
[Federal Register Volume 78, Number 84 (Wednesday, May 1, 2013)]
[Notices]
[Pages 25512-25514]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-10240]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69452; File No. SR-Phlx-2013-24]


Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Order 
Granting Approval of Proposed Rule Change and Amendment No. 1 Thereto 
To Adopt a Price/Display/Time Priority Algorithm, Permit the 
Registration of Market Makers, and Amend the Order Types Available on 
PSX

April 25, 2013.

I. Introduction

    On March 8, 2013, NASDAQ OMX PHLX LLC (``Phlx'' or ``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\ proposed rule changes to 
adopt a price/display/time algorithm, permit the registration of market 
makers, and amend the order types available on NASDAQ OMX PSX 
(``PSX''). Phlx filed Amendment No. 1 to the proposed rule change on 
March 18, 2013.\3\ The proposed rule change, as amended by Amendment 
No. 1, was published for comment in the Federal Register on March 26, 
2013.\4\ The Commission received no comment letters on the proposal. 
The Commission is approving the Exchange's proposal, 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\ Amendment No. 1 replaced the original filing in its 
entirety.
    \4\ See Securities Exchange Act Release No. 69194 (March 20, 
2013), 78 FR 18386 (March 26, 2013) (``Notice'').
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II. Background

    In 2010, the Exchange launched PSX as a new platform for trading 
cash equity securities, establishing a price/size pro rata priority 
model for allocating the execution of incoming orders against orders 
resting on the PSX book.\5\ The Exchange had anticipated that this 
market model would gain traction as an alternative to the price/time 
priority model currently used by other national securities exchanges. 
According to the Exchange, however, the price/size priority model has 
been only marginally successful in garnering market share, primarily 
due to the risk of a large execution at a stale price that a market 
participant would face if unable to adjust the prices of its posted 
orders quickly.\6\ Therefore, the Exchange proposes to adopt a price/
time priority model (but with displayed orders receiving priority over 
non-displayed orders) for PSX. The Exchange also proposes to allow 
member organizations that satisfy certain criteria to register as 
market makers on PSX (``PSX Market Makers''). Finally, the Exchange 
proposes to introduce Midpoint Peg Post-Only Orders and Price to Comply 
Post Orders, to adjust the operation of Minimum Quantity Orders and 
Post-Only Orders, and to eliminate Minimum Life Orders.
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    \5\ See Securities Exchange Act Release No. 62877 (September 9, 
2010), 75 FR 56633 (September 16, 2010) (SR-Phlx-2010-79) (``PSX 
Approval Order'').
    \6\ See Notice, supra note 4, at 18386.
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III. Discussion and Commission Findings

    The Commission finds that the proposed rule changes filed by the 
Exchange are consistent with the requirements of the Act and the rules 
and regulations thereunder applicable to a national securities 
exchange.\7\ Specifically, the Commission finds that the proposed rule 
changes are consistent with Section 6(b)(5) of the Act,\8\ which 
requires, among other things, that the rules of a national securities 
exchange be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest. Overall, the Commission believes that approving the 
Exchange's proposed rule change could benefit the public and market 
participants to the extent that it provides a more competitive venue 
for the trading of cash equity securities, resulting in better prices 
and executions for investors. The Commission finds that, for the 
reasons discussed below, the Exchange's proposal is consistent with the 
Act.
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    \7\ In approving these proposed rule changes, the Commission has 
considered the proposed rules' impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \8\ 15 U.S.C. 78f(b)(5).
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A. Order Processing Algorithm

