
[Federal Register Volume 79, Number 242 (Wednesday, December 17, 2014)]
[Notices]
[Pages 75207-75211]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-29499]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73823; File No. SR-NASDAQ-2014-119]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Modify Certain NASDAQ Options Market Professional User and Enterprise 
License Fees

December 11, 2014.
    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 November 28, 2014, The NASDAQ Stock Market LLC (``NASDAQ'') 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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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    NASDAQ proposes to amend Chapter XV, entitled ``Options Pricing,'' 
at Section 4 governing pricing for NASDAQ members using the NASDAQ 
Options Market (``NOM''), NASDAQ's facility for executing and routing 
standardized equity and index options. Specifically, the Exchange 
proposes to amend certain NOM professional user (``Professional User'') 
and enterprise license (``Enterprise License'') fees.
    While the changes proposed herein are effective upon filing, the 
Exchange has designated that the amendments be operative on January 1, 
2015.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, NASDAQ included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed

[[Page 75208]]

any comments it received on the proposed rule change. The text of these 
statements may be examined at the places specified in Item IV below. 
NASDAQ 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
    The purpose of the proposed rule change is to amend certain NOM 
Professional User and Enterprise License fees.
    Currently, the Exchange assesses recipients of the BONO options 
data feed a $5 monthly internal per Professional User fee, as well as a 
$5 monthly external per Professional User fee. The Exchange also 
assesses recipients of the ITTO options data feed a $10 monthly 
internal per Professional User fee, as well as a $10 monthly external 
per Professional User fee.
    The Exchange proposes to establish a single monthly $40 per 
Professional User fee for internal use that will entitle such 
subscriber to access both the BONO and ITTO options data feeds 
combined. NASDAQ also proposes to establish a single monthly $40 per 
Professional User fee for external use that will entitle such 
subscriber to access both the BONO and ITTO options data feeds 
combined. The monthly Professional User fees per recipient covers the 
usage of both ITTO and BONO and recipients no longer will need to 
report their usage separately since they will no longer be assessed 
fees separately for each data product. For example, if a firm has one 
Professional Subscriber accessing both BONO and ITTO options data feeds 
for internal use, the firm would only report the Subscriber once and 
pay $40 ($1 for Non-Professional). The Exchange believes that by 
allowing access to multiple products for one price, it will allow for a 
broad dissemination of NOM data overall and a wider range of consumer 
choice. Moreover, this reduces the administrative burden on the firms 
since they no longer need to segregate the access of each system.
    Additionally, the Exchange proposes to increase the existing 
monthly Enterprise License (Non-Display) Fee of $2,500 per firm to 
$10,000 per firm for access to the BONO and ITTO options data feeds 
combined. This pricing structure continues to offer two advantages. 
First, it establishes a monthly fee cap for distributors with large 
customer bases, effectively lowering average cost per user and marginal 
costs per user beyond the monthly breakpoint. Second, the Enterprise 
License offers administrative ease by eliminating the need for 
distributors to tally, track, and report to the Exchange a specific 
number of individual users every month. This is a voluntary option; 
distributors are permitted to choose between per user fee pricing and 
the Enterprise License.
    The Exchange believes that although the above Professional User and 
Enterprise License fees are higher, the value of the BONO and ITTO 
options data feeds has increased significantly over the last three 
years. During this period NOM has witnessed strong growth both in terms 
of the number of listings, as well as trading market share. 
Specifically, NOM listings increased from 663 as of June 2011 to over 
2,700 today while NOM's trading market share jumped more than 250% from 
July 2011 to July 2014 according to OCC data. Also, NOM technological 
enhancements in 2011 (referred to as NOM 2.0) expanded NOM 
functionality through the introduction of new versions of market data 
specifications in an uncompressed, binary format. Additionally, NOM's 
market data specifications now are the same as the market data 
specifications on both the NASDAQ OMX PHLX LLC and NASDAQ OMX BX, Inc. 
exchanges. The commonality among the market data specifications across 
these three markets provide for greatly increased efficiency to firms 
by allowing them to leverage the development work on one market across 
all of three markets.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6 of the Act,\3\ in general, and with 
Section 6(b)(4) and 6(b)(5) of the Act,\4\ in particular, in that it 
provides an equitable allocation of reasonable fees among Subscribers 
and recipients of NASDAQ data and is not designed to permit unfair 
discrimination between them. NASDAQ'S proposal to establish a single 
monthly $40 per Professional User fee for internal use and a separate 
single monthly $40 per Professional User fee for external use that will 
entitle such subscriber to access both the BONO and ITTO options data 
feeds combined reflects an equitable allocation of reasonable fees. The 
Commission has long recognized the fair and equitable and not 
unreasonably discriminatory nature of assessing different fees for 
Professional and Non-Professional users of the same data. NASDAQ also 
believes it is equitable to assess a higher fee per Professional User 
than to an ordinary non-professional user due to the enhanced 
flexibility and lower overall costs that it offers Distributors.
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    \3\ 15 U.S.C. 78f.
    \4\ 15 U.S.C. 78f(b)(4) and (5).
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    NASDAQ believes that the increase to the Enterprise License Fee 
from the existing monthly fee of $2,500 per firm to $10,000 per firm 
for access to the BONO and ITTO options data feeds combined is fair and 
equitable and not unreasonably discriminatory. Enterprise Licenses have 
long been accepted as an economically efficient form of volume discount 
for the heaviest users of market data (see Rule 7023 enterprise 
licenses). The value of the BONO and ITTO options data feeds has 
increased significantly over the last three years and NASDAQ notes that 
the Enterprise License Fee is entirely optional in that NASDAQ is not 
required to offer it and Distributors are not required to pay it. 
Accordingly, Distributors and users can discontinue use at any time and 
for any reason, including due to an assessment of the reasonableness of 
fees charged.
    In adopting Regulation NMS, the Commission granted self-regulatory 
organizations and broker-dealers increased authority and flexibility to 
offer new and unique market data to the public.
    The Commission concluded that Regulation NMS--by deregulating the 
market in proprietary data--would itself further the Act's goals of 
facilitating efficiency and competition:

