
[Federal Register: January 24, 2011 (Volume 76, Number 15)]
[Notices]               
[Page 4141-4144]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24ja11-92]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63717; File No. SR-Phlx-2010-145]

 
Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing of Amendment No. 1 and Order Granting Accelerated Approval to a 
Proposed Rule Change, as Modified by Amendment No. 1 Thereto, Relating 
to the Establishment of Remote Specialists

January 14, 2011.

I. Introduction

    On October 14, 2010, NASDAQ OMX PHLX LLC (``Phlx'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to allow certain Phlx exchange members to act as 
option specialists that are not physically present on the option 
trading floor. The proposed rule change was published for comment in 
the Federal Register on November 2, 2010.\3\ On January 11, 2011, the 
Exchange filed Amendment No. 1 to the proposed rule change.\4\ The 
Commission received no comments on the proposal. This order provides 
notice of filing of Amendment No. 1 and grants accelerated approval to 
the proposed rule change, as modified by Amendment No. 1.
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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. 63192 (October 27, 
2010), 75 FR 67427 (``Notice'').
    \4\ On December 16, 2010, the Exchange extended the period for 
Commission consideration of its proposal to January 14, 2011. See 15 
U.S.C. 78s(b)(2)(A)(ii)(II) (concerning the ability of the self-
regulatory organization that filed a proposed rule change to extend 
the time period for Commission consideration of its proposal).
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II. Description of the Proposal

    The Exchange proposes to amend Phlx Option Rules 501, 506, 507, 
1014, and 1020 to provide for remote specialists under limited 
circumstances and amend its Option Floor Procedure Advices \5\ B-3 and 
E-1 to reflect the new category of remote specialist.
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    \5\ Phlx's Options Floor Procedure Advices (``OFPAs'' or 
``Advices'') are part of the Exchange's minor rule plan (``MRP'' or 
``Minor Rule Plan''), which consists of Advices with preset fines, 
pursuant to Rule 19d-1(c) under the Act (17 CFR 240.19d-1(c)). See 
e.g., Securities Exchange Act Release No. 50997 (January 7, 2005), 
70 FR 2444 (January 13, 2005) (SR-Phlx-2003-40) (order approving the 
Exchange's Options Floor Broker Management System). As this time, 
Phlx is not proposing to change any of the fines that are applicable 
under any of the Advices.
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    Currently, Phlx has several types of Registered Options Traders 
(``ROTs'') \6\ that can register as market makers on the Exchange, 
including specialists, Streaming Quote Traders (``SQTs''),\7\ and 
Remote Streaming Quote Traders (``RSQTs'').\8\ Specialists are floor-
based Exchange members who are registered as options specialists 
pursuant to Rule 1020(a). An SQT has a physical presence on the options 
floor (though they may be ``in-crowd'' or ``out-of-crowd'') and is 
authorized to generate and submit option quotations electronically in 
options to which such SQT is assigned, but may only do so when he or 
she is physically present on the floor of the Exchange. An RSQT, on the 
other hand, has no physical trading floor presence and instead is 
authorized to generate and submit option quotations electronically in 
options to which such RSQT has been assigned. The various market making 
requirements applicable to each category of market maker are set forth 
in Rule 1014. Rules 500 through 599 (the ``Allocation and Assignment 
Rules'') generally describe the process for application and appointment 
of specialists, SQTs and RSQTs, as well as the allocation of classes of 
options to them.\9\
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    \6\ A ROT is a member who has received permission from the 
Exchange to trade in options for his own account. Phlx also has 
Directed SQTs and Directed RSQTs, which receive Directed Orders as 
defined in Rule 1080(l)(i)(A). Specialists may likewise receive 
Directed Orders. Further, Phlx rules also provide for non-streaming 
ROTs (``non-SQT ROT''), which can make markets in certain options on 
an issue-by-issue basis. See Rule 1014(b)(ii)(C).
    \7\ See Rule 1014(b)(ii)(A).
    \8\ See Rule 1014(b)(ii)(B).
    \9\ The Allocation and Assignment Rules also indicate under what 
circumstances new allocations may not be made. See, e.g., 
Supplementary Material .01 to Rule 506.
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    Accordingly, while Phlx's rules provide for remote market-making 
ROTs (i.e., RSQTs), they do not provide for remote specialists. Rather, 
Phlx's rules currently require that each options class and series 
listed on the Exchange have a specialist physically present on the

