[Federal Register Volume 65, Number 208 (Thursday, October 26, 2000)]
[Rules and Regulations]
[Pages 64137-64140]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-27479]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-43461, File No. S7-18-98]
RIN 3235-AH30


Amendments to Rule 9b-1 Under the Securities Exchange Act of 1934 
Relating to the Options Disclosure Document

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (``SEC'' or 
``Commission'') is adopting amendments to Rule 9b-1 (``Rule'') under 
the Securities Exchange Act of 1934 (``Exchange Act''). Rule 9b-1 
governs the filing and dissemination of, and the information to be 
included in, an options disclosure document. The amendments are 
intended to provide greater clarity to the Rule's provisions, while 
continuing a regulatory scheme that fosters investors' understanding of 
the characteristics and risks of standardized options.

EFFECTIVE DATE: This final rule is effective November 27, 2000.

FOR FURTHER INFORMATION CONTACT: Nancy J. Sanow, Assistant Director, at 
(202) 942-0796, or Steven Johnston, Special Counsel, at (202) 942-0795, 
Office of Market Supervision, Division of Market Regulation, 450 Fifth 
Street, NW., Washington, DC 20549-1001.

SUPPLEMENTARY INFORMATION: The Commission is adopting amendments to 
Rule 9b-1 \1\ under the Securities Exchange Act of 1934 \2\ to make 
technical and clarifying changes to the Rule to better reflect the 
disclosure requirements regarding standardized options.
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    \1\ 17 CFR 240.9b-1.
    \2\ 15 U.S.C. 78a et seq.
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I. Introduction

    In June 1998, the Commission published for comment amendments to 
Rule 9b-1 under the Exchange Act to revise certain language in the Rule 
to better reflect the disclosure requirements regarding standardized 
options.\3\ The changes are minor or technical in nature and do not 
alter the basic purpose of the Rule, namely, to ensure the 
dissemination of essential options information to less sophisticated 
investors in a manner that they can easily understand. The changes 
should also help to ensure that the Rule addresses the evolving nature 
of the markets for standardized options.\4\ The Commission received two 
comments supporting the proposal and is adopting the revisions as 
proposed.
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    \3\ Securities Exchange Act Release No. 40129 (June 25, 1998), 
63 FR 36138 (July 1, 1998) (``Proposing Release'').
    \4\ The term ``standardized options'' is defined as ``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 date and exercise 
prices, or such other securities as the Commission may, by order, 
designate.'' 17 CFR 240.9b-1(a)(4).
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II. Background

    In general, Rule 9b-1: (i) Specifies 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) describes 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.
    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 \5\ at least 60 days prior to 
the date definitive copies of the document are furnished to customers. 
Rule 9b-1(c) specifies that, with respect to the options classes 
covered by the ODD, 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. Further, Rule 9b-1(d) 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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    \5\ The term ``options market'' is defined as ``a national 
securities exchange, an automated quotation system of a registered 
securities association or a foreign securities exchange on which 
standardized options are traded.'' 17 CFR 240.9b-1(a)(1).
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    Adopted in 1982, the Rule is intended to foster better investor 
understanding of standardized options trading and to reduce the costs 
of issuer compliance with the registration requirements of the 
Securities Act of 1933 (``Securities Act'').\6\ Prior to the Rule's 
adoption, 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, 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 less sophisticated options investors.\7\ Accordingly, 
the Commission developed a disclosure document that contains 
information concerning the risks and uses of options trading and 
presents the information in a manner easily understandable by investors 
lacking a financial background. With the adoption of Rule 9b-1, the 
Commission established a new disclosure procedure specifically geared 
to satisfying the information needs of investors in standardized 
options.\8\
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    \6\ See Securities Exchange Act Release Nos. 18836 (June 24, 
1982), 47 FR 28688 (July 1, 1982) (``1982 Proposing Release'') and 
19055 (Sept. 16, 1982), 47 FR 41950 (Sept. 23, 1982) (``1982 
Adopting Release'').
    \7\ 1982 Proposing Release, id. at 47 FR 28688.
    \8\ Concurrent with the adoption of Rule 9b-1, the Commission 
adopted a Form S-20 for the registration of standardized options 
under the Securities Act. 1982 Adopting Release, supra note 6, 47 FR 
at 41951-2. This Form requires the filing of information relating to 
standardized options and their issuer. The Form must be filed with 
the Commission by the issuer and become effective before an options 
disclosure document may be distributed. 17 CFR 240.9b-1(b)(1).
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    Following the adoption of Rule 9b-1, an options disclosure document 
was prepared jointly by The American Stock Exchange LLC, the Chicago 
Board Options Exchange, Inc. (``CBOE''), the Pacific Exchange, Inc., 
the Philadelphia Stock Exchange, Inc., and The Options Clearing 
Corporation (``OCC''). The