    [E]fficiency is promoted when broker-dealers who do not need the 
data beyond the prices, sizes, market center identifications of the 
NBBO and consolidated last sale information are not required to 
receive (and pay for) such data. The Commission also believes that 
efficiency is promoted when broker-dealers may choose to receive 
(and pay for) additional market data based on their own internal 
analysis of the need for such data.\5\
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    \5\ Securities Exchange Act Release No. 51808 (June 9, 2005), 70 
FR 37496 (June 29, 2005).

By removing ``unnecessary regulatory restrictions'' on the ability of 
exchanges to sell their own data, Regulation NMS advanced the goals of 
the Act and the principles reflected in its legislative history. If the 
free market should determine whether proprietary data is sold to 
broker-dealers at all, it follows that the price at which such data is 
sold should be set by the market as well.
    On July 21, 2010, President Barack Obama signed into law H.R. 4173, 
the Dodd- Frank Wall Street Reform and

[[Page 75209]]

Consumer Protection Act of 2010 (``Dodd-Frank Act''), which amended 
Section 19 of the Act. Among other things, Section 916 of the Dodd-
Frank Act amended paragraph (A) of Section 19(b)(3) of the Act by 
inserting the phrase ``on any person, whether or not the person is a 
member of the self-regulatory organization'' after ``due, fee or other 
charge imposed by the self-regulatory organization.'' As a result, all 
self-regulatory organization (``SRO'') rule proposals establishing or 
changing dues, fees, or other charges are immediately effective upon 
filing regardless of whether such dues, fees, or other charges are 
imposed on members of the SRO, non-members, or both. Section 916 
further amended paragraph (C) of Section 19(b)(3) of the Act to read, 
in pertinent part, ``At any time within the 60-day period beginning on 
the date of filing of such a proposed rule change in accordance with 
the provisions of paragraph (1) [of Section 19(b)], the Commission 
summarily may temporarily suspend the change in the rules of the self-
regulatory organization made thereby, 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 this title. If the Commission takes such action, the 
Commission shall institute proceedings under paragraph (2)(B) [of 
Section 19(b)] to determine whether the proposed rule should be 
approved or disapproved.''
    The decision of the United States Court of Appeals for the District 
of Columbia Circuit in NetCoalition v. SEC, 615 F.3d 525 (D.C. Cir. 
2010) (``NetCoalition I''), upheld the Commission's reliance upon 
competitive markets to set reasonable and equitably allocated fees for 
market data. ``In fact, the legislative history indicates that the 
Congress intended that the market system `evolve through the interplay 
of competitive forces as unnecessary regulatory restrictions are 
removed' and that the SEC wield its regulatory power `in those 
situations where competition may not be sufficient,' such as in the 
creation of a `consolidated transactional reporting system.' 
NetCoalition I, at 535 (quoting H.R. Rep. No. 94-229, at 92 (1975), as 
reprinted in 1975 U.S.C.C.A.N. 321, 323).
    For the reasons stated above, NASDAQ believes that the allocation 
of the proposed fee is fair and equitable in accordance with Section 
6(b)(4) of the Act, and not unreasonably discriminatory in accordance 
with Section 6(b)(5) of the Act. As described above, the proposed fee 
is based on pricing conventions and distinctions that exist in NASDAQ's 
current fee schedule. These distinctions are each based on principles 
of fairness and equity that have helped for many years to maintain 
fair, equitable, and not unreasonably discriminatory fees, and that 
apply with equal or greater force to the current proposal.
    As described in greater detail below, if NASDAQ has calculated 
improperly and the market deems the proposed fees to be unfair, 
inequitable, or unreasonably discriminatory, firms can discontinue the 
use of their data because the proposed product is entirely optional to 
all parties. Firms are not required to purchase data and NASDAQ is not 
required to make data available or to offer specific pricing 
