[Federal Register Volume 63, Number 126 (Wednesday, July 1, 1998)]
[Proposed Rules]
[Pages 36138-36141]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-17437]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-40129 , File No. S7-18-98]
RIN 3235-AH30
Amendment to Rule 9b-1 Under the Securities Exchange Act Relating
to the Options Disclosure Document
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: The Commission is proposing an amendment to Rule 9b-1
(``Rule'') that would refine certain language of the Rule so that it
more clearly reflects the regulatory standards it was designed to
establish. The amendment is intended to strengthen Rule 9b-1 while
continuing to ensure a regulatory scheme that fosters investors'
understanding of the characteristics and risks of standardized options.
DATES: Comments should be submitted by July 31, 1998.
ADDRESSES: All comments should be submitted in triplicate and addressed
to Jonathan G. Katz, Secretary, U.S. Securities and Exchange
Commission, Mail Stop 6-9, 450 Fifth Street, N.W., Washington, D.C.
20549. Comments may also be submitted electronically at the following
E-Mail address: [email protected]. All comment letters should refer
to File No. S7-18-98; this file number should be included on the
subject line if E-mail is used. Comment letters will be available for
inspection and copying at the Commission's Public Reference Room at the
same address. Electronically submitted comment letters will be posted
at the Commission's Internet web site (http://www.sec.gov).
FOR FURTHER INFORMATION CONTACT: For further information regarding this
proposal, contact: Michael Walinskas, Deputy Associate Director, at
(202) 942-0090 or Kevin Ehrlich, Attorney, at (202) 942-0778.
SUPPLEMENTARY INFORMATION:
I. Introduction
In general, Rule 9b-1: \1\ (i) dictates when a self-regulatory
organization is required to file an options disclosure document
(``ODD'') with the Commission; (ii) itemizes the information required
to be contained in the ODD; (iii) specifies the Commission's process of
reviewing a preliminary ODD; and (iv) establishes the obligations of
broker-dealers to furnish the ODD prior to approving a customer's
account for trading in options. In light of the evolving nature of the
standardized options \2\ markets, the Commission is soliciting comments
on a proposal to amend Rule 9b-1 to ensure that the requirements of the
Rule continue to reflect the underlying objective of adequate
disclosure regarding standardized options.
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\1\ 17 CFR 240.9b-1.
\2\ Paragraph (a)(4) of the Rule defines standardized options to
mean ``options contracts trading on a national securities exchange,
an automated quotation system of a registered securities
association, or a foreign securities exchange which relate to
options classes the terms of which are limited to specific
expiration dates and exercise prices, or such other securities as
the Commission may, by order, designate.''
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II. Background
Rule 9b-1 provides that an options disclosure document containing
the information specified in paragraph (c) of the Rule must be filed
with the Commission by an options market \3\ at least 60 days prior to
the date definitive copies of the document are furnished to customers.
Paragraph (c) of the Rule currently specifies that, with respect to the
options classes covered by the document, the document must contain,
among other things, a discussion of the mechanics of buying, writing,
and exercising the options; the risks of trading the options; the
market for the option; and a brief reference to the transaction costs,
margin requirements, and tax consequences of options trading. Paragraph
(d) of the Rule further provides that no broker or dealer shall accept
an options order from a customer, or approve the customer's account for
the trading of options, ``unless the broker or dealer furnishes or has
furnished to the customer the options disclosure document.''
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\3\ Paragraph (a)(1) of the Rule defines an options market to
mean ``a national securities exchange, an automated quotation system
of a registered securities association or a foreign securities
exchange on which standardized options are traded.''
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The Commission adopted the Rule on September 16, 1982, in an effort
to foster better investor understanding of standardized options trading
and to reduce the costs of issuer compliance
[[Page 36139]]
with the registration requirements of the Securities Act of 1933
(``Securities Act'').\4\ Prior to the adoption of the Rule, it was
necessary for an options issuer to file a registration statement
containing detailed information about the issuer of the options and the
mechanics of options trading, in order to meet the registration
requirements of the Securities Act. These registration requirements,
however, made the prospectus ``lengthy and complicated'' and did not
meet the needs of financially unsophisticated options investors.\5\
Accordingly, the Commission proposed that a disclosure document be
developed which would contain information concerning the risks and uses
of options trading and present the information in a manner easily
understandable by investors lacking a technical, financial background.
