
[Federal Register Volume 78, Number 58 (Tuesday, March 26, 2013)]
[Notices]
[Pages 18410-18413]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-06884]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69196]


Order Granting a Limited Exemption From Rule 102 of Regulation M 
Concerning the NASDAQ Stock Market LLC Market Quality Program Pilot 
Pursuant to Regulation M Rule 102(e)

March 20, 2013.
    The Securities and Exchange Commission (``Commission'') approved a 
proposed rule change of the NASDAQ Stock Market LLC (``Exchange'' or 
``NASDAQ'') to add new NASDAQ Rule 5950 (``New Rule 5950'') to 
establish the Market Quality Program (``MQP'' or ``Program'').\1\ In 
connection with the Program, an MQP Company \2\ may list an eligible 
MQP Security \3\ on NASDAQ and in addition to the standard (non-MQP) 
NASDAQ listing fee, a sponsor may pay a fee (``MQP Fee'') \4\ that will 
be used for the purpose of incentivizing one or more market makers to 
enhance the market quality of an MQP Security on a voluntary pilot 
basis. The Commission believes that payment of the MQP Fee, which is 
incurred by the MQP Company but paid by the sponsor associated with the 
MQP Company, for the purpose of incentivizing market makers to make a 
quality market in otherwise less liquid MQP Securities would constitute 
an indirect attempt by the issuer to induce a bid for or a purchase of 
a covered security during a restricted period.\5\ As a result, absent 
exemptive relief, participation in the MQP by an MQP Company would 
violate Rule 102 of Regulation M.\6\ This order grants a limited 
exemption from Rule 102 of Regulation M solely to permit MQP Companies 
to participate in the MQP during the pilot, subject to certain 
conditions described below.
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    \1\ Securities Exchange Act Release No. 69195, (Mar. 20, 2013) 
(``Approval Order''). The Approval Order contains a detailed 
description of the MQP. On December 7, 2012, NASDAQ filed with the 
Commission, pursuant to Section 19(b)(1) of the Securities Exchange 
Act of 1934, as amended (``Act'' or ``Exchange Act'') and Rule 19b-4 
thereunder, a proposed rule change to establish the MQP. The 
proposed rule change, as modified by Amendment No. 1 thereto, was 
published for comment in the Federal Register on December 31, 2012. 
Securities Exchange Act Release No. 68515 (Dec. 21, 2012), 77 FR 
77141 (Dec. 31, 2012) (``Notice''). On February 7, 2013, NASDAQ 
submitted Amendment No. 2 to the proposed rule change. On February 
8, 2013 NASDAQ withdrew Amendment No. 2 due to a technical error in 
that amendment and submitted Amendment No. 3 to the proposed rule 
change. As noted in the Approval Order, Amendment No. 3 provided 
clarification to the proposed rule change and did not require notice 
and comment. On February 14, 2013, the Commission designated a 
longer period within which to take action on the proposed rule 
change. Securities Exchange Act Release No. 68925 (Feb. 14, 2013), 
78 FR 12116 (Feb. 21, 2013). The Approval Order grants approval of 
the proposed rule change, as modified by Amendment Nos. 1 and 3.
    Previously, NASDAQ filed, but later withdrew, an initial 
proposed rule change to establish the MQP. On March 23, 2012, NASDAQ 
filed with the Commission, pursuant to Section 19(b)(1) of the 
Exchange Act and Rule 19b-4 thereunder, a proposed rule change to 
establish the MQP. On March 29, 2012, the Exchange submitted 
Amendment No. 1 to the proposed rule change. The proposed rule 
change, as modified by Amendment No. 1 thereto, was published for 
comment in the Federal Register on April 12, 2012. Securities 
Exchange Act Release No. 66765 (Apr. 6, 2012), 77 FR 22042 (Apr. 12, 
2012). On May 18, 2012, the Commission extended the time period in 
which to either approve the proposed rule change, disapprove the 
proposed rule change, or institute proceedings to determine whether 
to disapprove the proposed rule change to July 11, 2012. Securities 
Exchange Act Release No. 67022 (May 18, 2012), 77 FR 31050 (May 24, 
2012). On July 11, 2012, the Commission instituted proceedings to 
determine whether to approve or disapprove the proposed rule change, 
as modified by Amendment No. 1. Securities Exchange Act Release No. 