    PSX currently employs a price/size pro rata execution order 
processing algorithm, with displayed orders receiving priority over 
non-displayed orders. Specifically, multiple orders displayed on the 
PSX book at the best price are allocated shares of an incoming order 
pro rata based on the proportion of the size of the displayed order to 
the total size of all displayed orders at that price. Once all 
displayed size at any price level is exhausted, the same pro rata logic 
applies to non-displayed orders at that price level.\9\
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    \9\ See Rule 3307. See also PSX Approval Order, supra note 5.
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    Phlx proposes to amend its rules to replace its price/size pro rata 
order processing algorithm with a price/time priority algorithm that is 
substantially similar to the order processing algorithms used at the 
NASDAQ Stock Market (``NASDAQ'') and/or NASDAQ OMX BX, Inc. (``BX''). 
Specifically, PSX's new order processing algorithm would allocate 
orders as follows:
    (1) Price. Better priced orders would be executed first.
    (2) Displayed orders. As among equally priced displayed orders, the 
first to arrive on the book would be executed first.
    (3) Non-displayed orders and the reserve portion of quotes and 
reserve orders. As among equally priced non-displayed orders and the 
reserve portion of quotes and reserve orders, the first to arrive on 
the book would be executed first.\10\
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    \10\ See proposed Rule 3307.
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    The Commission believes that the proposed PSX execution priority 
rules are consistent with Section 6(b)(5) of the Act. The Commission 
notes that the price/time priority model is the prevailing execution 
algorithm for the exchange trading of cash equity securities. The 
Commission has previously determined price/time execution algorithms to 
be consistent with the Act.\11\ Moreover, the particular price/time 
priority model proposed by Phlx is substantially similar to the model 
currently used by NASDAQ and BX and does not raise any novel issues.
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    \11\ See, e.g., Securities Exchange Act Release No. 54155 (July 
14, 2006), 71 FR 41291 (July 20, 2006) (SR-NASDAQ-2006-001); 
Securities Exchange Act Release No. 59154 (December 23, 2008), 73 FR 
80468 (December 31, 2008) (SR-BSE-2008-48).
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B. Market Making

    Phlx proposes to adopt rules to allow member organizations that are 
PSX participants to register and act as PSX Market Makers. Under the 
proposed rules, quotations and quotation sizes may be entered into PSX 
only by a PSX Market Maker or other entity approved by the Exchange to 
function in a market-making capacity.\12\ A PSX participant may 
register as a PSX Market Maker in an issue by entering an electronic

[[Page 25513]]