With the adoption of Rule 9b-1, the Commission established a new
disclosure procedure specifically geared to meeting the information
needs of investors in standardized options.\6\
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\4\ See Securities Exchange Act Release Nos. 18836 (June 24,
1982), 47 FR 28688 (July 1, 1982) (``Proposing Release'') and 19055
(September 16, 1982), 47 FR 41950 (September 23, 1982) (''Adopting
Release'').
\5\ Proposing Release, id. at 47 FR 28688.
\6\ Concurrent with the adoption of Rule 9b-1, the Commission
adopted a new Form S-20 for the registration of standardized options
under the Securities Act. Adopting Release, supra note 3, 47 FR at
41951-2. This Form requires the filing of information related to the
issuer of standardized options and such options. The Form must be
filed with the Commission by the issuer before an options disclosure
document may be distributed. 17 CFR 240.9b-1(b)(1)(1985).
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In 1982, following the adoption of Rule 9b-1, an options disclosure
document was prepared jointly by the American Stock Exchange, Inc., the
Chicago Board Options Exchange, Inc. (``CBOE''), the Pacific Exchange,
Inc., the Philadelphia Stock Exchange, Inc., and the Options Clearing
Corporation (``OCC''). The initial disclosure document consisted of a
single booklet generally describing the risks and uses of exchange-
listed options on individual equity securities. Since that time,
several revised disclosure booklets have been published describing,
among other things, the risks and uses of listed options on stock
indexes, debt instruments, and foreign currencies. Currently, the ODD
utilized by the U.S. options exchanges is entitled ``Characteristics
and Risks of Standardized Options.'' \7\
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\7\ In addition to the ODD utlized by the U.S. options
exchanges, two foreign exchanges, the London Securities and
Derivatives Exchange (``OMLX'') and Canada Clearing Corporation,
have each filed an ODD with the Commission. Both of these ODDs are
modeled after the U.S. options market ODD.
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III. Discussion
The Commission is proposing several changes to Rule 9b-1 to better
reflect the desired disclosure requirements regarding standardized
options. The changes are minor or technical and do not alter the basic
purpose of the Rule, to ensure the dissemination of essential options
information to unsophisticated investors in a manner they can easily
understand. Moreover, the changes should help to ensure that the Rule
addresses the evolving nature of the standardized options markets.
Accordingly, the Commission believes that the proposed amendments are
necessary or appropriate in the public interest. The following is a
discussion of the proposed changes.
In paragraph (a)(3) of the Rule, the definition of an ``options
disclosure document'' will be amended in order to explicitly state that
amendments and supplements to the ODD are included as part of the ODD.
New financial products have been introduced into the standardized
options marketplace recently, such as FLEX Equity options \8\ and
LEAPS.\9\ In order to reduce printing costs, descriptions of these and
similar products are often initially incorporated into the ODD through
an ODD supplement and delivered to the customer along with the bound
ODD. (This practice conforms to the Commission's interpretation of ODD
supplement delivery obligations under the current rule.) The proposed
amendment removes a potential ambiguity regarding whether such
supplements are required to be delivered to customers and should be
deemed part of the ODD.
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\8\ See, e.g., Securities Exchange Act Release No. 36841
(February 14, 1996), 61 FR 6666 (February 21, 1996) (order approving
the listing of Flexible Exchange options on specified equity
securities) (CBOE-95-43).
\9\ LEAPS are equity and index options that have a longer term
expiration (up to five years) as compared to regular options. See,
e.g., Securities Exchange Act Release No. 35617 (April 17, 1995), 60
FR 20132 (April 24, 1995) (CBOE-95-02).
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In addition, a definition of ``definitive options disclosure
document'' is being proposed in paragraph (a)(3) of the Rule so that
Rules 134a and 135b under the Securities Act accurately reference Rule
9b-1.\10\ This definition will be referenced in paragraphs (d)(1) and
(d)(2) of the Rule. In this manner, the Commission believes that
investor confusion will be lessened.
