36136 Federal Register / Vol. 63, No. 126 /Wednesday, July 1, 1998 / Proposed Rules

1 17 CFR 240.9b–1.

2 15 U.S.C. 78a et seq.

3 15 U.S.C. 77l(a)(2) (renumbered). Before the

Securities Litigation Reform Act of 1995, Public

Law No. 104–67, 109 Stat. 737, this provision was

contained in Section 12(2) of the Securities Act.

4 15 U.S.C. 77a et seq.

5 17 CFR 230.135b.

6Standardized options are ‘‘options contracts

trading on a national securities exchange, an

automated quotations 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.’’ Rule 9b1(a)(4) under the Exchange Act [17 CFR 240.9b1(a)(4)].

7Securities Act Release No. 6426 (Sept. 16, 1982)

[47 FR 41950] (‘‘Adopting Release’’).

8 17 CFR 239.20

9 Information about the companies whose shares

underlie the options is not required. Instead,

information about these companies is available

because these companies are generally required to

be reporting companies before options on the shares

can be approved for trading on U. S. options

markets.

10Rule 153b under the Securities Act [17 CFR

230.153b].

11See Adopting Release.

12 Id.; see also Securities Act Release No. 6494,

n.2 (Oct. 27, 1983) [48 FR 51328] (discussing the

Commission’s 1979 Special Study of the Options

Market, which suggested the simplified registration

and disclosure scheme).

13Securities Act Rule 135b.

14 15 U.S.C. 77e. However, as stated in the release

that proposed Rule 135b, the ODD is subject to

liability under the anti-fraud provisions. Securities

Act Release No. 6411 (June 24, 1982) [47 FR 28688]

(‘‘Proposing Release’’).

15Adopting Release at § I.C.

16Adopting Release. Because Rule 135b states

that Section 5 does not apply to distribution of the

ODD, it is clear that Section 12(a)(1) liability is

inapplicable because that section provides recourse

only for offers or sales made in violation of Section

5. See 15 U.S.C. 77l(a)(1).

17Section 12(a)(2) also imposes civil liability for

oral communications containing material

misstatements or omissions. 15 U.S.C. 77l(a)(2).

SECURITIES AND EXCHANGE

COMMISSION

17 CFR Part 230

[Release No. 33–7550; File No. S7–19–98]

RIN 3235–AH31

Options Disclosure Document

AGENCY: Securities and Exchange

Commission.

ACTION: Proposed Rule.

SUMMARY: The Securities and Exchange

Commission (‘‘Commission’’) is

proposing to revise Rule 135b under the

Securities Act of 1933 to provide that an

options disclosure document prepared

in accordance with Rule 9b–1 under the

Securities Exchange Act of 1934 is not

a prospectus and, accordingly, is not

subject to civil liability under Section

12(a)(2) of the Securities Act. This

proposal is intended to codify a longstanding interpretive position that was

issued immediately after the

Commission adopted the current

registration and disclosure system

applicable to standardized options. The

proposal also is intended to eliminate

any legal uncertainty in this area.

DATES: Comments should be received on

or before July 31, 1998.

ADDRESSES: Comment letters should be

submitted in triplicate 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 also may be

submitted electronically at the following

E-mail address: rule-comments@sec.gov.

All comment letters should refer to File

Number S7–19–98; this file number

should be included on the subject line

if e-mail is used. All comments received

will be available for public inspection

and copying in the Commission’s Public

Reference Room at the same address.

Electronically submitted comment

letters will be posted on the

Commission’s Internet web site (http://

www.sec.gov).

FOR FURTHER INFORMATION CONTACT:

David Lavan, at (202) 942–1840, Office

of Chief Counsel, Division of

Corporation Finance, U.S. Securities

and Exchange Commission, Mail Stop

3–3, 450 Fifth Street, N.W., Washington,

D.C. 20549.