request or by contacting PSX Market Operations.\13\ Registration would 
become effective on the day the registration request is entered.\14\ A 
PSX Market Maker's registration in an issue will be terminated by the 
Exchange if the PSX Market Maker fails to enter quotations in the issue 
within five (5) business days after the PSX Market Maker's registration 
in the issue becomes effective.\15\
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    \12\ Proposed Rule 3212(a).
    \13\ Proposed Rule 3212(b).
    \14\ Id.
    \15\ Proposed Rule 3212(c).
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    The proposed rules provide that a PSX Market Maker for a particular 
security must be willing to buy and sell that security for its own 
account on a continuous basis during regular market hours,\16\ and that 
a PSX Market Maker must also display a two-sided trading interest in 
that security of at least one normal unit of trading in PSX's quotation 
montage at all times. Proposed Rule 3213(a)(2) would require a PSX 
Market Maker for NMS stocks to adhere to certain pricing obligations 
that are premised on entering quotation prices that are not more than a 
designated percentage \17\ away from the national best bid or best 
offer (as applicable) and that must be refreshed if a change in the 
national best bid or best offer causes the quotation price to be more 
than a defined limit \18\ away from the national best bid or best 
offer.
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    \16\ Proposed Rule 3213(a)(1).
    \17\ The applicable percentages are defined in proposed Rule 
3213(a)(2)(D).
    \18\ The applicable limits are defined in proposed Rule 
3213(a)(2)(E).
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    In general, a PSX Market Maker that wishes to withdraw quotations 
in a security would be required to contact the Exchange's MarketWatch 
Department to obtain excused withdrawal status prior to withdrawing its 
quotations. An exception to the requirement for prior approval would 
exist for withdrawals based on a PSX Market Maker's systemic equipment 
problems. For other circumstances beyond the PSX Market Maker's 
control, a PSX Market Maker that wishes to withdraw its quotations 
would be required to contact the Exchange's MarketWatch Department to 
obtain excused withdrawal status prior to withdrawing its quotations. 
If a PSX Market Maker's ability to enter or update quotations is 
impaired, the PSX Market Maker would be required to immediately contact 
PSX Market Operations to request a withdrawal of its quotations. A PSX 
Market Maker that elects to remain in PSX when its ability to update 
quotations is impaired would be obligated to execute orders presented 
for execution against its disseminated quotations.\19\
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    \19\ Proposed Rule 3213(c).
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    Under the proposed rules, a PSX Market Maker may voluntarily 
terminate its registration in a security by withdrawing its two-sided 
quotation from PSX, but a PSX Market Maker that voluntarily terminated 
its registration in a security could not re-register as a PSX Market 
Maker in that security for one (1) business day.\20\ A PSX Market Maker 
would not be deemed to have terminated its registration in a security 
by voluntarily withdrawing its two-sided quotation from PSX if the PSX 
Market Maker's two-sided quotation in the subject security is withdrawn 
by the Exchange's systems due to certain issuer corporate actions and 
the PSX Market Maker satisfies specified conditions following the 
withdrawal of the quotation.\21\
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    \20\ Proposed Rule 3220(a).
    \21\ Proposed Rule 3220(d).
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    A PSX Market Maker that accidentally withdraws as a PSX Market 
Maker may be reinstated at the Exchange's discretion, if the PSX Market 
Maker notifies the Exchange's MarketWatch department promptly, the PSX 
Market Maker was not attempting to avoid its market making obligations, 
and the PSX Market Maker's firm has not exceeded the Exchange's 
reinstatement limitations.\22\
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    \22\ Proposed Rule 3220(b).
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    The Exchange also proposes several rules to govern conduct of PSX 
Market Makers in connection with securities that are subject of 
offerings governed by SEC Regulation M.\23\ The proposed rules address 
the entry of stabilizing bids,\24\ excused withdrawals based on status 
as a distribution participant or affiliated purchaser within the 
meaning of Regulation M,\25\ the imposition of penalty bids or engaging 
in syndicate covering transactions,\26\ and the meaning of certain new 
defined terms.\27\
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    \23\ Rules 100-105 under Regulation M, 17 CFR 242.100-242.105.
    \24\ Proposed Rule 3214.
    \25\ Proposed Rule 3219(e).
    \26\ Proposed Rule 3224.
    \27\ Proposed Rule 3203.
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    Phlx also proposes to require a member organization that is acting 
as a PSX Market Maker in a Commodity-Related Security \28\ to establish 
adequate information barriers when engaging in inter-departmental 
communications.\29\ A member organization acting as a PSX Market Maker 
in a Commodity-Related Security would be required to file with the 
Exchange's Regulation Department and keep current a list identifying 
all accounts--in which the PSX Market Maker holds an interest, over 
which it may exercise investment discretion, or in which it shares in 
the profits and losses--for trading in commodities or derivatives 
underlying that Commodity-Related Security.\30\ A member organization 
acting as a PSX Market Maker in a Commodity-Related Security would not 
be permitted to act or register as a market maker in any commodities or 
derivatives underlying that Commodity-Related Security.\31\
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    \28\ The term ``Commodity-Related Security'' is defined in Rule 
3230(c).
    \29\ Proposed Rule 3230(d).
    \30\ Proposed Rule 3230(e).
    \31\ Id.
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    A member organization acting as a registered PSX Market Maker in a 
Commodity-Related Security would be required to make available to the 
Exchange's Regulation Department certain information pertaining to 
transactions by the PSX Market Maker or by registered or non-registered 
employees affiliated with it for its or their own accounts for trading 
commodities or derivatives underlying that Commodity-Related 
Security.\32\ Finally, in connection with trading a Commodity-Related 
Security or commodities or derivatives underlying a Commodity-Related 
Security, the member organization acting as a PSX Market Maker in a 
Commodity-Related Security would be prohibited from using any material 
nonpublic information received from any person associated with the 
member organization or employee of that person regarding trading by 
that person or employee in the commodities or derivatives underlying 
such Commodity-Related Security.\33\
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    \32\ Proposed Rule 3230(f).
    \33\ Proposed Rule 3230(g).
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    The Commission finds the proposed rules governing the registration 
and regulation of PSX Market Makers to be consistent with Section 
6(b)(5) of the Act. In particular, the proposed rules should help to 
ensure that quotations submitted by PSX Market Makers, and displayed to 
market participants, bear some relationship to the prevailing market 
price and should thus promote fair and orderly markets and the 
protection of investors.\34\ The proposed