[[Page 4142]]

options floor (``floor-based specialist'').\10\ The Exchange notes 
that, historically, a floor-based specialist was required for each 
options class and series, consistent with the traditional model of an 
open outcry auction market featuring trading crowds at physical trading 
posts on the floor and Floor Brokers \11\ that represent orders on the 
floor on behalf of others.\12\ In addition to its floor-based trading 
environment, Phlx also operates an electronic system to execute option 
orders,\13\ resulting in a hybrid-model options market that combines a 
traditional open outcry auction market trading floor with electronic 
trading (the ``current Phlx market'').\14\
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    \10\ The Exchange states in the Notice that at least one 
exchange that uses a specialist system has allowed certain option 
series to trade without a designated lead market maker (specialist).
    \11\ See Rule 1060.
    \12\ See Notice, supra note 3, at 75 FR 67428.
    \13\ See Rule 1080 regarding the Exchange's electronic order, 
trading, and execution system.
    \14\ The current Phlx market model combining open outcry and 
electronic trading is also used by other options exchanges, such as 
Chicago Board Options Exchange, Inc., NYSE Amex LLC and NYSE Arca, 
Inc. Only electronic options trading is done on other exchanges, 
such as the International Securities Exchange, LLC and The NASDAQ 
Stock Market LLC.
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    The Exchange notes that it has found it to be difficult at times, 
if not impossible, to allocate certain option products. For example, 
the Exchange has found that specialists may, at times, relinquish their 
options privileges, when, for example, the underlying securities are 
involved in a takeover, a merger/acquisition situation, or some type of 
rights offering.\15\ Without a floor-based specialist that is willing 
to retain (or accept) allocation of an option, the Exchange may not 
list such options pursuant to its current rules. This, in turn, may 
negatively impact market participants and investors to the extent that 
the sudden delisting of a Phlx option limits their choice of execution 
venues. As discussed below, Phlx's proposed rule change is intended to 
address the difficulty that Phlx has faced in allocating options where 
no floor-based specialists are willing to accept the allocation. 
Specifically, Phlx proposes to allow for remote specialists, as it 
currently does for RSQTs, in order to expand the universe of market 
participants that could assume the role of specialist and help ensure 
the listing, or continued listing, of options on Phlx.
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    \15\ See Notice, supra note 3, at 75 FR 67428.
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III. Discussion

    After careful review, the Commission finds that the proposed rule 
change, as modified by Amendment No. 1, is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange.\16\ Specifically, the 
Commission finds that the proposal is consistent with Section 6(b)(5) 
of the Act,\17\ in that the proposal has been designed to promote just 
and equitable principles of trade, and to protect investors and the 
public interest.
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    \16\ In approving the proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \17\ 15 U.S.C. 78f(b)(5).
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    By providing for Remote Specialists, the Commission believes that 
Phlx's proposal will allow it to list, or continue listing, an option 
in which it does not have a registered floor-based specialist. The 
concept of a Remote Specialist would be similar to the existing class 
of RSQTs, and several rules that are presently applicable or unique to 
RSQTs would be expanded to encompass Remote Specialists. Such 
provisions are generally reflective of the ``remote'' nature of a 
Remote Specialist and are intended to accommodate the unique 
circumstances of a remote quoting specialist. However, the quoting 
obligations applicable to a Remote Specialist would be heightened over 
that which is applicable to RSQTs to reflect their status as 
``specialists'' under Exchange rules. Accordingly, all specialists, 
whether floor-based or remote, would be subject to similar requirements 
and similar privileges. Specific details of various provisions in the 
Exchange's proposed rule change are discussed further below.

