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
Federal Register / Vol. 63, No. 126 /Wednesday, July 1, 1998 / Proposed Rules 36139

4See 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’’).

5Proposing Release, id. at 47 FR 28688.

6Concurrent 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).

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.

8See, 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).

9LEAPS 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).

10Rule 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.

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

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

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.

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.

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
36140 Federal Register / Vol. 63, No. 126 /Wednesday, July 1, 1998 / Proposed Rules

11The 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.’’

12See 15 U.S.C. 78w(a)(2).

13Under 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 § 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).

Rule to require any changes to the

current disclosures in an ODD.11

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.

Pursuant to the Regulatory Flexibility

Act, 5 U.S.C. § 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.

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. § 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. §§ 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:

§ 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
Federal Register / Vol. 63, No. 126 /Wednesday, July 1, 1998 / Proposed Rules 36141

1 15 U.S.C. 78a et seq.

2 17 CFR 240.9b–1.

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. § 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.

Dated: June 24, 1998

Arthur Levitt, Jr.,

Chairman.

[FR Doc. 98–17437 Filed 6–30–98; 8:45 am]

BILLING CODE 8010–01–P