67411 (Jul. 11, 2012), 77 FR 42052 (Jul. 17, 2012). On October 2, 
2012, the Commission issued a notice of designation of a longer 
period for Commission action on proceedings to determine whether to 
disapprove the proposed rule change. Securities Exchange Act Release 
No. 67961, 77 FR 61452 (Oct. 9, 2012). On November 6, 2012, NASDAQ 
submitted Amendment No. 2 to the proposed rule change. On December 
6, 2012, NASDAQ withdrew the proposed rule change, as modified by 
Amendment Nos. 1 and 2 thereto. Securities Exchange Act Release No. 
68378, 77 FR 74042 (Dec. 12, 2012) (Securities Exchange Act Release 
Nos. 66765, 67022, 67411, 67961, and 68378 collectively, the 
``Initial Proposal'').
    \2\ The term ``MQP Company'' means the trust or company housing 
the exchange traded fund (``ETF'') or, if the ETF is not a series of 
a trust or company, then the ETF itself. New Rule 5950(e)(5).
    \3\ The term ``MQP Security'' means an ETF security issued by an 
MQP Company that meets all of the requirements to be listed on 
NASDAQ pursuant to Rule 5705. New Rule 5950(e)(1).
    \4\ The MQP Fee, as described more fully in New Rule 5950(b)(2), 
consists of an annual basic MQP Fee, and may include an additional 
annual supplemental fee.
    \5\ See Securities Exchange Act Release No. 67411 (Jul. 11, 
2012), 77 FR 42052 (Jul. 17, 2012) (stating ``The Commission 
believes that issuer payments made under the SRO Proposals would 
constitute an indirect attempt by the issuer of a covered security 
to induce a purchase or bid in a covered security during a 
restricted period in violation of Rue 102 * * * [u]nder the NASDAQ 
Proposal, the issuer payments would `be used for the purpose of 
incentivizing one or more Market Makers in the MQP Security,' which 
could induce bids or purchases for the issuer's security during a 
restricted period'').
    \6\ 17 CFR 242.102.
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    NASDAQ represents that the MQP is designed to ``promote market 
quality'' in certain ETFs listed on NASDAQ.\7\ NASDAQ represents that, 
pursuant to the MQP, the MQP Fee will be used for the purpose of 
incentivizing one or more market makers in the MQP Security (``MQP 
Market Maker'') \8\ to make a quality market in the MQP Security.\9\ An 
MQP Company participating in the MQP shall incur an annual basic MQP 
Fee of $50,000 per MQP Security.\10\ An MQP Company may also 
voluntarily incur an annual supplemental MQP Fee per MQP Security.\11\ 
The MQP Fee is in addition to the standard (non-MQP) NASDAQ listing fee 
applicable to the MQP Security.\12\ NASDAQ will prospectively bill each 
MQP Company for the MQP Fee.\13\ The MQP Fee will be credited to the 
NASDAQ General Fund.\14\ MQP Credits for each MQP Security will be 
calculated monthly and credited out of the NASDAQ General Fund 
quarterly on a pro rata basis to one or more eligible MQP Market 
Makers.\15\ The voluntary MQP established by New Rule 5950 will be 
effective on a pilot basis.\16\
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    \7\ New Rule 5950 Preamble.
    \8\ ``The term `Market Maker' has the meaning given in Rule 
5005(a)(24).'' New Rule 5950(e)(3).
    \9\ New Rule 5950 Preamble.
    \10\ New Rule 5950(b)(2)(A).
    \11\ New Rule 5950(b)(2)(B).
