[Federal Register Volume 65, Number 171 (Friday, September 1, 2000)]
[Notices]
[Pages 53246-53247]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-22484]



[[Page 53246]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43205; File No. SR-CBOE-00-18]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the Chicago Board Options Exchange, Inc., Interpreting Rules 
Relating to Customer Communications

August 24, 2000.

I. Introduction

    On April 20, 2000, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') submitted to the Securities and Exchange 
Commission (``Commission''), pursuant to section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 \2\ 
thereunder, a proposed rule change. In its proposal, the CBOE seeks to 
clarify an interpretation of its customer communication rule. The 
proposed rule change was published for comment in the Federal Register 
on June 1, 2000.\3\ The Commission received no comments on the proposal 
and this order approves it.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 42821 (May 24, 
2000), 65 FR 35149.
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II. Description of the Proposal

    Exchange Rule 9.21, ``Communications to Customers,'' governs 
communications between Exchange members and their customers and other 
members of the public. The Exchange, along with the other options 
exchanges, has published Guidelines for Options Communications 
(``Guidelines'') \4\ to explain the customer communications rules of 
the options exchanges and the interpretations of these rules. The 
Exchange proposes to issue a Regulatory Circular to formally install a 
clarifying interpretation that has long been applied by the Exchange. 
This interpretation deals with the requirement to discuss tax 
considerations when engaging in certain option strategies.
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    \4\ See Securities Exchange Act Release No. 29682 (September 13, 
1991), 56 FR 47973 (September 23, 1991) (File Nos. SR-Amex-90-38; 
SR-CBOE-90-27; SR-NASD-91-02; SR-NYSE-90-51; and SR-PSE-90-41).
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    Although Rule 9.21 is silent regarding tax considerations in 
customer communications, the Guidelines and the Exchange's internal 
checklist (``Checklist''), which CBOE's Department of Financial and 
Sales Practice Compliance uses in reviewing communication materials, do 
require that tax considerations be discussed in communications in 
certain circumstances. The Guidelines state, ``depending upon the 
technical or specific nature of such communication, any one or more of 
the following points should be addressed.'' The Guidelines go on to 
list various points, including the following statement about taxes, 
``[s]ince options transactions may involve complex tax considerations, 
it would be misleading to omit the mention of such strategies from any 
communication that discusses or recommends options strategies.'' In 
response to comments and recommendations made by the Commission's 
Office of Compliance Inspections and Examinations, the Exchange in 
February 1994 added language to its Checklist reflecting the Exchange's 
long-standing practice in reviewing communications for tax 
considerations. That practice was, and is, to require a discussion of 
tax considerations if the communication is educational material or 
sales literature that is strategy specific and complex.
    The Exchange believes that more clarification could be provided to 
its members regarding this topic and has, therefore, decided to issue 
an interpretation in a Regulatory Circular clarifying which 
communications require a mention about tax considerations. The language 
in the interpretation mimics the language contained in the Exchange's 
Checklist. The proposed interpretation states that an advisory 
concerning taxes is required for educational material and sales 
literature involving specific, detailed and complex option strategies. 
In addition, the proposed interpretation states an advisory regarding 
taxes is not necessary where the communication is of a general, 
noncomplex nature or involves common basic options strategies (e.g., 
purchasing, covered writing or cash secured put writing). According to 
the Exchange, an example of an appropriate advisory concerning taxes, 
where one is needed, would be, ``[b]ecause of the importance of tax 
considerations to many option transactions, the investor considering 
options should consult with his/her tax advisor as to how taxes affect 
the outcome of contemplated options transactions.'' \5\
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    \5\ The Commission notes that the CBOE included two versions of 
this model advisory in its filing. The first version, which was 
included in the Purpose section of the filing, stated that, 
``[b]ecause of the importance of tax considerations to all option 
transactions * * *.'' The second version, which was included in 
Exhibit A to the filing and is the sample Regulatory Circular, 
stated that, ``[b]ecause of the importance of tax considerations to 
many option transactions * * *.'' According to CBOE, the correct 
advisory is the second one. Telephone conversation between Jamie 
Galvan, Attorney, CBOE, and Joseph Corcoran, Attorney, Division of 
Market Regulation, Commission, on August 24, 2000.
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III. Discussion

    After careful review, the Commission finds that the proposal is 
consistent with the requirements of the Act.\6\ In particular, the 
Commission finds the proposal is consistent with section 6(b)(5) \7\ of 
the Act. Section 6(b)(5) requires, among other things, that the rules 
of an exchange be designed to promote just and equitable principles of 
trade and to protect investors and the public interest.
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    \6\ In addition, the Commission has considered the proposed 
rule's impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \7\ 15 U.S.C. 78f(b)(5).
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    Specifically, the Commission believes that the proposal is 
consistent with section 6(b)(5) in that it will help member firms 
understand their obligations under CBOE's ``Communications to 
Customers'' rule and the Guidelines. As CBOE pointed out, the 
``Communications to Customers'' rule does not specifically mention tax 
considerations. It does, however, prohibit misleading communications 
with the public. The Guidelines help clarify certain aspects of this 
rule, including whether a particular communication is misleading. Among 
other things, the Guidelines mention that it may be misleading to leave 
out discussions of tax considerations in a customer communication.
    CBOE believes that a discussion of taxes is necessary when the 
customer communication involves specific, detailed and complex option 
strategies, but is not necessary when the customer communication is 
simple or involves basic options strategies. The Commission finds that 
the interpretation is consistent with the Act in that it helps member 
firms understand their obligations under CBOE's rules. In approving 
this rule, however, the Commission wants to emphasize that it does not 
believe that a firm would be acting inconsistently with the 
``Communications to Customers'' rule and the Guidelines if the firm 
chose to include discussions of tax considerations in all of its 
customer communications.

IV. Conclusion

    It Is Therefore Ordered, pursuant to section 19(b)(2) of the 
Act,\8\ that the proposed rule change (SR-CBOE-00-18) is approved.
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    \8\ 15 U.S.C. 78s(b)(2).


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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-22484 Filed 8-31-00; 8:45 am]
BILLING CODE 8010-01-M