[Federal Register Volume 67, Number 1 (Wednesday, January 2, 2002)]
[Rules and Regulations]
[Pages 228-230]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-32079]



[[Page 227]]

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Part V





Securities and Exchange Commission





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17 CFR Part 230



Options Disclosure Document; Final Rule

Federal Register / Vol. 67, No. 1 / Wednesday, January 2, 2002 / 
Rules and Regulations

[[Page 228]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 230

[Release No. 33-8049; File No. S7-19-98]
RIN 3235-AH31


Options Disclosure Document

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: We are adopting a revision to a rule under the Securities Act 
of 1933 to clarify that an options disclosure document prepared in 
accordance with our rules under the Securities Exchange Act of 1934 is 
not a prospectus and is not subject to civil liability under Section 
12(a)(2) of the Securities Act. This amendment codifies a long-standing 
interpretive position taken by the Division of Corporation Finance soon 
after we adopted the current registration and disclosure system 
applicable to standardized options in 1982. We are codifying this 
position to reduce the legal uncertainty regarding the liability issue.

EFFECTIVE DATE: February 1, 2002.

FOR FURTHER INFORMATION CONTACT: Ray Be, Special Counsel, at (202) 942-
2910, Division of Corporation Finance, U.S. Securities and Exchange 
Commission, 450 Fifth Street, NW., Washington, DC 20549-0312.

SUPPLEMENTARY INFORMATION: We are adopting a revision to Rule 135b \1\ 
under the Securities Act of 1933.\2\
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    \1\ 17 CFR 230.135b.
    \2\ 15 U.S.C. 77a et seq.
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I. Background

    In 1998, we issued a release proposing an amendment to Rule 135b 
under the Securities Act to clarify 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.\3\
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    \3\ Release No. 33-7550 (July 1, 1998) [63 FR 36136].
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    This clarification is consistent with the original intent of the 
simplified registration and disclosure system for standardized options 
that we adopted in 1982.\4\ 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.\5\ This form is 
quite streamlined. The Form S-20 prospectus includes limited 
information about the clearing corporation issuer and the options being 
registered.\6\ The registration statement includes additional 
information about the issuer's directors and executive officers and 
legal proceedings as well as its financial statements.
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    \4\ Release No. 33-6426 (Sept. 16, 1982) [47 FR 41950]. Rule 9b-
1(a)(4) [17 CFR 240.9b-1(a)(4)] under the Securities Exchange Act of 
1934 [15 U.S.C. 78a et seq.] defines standardized options as 
``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.''
    \5\ 17 CFR 239.20.
    \6\ Rule 153b [17 CFR 230.153b] allows the issuer to satisfy its 
Securities Act Section 5(b)(2) [15 U.S.C. 77e(b)(2)] prospectus 
delivery requirement by delivering copies of the prospectus to each 
exchange on which the options are traded. The exchange then must 
deliver the prospectus to options customers upon request.
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    Investors are informed about the general characteristics of 
standardized options and the rules of options trading through a 
separate disclosure document we refer to as the ``options disclosure 
document'' or the ``ODD.'' The ODD must meet the informational 
requirements of Rule 9b-1 under the Exchange Act. In addition to 
setting forth what information must be disclosed in the ODD, Rule 9b-1 
requires brokers and dealers to furnish a copy of the ODD to a customer 
before or at the time they approve that customer's account or accept 
the customer's order to trade options covered by the ODD. The exchanges 
on which the registered options trade work closely with the clearing 
corporation to prepare and update the ODD.\7\
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    \7\ See Release No. 34-43461 (Oct. 19, 2000) [65 FR 64137].
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    We adopted the simplified registration and disclosure system 
applicable to standardized options primarily to reduce the expense of 
preparing and updating a detailed prospectus, and to provide investors 
with a document that is easier to read and understand than a 
traditional options prospectus.\8\ Securities Act Rule 135b and its 
adopting release provide 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'' for purposes only of 
Section 5 of the Securities Act.\9\ In that adopting release, we stated 
that ``[f]or purposes of clarification, it should be noted that if the 
disclosure document is deemed not to be an offer to sell or buy, it 
cannot be deemed to be a prospectus.'' \10\ In addition, we stated that 
Rule 135b ``is intended to relieve the preparers of the disclosure 
document from liability under Section 12(1) [now Section 12(a)(1)] of 
the [Securities] Act for distributing a disclosure document to 
investors which might, absent such relief, violate Section 5 of the 
[Securities] Act.'' \11\
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    \8\ Release No. 33-6426, see note 3 above; see also Release No. 
33-6494, n.2 (Oct. 27, 1983) [48 FR 51328] (discussing the 
Commission's 1979 Special Study of the Options Market, recommending 
the simplified registration and disclosure scheme).
    \9\ 15 U.S.C. 77e. However, as stated in the release proposing 
Rule 135b, the ODD is subject to liability under the antifraud 
provisions of the federal securities laws. See Release No. 33-6411 
(June 24, 1982) [47 FR 28688].
    \10\ Release No. 33-6426, see note 3 above.
    \11\ Release No. 33-6426, see note 3 above. 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).
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    However, Rule 135b and its adopting release both are silent as to 
whether the ODD is subject to liability under Section 12(a)(2) of the 
Securities Act. Section 12(a)(2) generally imposes civil liability on a 
person using a prospectus that contains material misstatements or 
omissions to offer or sell a security.\12\
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    \12\ Section 12(a)(2) also imposes civil liability for oral 
communications containing material misstatements or omissions. 15 
U.S.C. 77l(a)(2).
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    Shortly after we adopted Rule 135b, the Options Clearing 
Corporation, commonly known as the OCC, requested interpretive advice 
from the Division of Corporation Finance regarding the applicability of 
Section 12(a)(2) liability to an ODD. After considering the rule's 
adopting release, the Division advised the OCC that in its view, an ODD 
``is not a prospectus within the meaning of Section 2(10) [now Section 
2(a)(10)] of the Securities Act and, thus, is not subject to liability 
under Section 12(2) [now Section 12(a)(2)] of the Securities Act.'' 
\13\ In 1998, we proposed and sought comment on a revision to Rule 135b 
to clarify that the ODD is not subject to Section 12(a)(2) 
liability.\14\
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    \13\ Letter dated September 23, 1982, from then Division of 
Corporation Finance Director, Lee B. Spencer, Jr. to 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.
    \14\ Release No. 33-7550 (July 1, 1998) [63 FR 36136].
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II. Discussion

