
[Federal Register Volume 77, Number 71 (Thursday, April 12, 2012)]
[Notices]
[Pages 22015-22019]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-8838]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66768; File No. SR-NASDAQ-2012-048]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Relating to Customer Fees and Rebates in Penny Pilot Options

April 6, 2012.
    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 April 2, 2012, The NASDAQ Stock Market LLC (``NASDAQ'' or 
``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 NASDAQ. 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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[[Page 22016]]

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASDAQ proposes to modify Chapter XV, entitled ``Option Pricing,'' 
at Section 2 governing pricing for NASDAQ members using the NASDAQ 
Options Market (``NOM''), NASDAQ's facility for executing and routing 
standardized equity and index options. Specifically, NOM proposes to 
amend the Penny Pilot \3\ Options (``Penny Options'') Customer Rebates 
to Add Liquidity and Penny Options Customer Fee for Removing Liquidity. 
The Exchange also proposes to make other minor amendments to the 
Section 2.
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    \3\ The Penny Pilot was established in March 2008 and in October 
2009 was expanded and extended through June 30, 2012. See Securities 
Exchange Act Release Nos. 57579 (March 28, 2008), 73 FR 18587 (April 
4, 2008) (SR-NASDAQ-2008-026) (notice of filing and immediate 
effectiveness establishing Penny Pilot); 60874 (October 23, 2009), 
74 FR 56682 (November 2, 2009) (SR-NASDAQ-2009-091) (notice of 
filing and immediate effectiveness expanding and extending Penny 
Pilot); 60965 (November 9, 2009), 74 FR 59292 (November 17, 2009) 
(SR-NASDAQ-2009-097) (notice of filing and immediate effectiveness 
adding seventy-five classes to Penny Pilot); 61455 (February 1, 
2010), 75 FR 6239 (February 8, 2010) (SR-NASDAQ-2010-013) (notice of 
filing and immediate effectiveness adding seventy-five classes to 
Penny Pilot); 62029 (May 4, 2010), 75 FR 25895 (May 10, 2010) (SR-
NASDAQ-2010-053) (notice of filing and immediate effectiveness 
adding seventy-five classes to Penny Pilot); 65969 (December 15, 
2011, 76 FR 79268 (December 21, 2011) (SR-NASDAQ-2011-169) (notice 
of filing and immediate effectiveness extension and replacement of 
Penny Pilot). See also Exchange Rule Chapter VI, Section 5.
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    The text of the proposed rule change is available on the Exchange's 
Web site at http://www.nasdaq.cchwallstreet.com, 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. 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
    NASDAQ proposes to modify Chapter XV, entitled ``Option Pricing,'' 
at Section 2 governing the rebates and fees assessed for option orders 
entered into NOM. Specifically, the Exchange is proposing to modify the 
five tier structure for paying Customer Rebates to Add Liquidity in 
Penny Options. The Exchange proposes to amend various rebate tiers to 
further incentivize NOM Participants to route Customer orders in Penny 
Options to the Exchange by paying additional rebates for certain orders 
after the NOM Participant has met a volume criteria and also removing 
certain criteria to qualify for a rebate. The Exchange believes that 
incentivizing NOM Participants to send additional Customer orders in 
Penny Options to the Exchange will benefit all market participants by 
adding liquidity to the market.
    Specifically, the Exchange currently pays a Customer Rebate to Add 
Liquidity in Penny Options based on the following tier structure:
    * * * The Customer Rebate to Add Liquidity in Penny Pilot Options 
will be paid as noted below. Each Customer order of 5,000 or more, 
displayed or non-displayed contracts, which adds liquidity in Penny 
Pilot Options, will qualify for an additional rebate of $0.01 per 
contract provided the NOM Participant has qualified for a rebate in 
Tier 2, 3, 4 or 5 for that month.

------------------------------------------------------------------------
                                                           Rebate to add
                     Monthly volume                          liquidity
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Tier 1 Participant adds Customer liquidity of up to                $0.26
 14,999 contracts per day in a month....................
Tier 2 Participant adds Customer liquidity of 15,000 to             0.38
 49,999 contracts per day in a month....................
Tier 3 Participant adds Customer liquidity of 50,000 or             0.42
 more contracts per day in a month......................
Tier 4 \a\ Participant adds (1) Customer liquidity of               0.43
 100,000 or more contracts per day in a month, and (2)
 NOM Market Maker liquidity of 40,000 or more contracts
 per day in a month.....................................
Tier 5 \b\ Participant adds (1) Customer liquidity of               0.41
 25,000 or more contracts per day in a month, (2) the
 Participant has certified for the Investor Support
 Program set forth in Rule 7014; and (3) the Participant
 executed at least one order on NASDAQ's equity market..
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\a\ For purposes of Tier 4, the Exchange will aggregate the trading
  activity of separate NOM Participants when computing average daily
  volumes where 75 percent common ownership or control exists between
  NOM Participants.
\b\ For purposes of Tier 5, the Exchange will allow a NOM Participant to
  qualify for the rebate if a NASDAQ member under common ownership with
  the NOM Participant has certified for the Investor Support Program and
  executed at least one order on NASDAQ's equity market. Common
  ownership is defined as 75 percent common ownership or control.

