THE ATTORNEY GENEIRAL 

OF TEXAS 

October 21:“197,3. :t ,i’ ,,,: 

The Honorable Roy W. Mouer 

Securities Commissioner 

709 State Finance ,Building 

Box 13167 Capitol Station 

Austin, Texas ,787ll 

Opinion Nb. H- 116 

Re: The aqlication of the 

Texas,, S.ecurities Act 

to. the ‘C’hi,cago Board 

Op,tions E’xchange 

..:.‘( Diar' ‘Mr. Mouer: 

You have requested’our opinion one the~ioli~~ing.~uestions: 

>.’ I 

I(l).Whether a.Chicago Board”&tion isa, 

,!security’ as that term i”de!f~ned:in,Sect,ion~~~. A 

of The Securiiieb .Act. 

: ), 

< :’ 

“‘I( 2) Whether the Chicago Boaid:~~~~~~‘.,~~xchange 

is”! ‘stock exchange’ as. that, ter.m.:is &~‘$$$$ection 6. F 

of The Securities Act. Ii’ , 

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You have further advised: 

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3: !:icij:., 

,.: ,$e &&ago B.oard’ ‘&&ns,‘E&ha~ge &de 

.,: 1.. V&Rlicat$n to~;:~t.~~~‘Sec~,~j~i.~~, @d fo,Fi,L9p,proval 

~, : .as ,a:r;ecognis+d, and,res,ponsJble ‘:stoc,h .exchange under 

. ~.. ‘.:!,” ,..,., >~,k .I>... 

,, :, ,&ticle ,58& Sect$m 6:.~~(‘~he,‘.,Secqrlti~.p:,~!:~,),?,,:A hear- 

~. .,:&g!,/n )h: ma!ier.Tyafl ,J=t$, ,p May iT$.!,:,, f~&c#p= it 

was establi,shed that the ,.Chicago Board :$3@&s Exchange 

,has registered withthe Securities’and Ex&nge Cqmmission as ‘a national s’ecurities exchange ‘a+.‘the,options ::, ,, :I:; ,.,, 

traded on the exchange, called Chicago Board ,Options. 

,have been regis,tered under,,the s~ecuri~~~cs:r~~gistration ._.: .,, 

provisions of The Securities Act of 193,3.,“. :~.~,I_ 

p. 555 
The Honorable Roy W. Mouer, page 2 (H-116) 

The information provided us indicates that the Chicago Board Options 

Exchange does not deal directly in corporate stock but confines its activities 

to the exchange of corporate stock options, known in the trade as “puts” and 

“calls”. The business of the exchange is described in its prospectus dated 

April 5, 1973, which you have provided us, as follows: 

“The Chicago Board Options covered by this 

prospectus are call options which give the holder 

the right to purchase from the Clearing Corporation 

a fixed number of shares of a specified security 

(referred to as the ‘underlying stock’) for a fixed 

purchase price (the ‘exercise price’) prior to a 

fixed expiration date. . . . A Chicago Board Option 

may be purchased only in a transaction on the Exchange. The ‘writer’ of an Option is a person who, 

through his broker, has sold an. Option on the Exchange 

and has thereby undertaken with the Clearing Corporation to deliver the underlying stock upon the timely 

assignment of an exercise notice to him against payment of the specified exercise price. The Clearing 

Corporation does not itself own the underlying stock. 

and the writer may not own the underlying stock (in 

which event he is known as an ‘uncovered writer’ and 

is subject to Exchange’s margin requirements applicable to uncovered writers. . . . ), As consideration 

for the rights and obligations represented by an 

Option,, the buyer ‘(often referred to herein as ‘holder’) 

pays ‘and’the writer receives an amount known as the 

-prkiniur;li” “’ The premium is determined in the Exchangel,s auction market on the basis of supply and 

demand, although it also depends upon considerations 

such as the duration of the Option, the difference between the exercise price and the market price of the 

underlying stock, and the price volatility and other 

characteristics of the underlying stock. In addition, 

buyers and writers of Options must pay commissions 

to their brokers in every Option transaction. ” 

p. 556 
. 

The Honorable Roy W. Mouer, page 3 (H-116) 

In our opinion the options traded on the Chicago Board Options 

Exchange are “securities” as defined in Article 581-4. A (The Securities 

Act),: Vernon’s Texas Civil Statutes.~ 

“The term ‘security’ or ‘securities’ shall 

include any share, stock, treasury stock, stock 

certificate under a voting trust agreement, collateral trust certificate, equipment trust certificate, 

pre-organization certificate ‘or receipt, subacription or reorganization certificate, note, bond, 

,debenture, mortgage certificate or other evidence 

of indebtedness, any form of commercial paper, 

certificate in or undera profit sharing or participation agreement, certificate or any instrument 

repre’senting any inter~est in ‘or under an oil, gas 

or mining lease, fee or title, or any certificate or 

instrument representing ‘or secured by an interest 

in any or all of the capital, property, assets, profits 

or earnings of ,any company, investment contract, or 

any other instrument commonly known as, a security, 

whether similar to those herein referred to or not. 