    Despite this long-standing interpretive position, some uncertainty 
continues to exist about the applicability of Section

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12(a)(2) liability to an ODD.\15\ In response to informal requests from 
the Chicago Board Options Exchange and the OCC, we intend to reduce 
uncertainty in this area. We received two letters of comment on the 
1998 proposal to amend Rule 135b.\16\ Both letters supported 
clarification of the Section 12(a)(2) liability issue.
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    \15\ See, for example, Spicer v. Chicago Board Options Exchange, 
No. 88 C 2139 (N.D. Ill. Oct. 24, 1990) (deciding that an ODD could 
be subject to Section 12(a)(2) liability), motion to reconsider 
denied (Jan. 24, 1991), summary judgment granted (Dec. 9, 1992) 
(finding in favor of the OCC on the Section 12(a)(2) claim on other 
grounds). We have never considered inclusion of the statement 
referring to the ODD that is required by Form S-20 as having the 
effect of incorporating the ODD by reference into the Form S-20 
prospectus. Accordingly, we have added language to Rule 135b stating 
that the ODD shall not be deemed a prospectus for purposes of 
Sections 2(a)(10) and 12(a)(2) (15 U.S.C. 77b(a)(10) and 77l(a)(2)) 
of the Act, even if it is referred to in, deemed to be incorporated 
by reference into, or otherwise in any manner deemed to be a part of 
a Form S-20 prospectus.
    \16\ See the comment letters from Options Clearing Corporation 
(Aug. 26, 1998) and the Philadelphia Stock Exchange (Aug. 28, 1998). 
The comments we received are available in our Public Reference Room 
at 450 Fifth Street, NW., Washington, DC 20549, in File No. S7-19-
98.
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    As noted above, the ODD informs investors of the general 
characteristics of standardized options and the rules of options 
trading. Because of the general nature of this document, the ODD does 
not encourage investors to invest in any particular standardized 
option. Rather, the ODD merely provides background information about 
standardized options. Therefore, we believe that the ODD is neither an 
offer under the Securities Act nor a prospectus and therefore is not 
subject to Section 12(a)(2) liability.\17\
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    \17\ We note that this amendment is consistent with Congress' 
exemption of security futures products from Section 12(a)(2) 
liability. Congress generally intended that we treat standardized 
options and securities futures products similarly. See, for example, 
Exchange Act Section 6(h)(3)(C) [15 U.S.C. 78f(h)(3)(C)].
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    Accordingly, we are adopting the proposed change to Rule 135b to 
codify the Division of Corporation Finance's position that an ODD 
prepared in accordance with Exchange Act Rule 9b-1 is not subject to 
liability under Securities Act Section 12(a)(2).\18\
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    \18\ Of course, the document would continue to be subject to the 
antifraud 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, we believe that the rule, if amended as proposed, would 
continue to be consistent with protection of investors.
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III. Costs and Benefits