    The Exchange proposes to amend the tier structure for Customer 
Rebates to Add Liquidity in Penny Options as follows:
    * * * The Customer Rebate to Add Liquidity in Penny Pilot Options 
will be paid as noted below. Each Customer order of 5,000 or more, 
displayed or non-displayed contracts, which adds liquidity in Penny 
Pilot Options, will qualify for an additional rebate of $0.01 per 
contract provided the NOM Participant has qualified for a rebate in 
Tier 2, 3, 4 or 5 for that month.

------------------------------------------------------------------------
                                                           Rebate to add
                     Monthly volume                          liquidity
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Tier 1 Participant adds Customer liquidity of up to                $0.26
 14,999 contracts per day in a month....................
Tier 2 Participant adds Customer liquidity of 15,000 to             0.38
 49,999 contracts per day in a month....................
Tier 3 Participant adds Customer liquidity of 50,000 to             0.43
 74,999 contracts per day in a month....................
Tier 4 Participant adds Customer liquidity of 75,000 or             0.44
 more contracts per day in a month......................

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Tier 5 \a\ Participant adds (1) Customer liquidity of               0.42
 25,000 or more contracts per day in a month, (2) the
 Participant has certified for the Investor Support
 Program set forth in Rule 7014; and (3) the Participant
 executed at least one order on NASDAQ's equity market..
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\a\ For purposes of Tier 5, the Exchange will allow a NOM Participant to
  qualify for the rebate if a NASDAQ member under common ownership with
  the NOM Participant has certified for the Investor Support Program and
  executed at least one order on NASDAQ's equity market. Common
  ownership is defined as 75 percent common ownership or control.

