Document ID: SEC-2008-1470-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Board Options Exchange, Inc.
Posted Date: 2008-10-27T04:00Z

[Federal Register: October 27, 2008 (Volume 73, Number 208)]
[Notices]               
[Page 63747-63749]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27oc08-100]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58823; File No. SR-CBOE-2007-30]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Granting Approval of Proposed Rule Change, as 
Modified by Amendment No. 1 Thereto, Relating to Amendments to Rule 
9.21 (Communications to Customers)

October 21, 2008.
    On March 19, 2007, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') a proposed rule change pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Exchange Act'') \1\, 
and Rule 19b-4 thereunder.\2\ CBOE filed Amendment No. 1 to the 
proposed rule change on June 9, 2008.\3\ Notice of the proposal, as 
modified by Amendment No. 1, was published for comment in the Federal 
Register on July 17, 2008.\4\ The Commission received one comment 
letter regarding the proposed rule change \5\ and a response to 
comments from CBOE.\6\ This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaces the original filing in its 
entirety.
    \4\ See Securities Exchange Act Release No. 58138 (Jul. 10, 
2008) 73 FR 40886 (Jul. 17, 2008) (SR-CBOE-2007-30) (notice).
    \5\ See Letter from Melissa MacGregor, Vice President and 
Assistant General Counsel, Securities Industry and Financial Markets 
Association (``SIFMA''), dated July 31, 2008.
    \6\ See Letter from Lawrence J. Bresnahan, Vice President, CBOE, 
dated September 30, 2008.
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I. Description of the Proposed Rule Change

    On December 23, 2002, the Commission published final rules that 
exempt standardized options, as defined in Rule 9b-1 \7\ under the 
Exchange Act, that are issued by a registered clearing agency and 
traded on a registered national securities exchange or on a registered 
national securities association, from all provisions of the Securities 
Act (other than the anti-fraud provisions) and the registration 
requirements of the Exchange Act.\8\ Because the Securities Act of 1933 
(``Securities Act'') \9\ and the rules thereunder (other than the anti-
fraud provisions) are no longer applicable to such standardized 
options, CBOE proposed to remove elements of the Securities Act that 
are embedded in CBOE Rule 9.21 (``Communications to Customers''). In 
particular, CBOE proposed to remove all references to a ``prospectus'' 
from Rule 9.21. Prospectuses are no longer required for such 
standardized options, and the Options Clearing Corporation has, in 
fact, ceased publication of a prospectus.\10\ In addition, the proposed 
amendments expand the types of communications governed by Rule 9.21 to 
include independently prepared reprints and other communications 
between a member or member organization and a customer, exempt certain 
options communications from the pre-approval requirement by a 
Registered Options Principal (``ROP'') and update and reorganize Rule 
9.21. The proposed amendments are similar to amendments filed with the 
Commission by the Financial Industry Regulatory Authority, Inc. 
(``FINRA'').\11\
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    \7\ 17 CFR 240.9b-1.
    \8\ See ``Exemption for Standardized Options From Provisions of 
the Securities Act of 1933 and From the Registration Requirements of 
the Securities Exchange Act of 1934; Final Rule,'' Securities Act 
Release No. 8171 and Exchange Act Release No. 47082 (Dec. 23, 2002), 
68 FR 188 (Jan. 2, 2003).
    \9\ 15 U.S.C. 77a et seq.
    \10\ The options disclosure document (``ODD'') prepared in 
accordance with Rule 9b-1 under the Exchange Act is not deemed to be 
a prospectus. 17 CFR 230.135b. See, e.g., Securities Act Release No. 
8049 (Dec. 21, 2001), 67 FR 228 (Jan. 2, 2002).
    \11\ See Securities Exchange Act Release No. 57720 (Apr. 25, 
2008) 73 FR 24332 (May 2, 2008), Exchange Act Release No. 58738 
(approval order) (Oct. 6, 2008) 73 FR 60371 (Oct. 10, 2008) (SR-
FINRA-2008-13).
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A. Deletion of Certain Provisions

    As noted above, CBOE Rule 9.21 contains a number of references to a 
prospectus and other Securities Act requirements. The Exchange proposed 
to delete the following from Rule 9.21:
    (1) Rule 9.21(a)(iv), which references the Securities Act 
definition of prospectus,
    (2) Rule 9.21(d), which incorporates Securities Act principles in 
that it prohibits written material concerning options from being 
furnished to any person who has not previously or contemporaneously 
received the ODD,
    (3) Rule 9.21(e)(ii), which defines the term ``Educational 
Material,'' \12\
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    \12\ This paragraph essentially incorporates language of 
Securities Act Rule 134a. While this amendment would eliminate the 
separate educational material category, as discussed below the 
Exchange also proposed to revise the definition of Sales Literature 
to include educational material.
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    (4) Interpretation and Policy .02A of Rule 9.21, which outlines 
what is permitted in an ``Advertisement,'' \13\ and
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    \13\ This paragraph essentially incorporates language of 
Securities Act Rule 134.
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    (5) Interpretation and Policy .03 of Rule 9.21, which concerns 
educational material.\14\
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    \14\ See note 12, supra.
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B. Redesignation of Rule 9.21(a) to Proposed Rule 9.21(d) and Related 
Amendments

    Rule 9.21(a) currently contains an outline of the ``General Rule'' 
for options communications. CBOE proposed to redesignate paragraph (a) 
as paragraph (d), and to incorporate limitations on the use of options 
communications contained in Interpretations and Policies .01 of Rule 
9.21 into proposed Rule 9.21(d). In addition, proposed Rule 
9.21(d)(iii) would amend Rule 9.21(a)(iii) by clarifying the types of 
cautionary statements and caveats that are prohibited. Also, as 
previously noted, CBOE proposed to delete Rule 9.21(a)(iv).