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\10\ Rule 134a states that written materials related to
standardized options will not be deemed to be a prospectus for the
purposes of Section 2(10) of the Securities Act provided that, among
other conditions, such materials are limited to explanatory
information describing the general nature of the standardized
options markets. In addition, Rule 135b states that for purposes of
Section 5 of the Securities Act, materials meeting the requirements
of Rule 9b-1 of the Exchange Act will not be deemed to constitute
either an offer to sell or an offer to buy any security.
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The amendment will also make several technical clarifying changes
to the Rule. For example, in paragraph (b)(2)(i), the word ``options''
will be inserted before the phrase ``disclosure document.'' Similarly,
in paragraph (b)(2)(ii), the phrase ``options disclosure document''
will replace the phrase ``such material,'' and the phrase ``options
classes covered by the document'' will replace the more general
language ``the subject standardized options contracts.'' In each of
these instances, the Commission believes that the new language
eliminates potential ambiguity.
The proposed amendments to paragraphs (c)(2) and (c)(3) of the
Rule, which currently require that the ODD contain information
regarding, respectively, the ``mechanics of buying, writing and
exercising options, including settlement procedures'' and ``the risks
of trading options'' will be changed to better reflect the type of
information that appropriately is and should be included in the ODD.
Specifically, paragraph (c)(2) will require a discussion of the
``mechanics of exercising'' options, and paragraph (c)(3) will require
a discussion of the risks of ``being a holder or writer'' of options.
The Rule's existing language might be interpreted incorrectly to mean
that options exchanges covered by Rule 9b-1 must provide information to
investors via the ODD about how to ``trade'' options, including
exchange operating procedures and effective investment strategies.
Similarly, the proposed amendments to paragraphs (c)(4) and (c)(7)
of the Rule will be amended to ensure that the scope of information
included within the ODD is consistent with its intended purpose and
character. Accordingly, rather than including a discussion of the
``market for the options,'' paragraph (c)(4) will simply require ``the
identification of the market or markets in which the options are
traded.'' In addition, paragraph (c)(7) will require a ``general''
identification of the ``type'' of instrument or instruments underlying
the options class or classes covered by the document.
The changes to paragraphs (c)(2), (c)(3), (c)(4), and (c)(7) of the
Rule should help to clarify that the purpose of the ODD is to inform
investors generally about the characteristics and risks of options as
well as the risks to investors of maintaining positions in options. The
Commission does not intend for the proposed changes to the
[[Page 36140]]
Rule to require any changes to the current disclosures in an ODD.\11\
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\11\ The Commission notes that under the Rule it retains
authority to review and approve ODDs and to revise ``such other
information as the Commission may specify.''
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IV. Request for Comments
The Comission seeks comments on the proposed amendments to Rule 9b-
1. Comments should address whether the amendment clarifies the
disclosure requirements of Rule 9b-1 while continuing to ensure a
regulatory scheme that fosters inventors' understanding of standardized
options. The Commission's view is that the proposed changes will not
require any substantive changes to existing ODDs now distributed by the
U.S. options exchanges, Canada Clearing Corporation, and OMLX. The
Commission requests comment on this point.
V. Costs and Benefits of the Proposed Rule Change and its Effects
on Competition
To assist the Commission in its evaluation of the costs and
benefits that may result from the proposed exemption, commentators are
requested to provide analysis and data, if possible, relating to costs
and benefits associated with the proposal herein. The proposed
amendments to Rule 9b-1 under the Act will not change any substantive
disclosure obligations or compliance costs. Rather, the proposal would
clarify the disclosure requirements and goals regarding standardized
option products. The proposal should remove ambiguity that currently
may exist within the rules regarding standardized options disclosures.
The Commission requests commentators to address whether the proposed
amendment would generate the anticipated benefits, or impose any costs
on U.S. investors, broker-dealers, or others.