    Currently, Tier 3 firms that add 50,000 or more contracts per day 
in a month of Customer liquidity, in Penny Options, receive a rebate of 
$0.42 per contract. The Exchange is proposing to increase the Tier 3 
Customer rebate from $0.42 per contract to $0.43 per contract. The 
Exchange also proposes to amend the number of contracts required to 
qualify for Tier 3 from 50,000 or more contracts per day in a month to 
require NOM Participants to add between 50,000 to 74,999 contracts per 
day in a month of Customer liquidity in Penny Options to qualify for 
the increased $0.43 Customer rebate.
    Currently, Tier 4 firms that (1) add Customer liquidity of 100,000 
or more contracts per day in a month of Customer order liquidity in 
Penny Options, and (2) provide 40,000 or more contracts per day of NOM 
Market Maker liquidity per day in a month receive a rebate of $0.43 per 
contract if both criteria are met. For purposes of determining 
qualification for this tier, the Exchange currently aggregates \4\ the 
trading activity of separate NOM Participants in calculating the 
average daily volume if there is at least 75% common ownership or 
control between the NOM Participants. The Exchange proposes to amend 
the criteria to qualify for Tier 4 from 100,000 or more contracts per 
day in a month to 75,000 or more contracts per day in a month of 
Customer liquidity in Penny Options and also remove the second criteria 
to qualify for Tier 4. The Exchange would therefore remove the 
requirement that a NOM Market Maker add liquidity of 40,000 or more 
contracts per day in a month. In addition the Exchange proposes to 
increase the current Tier 4 Customer rebate of $0.43 per contract to 
$0.44 per contract. The Exchange would also remove note ``(a)'', which 
was associated with the second criteria of Tier 4, which is no longer 
necessary as the NOM Marker Maker requirement would no longer be a 
condition to receive the Tier 4 Customer rebate.
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    \4\ Aggregation is necessary and appropriate because certain NOM 
participants conduct Customer and NOM Market Maker trading activity 
through separate but related broker-dealers.
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    Currently, Tier 5 firms that (1) provide 25,000 or more contracts 
per day in a month of Customer order liquidity in Penny Options, (2) 
where the Participant has certified for the Investor Support Program 
(``ISP'') as set forth in Rule 7014 \5\; and (3) where the Participant 
executed at least one order on NASDAQ's equity market receive a $0.41 
per contract Customer rebate. The Exchange proposes to amend Tier 5 to 
increase the Customer rebate in Penny Options from $0.41 per contract 
to $0.42 per contract. The Exchange would also renumber the current 
note ``(b)'' as note ``(a).'' The Exchange is not proposing any changes 
to current Tiers 1 and 2.\6\
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    \5\ For a detailed description of the ISP, see Securities 
Exchange Act Release No. 63270 (November 8, 2010), 75 FR 69489 
(November 12, 2010) (NASDAQ-2010-141) (notice of filing and 
immediate effectiveness) (the ``ISP Filing''). See also Securities 
Exchange Act Release Nos. 63414 (December 2, 2010), 75 FR 76505 
(December 8, 2010) (NASDAQ-2010-153) (notice of filing and immediate 
effectiveness); and 63628 (January 3, 2011), 76 FR 1201 (January 7, 
2011) (NASDAQ-2010-154) (notice of filing and immediate 
effectiveness).
    \6\ The Exchange currently pays an additional rebate of $0.01 
per contract for each Customer order of 5,000 or more, displayed or 
non-displayed contracts, which adds liquidity in Penny Options as 
long as the NOM Participant qualified for a rebate in Tier 2, 3, 4 
or 5 for that month. This is not being amended in this proposal.
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    The Exchange also proposes to subsidize the proposed increased 
Customer Rebates to Add Liquidity in Penny Options by increasing the 
Customer Fee for Removing Liquidity in Penny Options from $0.44 per 
contract to $0.45 per contract. The Exchange believes that this 
increase will allow the Exchange to compete more effectively by 
subsidizing rebates offered on Customer orders.
    The Exchange also proposes to make minor amendments to Section 2 
including amending the title of Section 2 from ``NASDAQ Options Market 
-Fees'' to ``NASDAQ Options Market -Fees and Rebates.'' to more 
specifically describe the Rule. The Exchange also proposes to correct a 
cross-reference to the NASDAQ OMX PHLX LLC (``Phlx'') ``Fee Schedule.'' 
The Exchange proposes to update the title of the ``Fee Schedule'' to 
the ``Pricing Schedule'' in accordance with a recent amendment filed by 
Phlx.\7\
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    \7\ See SR-Phlx-2012-35.
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2. Statutory Basis
    NASDAQ believes that the proposed rule changes are consistent with 
the provisions of Section 6 of the Act,\8\ in general, and with Section 
6(b)(4) of the Act,\9\ in particular, in that it provides for the 
equitable allocation of reasonable dues, fees and other charges among 
members and issuers and other persons using any facility or system 
which NASDAQ operates or controls.
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    \8\ 15 U.S.C. 78f.
    \9\ 15 U.S.C. 78f(b)(4).
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    The Exchange believes that the proposed new pricing tiers are 
reasonable, equitable and not unfairly discriminatory because they 
continue an existing program \10\ to encourage broker-dealers acting as 
agent for Customer orders to select the Exchange as a venue to post 
Customer orders. The Exchange believes that its success at attracting 
Customer order flow benefits all market participants by improving the 
quality of order interaction and executions at the Exchange. The 
Exchange believes the existing monthly volume thresholds have 
incentivized firms that route Customer orders to the Exchange to 
increase Customer order flow to the Exchange. The Exchange desires to 
continue to encourage firms that route Customer orders to increase 
Customer order flow to the Exchange by offering greater Customer 
rebates for greater liquidity added to the Exchange.
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    \10\ The Exchange adopted these monthly volume achievement tiers 
in September 2011. See Securities Exchange Act Release Nos. 65317 
(September 12, 2011), 76 FR 57778 (September 16, 2011) (SR-NASDAQ-
2011-124), 65317 (September 12, 2011), 76 FR 61129 (October 3, 2011) 
(SR-NASDAQ-2011-127), 66126 (January 10, 2012), 77 FR 2335 (January 
17, 2012) (SR-NASDAQ-2012-003) and 66360 (February 8, 2012), 77 FR 
8312 (February 14, 2012) (SR-NASDAQ-2012-022).
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    Specifically, the Exchange believes that the increased Customer 
rebates in Penny Options would further incentivize firms to continue to 
send more Customer volume to the Exchange. By increasing the Customer 
rebates in Tiers 3, 4 and 5 by $0.01 per contract each, the Exchange 
would further encourage NOM Participants to transact a greater number 
of Customer rebates in Penny Options. With respect to Tier 3, NOM 
Participants that qualify for these Customer rebates today should 
qualify