    \12\ New Rule 5950(b)(2)(C).
    \13\ New Rule 5950(b)(2)(D).
    \14\ New Rule 5950(b)(2)(E).
    \15\ New Rule 5950(c)(2).
    \16\ New Rule 5950(f).

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[[Page 18411]]

    Under New Rule 5950, NASDAQ will be required to provide 
notification on its Web site regarding: (i) acceptance of an MQP 
Company, on behalf of an MQP Security, and an MQP Market Maker into the 
Program; \17\ (ii) the total number of MQP Securities that any one MQP 
Company may have in the Program; \18\ (iii) the names of MQP Securities 
and MQP Market Maker(s) in each MQP Security, and the dates that an MQP 
Company, on behalf of an MQP Security, commences participation in and 
withdraws or is terminated from the Program; \19\ (iv) a statement 
about the MQP that sets forth a general description of the Program as 
implemented on a pilot basis and a fair and balanced summation of the 
potentially positive aspects of the Program (e.g., enhancement of 
liquidity and market quality in MQP Securities) as well as the 
potentially negative aspects and risks of the Program (e.g., possible 
lack of liquidity and negative price impact on MQP Securities that 
withdraw or are terminated from the Program), and indicates how 
interested parties can get additional information about products in the 
Program; \20\ (v) when NASDAQ receives notification that an MQP 
Company, on behalf of an MQP Security, or a Market Maker intends to 
withdraw from the Program, and the date of actual withdrawal or 
termination from the Program; \21\ and (vi) any limit on the number of 
MQP Market Makers permitted to register in an MQP Security.\22\ 
Furthermore, MQP Companies must, on a product-specific Web site for 
each product, indicate that the product is in the MQP and provide a 
link to the Exchange's MQP Web page during such time that the MQP 
Company lists an MQP Security.\23\
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    \17\ New Rule 5950(a)(1)(C)(i).
    \18\ New Rule 5950(a)(1)(C)(ii).
    \19\ New Rule 5950(a)(1)(C)(iii).
    \20\ New Rule 5950(a)(1)(C)(iv).
    \21\ New Rule 5950(a)(2)(D).
    \22\ New Rule 5950(c)(3).
    \23\ New Rule 5950(b)(1)(D).
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    In response to the Notice, the Commission received three comment 
letters in support of the MQP.\24\ One commenter stated that the MQP 
program ``could create value for an issuer,'' ``jump-start trading,'' 
and make future liquidity ``less uncertain.'' \25\ One commenter 
believes ``the MQP could benefit promising tech companies that today 
may lack liquid, quality markets.'' \26\ Another commenter stated that 
``payments from issuers to market makers are used in a number of 
countries outside of the United States with great success.'' \27\ This 
commenter reiterated answers to questions concerning disclosure posed 
in connection with the Initial Proposal. In some areas, the commenter 
stated that ``more information is probably better than less,'' but in 
other areas cautioned about the ``potential for information overload.'' 
\28\ Further, the commenter stated that a ticker symbol identifier 
could be used in connection with an MQP Company's participation in the 
Program to signal to investors that lower volatility is generated by 
the Program.\29\ Another commenter agreed that ``MQP brokers' trades 
and quotes should be flagged.'' \30\
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    \24\ Letter from Albert J. Menkveld, Associate Professor of 
Finance, VU University Amsterdam and the Duisenberg School of 
Finance, dated February 18, 2013 (``Menkveld Letter''), Letter from 
Rey Ramsey, President and CEO, TechNet, dated January 22, 2013 
(``TechNet Letter'') and Letter from Daniel G. Weaver, Ph.D., 
Professor of Finance, Rutgers Business School, dated January 30, 
2013 (``Weaver Letter''). Both commenters submitted letters in 
support of the Initial Proposal as well. Letter from Rey Ramsey, 
President and CEO, TechNet, dated June 20, 2012 and Letter from 
Daniel G. Weaver, Ph.D., Professor of Finance, Rutgers Business 
School, dated April 26, 2012.