[[Page 64138]]

initial disclosure document consisted of a single booklet that 
generally described the risks and uses of exchange-listed options on 
individual equity securities. Since that time, several revised 
disclosure booklets have been published that describe, 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.\9\
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    \9\ In addition to the ODD utilized by the U.S. options 
exchanges, several foreign markets have filed ODDs with the 
Commission which enables them to effect options transactions with 
U.S. market participants under certain conditions. These ODDs are 
modeled after the U.S. options market ODD.
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    The Commission determined that Rule 9b-1 would be clearer if 
certain technical amendments were made. While the substantive goals of 
the Rule did not require revision, the Rule required specific changes 
to make the language more precise. The changes are technical in nature 
and only codify current practice as it has evolved over time. The 
specific changes are discussed more fully below.

III. Discussion

    The Commission received two comments on the proposed changes to 
Rule 9b-1.\10\ The OCC commented that the proposal would eliminate 
uncertainty and urged the Commission to promptly adopt the proposed 
changes to Rule 9b-1.\11\ The Philadelphia Stock Exchange, Inc. 
(``Phlx'') commented that the proposed changes to Rule 9b-1 would 
better reflect the Rule's underlying intent and provide more precise 
and clear language.\12\ The Commission agrees with these comments and 
is adopting Rule 9b-1 as proposed.
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    \10\ See Letter from James Yong, First Vice President and 
General Counsel, The Options Clearing Corporation, to Jonathan G. 
Katz, Secretary, Securities and Exchange Commission, dated August 
26, 1998 (``OCC Letter''); Letter from Edith Hallahan, Vice 
President and Associate General Counsel, Philadelphia Stock Exchange 
(``Phlx''), to Jonathan G. Katz, Secretary, Securities and Exchange 
Commission, dated August 28, 1998 (``Phlx Letter'').
    \11\ OCC Letter, p. 2.
    \12\ Phlx Letter, p. 1.
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    Paragraph (a)(3) of the Rule, the definition of an ``options 
disclosure document,'' is being amended to explicitly state that the 
amendments and supplements to the ODD are included as part of the ODD. 
New financial products have been introduced into the standardized 
options marketplace such as Flexible Exchange Options on specified 
equity securities (``FLEX Equity options'') \13\ and Long-Term Index 
Option series (``LEAPS'').\14\ Descriptions of these and other similar 
products are often initially incorporated into the ODD through a 
supplement and delivered to the customer along with the bound ODD. 
These amendments remove the potential ambiguity regarding whether such 
supplements are part of the ODD and should be delivered to customers. 
In addition, paragraph (a)(3) of the Rule is being amended to conform 
the definition of ``definitive options disclosure document'' to Rules 
134a and 135b under the Securities Act.\15\
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    \13\ See Securities Exchange Act Release No. 36841 (Feb. 14, 
1996), 61 FR 6666 (Feb. 21, 1996) (order approving the listing of 
FLEX Equity Options) (CBOE-95-43).
    \14\ See Securities Exchange Act Release No. 35617 (Apr. 17, 
1995), 60 FR 20132 (Apr. 24, 1995) (order approving the listing of 
LEAPS) (CBOE-95-02).
    \15\ Rule 134a states that written materials related to 
standardized options will not be deemed to be a prospectus for 
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. 17 CFR 230.134a. 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. 