Provided, however, that this definition shall not 

apply to any insurance policy, endowment policy, 

annuity contract, optional annuity contract, or any 

contract or agreement in relation.to and in consequence of any such policy or contract, issued by an 

insurance company subject to the supervision or control of the Board of Insurance Commissioners when 

the form of such policy or contract has been duly filed 

with the Board as, now or hereafter required by law. ” 

Your letter states ,that at the hearing, “It was established that. . . 

the options traded on the exchange, called Chicago Board Options, have 

been registered under the securities registration provisions of the Securities 

Act of 1933. ” Accordingly, it is plain that the phrase in the definition in 

$‘4A of the Securities Act “or any other instrument commonly known as a 

security, whether similar to those herein referred to or not” would cover 

the investments in question. 

p. 557 
The Honorable Roy W. Mouer, page 4 (H-116) 

We recognize that the definitions of “securities” in $ 2B of The 

Securities Act of 1933 (15 USC 5 77b) and in the statutues of many states 

recognizing such options as securities, contain the phrase “right to 

subscribe to or purchase any of the foregoing, ” which phrase is not 

contained in the Texas act; however we do not believe this manifests 

any legislative attempt to eliminate such options from the Texas Securities Act. 

Other provisions in 5 4 of Article 581 that persuade us that the 

Legislature intended the inclusion of options in the definition of securities 

are found in its definitions of “dealer. ” “salesman” and “sell”: 

“C. The term ‘dealer’ shall include every 

person or company, other than a salesman, who 

engages in this state, either for all or part of his 

or its time, directly or through an agent, in selling, 

offering for sale or delivery or soliciting subscriptions to or orders for, or undertaking to dispose 

of, or to invite offers for, or rendering services 

as an investment adviser, or dealing in any other 

manner in any security ‘or securities within this 

state. 

“D. The term ‘salesman’ shall include every 

person or company employed or appointed or authoriced by a dealer to sell, offer for sale or delivery, 

or, solicit s,ubscriptions to or orders for, or deal in 

any .other manner, in securities within this state. . . . 

“E. . . . . The term ‘sell’ means any act by 

which a sale is made, and the term ‘sale’ or ‘offer 

for sale’ shall include a subscription, fan option. for 

sale, a solicitation of sale, a solicitation of an offer 

to buy, an attempt to sell, or an offer to sell, directly 

or by an agent or salesman, by a circular, letter, or 

adver,tisement or otherwise . . , . ” (emphasis added) 

p. 558 
The Honorable Roy W. Mouer, page 5 (H-116) 

In answer to your second question we hold that the Chicago Board 

Options Exchange is a “stock exchange” as referred to under 5 6F of 

Articlec~581, the Texas Securities Act, which reads: 

“Except as hereinafter in this Act expressly 

provided, the provisions of this Act shall not apply 

to any of rhe following securities when ,offered for 

sale, or sold, or dealt in by a registered dealer or 

salesmen of a registered dealer: . . . . 

“F. Securities which at the time of sale have 

been fully.listed up,on the American Stock Exchange, 

the Boston Stock Exchange, the Midwest Stock Exchange or the New York Stock Exchange, or upon any 

recognized and responsible stock exchange approved 

by the Commissioner as hereinafter in this section 

provided. . . . . ‘I 

“Stock exchange ” is not defined in the statute and accordingly we 

are relegated tothe meaning in which it is ordinarily understood. Satterfield 

v. Satterfield,. 448 S. W. ,2d 456 (Tex. 1969); cf. Article 10, V. T. C. S. In 

this situation, “It is proper and sometimes necessary to consult a dictionary 

to ascertain the meaning to be attached to a word. ” Board of Ins. Comlrs. 

V. Duncan. 174 S. W. 2d 326 (Tex. Civ. App. 1943); 53 Tex. Sur. Zd, Statutes, 

§147, p. 214. 

Webster’s Third New International Dictionary (1961) defines “stock 

exchange ” to mean: 

“a building or room in which security trading is 

conducted on an organized system. . . an association or group of people organized to provide 

an auction market among themselves for the purchase and sale of securities. ” 

Under this definition and the general understanding referred to itiArtcl= 581,. a “stock exchange” is not limited to an exchange that trades in 

p. 559 
The Honorable Roy W. Mouer, page 6 (H-116) 

“stocks. ‘I Rather, it embraces the concept of an exchange market in 

securities. Accordingly, Chicago Board Options Exchange, as a registered national securities exchange, plainly is a stock exchange as that 

term is generally understood and as it is used in $ 6. F. 

We are further persuaded in this conclusion by the information you 

have provided to the ,effect thatat your hearing “it was established that 

the Chicago Board Options Exchange has registered with the Securities 

and Exchange ,Commission as a national securities exchange. . . . ” 

By our affirmative answer to your second question we should not 

be understood a’s expressing any opinion on the question of whether the 

Chicago Board Options Exchange is a “recognized and responsible stock 

exchange. ‘I We are merely holding that it is a “stock exchange” and you 

are advised that the question of whether it is “recognized and responsible” 

is a factual matter entirely within your prerogative to determine. 

SUMMARY 

Ii ‘The, stock options which are the subject of 

investments on the Chicago Board OptionsExchange 

are ,“securities” as defined in Article 581-4A, V. T. C. S. 

Z., The Chicago Board Options Exchange is a 

“stock ,exchange” under Article 581-6, F, Vi T,: C. S; .,. .~~~.~ 

Very truly yours, 

J~OHN L. H.IL&:“~~~ .;.’ :, 

Attorney General of ‘Texas.. 

DAVJD M. KENDALL, Chairman 

Opitiion Committee 

p. 560