[Federal Register Volume 63, Number 126 (Wednesday, July 1, 1998)]
[Proposed Rules]
[Pages 36138-36141]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-17437]


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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.

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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: [email protected]. 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.
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    \1\ 17 CFR 240.9b-1.
    \2\ Paragraph (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.''
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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.''
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    \3\ Paragraph (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.''
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    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

[[Page 36139]]

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\
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    \4\ See 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'').
    \5\ Proposing Release, id. at 47 FR 28688.
    \6\ Concurrent 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).
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    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\
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    \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.
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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.
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    \8\ See, 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).
    \9\ LEAPS 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).
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    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.
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    \10\ Rule 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.
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    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

[[Page 36140]]

Rule to require any changes to the current disclosures in an ODD.\11\
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    \11\ The 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.''
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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.
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    \12\ See 15 U.S.C. 78w(a)(2).
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    Pursuant to the Regulatory Flexibility Act, 5 U.S.C. Sec. 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.
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    \13\ Under 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 Sec. 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).
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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. Sec. 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. 
Secs. 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:


Sec. 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

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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. Sec. 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.

    \1\ 15 U.S.C. 78a et seq.
    \2\ 17 CFR 240.9b-1.
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    Dated: June 24, 1998
Arthur Levitt, Jr.,
Chairman.
[FR Doc. 98-17437 Filed 6-30-98; 8:45 am]
BILLING CODE 8010-01-P