alternatives for potential purchases. NASDAQ can discontinue offering a 
pricing alternative (as it has in the past) and firms can discontinue 
their use at any time and for any reason (as they often do), including 
due to their assessment of the reasonableness of fees charged. NASDAQ 
continues to establish and revise pricing policies aimed at increasing 
fairness and equitable allocation of fees among Subscribers.
    NASDAQ believes that periodically it must adjust fees to reflect 
market forces and NASDAQ believes it is an appropriate time to adjust 
this fee. This also reflects that the market for this Depth-of-Book 
information is highly competitive and continually evolves as products 
develop and change.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act, as amended. 
Notwithstanding its determination that the Commission may rely upon 
competition to establish fair and equitably allocated fees for market 
data, the NetCoalition court found that the Commission had not, in that 
case, compiled a record that adequately supported its conclusion that 
the market for the data at issue in the case was competitive. NASDAQ 
believes that a record may readily be established to demonstrate the 
competitive nature of the market in question.
    There is intense competition between trading platforms that provide 
transaction execution and routing services and proprietary data 
products. Transaction execution and proprietary data products are 
complementary in that market data is both an input and a byproduct of 
the execution service. In fact, market data and trade execution are a 
paradigmatic example of joint products with joint costs. Data products 
are valuable to many end Subscribers only insofar as they provide 
information that end Subscribers expect will assist them or their 
customers in making trading decisions.
    The costs of producing market data include not only the costs of 
the data distribution infrastructure, but also the costs of designing, 
maintaining, and operating the exchange's transaction execution 
platform and the cost of regulating the exchange to ensure its fair 
operation and maintain investor confidence. The total return that a 
trading platform earns reflects the revenues it receives from both 
products and the joint costs it incurs. Moreover, an exchange's 
customers view the costs of transaction executions and of data as a 
unified cost of doing business with the exchange. A broker-dealer will 
direct orders to a particular exchange only if the expected revenues 
from executing trades on the exchange exceed net transaction execution 
costs and the cost of data that the broker-dealer chooses to buy to 
support its trading decisions (or those of its customers). The choice 
of data products is, in turn, a product of the value of the products in 
making profitable trading decisions. If the cost of the product exceeds 
its expected value, the broker-dealer will choose not to buy it. 
Moreover, as a broker-dealer chooses to direct fewer orders to a 
particular exchange, the value of the product to that broker-dealer 
decreases, for two reasons. First, the product will contain less 
information, because executions of the broker-dealer's orders will not 
be reflected in it. Second, and perhaps more important, the product 
will be less valuable to that broker-dealer because it does not provide 
information about the venue to which it is directing its orders. Data 
from the competing venue to which the broker-dealer is directing orders 
will become correspondingly more valuable.
    Thus, an increase in the fees charged for either transactions or 
data has the potential to impair revenues from both products. ``No one 
disputes that competition for order flow is `fierce'.'' NetCoalition at 
24. However, the existence of fierce competition for order flow implies 
a high degree of price sensitivity on the part of broker-dealers with 
order flow, since they may readily reduce costs by directing orders 
toward the lowest-cost trading venues. A broker-dealer that shifted its 
order flow from one platform to another in response to order execution 
price differentials would both reduce the value of that platform's 
market data and reduce its own need to consume data