    \25\ Menkveld Letter.
    \26\ TechNet Letter.
    \27\ Weaver Letter.
    \28\ Id.
    \29\ Id.
    \30\ Menkveld Letter.
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    In addition, commenters generally in favor of the Initial Proposal 
supported the Program's stated goal to increase liquidity and promote 
efficient, robust markets for exchange-traded products.\31\ However, in 
connection with the Initial Proposal, certain commenters expressed 
concerns about the MQP, including the departure from rules precluding 
market makers from directly or indirectly accepting payment from an 
issuer of a security for acting as a market maker.\32\ In particular, 
commenters discussed the potential distortive impact on the natural 
market forces of supply and demand.\33\ Commenters also discussed what 
they viewed as the failure of Program requirements to adequately 
mitigate potential negative impacts of the MQP, including concerns 
about hampering investors' ability to evaluate quotations in MQP 
Securities.\34\
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    \31\ See, e.g., Letter from Joseph Cavatoni, Managing Director, 
and Joanne Medero, Managing Director, BlackRock, Inc., dated July 
11, 2012.
    \32\ See, e.g., Letter from Gus Sauter, Managing Director and 
Chief Investment Officer, Vanguard, dated May 3, 2012 (citing to a 
discussion in NASD Notice to Members 75-16 regarding the reasons for 
prohibiting issuer payments for market making: ``The additional 
factor of payments by an issuer to a market maker would probably be 
viewed as a conflict of interest since it would undoubtedly 
influence, to some degree, a firm's decision to make a market and 
thereafter, perhaps, the prices it would quote. Hence, what might 
appear to be independent trading activity may well be illusory.''). 
In addition, another commenter noted ``that the MQP would represent 
a departure from the current rules precluding market makers from 
directly or indirectly accepting payment from an issuer of a 
security for acting as a market marker'' yet supported the concept 
of market maker incentive programs on a pilot basis. Letter from Ari 
Burstein, Investment Company Institute (``ICI''), dated May 3, 2012. 
In a subsequent letter, however, the same commenter noted that 
certain of its members opposed the MQP and stated that it ``could 
create a `pay-to-play' environment.'' Letter from Ari Burstein, ICI, 
dated August 16, 2012. Pursuant to the Approval Order, the Exchange 
will adopt new IM-2460-1 to exclude the MQP from NASDAQ Rule 2460 
(Payment for Market Making). The Approval Order notes that NASDAQ 
Rule 2460 is almost identical to, and is based on, FINRA Rule 5250 
(Payments for Market Making) and that a number of aspects of the MQP 
mitigate the concerns that FINRA Rule 5250 and NASDAQ Rule 2460 were 
designed to address.
    \33\ See, e.g., Letter from F. William McNabb, Chairman and 
Chief Executive Officer, Vanguard, dated August 16, 2012.
    \34\ See, e.g., Letter from Gus Sauter, Managing Director and 
Chief Investment Officer, Vanguard, dated May 3, 2012.
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    One commenter stated that ``[i]ssuer payments to market makers have 
the potential to distort market forces, resulting in spreads and prices 
that do not reflect actual supply and demand.'' \35\ Another commenter 
suggested that ``[i]ncentivized trading obfuscates true supply and 
demand by creating volume where no natural buyers and sellers exist.'' 
\36\ One commenter questioned whether any safeguards could alleviate 
their concerns regarding issuer payments to market makers.\37\ Another 
commenter questioned whether information that would be posted to 
NASDAQ's Web site would adequately address investor protection and 
market integrity concerns because investors may not search the NASDAQ 
Web site for important information about a particular product.\38\
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    \35\ Letter from F. William McNabb, Chairman and Chief Executive 
Officer, Vanguard, dated August 16, 2012.
    \36\ Letter from Timothy Quast, Managing Director, Modern IR, 
dated April 26, 2012.