SUPPLEMENTARY INFORMATION: In order to

clarify that an options disclosure

document prepared in accordance with

Rule 9b–1 1 under the Securities

Exchange Act of 1934 (‘‘Exchange

Act’’) 2 is not a prospectus for purposes

of Section 12(a)(2) 3 of the Securities Act

of 1933 (‘‘Securities Act’’),4 the

Commission is proposing to revise Rule

135b 5 under the Securities Act.

I. Proposed Amendment

The Commission has a simplified

registration and disclosure system for

investors in standardized options 6,

which the Commission adopted in

1982. 7 Under this system, the issuer of

the standardized options (generally a

clearing corporation) may register the

options under the Securities Act on

Form S–20. 8 This form is quite

streamlined. It requires limited

information about the clearing

corporation issuer and the options it

issues in a prospectus filed as Part I of

the registration statement, and more

detailed information (including the

issuer’s financial statements) in Part II

of the registration statement. 9 The

options issuer may satisfy its prospectus

delivery requirement by delivering the

prospectus to each options market on

which the options are traded, for the

purpose of redelivery to options

customers on request. 10

The disclosure document used to

inform investors generally about options

is the ‘‘options disclosure document’’

(‘‘ODD’’). The ODD is prepared by the

exchange on which the registered option

trades and must meet the requirements

of Rule 9b-1 under the Exchange Act.

The ODD provides a general description

of standardized options and the rules of

options trading. The ODD must be

delivered to a customer at or before the

time that a broker or dealer approves the

customer’s account for options trading.

Typically, the exchanges work closely

with the clearing corporation in

preparing the ODD. 11

The Commission adopted this

simplified registration and disclosure

system in part to reduce the expense of

preparing and updating a detailed

prospectus, and to provide investors

with a document that is easier to read

than the options prospectus that

investors received before adoption of

these rules. 12 Rule 135b under the

Securities Act is one rule of this system.

This rule provides that an ODD

prepared in accordance with Rule 9b-1

under the Exchange Act ‘‘shall not be

deemed to constitute an offer to sell or

offer to buy any security’’ 13 for purposes

of Section 5 of the Securities Act. 14 In

the Adopting Release, the Commission

stated that ‘‘if the disclosure document

is deemed not to be an offer to sell or

buy, it cannot be deemed to be a

prospectus.’’ 15 In addition, the

Commission stated that Rule 135b ‘‘is

intended to relieve the preparers of the

disclosure document from liability

under Section [12(a)(1)] of the Act for

distributing a disclosure document to

investors which might, absent such

relief, violate Section 5 of the Act.’’ 16

However, Rule 135b and the Adopting

Release both are silent as to whether

Rule 135b was intended to address

liability under Section 12(a)(2) of the

Securities Act. Section 12(a)(2)

generally imposes civil liability for a

prospectus that contains material

misstatements or omissions. 17

Shortly after the Commission adopted

the rule, the Options Clearing

Corporation (‘‘OCC’’) requested

interpretive advice from the Division of

Corporation Finance (‘‘Division’’)

regarding the applicability of liability

under Section 12(a)(2) of the Securities

Act to an ODD. After considering the

Adopting Release, the Division advised

the OCC that in its view, an ODD ‘‘is not

a prospectus within the meaning of
Federal Register / Vol. 63, No. 126 /Wednesday, July 1, 1998 / Proposed Rules 36137

18Letter dated September 23, 1982, from then

Division of Corporation Finance Director, Lee B.

Spencer, Jr. to Mr. Marc L. Berman, then Senior

Vice President and General Counsel, of the Options

Clearing Corporation. On its face, the text of Rule

135b does not address the applicability of Section

12 liability. In its interpretive letter, the Division

noted that the limiting language ‘‘for purposes only

of Section 5 of the Act’’ appearing in Rule 135b is

intended to clarify that the ODD would be subject

to the antifraud provisions of Section 17(a) of the

Securities Act [15 U.S.C. 77q(a)] and Section 10(b)

of the Exchange Act [15 U.S.C. 78j(b)], but is not

intended to suggest that the ODD remains subject

to Section 12(a)(2) liability.

