[Federal Register Volume 63, Number 126 (Wednesday, July 1, 1998)]
[Proposed Rules]
[Pages 36136-36138]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-17438]



[[Page 36135]]

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Part VI





Securities and Exchange Commission





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17 CFR Parts 230 and 240



Options Disclosure Document; Amendment to Rule 9b-1 Under the 
Securities Exchange Act Relating to the Options Disclosure Document; 
Proposed Rules

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

[[Page 36136]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 230

[Release No. 33-7550; File No. S7-19-98]
RIN 3235-AH31


Options Disclosure Document

AGENCY: Securities and Exchange Commission.

ACTION: Proposed Rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
proposing to revise Rule 135b under the Securities Act of 1933 to 
provide 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. This proposal is intended to codify a 
long-standing interpretive position that was issued immediately after 
the Commission adopted the current registration and disclosure system 
applicable to standardized options. The proposal also is intended to 
eliminate any legal uncertainty in this area.

DATES: Comments should be received on or before July 31, 1998.

ADDRESSES: Comment letters should be submitted in triplicate 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 
also may be submitted electronically at the following E-mail address: 
[email protected]. All comment letters should refer to File Number 
S7-19-98; this file number should be included on the subject line if e-
mail is used. All comments received will be available for public 
inspection and copying in the Commission's Public Reference Room at the 
same address. Electronically submitted comment letters will be posted 
on the Commission's Internet web site (http://www.sec.gov).

FOR FURTHER INFORMATION CONTACT: David Lavan, at (202) 942-1840, Office 
of Chief Counsel, Division of Corporation Finance, U.S. Securities and 
Exchange Commission, Mail Stop 3-3, 450 Fifth Street, N.W., Washington, 
D.C. 20549.

SUPPLEMENTARY INFORMATION: In order to clarify that an options 
disclosure document prepared in accordance with Rule 9b-1 1 
under the Securities Exchange Act of 1934 (``Exchange Act'') 
2 is not a prospectus for purposes of Section 12(a)(2) 
3 of the Securities Act of 1933 (``Securities 
Act''),4 the Commission is proposing to revise Rule 135b 
5 under the Securities Act.
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    \1\ 17 CFR 240.9b-1.
    \2\ 15 U.S.C. 78a et seq.
    \3\ 15 U.S.C. 77l(a)(2) (renumbered). Before the Securities 
Litigation Reform Act of 1995, Public Law No. 104-67, 109 Stat. 737, 
this provision was contained in Section 12(2) of the Securities Act.
    \4\ 15 U.S.C. 77a et seq.
    \5\ 17 CFR 230.135b.
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I. Proposed Amendment

    The Commission has a simplified registration and disclosure system 
for investors in standardized options 6, which the 
Commission adopted in 1982. 7 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. 
8 This form is quite streamlined. It requires limited 
information about the clearing corporation issuer and the options it 
issues in a prospectus filed as Part I of the registration statement, 
and more detailed information (including the issuer's financial 
statements) in Part II of the registration statement. 9 The 
options issuer may satisfy its prospectus delivery requirement by 
delivering the prospectus to each options market on which the options 
are traded, for the purpose of redelivery to options customers on 
request. 10
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    \6\ Standardized options are ``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.'' Rule 9b-
1(a)(4) under the Exchange Act [17 CFR 240.9b-1(a)(4)].
    \7\ Securities Act Release No. 6426 (Sept. 16, 1982) [47 FR 
41950] (``Adopting Release'').
    \8\ 17 CFR 239.20
    \9\ Information about the companies whose shares underlie the 
options is not required. Instead, information about these companies 
is available because these companies are generally required to be 
reporting companies before options on the shares can be approved for 
trading on U. S. options markets.
    \10\ Rule 153b under the Securities Act [17 CFR 230.153b].
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    The disclosure document used to inform investors generally about 
options is the ``options disclosure document'' (``ODD''). The ODD is 
prepared by the exchange on which the registered option trades and must 
meet the requirements of Rule 9b-1 under the Exchange Act. The ODD 
provides a general description of standardized options and the rules of 
options trading. The ODD must be delivered to a customer at or before 
the time that a broker or dealer approves the customer's account for 
options trading. Typically, the exchanges work closely with the 
clearing corporation in preparing the ODD. 11
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    \11\ See Adopting Release.
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    The Commission adopted this simplified registration and disclosure 
system in part to reduce the expense of preparing and updating a 
detailed prospectus, and to provide investors with a document that is 
easier to read than the options prospectus that investors received 
before adoption of these rules. 12 Rule 135b under the 
Securities Act is one rule of this system. This rule provides 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'' 13 for purposes of Section 5 of the 
Securities Act. 14 In the Adopting Release, the Commission 
stated that ``if the disclosure document is deemed not to be an offer 
to sell or buy, it cannot be deemed to be a prospectus.'' 15 
In addition, the Commission stated that Rule 135b ``is intended to 
relieve the preparers of the disclosure document from liability under 
Section [12(a)(1)] of the Act for distributing a disclosure document to 
investors which might, absent such relief, violate Section 5 of the 
Act.'' 16
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    \12\ Id.; see also Securities Act Release No. 6494, n.2 (Oct. 
27, 1983) [48 FR 51328] (discussing the Commission's 1979 Special 
Study of the Options Market, which suggested the simplified 
registration and disclosure scheme).
    \13\ Securities Act Rule 135b.
    \14\ 15 U.S.C. 77e. However, as stated in the release that 
proposed Rule 135b, the ODD is subject to liability under the anti-
fraud provisions. Securities Act Release No. 6411 (June 24, 1982) 
[47 FR 28688] (``Proposing Release'').
    \15\ Adopting Release at Sec. I.C.
    \16\ Adopting Release. 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 the Adopting Release both are silent as to 
whether Rule 135b was intended to address liability under Section 
12(a)(2) of the Securities Act. Section 12(a)(2) generally imposes 
civil liability for a prospectus that contains material misstatements 
or omissions. 17
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    \17\ 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 the Commission adopted the rule, the Options Clearing 
Corporation (``OCC'') requested interpretive advice from the Division 
of Corporation Finance (``Division'') regarding the applicability of 
liability under Section 12(a)(2) of the Securities Act to an ODD. After 
considering the Adopting Release, the Division advised the OCC that in 
its view, an ODD ``is not a prospectus within the meaning of