    We solicited comment to assist us in our evaluation of the costs 
and benefits associated with the change to Rule 135b. In response, we 
received two comment letters from affected parties, the Philadelphia 
Stock Exchange and the OCC. Both commenters supported the amendment. 
The OCC noted that the amendment would eliminate uncertainty in this 
area of the law, which would be beneficial to all parties. The 
amendment will not result in any new costs because it simply codifies 
the long-standing interpretive position of the Division of Corporation 
Finance 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 reducing any uncertainty in the 
courts concerning the applicability of Section 12(a)(2) liability to an 
ODD, we anticipate that the amendment will reduce the time and money 
spent by plaintiffs, the options exchanges, the OCC and the courts in 
pursuing, defending and dismissing such claims.
    As stated above, at least one federal district court has ruled that 
a claim may exist under Section 12(a)(2) even though the Division's 
interpretive position was in place.\19\ This type of conflicting ruling 
has added to the cost of defending and adjudicating claims and added 
uncertainty regarding the Section 12(a)(2) liability issue. In 
addition, the OCC has informed us of another suit currently pending in 
which the plaintiffs have claimed that the ODD is subject to Section 
12(a)(2) liability. We also contacted the OCC to help estimate the 
dollar cost of the uncertainty, which includes the cost of legal 
services. They were not able to provide dollar estimates because of the 
difficulty of separating the costs of defending one claim among a 
number of claims. Although it is not possible to quantify the extent to 
which plaintiffs would bring such suits in the future absent the 
amendment, we expect the rule clarification to result in cost savings 
to plaintiffs, defendants and courts by reducing any further need for 
these parties to address this issue.
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    \19\ See Spicer v. Chicago Board Options Exchange in note 15 
above.
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IV. Effects on Efficiency, Competition and Capital Formation

    We sought and received no comments on the amendment's effects on 
efficiency, competition and capital formation. The amendment to Rule 
135b is intended to reduce the OCC's and the exchanges' risk of Section 
12(a)(2) liability for the contents of the ODD. We do not expect this 
rule to have a negative impact on efficiency, competition and capital 
formation for the following reasons:
    This amendment reduces the legal risks to the OCC as issuer. But 
the OCC does not receive the proceeds from the sale of these 
securities. Rather, it acts as the clearing agent between the buyers 
and sellers of the securities. As such, the risk to the seller is 
unchanged by this rule and will not impact the economic incentives of 
buyers and seller to transact. This rule therefore should have no 
impact on capital formation.
    To the extent that this rule reduces the risk of legal actions 
against the OCC and the exchanges on the basis of differences of 
interpretation in Section 12(a)(2) liability, this rule will reduce the 
resources spent by the OCC and exchanges addressing suits. This rule 
therefore should increase the efficiency of the OCC and exchanges.
    We do not expect the amendment to have a significant impact on 
competition because the OCC is currently the only clearing corporation 
for standardized options trading on exchanges in the United States. Any 
new clearing corporations in the United States would benefit from the 
clarification equally with the OCC. Similarly, the exchanges will 
equally benefit from the clarification. However, to the extent that the 
options exchanges and the OCC compete with foreign markets for the 
trading of standardized options, by improving the efficiency of these 
entities, the amendment will have some positive effect on the 
exchanges' and the OCC's ability to compete in this market.

V. 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 will not have a significant economic impact on a substantial 
number of small entities. This certification, including the reasons 
supporting the certification, was attached to the proposing release, 
Release No. 33-7550, as Appendix A. We solicited comments on the 
potential impact of the amendment on small entities, but received no 
comments.

VI. Statutory Basis

    We are adopting the amendment to Securities Act Rule 135b pursuant 
to Sections 2(a)(10), 2(b), 7, 10, 19(a) and 28 of the Securities Act, 
as amended.

List of Subjects in 17 CFR Part 230

    Reporting and recordkeeping requirements, Securities.

[[Page 230]]

Text of the Rule Amendment

    In accordance with the foregoing, Title 17, chapter II of the Code 
of Federal Regulations is amended as follows:

PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

    1. The general authority citation for Part 230 is revised to read 
as follows:


    Authority: 15 U.S.C. 77b, 77c, 77d, 77f, 77g, 77h, 77j, 77r, 
77s, 77sss, 77z-3, 78c, 78d, 78l, 78m, 78n, 78o, 78t, 78w, 78ll(d), 
78mm, 79t, 80a-8, 80a-24, 80a-28, 80a-29, 80a-30, and 80a-37, unless 
otherwise noted.
* * * * *
    2. Revise Sec. 230.135b to read as follows:


Sec. 230.135b  Materials not deemed an offer to sell or offer to buy 
nor a prospectus.

    Materials meeting the requirements of Sec. 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 (15 U.S.C. 77e) of the Act, nor shall such 
materials be deemed a prospectus for purposes of Sections 2(a)(10) and 
12(a)(2) (15 U.S.C. 77b(a)(10) and 77l(a)(2)) of the Act, even if such 
materials are referred to in, deemed to be incorporated by reference 
into, or otherwise in any manner deemed to be a part of a Form S-20 
prospectus.

    By the Commission.

    Dated: December 21, 2001.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-32079 Filed 12-31-01; 8:45 am]
BILLING CODE 8010-01-P