19See, e.g., Spicer v. Chicago Board Options

Exchange, No. 88 C 2139 (N.D. Ill. Oct. 24, 1990),

motion to reconsider denied (Jan. 24, 1991) (holding

that an ODD that is incorporated by reference as a

matter of law into the prospectus could be subject

to Section 12(2) [now Section 12(a)(2)] liability).

20Of course, the document would continue to be

subject to the anti-fraud liability provisions of

Section 17(a) of the Securities Act [15 U.S.C.

77q(a)], Section 10(b) of the Exchange Act [15

U.S.C. 78j(b)], and Rule 10b-5 under the Exchange

Act [17 CFR 240.10b-5]. Thus, the Commission

believes that the rule, if amended as proposed,

would continue to be consistent with protection of

investors.

21 15 U.S.C. 77s(a).

22 15 U.S.C. 77b(10).

23 15 U.S.C. 77g.

24 15 U.S.C. 77j.

25 15 U.S.C. 77l.

26 15 U.S.C. 77s(a).

Section [2(a)(10)] of the Securities Act

and, thus, is not subject to liability

under Section [12(a)(2)] of the Securities

Act.’’ 18

Despite this long-standing interpretive

position, uncertainty exists about the

applicability of Section 12(a)(2) liability

to an ODD. 19 In response to informal

requests from the Chicago Board

Options Exchange and the OCC, the

Commission believes that it is

appropriate and in the public interest to

eliminate any uncertainty in this area.

Accordingly, the Commission proposes

to modify Rule 135b to codify the

Division’s position that an ODD

prepared in accordance with Rule 9b-1

under the Exchange Act is not subject to

liability under Section 12(a)(2) because

it is not a prospectus. 20

II. Request for Comment

The Commission seeks comments on

any aspect of the proposed amendment

to Rule 135b. Any interested persons

wishing to submit written comments

relating to the rule proposal are invited

to do so by submitting them in triplicate

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 also

may be submitted electronically at the

following E-mail address: rulecomments@sec.gov. Comments will be

considered by the Commission in

complying with its responsibilities

under Section 19(a) of the Securities

Act. 21 Commentators should refer to

File No. S7–19–98; this file number

should be included on the subject line

if E-mail is used.

III. Costs and Benefits of the Proposed

Rule Change and its effects on

Efficiency, Competition and Capital

Formation

The Commission does not anticipate

that the proposed amendment will, in

and of itself, result in any economic

costs. The rule proposal is not intended

to change current practice under the

federal securities laws. Rather, the

proposal is intended to make it clear

that an ODD prepared in accordance

with Exchange Act Rule 9b-1 is not a

prospectus and thus is not subject to

liability under Section 12(a)(2) of the

Securities Act. By eliminating any

uncertainty over the applicability of

Section 12(a)(2) liability to an ODD, it

is anticipated that the proposal will

result in some unquantifiable economic

benefits.

However, commentators are

encouraged to provide views and data

relating to any costs or benefits

associated with the rule proposal. In

particular, please identify any costs or

benefits associated with the rule

proposal relating to the preparation of

the disclosure document. Will the

proposal have no substantial effect as

anticipated, or will the proposal result

in additional costs and/or benefits?

Please describe, and quantify where

possible, any foreseeable significant

effects. In addition, address whether the

proposal will affect the current

compliance burden of exchanges or

options issuers.

Because the proposed amendment is

intended to codify long-standing

Commission interpretations, the

Commission does not currently believe

that the proposed amendments to Rule

135b will impose any additional

burdens on competition. Nevertheless,

the Commission seeks comments on any

anti-competitive effects the rule, as

amended, may have.

In addition, by eliminating any

uncertainty in this area, the Commission

currently believes that the proposed rule

amendments will have a positive, but

unquantifiable, effect on efficiency,

competition and capital formation. The

Commission seeks comments on this

preliminary view.

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.

IV. 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

proposal would not, if adopted, have a

significant economic impact on a

substantial number of small entities.

This certification, including the reasons

therefore, is attached to this release as

Appendix A. We encourage written

comments on the Certification.