Specialist Rights and Obligations

    Phlx proposes to define ``remote specialist'' by amending Rule 1020 
to state that a remote specialist is a qualified RSQT approved by the 
Exchange to function as a specialist in one or more options, if the 
Exchange determines that it cannot allocate such options to a non-
remote (i.e., floor-based) specialist. As provided in proposed Rule 
501(f)(iii), a Remote Specialist would have all the rights and 
obligations of a specialist, unless Exchange rules provide otherwise. 
Further, Phlx proposes to underscore this principle by indicating in 
Rule 1020(a) that the term ``specialist'' includes a Remote Specialist, 
as defined in Rule 1020(a)(ii), that is registered pursuant to Rule 501 
and that a Remote Specialist has all the rights and obligations of an 
options specialist on the Exchange.

Becoming a Remote Specialist

    The Exchange also proposes to amend Rule 501, which generally deals 
with the process of applying for approval to be a specialist, to 
indicate that in certain circumstances RSQTs may seek to register as 
Remote Specialists. Specifically, the process for becoming a Remote 
Specialist would be a two-step process.\18\ A member would first need 
to qualify and register as a market maker on the Exchange by becoming 
approved as an RSQT pursuant to Rule 507.\19\ Then, if the RSQT wished 
to become a Remote Specialist, it would need to apply separately to 
become a Remote Specialist pursuant to the separate process set forth 
in Rule 501. Proposed Rule 501(f) provides that RSQTs may submit an 
application to be an approved specialist unit \20\ and the Exchange may 
approve such application in one or more options. Under Rule 501(f)(i), 
a Remote Specialist could function as a specialist in one or more 
options only if the Exchange determines that it cannot allocate such 
option(s) to a floor-based specialist.\21\
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    \18\ Proposed Rule 507(f) would state that nothing in Rule 507 
shall be construed to automatically qualify an RSQT to be a Remote 
Specialist on the Exchange.
    \19\ For all RSQT application and approval criteria, see Rule 
507(a)(i)(A) through (a)(i)(G).
    \20\ A ``specialist unit,'' including a Remote Specialist unit, 
may have one or more individual ``specialists.''
    \21\ Additionally, in light of the proposed off-floor Remote 
Specialist, Phlx proposes to modify Rule 506(c) to require that the 
Exchange's decisions regarding allocation of specialist privileges 
be not only communicated in writing to floor members, but also 
communicated in writing to all Exchange members (both floor-based 
and off-floor).
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    The proposed rule would require that each Remote Specialist be 
available and reachable at all times during trading hours for the 
product(s) allocated to such specialist.\22\ Accordingly, a Remote 
Specialist would be required to provide Exchange staff and members with 
telephonic and/or electronic communication access to such specialist 
and its associated staff at all times during trading hours.\23\
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    \22\ See Proposed Rule 501(f)(ii). See also OFPA E-1 (Required 
Staffing of Options Floor). A Remote Specialist would be required to 
have a representative available during the times required by that 
OFPA.
    \23\ To the extent necessary, the Exchange represents that it 
would announce such communication arrangements to its members via an 
Options Trading Alert (``OTA'') or Options Regulatory Alert 
(``ORA'').
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    Additionally, Phlx proposes to amend Rule 501 and 506 to indicate 
that back-up specialist arrangements and assistant specialist 
requirements are not applicable to Remote Specialists.\24\ In support 
of this provision, the Exchange notes its belief that the rationale for