[[Page 75210]]

from the disfavored platform. Similarly, if a platform increases its 
market data fees, the change will affect the overall cost of doing 
business with the platform, and affected broker-dealers will assess 
whether they can lower their trading costs by directing orders 
elsewhere and thereby lessening the need for the more expensive data.
    Analyzing the cost of market data distribution in isolation from 
the cost of all of the inputs supporting the creation of market data 
will inevitably underestimate the cost of the data. Thus, because it is 
impossible to create data without a fast, technologically robust, and 
well-regulated execution system, system costs and regulatory costs 
affect the price of market data. It would be equally misleading, 
however, to attribute all of the exchange's costs to the market data 
portion of an exchange's joint product. Rather, all of the exchange's 
costs are incurred for the unified purposes of attracting order flow, 
executing and/or routing orders, and generating and selling data about 
market activity. The total return that an exchange earns reflects the 
revenues it receives from the joint products and the total costs of the 
joint products.
    Competition among trading platforms can be expected to constrain 
the aggregate return each platform earns from the sale of its joint 
products, but different platforms may choose from a range of possible, 
and equally reasonable, pricing strategies as the means of recovering 
total costs. For example, some platforms may choose to pay rebates to 
attract orders, charge relatively low prices for market information (or 
provide information free of charge) and charge relatively high prices 
for accessing posted liquidity. Other platforms may choose a strategy 
of paying lower rebates (or no rebates) to attract orders, setting 
relatively high prices for market information, and setting relatively 
low prices for accessing posted liquidity. In this environment, there 
is no economic basis for regulating maximum prices for one of the joint 
products in an industry in which suppliers face competitive constraints 
with regard to the joint offering. This would be akin to strictly 
regulating the price that an automobile manufacturer can charge for car 
sound systems despite the existence of a highly competitive market for 
cars and the availability of after-market alternatives to the 
manufacturer-supplied system.
    The market for market data products is competitive and inherently 
contestable because there is fierce competition for the inputs 
necessary to the creation of proprietary data and strict pricing 
discipline for the proprietary products themselves. Numerous exchanges 
compete with each other for listings, trades, and market data itself, 
providing virtually limitless opportunities for entrepreneurs who wish 
to produce and distribute their own market data. This proprietary data 
is produced by each individual exchange, as well as other entities, in 
a vigorously competitive market.
    Broker-dealers currently have numerous alternative venues for their 
order flow, including thirteen SRO markets, as well as internalizing 
broker-dealers (``BDs'') and various forms of alternative trading 
systems (``ATSs''), including dark pools and electronic communication 
networks (``ECNs''). Each SRO market competes to produce transaction 
reports via trade executions, and two FINRA-regulated Trade Reporting 
Facilities (``TRFs'') compete to attract internalized transaction 
reports. Competitive markets for order flow, executions, and 
transaction reports provide pricing discipline for the inputs of 
proprietary data products.
    The large number of SROs, TRFs, BDs, and ATSs that currently 
produce proprietary data or are currently capable of producing it 
provides further pricing discipline for proprietary data products. Each 
SRO, TRF, ATS, and BD is currently permitted to produce proprietary 
data products, and many currently do or have announced plans to do so, 
including NASDAQ, New York Stock Exchange LLC (``NYSE''), NYSE MKT LLC, 
NYSE Arca LLC, and BATS Exchange, Inc. (``BATS'').
    Any ATS or BD can combine with any other ATS, BD, or multiple ATSs 
or BDs to produce joint proprietary data products. Additionally, order 
routers and market data vendors can facilitate single or multiple 
broker-dealers' production of proprietary data products. The potential 
sources of proprietary products are virtually limitless.
    The fact that proprietary data from ATSs, BDs, and vendors can by-
pass SROs is significant in two respects. First, non-SROs can compete 
directly with SROs for the production and sale of proprietary data 
products, as BATS and Arca did before registering as exchanges by 
publishing data on the Internet. Second, because a single order or 