Commentators are asked to describe the

nature of any impact on small business

entities and provide empirical data to

support the extent of the impact.

V. Paperwork Reduction Act

Certain sections of Rule 135b contain

‘‘collection of information’’

requirements within the meaning of the

Paperwork Reduction Act of 1995

(‘‘PRA’’) (44 U.S.C. 3501 et seq.). The

Commission has 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 3235–0200. Because the

proposed rule changes should not

materially affect the collection of

information 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.

VI. Statutory Bases

The amendment to Securities Act

Rule 135b is being proposed pursuant to

Sections 2(a)(10), 22 7, 23 10, 24 12, 25 and

19(a) 26 of the Securities Act, as

amended.

List of Subjects in 17 CFR Part 230

Reporting and recordkeeping

requirements, Securities.

Text of the Proposal

In accordance with the foregoing,

Title 17, chapter II of the Code of

Federal Regulations is proposed to be

amended as follows:
36138 Federal Register / Vol. 63, No. 126 /Wednesday, July 1, 1998 / Proposed Rules

27 15 U.S.C. 77e.

28 15 U.S.C. 77b(10).

29 15 U.S.C. 77l(a)(2).

1 17 CFR 240.9b–1.

2Paragraph (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.’’

3Paragraph (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.’’

PART 230—GENERAL RULES AND

REGULATIONS, SECURITIES ACT OF

1933

1. The authority citation for Part 230

continues to read in part as follows:

Authority: 15 U.S.C. 77b, 77f, 77g, 77h, 77j,

77r, 77s, 77sss, 78c, 78d, 78l, 78m, 78n, 78o,

78w, 78ll(d), 79t, 80a-8, 80a-24, 80a-29, 80a30, and 80a-37, unless otherwise noted.

* * * * *

2. Section § 230.135b is revised to

read as follows:

§ 230.135b Materials not deemed an offer

to sell or offer to buy nor a prospectus.

Materials meeting the requirements of

§ 240.9b-1 of this chapter shall not be

deemed an offer to sell or offer to buy

a security for purposes solely of Section

5 27 of the Act, nor shall such materials

be deemed a prospectus for purposes of

Sections 2(a)(10) 28 and 12(a)(2) 29 of the

Act.

By the Commission.

Dated: June 25, 1998.

BILLING CODE 8010–01–P

Margaret H. McFarland,

Deputy Secretary.

Appendix A

[Note: This Appendix A to the preamble will

not appear in the Code of Federal

Regulations]

Regulatory Flexibility Act Certification

I, Arthur Levitt, Chairman of the Securities

and Exchange Commission, hereby certify,

pursuant to 5 U.S.C. 605(b), that the

proposed amendment to Rule 135b under the

Securities Act, as set forth in Securities Act

Release No. 33–7550, would not, if adopted,

impose additional disclosure or delivery

requirements or otherwise alter current

requirements, and therefore would not have

a significant economic impact on a

substantial number of small entities.

The amendment proposed in Securities Act

Release No. 33–7550 is intended to codify a

long standing interpretive position by

clarifying that an Options Disclosure

Document complying with the requirements

of Exchange Act Rule 9b–1 is not subject to

liability under Section 12(a)(2) of the

Securities Act. No new disclosure or delivery

obligations are proposed, nor are old

methods of disclosure or delivery being

terminated. Because the proposed

amendment is consistent with the current

interpretive position, no new liability would

be imposed and the current liability system

would not be altered. Since no changes to

substantive disclosure or delivery

requirements are being proposed, the

proposal will not have a significant economic

impact on businesses, large or small.

Economic benefits resulting from the

proposed amendment are anticipated. In

particular, the proposed amendment would

eliminate uncertainty over the applicability

of Section 12(a)(2) liability to an Options

Disclosure Document.

Dated: June 24, 1998.

Arthur Levitt,

Chairman.

[FR Doc. 98–17438 Filed 6–30–98; 8:45 am]

BILLING CODE 8010–01–M

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.

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: rulecomments@sec.gov. 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.

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.’’

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