17 CFR 230.134b.
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    Several technical clarifying changes are also being made to the 
Rule. In paragraph (b)(2)(i), the word ``options'' is inserted before 
the phrase ``disclosure document.'' Similarly, in paragraph (b)(2)(ii), 
the phrase ``options disclosure document'' replaces the phrase ``such 
material,'' and the phrase ``options classes covered by the document'' 
replaces the more general language of ``the subject standardized 
options contracts.'' In paragraphs (b)(2) (i) and (ii), the Rule is 
also being amended to clarify that both amendments and supplements to 
the ODD are permissible and clarifies the issuer's obligation to supply 
supplements to investors and the Commission. Additionally, paragraph 
(c)(6) is amended to add the phrase ``the identification of'' before 
the phrase ``the issuer of the options.'' The Commission believes that 
the new language clarifies the Rule language and eliminates potential 
ambiguity.
    The Rule's current provisions requiring that the ODD contain 
information regarding the ``mechanics of buying, writing and exercising 
options, including settlement procedures'' and ``the risks of trading 
options'' are amended to better reflect the information that should be 
included in the ODD. Specifically, paragraph (c)(2) now requires a 
discussion of the ``mechanics of exercising'' options and paragraph 
(c)(3) now requires a discussion of the risks of ``being a holder or 
writer'' of options. These amendments are intended to make clear that 
the exchanges are not required to provide information via the ODD to 
customers on how to ``trade'' options, such as information regarding 
investment strategies. To clarify the intended scope of information 
included within the ODD, paragraph (c)(4) of the Rule is amended to 
require ``the identification of the market or markets in which the 
options are traded,'' rather than a discussion of the ``market for the 
options.'' Also, paragraph (c)(7) is amended to require a ``general'' 
discussion of the ``type'' of instruments underlying the options 
classes. The Commission believes that these changes help clarify the 
purpose of the ODD and do not require any changes to the current 
disclosures in the ODD.
    Paragraphs (d)(1) and (2) are also being amended to reflect the 
revised definition of ``definitive options disclosure document'' 
contained in paragraph (a)(3). Again, this change does not affect the 
substantive nature of the Rule, but merely conforms the terminology to 
accurately reflect references in Rules 134a and 135b under the 
Securities Act.\16\ Paragraph (d)(2) is also being amended to reflect 
the inclusion of supplements noted in revised paragraphs (b)(2) (i) and 
(ii).
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    \16\ 17 CFR 230.134a; 17 CFR 230.134b.
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IV. Cost-Benefit Analysis

    The Commission believes that the amendments are likely to benefit 
investors and do not have any costs associated with them. To assist the 
Commission in its evaluation of the costs and benefits that may result 
from the amendments, commenters were requested to provide analysis and 
data, if possible, relating to costs and benefits associated with the 
proposal. While the two comments received supported the amendments, no 
comments were received concerning the costs to investors, broker-
dealers or others. The Commission anticipates that the proposed 
amendments will not change any substantive disclosure obligations or 
currently existing compliance costs, but will rather clarify the 
disclosure requirements and goals regarding standardized options 
products, and thereby benefit investors.