    \37\ Letter from Ari Burstein, ICI, dated August 16, 2012 
(stating ``ICI members who oppose the Programs believe any fixes to 
the proposed parameters will be insufficient to address their 
overall concerns with market maker incentive programs'').
    \38\ Letter from Gus Sauter, Managing Director and Chief 
Investment Officer, Vanguard, dated May 3, 2012 (asking ``[f]or 
example, given what we know about investor behavior, is it likely 
that investors would consult Nasdaq's Web site for information about 
which ETFs and market makers are participating in the Program. * * * 
[i]f not, then most investors would not be able to distinguish 
quotations that reflect true market forces from quotations that have 
been influenced by issuer payments''). As discussed below, while New 
Rule 5950 requires certain disclosures on the NASDAQ Web site, the 
Commission believes that additional disclosures are required to 
address these concerns as they relate to relief from Rule 102 of 
Regulation M.

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[[Page 18412]]

Rule 102 of Regulation M
    Rule 102 of Regulation M prohibits issuers, selling security 
holders, or any affiliated purchaser of such persons, directly or 
indirectly, from bidding for, purchasing, or attempting to induce any 
person to bid for or purchase a covered security \39\ during the 
applicable restricted period in connection with a distribution of 
securities effected by or on behalf of an issuer or selling security 
holder, except as specifically permitted in the rule.\40\ As mentioned 
above, the Commission believes that the payment of the MQP Fee would 
constitute an indirect attempt to induce a bid for or purchase of a 
covered security during the applicable restricted period.\41\ As a 
result, absent exemptive relief, participation in the MQP by an MQP 
Company would violate Rule 102.
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    \39\ Covered security is defined as any security that is the 
subject of a distribution, or any reference security. 17 CFR 
242.100(b).
    \40\ 17 CFR 242.102(a).
    \41\ See note 5, supra.
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    On the basis of the conditions set out below and the requirements 
set forth in New Rule 5950, which in general are designed to help 
inform investors about the potential impact of the MQP, the Commission 
finds that it is appropriate in the public interest, and is consistent 
with the protection of investors, to grant a limited exemption from 
Rule 102 of Regulation M solely to permit the payment of the MQP Fee as 
set forth in New Rule 5950 during the pilot.\42\ This limited exemption 
is conditioned on a requirement that the MQP Security is an ETF and the 
secondary market price for shares of the ETF must not vary 
substantially from the net asset value of such ETF shares during the 
duration of the ETF's participation in the MQP. This condition is 
designed to limit the MQP to ETFs that have a pricing mechanism that is 
expected to keep the price of the ETF shares tracking the net asset 
value of the ETF shares, which should make the shares less susceptible 
to price manipulation.
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    \42\ Rule 102(e) allows the Commission to grant an exemption 
from the provision of Rule 102, either unconditionally or on 
specified terms and conditions, to any transaction or class of 
transactions, or to any security or class of securities.
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    This limited exemption is further conditioned on disclosure 
requirements, as set forth below, which are designed to alert potential 
investors that the trading market for the otherwise less liquid 
securities in the MQP may be affected by the Program. By making it 
easier for investors to be able to distinguish which quotations may 
have been influenced by the MQP Fee from those that have not, and by 
requiring the MQP Companies to provide information on the potential 
effect of Program participation on the price of their MQP Securities, 
the required enhanced disclosure requirements are designed to inform 
potential investors about the potential distortive impact of the MQP 
Fee on the natural market forces of supply and demand. General 
disclosure provided on the Exchange's Web site and a simple 
notification on a product-specific Web site, as required under new 
NASDAQ Rule 5950, may not be sufficient to obtain this result. The 
required enhanced disclosures are expected to promote greater investor 
protection by helping to ensure that investors (who may not know to 
search the NASDAQ's Web site) will have easier access to important 
information about a particular ETF.\43\ We also note that, to the 
extent that information about participation in the MQP is material, 
disclosure of this kind may already be required by the federal 
securities laws and rules.