In addition, Section 23(a)(2) of the Act requires that the
Commission, when promulgating rules under the Exchange Act, to
consider, among other matters, the impact any such regulations would
have on competition.\12\ The Commission has preliminarily considered
the proposed rule in light of the standards cited in Section 23(a)(2)
of the Act and believes preliminarily that it would not impose any
significant burden on competition not necessary or appropriate in
furtherance of the Exchange Act. As noted above, the Commission does
not believe that the proposed amendments will require any changes to
the current disclosures in an ODD.
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\12\ See 15 U.S.C. 78w(a)(2).
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Pursuant to the Regulatory Flexibility Act, 5 U.S.C. Sec. 605(b),
the Commission has certified that the proposed amendment would not have
a significant economic impact on a substantial number of small
entities.\13\ The Commission requests comments on the certification
(see Appendix A). Commenters are asked to provide empirical data to
support the extent of any identified impact.
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\13\ Under the Exchange Act, as small broker or dealer entity is
defined as ``a broker or dealer that had total capital (net worth
plus subordinated liabilities) of less than $500,000 on the last
business day of the preceding fiscal year as of which its audited
financial statements were prepared pursuant to Sec. 240.17a-5(d) or,
if not required to file such statements, a broker or dealer that had
total capital (net worth plus subordinated liabilities) of less than
$500,000 on the last business day of the preceding fiscal year (or
in the time that it has been in business, if shorter).'' 17 CFR
240.010(c).
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VI. Regulatory Flexibility Act Certification
Pursuant to Section 605(b) of the Regulatory Flexibility Act, 5
U.S.C. 605(b), the Chairman of the Commission has certified that the
amendment proposed herein would not, if adopted, have a significant
economic impact on a substantial number of small entities. This
certification, including the reasons therefor, is attached to this
release as Appendix A. We encourage written comments on the
Certification. Commenters are asked to describe the nature of any
impact on small business entities and provide empirical data to support
the extent of the impact.
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996, the Commission is also requesting information regarding
the potential impact of the proposals on the economy on an annual
basis. The Commission does not currently believe that the amendments,
if adopted, would result or be likely to result in (i) an annual effect
on the economy of $100 million or more; (ii) a major increase in costs
or prices for consumers or individual industries; or (iii) significant
adverse effects on competition, investment, or innovation.
Nevertheless, the Commission solicits comment on this preliminary view.
Commentators should provide empirical data to support their views.
VII. Paperwork Reduction Act
Certain provisions of Rule 9b-1 contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act of 1995 (``PRA'') (44 U.S.C. Sec. 3501 et seq.). The
Commission previously submitted the rule to the Office of Management
and Budget (``OMB'') for review in accordance with 44 U.S.C. 3507(d),
and OMB has assigned the rule OMB control number 3235-0480. Because the
proposed rule changes should not materially affect the substance of the
required disclosures or the filing and delivery obligations under the
rule, there is no requirement that the Commission resubmit the rule
with the proposed amendment to OMB for review under the PRA.
VIII. Statutory Basis
The amendment to Rule 9b-1 is being proposed pursuant to 15 U.S.C.
Secs. 78a et seq., particularly Sections 9 and 23.
Text of the Proposed Amendment
List of Subjects in post
17 CFR Part 240
Reporting and recordkeeping requirements, Securities.
In accordance with the foregoing, Title 17, Chapter II of the Code
of Federal Regulations is proposed to be amended as follows:
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
1. The authority citation for Part 240 continues to read in part as
follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77eee,
77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78f, 78i, 78j, 78k, 78k-1,
78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 78w, 78x, 78ll(d), 79q,
79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4 and 80b-11, unless
otherwise noted.
* * * * *
2. Section 240.9b-1 is amended by revising paragraphs (a)(3),
(b)(2)(i) and (ii), (c)(2), (c)(3), (c)(4), (c)(6), (c)(7), (d)(1) and
(d)(2) as follows:
Sec. 240.9b-1 Options disclosure document.
(a) * * *
(3) ``Options disclosure document'' means a document, including all
amendments and supplements thereto, prepared by one or more options
markets which has been filed with the Commission or distributed in
accordance with paragraph (b) of this section [contains the information
required by this rule with respect to the options classes covered by
the document]. ``Definitive options disclosure document'' or
``document'' means an options disclosure document furnished to
customers in accordance with paragraph (b) of this section.