[[Page 4143]]

requiring designation of an assistant specialist and a back-up 
specialist in the floor-based context is antiquated in the context of 
the Exchange's electronic-based trading system, in which assigned 
RSQTs, in conjunction with other assigned market makers on the 
Exchange, are able to provide liquidity in the event of a specialist's 
temporary absence.\25\ Further, a similar class of remote market makers 
on Phlx (RSQTs) does not have back-up personnel requirements.\26\
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    \24\ The Exchange also proposes to clarify in Advice E-1 that a 
Remote Specialist is exempt from the obligation to have personnel on 
the trading floor, while retaining the obligation to have a 
representative available telephonically.
    \25\ In addition, the Exchange notes that nearly all option 
issues traded on Phlx are traded on multiple exchanges. As such, the 
historical risk that is addressed by the assistant/backup 
requirement (namely, the ability of the Exchange to foster the 
provision of liquidity) is diminished. See Notice, supra note 3, at 
75 FR 67429.
    \26\ See Notice, supra note 3, at 75 FR 67429, n.20.
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Quoting Obligations and Priority

    Remote Specialists would be subject to all of the obligations of a 
floor-based specialist on the Exchange, except where otherwise noted in 
the Exchange's rules.\27\ Specifically, the Exchange proposes to amend 
Rule 1014(b)(ii)(D)(2) to provide that Remote Specialists in a 
particular option shall be responsible to quote two-sided markets in 
that option to the same extent as on-floor specialists would be 
required to do. The Exchange further proposes to amend Rule 
1014(b)(ii)(D)(1) to state that the RSQT quoting requirements are not 
applicable to RSQTs when they are acting in the capacity of Remote 
Specialist. The intent of this provision is to establish equivalent 
quoting requirements as between on-floor specialists and Remote 
Specialists.
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    \27\ See Proposed Rule 501(f)(iii).
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    Currently, Rule 1014 provides that quoting obligations do not apply 
to RSQTs in certain types of options products and establishes an 
exemption for RSQTs and other market makers from the obligations set 
forth in Rule 1014 in certain categories of products. The Exchange 
proposes to add new language to indicate that these exemptions apply to 
RSQTs only when they are acting as RSQTs, and would not apply to RSQTs 
when they are functioning as Remote Specialists in particular options.
    Further, the Exchange proposes to amend sub-paragraph (b)(ii)(B) of 
Rule 1014 to clarify that an RSQT cannot simultaneously quote both as 
RSQT and as Remote Specialist in a particular security. That is, if an 
RSQT is a Remote Specialist in a particular security, the Remote 
Specialist must make a market as a specialist and may not make a market 
as an RSQT in that particular security.\28\ Additionally, the Exchange 
proposes to add Remote Specialists to Commentary .05(c)(ii) of Rule 
1014 to reflect that Remote Specialists will be treated similar to 
RSQTs and out-of-crowd SQTs for priority purposes under that Rule 
because they do not engage in open outcry floor trading.
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    \28\ As an example of the operation of the proposed rules 
wherein an RSQT may function as a traditional RSQT and also function 
as a Remote Specialist, if an RSQT is allocated two option classes 
as a Remote Specialist, in those two classes the Remote Specialist 
will have the very same quoting (market making) requirements that 
are currently applicable to all specialists, including continuous 
quoting obligations. In the remaining classes to which an RSQT is 
appointed, the RSQT will have the same quoting (market making) 
requirements that are applicable to all RSQTs. The RSQT will not be 
able to submit quotes or act as RSQT in the two allocated Remote 
Specialist classes. See Amendment No. 1 to File No. SR-Phlx-2010-145 
at 15 n.29 (January 11, 2011).
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    In addition, Commentary .05(b) to Rule 1014 states that SQTs and 
RSQTs can submit orders electronically. The Exchange is amending 
Commentary .05(b) to provide that Remote Specialists also may submit 
quotes electronically. Further, Commentary .05(c)(i) provides that if a 
Floor Broker presents a non-electronic order in an option assigned to 
an RSQT or an off-floor SQT, such RSQT or SQT may not participate in 
trades stemming from the non-electronic order unless the order is 
executed at the price quoted by the non-crowd RSQT or SQT at the time 
of execution. The Exchange proposes to include Remote Specialists in 
Commentary .05(c)(i) to establish priority for Remote Specialists that 
is coextensive with the priority afforded in that Rule to RSQTs and 
out-of-crowd SQTs.
    The Commission believes that these provisions are appropriate to 
set forth equivalent obligations and standards applicable to Remote 
Specialists that are equivalent to the obligations and standards 
applicable to floor-based specialists. The Commission believes that a 
specialist must have an affirmative obligation to hold itself out as 
willing to buy and sell options for its own account on a regular or 
continuous basis to justify receiving unique benefits available to the 
specialist. The Commission believes that Phlx's rules impose such 
affirmative obligations on Remote Specialists that choose to operate 
remotely and notes that, under the proposal, Remote Specialists acting 
from a remote location would still be required to meet the obligations 
of a floor-based specialist.\29\ Furthermore, the Commission believes 
that RSQTs that act as Remote Specialists where no on-floor specialists 
are willing to accept, or retain, an option allocation, would provide 
or continue to provide a market that would not otherwise exist on the 
Exchange, which should benefit traders, investors, and public customers 
making hedging and trading decisions. Further, the proposed rules 
clearly provide that an RSQT that becomes a Remote Specialist in a 
particular security must make a market in that security as a specialist 
and may not make a market as an RSQT in that particular security.
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    \29\ See id.
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OFPA and Advices