[[Page 36137]]

Section [2(a)(10)] of the Securities Act and, thus, is not subject to 
liability under Section [12(a)(2)] of the Securities Act.'' 
18
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    \18\ Letter dated September 23, 1982, from then Division of 
Corporation Finance Director, Lee B. Spencer, Jr. to Mr. 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.
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    Despite this long-standing interpretive position, uncertainty 
exists about the applicability of Section 12(a)(2) liability to an ODD. 
19 In response to informal requests from the Chicago Board 
Options Exchange and the OCC, the Commission believes that it is 
appropriate and in the public interest to eliminate any uncertainty in 
this area. Accordingly, the Commission proposes to modify Rule 135b to 
codify the Division's position that an ODD prepared in accordance with 
Rule 9b-1 under the Exchange Act is not subject to liability under 
Section 12(a)(2) because it is not a prospectus. 20
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    \19\ See, e.g., Spicer v. Chicago Board Options Exchange, No. 88 
C 2139 (N.D. Ill. Oct. 24, 1990), motion to reconsider denied (Jan. 
24, 1991) (holding that an ODD that is incorporated by reference as 
a matter of law into the prospectus could be subject to Section 
12(2) [now Section 12(a)(2)] liability).
    \20\ Of course, the document would continue to be subject to the 
anti-fraud 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, the Commission believes that the rule, if amended as proposed, 
would continue to be consistent with protection of investors.
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II. Request for Comment

    The Commission seeks comments on any aspect of the proposed 
amendment to Rule 135b. Any interested persons wishing to submit 
written comments relating to the rule proposal are invited to do so by 
submitting them in triplicate 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 also may be submitted 
electronically at the following E-mail address: [email protected]. 
Comments will be considered by the Commission in complying with its 
responsibilities under Section 19(a) of the Securities Act. 
21 Commentators should refer to File No. S7-19-98; this file 
number should be included on the subject line if E-mail is used.
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    \21\ 15 U.S.C. 77s(a).
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III. Costs and Benefits of the Proposed Rule Change and its effects 
on Efficiency, Competition and Capital Formation

    The Commission does not anticipate that the proposed amendment 
will, in and of itself, result in any economic costs. The rule proposal 
is not intended to change current practice under the federal securities 
laws. Rather, the proposal is intended to make it clear 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 eliminating any uncertainty over the applicability 
of Section 12(a)(2) liability to an ODD, it is anticipated that the 
proposal will result in some unquantifiable economic benefits.
    However, commentators are encouraged to provide views and data 
relating to any costs or benefits associated with the rule proposal. In 
particular, please identify any costs or benefits associated with the 
rule proposal relating to the preparation of the disclosure document. 
Will the proposal have no substantial effect as anticipated, or will 
the proposal result in additional costs and/or benefits? Please 
describe, and quantify where possible, any foreseeable significant 
effects. In addition, address whether the proposal will affect the 
current compliance burden of exchanges or options issuers.
    Because the proposed amendment is intended to codify long-standing 
Commission interpretations, the Commission does not currently believe 
that the proposed amendments to Rule 135b will impose any additional 
burdens on competition. Nevertheless, the Commission seeks comments on 
any anti-competitive effects the rule, as amended, may have.
    In addition, by eliminating any uncertainty in this area, the 
Commission currently believes that the proposed rule amendments will 
have a positive, but unquantifiable, effect on efficiency, competition 
and capital formation. The Commission seeks comments on this 
preliminary view.
    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.

IV. Regulatory Flexibility Act Certification

    Pursuant to Section 605(b) of the Regulatory Flexibility Act, 5 
U.S.C. Sec. 605(b), the Chairman of the Commission has certified that 
the proposal would not, if adopted, have a significant economic impact 
on a substantial number of small entities. This certification, 
including the reasons therefore, is attached to this release as 
Appendix A. We encourage written comments on the Certification. 
Commentators are asked to describe the nature of any impact on small 
business entities and provide empirical data to support the extent of 
the impact.

V. Paperwork Reduction Act

    Certain sections of Rule 135b 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 has 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 3235-0200. Because the proposed rule changes 
should not materially affect the collection of information 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.

VI. Statutory Bases

    The amendment to Securities Act Rule 135b is being proposed 
pursuant to Sections 2(a)(10), 22 7, 23 10, 
24 12, 25 and 19(a) 26 of the 
Securities Act, as amended.
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    \22\ 15 U.S.C. 77b(10).
    \23\ 15 U.S.C. 77g.
    \24\ 15 U.S.C. 77j.
    \25\ 15 U.S.C. 77l.
    \26\ 15 U.S.C. 77s(a).
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List of Subjects in 17 CFR Part 230

    Reporting and recordkeeping requirements, Securities.

Text of the Proposal

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

[[Page 36138]]

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, 80a-30, and 80a-37, unless otherwise noted.
* * * * *
    2. Section Sec. 230.135b is revised 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 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.
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    \27\ 15 U.S.C. 77e.
    \28\ 15 U.S.C. 77b(10).
    \29\ 15 U.S.C. 77l(a)(2).

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    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