[[Page 25514]]

rules are substantially similar to requirements currently in place at 
NASDAQ and BX and raise no novel issues.\35\
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    \34\ See, e.g., Securities Exchange Act Release No. 53128 
(January 13, 2006), 71 FR 3550 (January 23, 2006) (File No. 10-131) 
(approving NASDAQ market maker rules as part of its registration as 
a national securities exchange); Securities Exchange Act Release No. 
59154 (December 23, 2008), 73 FR 80468 (December 31, 2008) (SR-BSE-
2008-48); Securities Exchange Act Release No. 63255 (November 5, 
2010), 75 FR 69484, 69485 (November 12, 2010) (SR-BATS-2010-025, SR-
BX-2010-66, SR-CBOE-2010-087, SR-CHX-2010-22, SR-FINRA-2010-049, SR-
NASDAQ-2010-115, SR-NSX-2010-12, SR-NYSE-2010-69, SR-NYSEAmex-2010-
96, SR-NYSEArca-2010-83) (approving corresponding marketwide rules 
with respect to market maker quoting and pricing obligations) 
(``2010 Order'').
    \35\ See, e.g., proposed Rule 3212 (addressing the registration 
of PSX Market Makers), which is substantially similar to NASDAQ Rule 
4612 and BX Rule 4612.
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C. Modifications to Order Types