    The Exchange also proposes to clarify several OFPAs regarding a 
Remote Specialist's off-floor electronic quoting and trading 
capabilities. Particularly, the Exchange is amending Advice B-3 to 
state that a Remote Specialist is exempted from the requirement that an 
ROT, including a specialist, trade a certain percentage of volume on 
the Exchange in person. The change reflects the fact that a Remote 
Specialist would not be physically present on the Exchange's trading 
floor and would instead submit quotes and orders remotely. 
Additionally, the Exchange is deleting Advice A-7 (specialist 
responsibilities for cancellations) and Advice A-10 (specialists 
trading the book) as specialists are no longer agents for the book with 
respect to Advice A-10, and both Advices are no longer required in 
light of subsequent developments in the Exchange's electronic trading 
and communication capabilities.\30\
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    \30\ See id. at 17.
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Surveillance

    Finally, the Exchange represents that it has developed surveillance 
procedures for its auction and electronic markets and will use the 
surveillance procedures now in place to perform surveillance of Remote 
Specialists.\31\
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    \31\ See Notice, supra note 3, at 75 FR 67431.
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Accelerated Approval

    In Amendment No. 1, the Exchange clarifies the role of a RSQT 
acting in the capacities of both a RSQT and a Remote Specialist to 
state that when acting as a Remote Specialist in specifically allocated 
classes the Remote Specialist will have all the same obligations that 
are applicable to Specialists, including continuous quoting 
obligations.\32\ Amendment No. 1 also amended proposed Rule 501(f)(ii) 
to require a Remote Specialist to provide Exchange staff with either 
telephonic or electronic communication access (as originally proposed, 
only telephonic access was specified). Finally, Amendment No. 1

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proposes to delete (rather than amend, as originally proposed) Advices 
A-7 and A-10, which the Exchange believes are no longer necessary for 
the reasons discussed above. Because the changes proposed in Amendment 
No. 1 are minor changes to the proposal that do not raise material 
issues, the Commission finds that good cause exists, consistent with 
Section 19(b) of the Act,\33\ for approving the proposed rule change, 
as modified by Amendment No. 1, prior to the thirtieth day after 
publication of notice of filing of Amendment No. 1 in the Federal 
Register.
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    \32\ See Amendment No. 1, supra note 28, at 15 n.29.
    \33\ 15 U.S.C. 78s(b).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as modified by Amendment No. 1, 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-Phlx-2010-145 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-Phlx-2010-145. 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 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-Phlx-2010-145 and should be 
submitted on or before February 14, 2011.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\34\ that the proposed rule change (SR-Phlx-2010-145), as modified 
by Amendment No. 1, be, and it hereby is, approved.
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    \34\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\35\
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    \35\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-1297 Filed 1-21-11; 8:45 am]
BILLING CODE 8011-01-P

