009-058), as 
modified by Amendment No. 1, be, and hereby is, approved on an 
accelerated basis.
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    \35\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\36\
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    \36\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-27145 Filed 10-26-10; 8:45 am]
BILLING CODE 8011-01-P