[[Page 22018]]

for the increased rebate which continues to require at least 50,000 
contracts per day in a month of Customer liquidity, but also amends the 
criteria to between 50,000 and 74,999 contracts of Customer liquidity 
in Penny Options to qualify for the increased rebate of $0.43 per 
contract. NOM Participants who currently transact greater than 74,999 
contracts per day in a month today would be entitled to an even greater 
rebate because they would qualify for the increased Tier 4 rebate of 
$0.44 per contract. The Exchange is amending Tier 4 to lower the first 
criteria from 100,000 or more contracts of Customer liquidity to 75,000 
or more contracts of Customer liquidity in Penny Options and remove the 
second criteria to qualify for the Customer rebate.\11\ Therefore NOM 
Participants would only be required to add 75,000 or more contracts per 
day in a month of Customer liquidity in Penny Options to receive the 
increased Customer rebate of $0.44 per contract. The lower criteria in 
Tier 4 would allow NOM Participants that currently qualify for Tier 3, 
because they add greater than 75,000 contracts per day in a month of 
Customer liquidity in Penny Options, to qualify for the $0.44 per 
contract rebate and also encourage other NOM Participants to add more 
Customer liquidity to qualify for an even greater rebate than that 
offered for Tier 3.
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    \11\ As previously mentioned, the Exchange would no longer 
require 40,000 or more contracts per day in a month of NOM Market 
Maker liquidity.
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    The Exchange's proposal to increase the rebates in Tiers 3, 4 and 5 
and amend the Tier 3 and 4 criteria as described herein is reasonable 
because it should further encourage NOM Participants to qualify for 
Customer rebates in Penny Options by transacting a greater number of 
Customer contracts in Penny Options and increase liquidity on NOM. 
Increased liquidity benefits all market participants on the Exchange. 
In addition, the increased Tier 5 Customer rebate should further 
encourage increased activity in both the NASDAQ Options Market and in 
the ISP of the NASDAQ equity market. The Exchange's proposal to 
increase the rebates in Tiers 3, 4 and 5 as well as amend the criteria 
for Tiers 3 and 4 is equitable and not unfairly discriminatory because 
all NOM Participants that transact Customer orders in Penny Options are 
eligible for the Customer rebates.\12\ In addition, the proposals to 
amend the Tier 3 criteria to between 50,000 and 74,999 contracts of 
Customer liquidity in Penny Options and lower the Tier 4 criteria to 
75,000 or more contracts of Customer liquidity in Penny Options and 
eliminate the second criteria are equitable and not unfairly 
discriminatory because they should encourage NOM Participants that 
currently qualify for Tier 3 today to obtain the increased Tier 4 
rebate and encourage other NOM Participants to transact additional 
Customer orders in Penny Options to obtain the increased rebates.
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    \12\ Tier 1 pays a rebate for NOM Participants that add Customer 
liquidity of up to 14,999 contracts per day in a month of Penny 
Options. There is no required minimum volume of Customer orders to 
qualify for a Customer Rebate to Add Liquidity.
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    The Exchange's proposal to increase the Customer Fee for Removing 
Liquidity in Penny Options is reasonable because the Exchange is 
seeking to recoup costs associated with offering Customer rebates in 
Penny Options to attract greater liquidity to the Exchange. The 
increased liquidity benefits all market participants. The Exchange's 
proposal to increase the Customer Fee for Removing Liquidity in Penny 
Options is equitable and not unfairly discriminatory because all market 
participants would uniformly be assessed a $0.45 per contract Customer 
Fee for Removing Liquidity in Penny Options. Currently, Professionals, 
Firms, Non-NOM Market Makers and NOM Market Makers are assessed a $0.45 
per contract Fee for Removing Liquidity in Penny Options. The Exchange 
believes that increasing the Customer Fee for Removing Liquidity by 
$0.01 per contract ($0.44 per contract to $0.45 per contract) allows 
the Exchange to recoup costs and offer even greater Customer rebates, 
thereby benefitting all market participants by attracting Customer 
order flow to NOM.
    The Exchange's proposals to amend the title of Section 2 to reflect 
the rebates offered and also update a cross-reference to the Phlx fees 
are reasonable, equitable and not unfairly discriminatory because these 
amendments provide greater clarity and accuracy to the Rule text.
    The Exchange operates in a highly competitive market comprised of 
nine U.S. options exchanges in which sophisticated and knowledgeable 
market participants can and do send order flow to competing exchanges 
if they deem fee levels at a particular exchange to be excessive or 
rebate opportunities to be inadequate. The Exchange believes that the 
proposed fee and rebate scheme are competitive and similar to other 
fees, rebates and tier opportunities in place on other exchanges. The 
Exchange believes that this competitive marketplace materially impacts 
the fees and rebates present on the Exchange today and substantially 
influences the proposal set forth above.

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 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 either solicited or received.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Act.\13\ At any time within 60 days of the 
filing of the proposed rule change, the Commission summarily may 
temporarily suspend such rule change if it appears to the Commission 
that such action is necessary or appropriate in the public interest, 
for the protection of investors, or otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or disapproved.
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    \13\ 15 U.S.C. 78s(b)(3)(A)(ii).
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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 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 email to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2012-048 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-NASDAQ-2012-048. This 
file number should be included on the subject line if email 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

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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-NASDAQ-2012-048 and should be submitted 
on or before May 3, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-8838 Filed 4-11-12; 8:45 am]
BILLING CODE 8011-01-P


