00-22484. 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.

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.

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]

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.

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.

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.^[9]

Margaret H. McFarland,

Deputy Secretary.

Footnotes

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.

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).

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.

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).

8.  15 U.S.C. 78s(b)(2).

9.  17 CFR 200.30-3(a)(12).