V. Consideration of Burden on Competition

    Section 23(a)(2) of the Exchange Act requires that the Commission, 
when promulgating rules under the Exchange Act, consider, among other 
matters, the impact any such rules would have on

[[Page 64139]]

competition and not adopt any rule that would impose a burden on 
competition that is not necessary or appropriate in the public 
interest.\17\ In the Proposing Release, the Commission solicited 
comments on the effect on competition. The Commission received no 
comments regarding this issue. The Commission has considered the 
amendments in light of the standards cited in section 23(a)(2) of the 
Exchange Act and believes that they would not impose any burden on 
competition.
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    \17\ 15 U.S.C. 78w(a)(2).
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    Because the amendments are intended to clarify the exchanges' 
obligations to make certain disclosures to customers via the ODD, the 
changes should not materially affect the substance of the existing 
required disclosures or the filing or delivery obligations under the 
Rule. The Commission does not expect that the amendments will impose 
any additional costs on the exchanges and will help to remove potential 
ambiguities in the Rule. Thus, the Commission believes that the 
amendments should impose no burdens on competition.

VI. Promotion of Efficiency, Competition, and Capital Formation

    Section 3(f)\18\ of the Exchange Act requires the Commission, when 
engaging in rulemaking that requires it to consider or determine 
whether an action is necessary or appropriate in the public interest, 
to consider whether the action will promote efficiency, competition, 
and capital formation. No comments were received on this point. The 
Commission believes that the amendments will reduce potential investor 
confusion and help to clarify the Rule's goals and objectives. In 
addition, the Commission believes that making such clarifying changes 
to the Rule will help to enhance the operation of the options markets. 
The Commission further believes that the changes to the Rule will help 
issuers understand their obligations and enhance opportunities for 
capital formation in the options markets. Accordingly, the Commission 
believes that the amendments being adopted today promote efficiency, 
competition, and capital formation.
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    \18\ 15 U.S.C. 78c(f).
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VII. Regulatory Flexibility Act Consideration

    Pursuant to section 605(b) of the Regulatory Flexibility Act,\19\ 
the Chairman of the Commission has certified that Rule 9b-1 would not 
have a significant economic impact on a substantial number of small 
entities. This certification, including the reasons therefore, was 
attached to the Proposing Release as Appendix A. The Commission 
solicited comments concerning the impact on small entities and the 
Regulatory Flexibility Act certification, but received no comments.
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    \19\ 5 U.S.C. 605(b).
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VIII. 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'').\20\ 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 amendments 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 amendments to OMB for 
review under the PRA. The Commission received no comments regarding the 
analysis under the Paperwork Reduction Act.
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    \20\ 44 U.S.C. 3501 et seq.
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IX. Statutory Basis

    The amendments to Rule 9b-1 are being adopted pursuant to 15 U.S.C. 
78a et seq., particularly sections 9 and 23 of the Exchange Act.

List of Subjects in 17 CFR Part 240

    Reporting and recordkeeping requirements, Securities.

Text of the Rule Amendments

    In accordance with the foregoing, Title 17, Chapter II of the Code 
of Federal Regulations is 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, 78j-1, 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), (b)(2)(ii), (c), and (d) to read 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. ``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 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.
    (ii) Notwithstanding paragraph (b)(2)(i) of this section, an 
options market may distribute an amendment or supplement to an options 
disclosure document 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. 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) Information required in an options disclosure document. An 
options disclosure document shall contain the following information, 
unless otherwise provided by the Commission, with respect to the 
options classes covered by the document:

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    (1) A glossary of terms;
    (2) A discussion of the mechanics of exercising the options;
    (3) A discussion of the risks of being a holder or writer of the 
options;
    (4) The identification of the market or markets in which the 
options are traded;
    (5) A brief reference to the transaction costs, margin requirements 
and tax consequences of options trading;
    (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;
    (8) The registration of the options on Form S-20 (17 CFR 239.20) 
and the availability of the prospectus and the information in Part II 
of the registration statement; and
    (9) Such other information as the Commission may specify.
    (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 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 a copy of the definitive options disclosure 
document.
    (2) If a 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 to each 
customer whose account is approved for trading the options class or 
classes to which the amendment or supplement relates.

    Dated: October 19, 2000.
    By the Commission.
Jonathan G. Katz,
Secretary.
[FR Doc. 00-27479 Filed 10-25-00; 8:45 am]
BILLING CODE 8010-01-P