C. Proposed Amendments to Rule 9.21(b)

    CBOE proposed to amend Rule 9.21(b) to include the types of 
communications

[[Page 63748]]

proposed to be added to the definition of ``Options Communications'' in 
proposed Rule 9.21(a). Proposed Rules 9.21(b)(ii) and (b)(iii) would 
also amend the current requirements to obtain advance approval by a ROP 
for most options communications by exempting certain options 
communications, defined as ``Correspondence'' and ``Institutional Sales 
Material.'' Specifically, proposed Rule 9.21(b)(ii) would exempt 
correspondence from the pre-approval requirement unless the 
correspondence is distributed to 25 or more existing retail customers 
within any 30 calendar-day period and makes any financial or investment 
recommendation or otherwise promotes a product or service of the 
member. All correspondence would be subject to general supervision and 
review requirements.\15\ Proposed Rule 9.21(b)(iii) would exempt 
institutional sales material from the pre-approval requirement if the 
material is distributed to ``qualified investors'' (as defined in 
Section 3(a)(54) of the Exchange Act \16\).
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    \15\ See CBOE Rule 9.8.
    \16\ 15 U.S.C. 78c(a)(54).
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    Pre-approval by a ROP would, however, be required with respect to 
independently prepared reprints. In addition, Proposed Rule 9.21(b)(iv) 
would require that firms retain options communications in accordance 
with the recordkeeping requirements of Rule 17a-4 under the Exchange 
Act.\17\ Proposed Rule 9.21(b)(iv) would also require that firms retain 
other related documents in the form and for the time periods required 
for options communications by Rule 17a-4.
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    \17\ 17 CFR 240.17a-4. More specifically, Rule 17a-4(b)(4) 
requires that a broker-dealer retain ``originals of all 
communications received and copies of all communications sent * * * 
including all communications which are subject to rules of a self-
regulatory organization of which the member, broker or dealer is a 
member regarding communications with the public.''
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D. Proposed Amendments to Rule 9.21(c)

    Rule 9.21(c) currently requires members to obtain approval for 
every advertisement and all educational material from the Exchange's 
Department of Compliance. This requirement applies regardless of 
whether the options communications are used before or after the 
delivery of a current ODD. CBOE proposed to amend this provision to 
require approval by the Exchange only with respect to options 
communications used prior to the delivery of a current ODD. The 
Exchange pre-approval requirement for options communications used 
subsequent to the delivery of the ODD is being eliminated because the 
ODD should help alert the customer to the characteristics and risks 
associated with trading in options and because Rule 9.21(b) requires 
the Registered Options Principal of a member organization to pre-
approve options communications (with certain exceptions for 
``Correspondence'' and ``Institutional Sales Material''). Rule 9.21(c) 
would also be amended to include the types of communications added to 
the definition of ``Options Communications'' in proposed Rule 9.21(a).

E. Redesignation of Rule 9.21(e) to Proposed Rule 9.21(a) and Related 
Amendments

    Rule 9.21(e) currently defines terms used in Rule 9.21. CBOE 
proposed to redesignate paragraph (e) as paragraph (a). CBOE also 
proposed to amend the definition of ``Options Communications'' in 
proposed Rule 9.21(a) to expand the types of communications governed by 
Rule 9.21 to include independently prepared reprints and other 
communications between a member or member organization and a customer. 
The Exchange proposed to amend the definitions of ``Advertisement'' and 
``Sales Literature;'' and define ``Correspondence,'' ``Institutional 
Sales Material,'' ``Public Appearances,'' and ``Independently Prepared 
Reprints;'' to clarify the rule. In addition, as previously noted, CBOE 
proposed to delete the definition of ``Educational Material.''

F. Proposed Rule 9.21(e)

    Proposed Rule 9.21(e) would set forth (i) standards for options 
communications that are not preceded or accompanied by an ODD and (ii) 
standards for options communications used prior to delivery of an ODD. 
These requirements generally would clarify and restate the requirements 
contained in the current Interpretations and Policies .02 of Rule 9.21.