    Phlx proposes to make certain changes to PSX's order functionality. 
Specifically, Phlx proposes to adjust the operation of Minimum Quantity 
Orders and Post-Only Orders, adopt rules to institute Midpoint Peg 
Post-Only Orders and Price to Comply Orders, and eliminate Minimum Life 
Orders.
    Under current PSX rules, if the size of a Minimum Quantity Order is 
reduced to less than one round lot due to a partial execution, the 
minimum quantity condition on the order will be removed.\36\ Phlx 
proposes to modify the operation of PSX's Minimum Quantity Order by 
permitting such orders to retain their minimum quantity condition even 
after their size is reduced to less than one round lot.\37\ The 
Commission believes that Phlx's proposed changes to the Minimum 
Quantity Order type are consistent with the Act. The Commission notes 
that the proposed change will allow the operation of the order to 
better reflect the intention of the market participants entering the 
order, since it will allow a minimum quantity condition to continue to 
be attached to an order at a size below one round lot. This change also 
will make the operation of the PSX Minimum Quantity Order consistent 
with functionality currently in place at NASDAQ.\38\
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    \36\ Rule 3301(f)(5).
    \37\ Proposed Rule 3301(f)(5).
    \38\ NASDAQ Rule 4751(f)(5).
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    Phlx also proposes to modify the functionality associated with its 
existing Post-Only Order on PSX. Currently, if a Post-Only Order would 
lock or cross an order on PSX at the time of entry, the order is re-
priced and displayed by PSX one minimum price increment below the 
current low offer (for bids) or above the current best bid (for 
offers).\39\ Under the proposed change, if a Post-Only Order would 
cross an existing order, the order would be repriced unless the value 
of price improvement associated with executing against a resting order 
equals or exceeds the sum of fees charged for the execution and the 
value of any rebate that would be provided if the order posted to the 
book and subsequently provided liquidity, in which case the order would 
execute.\40\ The Commission believes that Phlx's proposed changes to 
the Post-Only Order type are consistent with the Act. According to the 
Exchange, the proposed changes to the Post-Only Order are designed to 
provide market participants with better control over their execution 
costs by ensuring that a Post-Only Order will post to the PSX book only 
when an immediate execution of the order would not be more economically 
advantageous to the market participant that entered it.\41\ The 
Commission notes that the proposed changes to the Post-Only Order 
functionality would make this order type consistent with functionality 
currently existing on NASDAQ and BX.\42\
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    \39\ Rule 3301(f)(10). In addition, if the order would lock or 
cross a protected quotation of another market center, the order will 
be accepted at the locking price (i.e., the current low offer (for 
bids) or the current best bid (for offers)) and displayed by PSX to 
one minimum price increment (i.e., $0.01 or $0.0001) below the 
current low offer (for bids) or above the current best bid (for 
offers). Thus, if the national best bid and offer, as displayed on 
another market center, was $10 x $10.05, an order to buy at $10.05 
or higher would be accepted at the locking price of $10.05, but 
would be displayed at $10.04. Subsequently, an incoming order to 
sell at $10.05 or lower would be matched against the Post-Only buy 
order.
    \40\ Proposed Rule 3301(f)(11).
    \41\ Proposed Rule 3301(f)(11).
    \42\ NASDAQ Rule 4751(f)(10) and BX Rule 4751(9).
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    In addition, Phlx also proposes to adopt two new order types: the 
Midpoint Peg Post-Only Order and the Price to Comply Post Order. A 
Midpoint Peg Post-Only Order would be a non-displayed order that is 
priced at the mid-point between the national best bid and best 
offer.\43\ Like a Post-Only Order, the Midpoint Peg Post-Only Order 
would not remove liquidity from PSX upon entry if it would lock a non-
displayed order on PSX. Rather, the Midpoint Peg Post-Only Order would 
post and lock the pre-existing order but will remain undisplayed.\44\ 
The Price to Comply Post Order would permit participants to post 
liquidity at or near the inside market in compliance with the 
restrictions on locked and crossed markets and trade-throughs under 
Rules 610(d) and 611 under Regulation NMS.\45\ If, at the time of its 
entry, a Price to Comply Post Order would lock or cross the protected 
quotation of another trading center or would execute at a price 
inferior to the protected quotation of another trading center, the 
order would be re-priced and displayed one minimum price increment 
below the current low offer (for bids) or one penny above the current 
best bid (for offers). Price to Comply Post Orders would not be 
routable.\46\
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    \43\ Proposed Rule 3301(f)(7).
    \44\ SEC Rule 610(d) under Regulation NMS, 17 CFR 242.610(d), 
restricts displayed quotations that lock protected quotations in NMS 
Stocks, but does not apply to non-displayed trading interest.
    \45\ 17 CFR 242.610(d), 611.
    \46\ Proposed Rule 3301(f)(9).
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    The Commission believes that Phlx's proposed new order types are 
consistent with the Act. The Commission notes that the proposed 
introduction of Midpoint Peg Post-Only Orders is intended to provide 
market participants with better control over their execution costs and 
to provide a means to offer price improvement opportunities.\47\ The 
proposed Midpoint Peg Post-Only Order functionality is identical to an 
order currently operative on NASDAQ.\48\ The Exchange represents that 
the proposed Price to Comply Post Order is intended to provide PSX 
Market Makers and other participants with a straightforward mechanism 
to enter an order that re-prices to ensure that it does not lock or 
cross or trade through the protection quotation of another market 
center.\49\ The Commission notes that the Proposed Price to Comply Post 
Order is substantially similar to an order type that is currently in 
use at NASDAQ.\50\
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    \47\ Proposed Rule 3301(f)(7).
    \48\ NASDAQ Rule 4751(f)(11).
    \49\ Proposed Rule 3301(f)(9).
    \50\ NASDAQ Rule 4715(f)(8).
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    Finally, Phlx also proposes to eliminate PSX's Minimum Life Order. 
The Minimum Life Order is a displayed order that may not be cancelled 
for a period of 100 milliseconds following its receipt.\51\ The 
Commission finds that Phlx's proposed elimination of the Minimum Life 
Order type is consistent with the Act. The Commission notes that no 
other national securities exchange has adopted this order type.
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    \51\ Rule 3301(e)(11).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\52\ that the proposed rule change (SR-Phlx-2013-24), as amended, 
be, and hereby is, approved.
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    \52\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\53\
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    \53\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-10240 Filed 4-30-13; 8:45 am]
BILLING CODE 8011-01-P