* * * * *
(b)(1) * * *
(2)(i) If the information contained in the options disclosure
document
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becomes or will become materially inaccurate or incomplete or there is
or will be an omission of material information necessary to make the
options disclosure document not misleading, the options market shall
amend or supplement its options disclosure document by filing five
copies of an amendment or supplement to such options disclosure
document with the Commission at least 30 days prior to the date
definitive copies are furnished to customers, unless the Commission
determines otherwise having due regard to the adequacy of the
information disclosed and the public interest and protection of
investors. Five copies of the definitive options disclosure document,
as amended or supplemented, shall be filed with the Commission not
later than the date the amendment or supplement, or the amended options
disclosure document, is furnished to customers.
(2)(ii) Notwithstanding paragraph (b)(2)(i) of this section, an
options market may distribute an amendment or supplement to an options
disclosure document [such materials] prior to such 30 day period if it
determines, in good faith, that such delivery is necessary to ensure
timely and accurate disclosure with respect to one or more of the
options classes covered by the document [the subject standardized
options contracts]. Five copies of any amendment or supplement
distributed pursuant to this paragraph shall be filed with the
Commission at the time of distribution. In that instance, if the
Commission determines, having given due regard to the adequacy of the
information disclosed and the public interest and the protection of
investors, it may require refiling of the amendment pursuant to
paragraph (b)(2)(i) of this section.
(c) * * *
(2) A discussion of the mechanics of [buying, writing and]
exercising the options [including settlement procedures];
(3) A discussion of the risks of being a holder or writer of the
options [trading the options];
(4) The identification of the market [for] or markets in which the
options are traded;
* * * * *
(6) The identification of the issuer of the options;
(7) A general identification of the type of instrument or
instruments underlying the options class or classes covered by the
document;
* * * * *
(d) Broker-dealer obligations. (1) No broker or dealer shall accept
an order from a customer to purchase or sell an option contract
relating to an options class that is the subject of a[n] definitive
options disclosure document, or approve the customer's account for the
trading of such option, unless the broker or dealer furnishes or has
furnished to the customer [the] a copy of the definitive options
disclosure document.
(2) If a[n] definitive options disclosure document relating to an
options class is amended or supplemented, each broker and dealer shall
promptly send a copy of the definitive amendment or supplement or a
copy of the definitive options disclosure document as amended [the
information contained in the definitive amendment] to each customer
whose account is approved for trading the options class or classes to
which the amendment or supplement [options disclosure document]
relates.
Dated: June 25, 1998.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
Appendix A--Regulatory Flexibility Act Certification
[Note: This Appendix A to the preamble will not appear in the Code
of Federal Regulations.]
I, Arthur Levitt, Jr., Chairman of the U.S. Securities and
Exchange Commission (``Commission''), hereby certify, pursuant to 5
U.S.C. Sec. 605(b), that the proposed amendment to Rule 9b-1
(``Rule'') under the Securities Exchange Act of 1934, (``Exchange
Act'') \1\ set forth in Securities Exchange Act Release No. 34-
40129, would not, if adopted, have a significant economic impact on
a substantial number of small entities. The proposed amendment will
clarify existing disclosure obligations for standardized option
products pursuant to Section 9 of the Act and Rule 9b-1 thereunder
\2\ and should not materially affect the substance of the required
disclosures or the filing and delivery obligations under the Rule.
Consequently, no new preparation, printing, or distribution costs
will be necessary. Finally, the proposed rule imposes no new
recordkeeping requirements or compliance burdens on small entities.
Accordingly, the proposed amendment would not have a significant
economic impact on a substantial number of small entities.
\1\ 15 U.S.C. 78a et seq.
\2\ 17 CFR 240.9b-1.
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Dated: June 24, 1998
Arthur Levitt, Jr.,
Chairman.
[FR Doc. 98-17437 Filed 6-30-98; 8:45 am]
BILLING CODE 8010-01-P