G. Interpretations and Policies

    Proposed Rule 9.21(e)(i)(B) would require options communications to 
contain contact information for obtaining a copy of the ODD. Proposed 
Interpretation and Policy .01 would include the provisions found in 
current Section A of Interpretation and Policy .02 regarding how this 
requirement may be satisfied. In addition, as noted above, the 
provisions of Interpretation and Policy .01 regarding limitations on 
the use of options communications are proposed to be incorporated into 
proposed Rule 9.21(d).
    As previously noted, the provisions of Interpretation and Policy 
.02 that outline what is permitted in an advertisement are proposed to 
be deleted and the provisions relating to standards for options 
communications used prior to delivery of the ODD are proposed to be 
incorporated into proposed Rule 9.21(e)(ii).
    Interpretation and Policy .03, which concerns educational material, 
is proposed to be deleted as noted above.
    Interpretation and Policy .04 sets forth the standards applicable 
to Sales Literature. Section A of Interpretation and Policy .04 sets 
forth the requirement that Sales Literature shall state that supporting 
documentation for any claims, comparisons, recommendations, statistics 
or other technical data will be supplied upon request. The Exchange 
proposed to redesignate Section A of Interpretation and Policy .04 as 
proposed Rule 9.21(d)(vii).
    Section B of Interpretation and Policy .04 pertains to standards 
for Sales Literature that contains projected performance figures. 
Section C of Interpretation and Policy .04 pertains to standards for 
Sales Literature that contains historical performance figures. The 
Exchange proposed to redesignate Section B of Interpretation and Policy 
.04 as proposed Interpretation and Policy .02 and Section C of 
Interpretation and Policy .04 as proposed Interpretation and Policy 
.03.
    Rule 9.21 currently requires that a copy of the ODD precede or 
accompany options related sales literature. The Exchange is proposing 
to modify the ODD delivery requirement applicable to sales literature 
to provide that an ODD must precede or accompany any communication that 
conveys past or projected performance figures involving options or 
constitutes a recommendation pertaining to options.\18\
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    \18\ See proposed Rule 9.21(e)(i)(C) and proposed Interpretation 
and Policies .02 and .03.
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    A notice providing the name and address of a person from whom the 
ODD may be obtained would be required in sales literature that does not 
contain a recommendation or past or projected performance figures. 
Because CBOE is proposing to merge educational material into the sales 
literature category,\19\ this amendment would continue to allow 
communications that are educational in nature to be disseminated 
without being preceded or accompanied by a copy of the ODD.
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    \19\ See Proposed Rule 9.21(a)(ii).
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    The Exchange proposed to redesignate Section D of Interpretation 
and Policy .04 as proposed Interpretation and

[[Page 63749]]

Policy .04. The Exchange proposed to delete Sections E and F of 
Interpretation and Policy .04. The Exchange believes Section E is 
unnecessary because worksheets are included in the definition of 
``Sales Literature.'' The Exchange believes Section F is no longer 
necessary because the Exchange is proposing to clarify the record-
keeping requirements applicable to options communications in proposed 
Rule 9.21(b)(iv).

II. Comment Letter

    The Commission received one comment letter from SIFMA on the 
proposed rule change.\20\ CBOE responded to this comment letter.\21\
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    \20\ See note 5, supra.
    \21\ See note 6, supra.
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    SIFMA expressed support for the proposed rule change and 
incorporated by reference SIFMA's prior comments on a similar proposal 
by FINRA regarding options communications with the public.\22\ FINRA 
addressed SIFMA's prior comments in an amendment to FINRA's proposed 
rule change.\23\ CBOE stated it concurred in general with FINRA's 
responses to SIFMA's prior comments.\24\ Therefore, CBOE did not 
believe that additional changes to the proposed rule change were 
required.\25\
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    \22\ See Letter from Melissa MacGregor, Vice President and 
Assistant General Counsel, SIFMA, dated May 22, 2008, regarding 
Exchange Act Release No. 57720 (Apr. 25, 2008) 73 FR 24332 (May 2, 
2008).
    \23\ See Securities Exchange Act Release No. 58738 (Oct. 6, 
2008) 73 FR 60371 (Oct. 10, 2008) (SR-FINRA-2008-13).
    \24\ See note 6, supra.
    \25\ See id.
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III. Discussion and Findings

    After careful review of the proposed rule change, the comment 
letter and CBOE's response to the comment letter, the Commission finds 
that the proposed rule change is consistent with the requirements of 
the Exchange Act, and the rules and regulations thereunder that are 
applicable to a national securities exchange.\26\ In particular, the 
Commission believes that the proposed rule change is consistent with 
Section 6(b) of the Exchange Act \27\ in general and would further the 
objectives of Section 6(b)(5) \28\ in particular in that it is designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, and, in general, to protect 
investors and the public interest by providing the investing public 
with options communications rules that are designed to provide 
appropriate safeguards and greater clarity by promoting harmonization 
between CBOE's and other SROs' options communications rules.
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    \26\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition and capital 
formation. See 15 U.S.C. 78c(f).
    \27\ 15 U.S.C. 78f(b).
    \28\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\29\ that the proposed rule change (SR-CBOE-2007-30), as modified 
by Amendment No. 1 thereto, be, and hereby is, approved.
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    \29\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\30\
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    \30\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-25504 Filed 10-24-08; 8:45 am]

BILLING CODE 8011-01-P