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    \43\ The required Web site and press release disclosures should 
be less burdensome than requiring a ticker symbol identifier or 
flagging MQP broker quotes and trades, as suggested by two 
commenters.
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Conclusion

    It is therefore ordered, that MQP Companies are hereby exempted 
from Rule 102 of Regulation M solely to permit the payment of the MQP 
Fee as set forth in New Rule 5950 in connection with an MQP Security 
during the pilot, subject to the conditions contained in this order and 
compliance with the requirements of New Rule 5950.
    This exemption is subject to the following conditions:
    1. The MQP Security is an ETF and the secondary market price for 
shares of the ETF must not vary substantially from the net asset value 
of such ETF shares during the duration of the MQP Security's 
participation in the MQP;
    2. An MQP Company must provide prompt notice to the public by 
broadly disseminating a press release prior to entry (or upon re-entry) 
into the MQP. This press release must disclose:
    a. The payment of an MQP Fee is intended to generate more quotes 
and trading than might otherwise exist absent this payment, and that 
the MQP Security leaving the Program may adversely impact a purchaser's 
subsequent sale of the security; and
    b. A hyperlink to the Web page described in condition (4) below;
    3. An MQP Company must provide prompt notice to the public by 
broadly disseminating a press release prior to an MQP Security leaving 
the Program for any reason, including termination of the Program. This 
press release must disclose:
    a. The date that the MQP Security is leaving the MQP and that 
leaving the MQP may have a negative impact on the price and liquidity 
of the MQP Security which could adversely impact a purchaser's 
subsequent sale of the MQP Security; and
    b. A hyperlink to the Web page described in condition (4) below;
    4. An MQP Company must provide prompt, prominent and continuous 
disclosure on its Web site in the location generally used to 
communicate information to investors about a particular MQP Security, 
and for an MQP Security that has a separate Web site, the MQP 
Security's Web site of:
    a. The MQP Security and ticker, date of entry into the Program, and 
the amount of the MQP Fee (basic and supplemental, if any);
    b. Risk factors investors should consider when making an investment 
decision, including that participation in the Program may have 
potential impacts on the price and liquidity of the MQP Security; and
    c. Termination date of the pilot, anticipated date (if any) of the 
MQP Security leaving the Program for any reason and the date of actual 
exit date (if applicable), and that the MQP Security leaving the 
Program could adversely impact a purchaser's subsequent sale of the MQP 
Security; and
    5. The Web site disclosure in condition 4 must be promptly updated 
if a material change occurs with respect to any information contained 
in the disclosure.
    This exemptive relief expires when the pilot terminates, and is 
subject to modification or revocation at any time the Commission 
determines that such action is necessary or appropriate in furtherance 
of the purposes of the Exchange Act. This exemptive relief is limited 
solely to the payment of the MQP Fee as set forth in New Rule 5950 for 
an MQP Security that is an ETF participating in the Program, and does 
not extend to any other activities, any other security of the MQP 
Company, or any other issuers.\44\ In addition, persons relying on this 
exemption are directed to the anti-fraud and anti-manipulation 
provisions of the Exchange Act, particularly Sections 9(a) and 10(b), 
and Rule 10b-5 thereunder. Responsibility for compliance with these and 
any other applicable provisions of the federal securities laws must 
rest with the persons relying on this exemption. This

[[Page 18413]]

order does not represent Commission views with respect to any other 
question that the proposed activities may raise, including, but not 
limited to the adequacy of the disclosure required by federal 
securities laws and rules, and the applicability of other federal or 
state laws and rules to, the proposed activities.
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    \44\ Other activities, such as ETF redemptions, are not covered 
by this exemptive relief.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\45\
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    \45\ 17 CFR 200.30-3(a)(6).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-06884 Filed 3-25-13; 8:45 am]
BILLING CODE 8011-01-P