transaction report can appear in an SRO proprietary product, a non-SRO 
proprietary product, or both, the data available in proprietary 
products is exponentially greater than the actual number of orders and 
transaction reports that exist in the marketplace.
    Market data vendors provide another form of price discipline for 
proprietary data products because they control the primary means of 
access to end Subscribers. Vendors impose price restraints based upon 
their business models. For example, vendors such as Bloomberg and 
Thomson Reuters that assess a surcharge on data they sell may refuse to 
offer proprietary products that end Subscribers will not purchase in 
sufficient numbers. Internet portals, such as Google, impose a 
discipline by providing only data that will enable them to attract 
``eyeballs'' that contribute to their advertising revenue. Retail 
broker-dealers, such as Schwab and Fidelity, offer their customers 
proprietary data only if it promotes trading and generates sufficient 
commission revenue. Although the business models may differ, these 
vendors' pricing discipline is the same: They can simply refuse to 
purchase any proprietary data product that fails to provide sufficient 
value. NASDAQ and other producers of proprietary data products must 
understand and respond to these varying business models and pricing 
disciplines in order to market proprietary data products successfully.
    In addition to the competition and price discipline described 
above, the market for proprietary data products is also highly 
contestable because market entry is rapid, inexpensive, and profitable. 
The history of electronic trading is replete with examples of entrants 
that swiftly grew into some of the largest electronic trading platforms 
and proprietary data producers: Archipelago, Bloomberg Tradebook, 
Island, RediBook, Attain, TracECN and BATS Trading. A proliferation of 
dark pools and other ATSs operate profitably with fragmentary shares of 
consolidated market volume.
    Regulation NMS, by deregulating the market for proprietary data, 
has increased the contestability of that market. While broker-dealers 
have previously published their proprietary data individually, 
Regulation NMS encourages market data vendors and broker-dealers to 
produce proprietary products cooperatively in a manner never before 
possible. Multiple market data vendors already have the capability to 
aggregate data and disseminate it on a profitable scale, including 
Bloomberg, and Thomson Reuters.
    The vigor of competition for information is significant. NASDAQ has 
made a determination to adjust the fees associated with these products 
in order to reflect more accurately the value of its products and the 
investments made to enhance them, as well as to keep pace with changes 
in the industry and evolving customer needs. These products are 
entirely optional and are geared towards attracting new

[[Page 75211]]

customers, as well as retaining existing customers.
    The Exchange has witnessed competitors creating new products and 
innovative pricing in this space over the course of the past year. 
NASDAQ continues to see firms challenge its pricing on the basis of the 
Exchange's explicit fees being higher than the zero-priced fees from 
other competitors such as BATS. In all cases, firms make decisions on 
how much and what types of data to consume on the basis of the total 
cost of interacting with NASDAQ or other exchanges. Of course, the 
explicit data fees are but one factor in a total platform analysis. 
Some competitors have lower transactions fees and higher data fees, and 
others are vice versa. For example, NOM offers one distributor fee 
which allows firms to access both the BONO and ITTO data feeds. The 
market for this information is highly competitive and continually 
evolves as products develop and change.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor 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.\6\ 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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    \6\ 15 U.S.C. 78s(b)(3)(a)[sic](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, as amended, 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-2014-119 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2014-119. 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 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 Website 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 
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available 
for inspection and copying at the principal offices 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-2014-
119, and should be submitted on or before January 7, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-29499 Filed 12-16-14; 8:45 am]
BILLING CODE 8011-01-P


