98-17438. Options Disclosure Document  

  • [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]]
    
    _______________________________________________________________________
    
    Part VI
    
    
    
    
    
    Securities and Exchange Commission
    
    
    
    
    
    _______________________________________________________________________
    
    
    
    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: 
    rule-comments@sec.gov. 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: rule-comments@sec.gov. 
    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
    
    
    

Document Information

Published:
07/01/1998
Department:
Securities and Exchange Commission
Entry Type:
Proposed Rule
Action:
Proposed Rule.
Document Number:
98-17438
Dates:
Comments should be received on or before July 31, 1998.
Pages:
36136-36138 (3 pages)
Docket Numbers:
Release No. 33-7550, File No. S7-19-98
RINs:
3235-AH31: Revisions to Rules Governing Options Disclosure Document
RIN Links:
https://www.federalregister.gov/regulations/3235-AH31/revisions-to-rules-governing-options-disclosure-document
PDF File:
98-17438.pdf
CFR: (1)
17 CFR 230.135b