# Board Of Trade Of The City Of Chicago v. Securities And Exchange Commission

> Court of Appeals for the Seventh Circuit · May 27, 1982 · 677 F.2d 1137

URL: https://www.frixlaw.com/law-library/cases/403691

## Case

- **Full name:** Fed. Sec. L. Rep. P 98,605 Board of Trade of the City of Chicago v. Securities and Exchange Commission, and Chicago Board Options Exchange, Incorporated, Intervenor-Respondent
- **Court:** Court of Appeals for the Seventh Circuit
- **Decided:** May 27, 1982
- **Citations:** 677 F.2d 1137
- **Precedential status:** Published
- **Opinion:** Opinion
- **Cited by:** 18 later opinions in the Frix Law Library

## Citator (automated)

- **Red flag:** Vacated by Chicago Board Options Exchange, Inc. v. Board of Trade, 459 U.S. 1026 (1982).
- Negative treatments: 2
- Distinguished by: 0
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/403691

## Opinion text

677 F.2d 1137
Fed. Sec. L. Rep. P 98,605
BOARD OF TRADE OF the CITY OF CHICAGO, Petitioner,
v.
SECURITIES AND EXCHANGE COMMISSION, Respondent,
and
Chicago Board Options Exchange, Incorporated, Intervenor-Respondent.
No. 81-1660.
United States Court of Appeals,
Seventh Circuit.
Argued Nov. 4, 1981.
Decided March 24, 1982.
Rehearing and Rehearing En Banc Denied May 27, 1982.
Mahlon M. Frankhauser, Kirkland & Ellis, Washington, D. C., for petitioner.
Paul Gonson, Securities & Exchange Comm., Washington, D. C., for respondent.
Burton R. Rissman, Schiff, Hardin & Waite, Chicago, Ill., for intervenor-respondent.
Before CUMMINGS, Chief Judge, CUDAHY, Circuit Judge, and CAMPBELL, Senior District Judge. *
CUMMINGS, Chief Judge.
1
The issue in this case is whether the Securities and Exchange Commission (SEC) has authority to regulate trading in options on Government National Mortgage Association mortgage-backed pass-through certificates (GNMA's), given that GNMA's are both "commodities" and "securities." We hold that pending further action by the Commodity Futures Trading Commission (CFTC), all trading of options on GNMA's is prohibited and that the SEC has no jurisdiction of its own to permit trading in GNMA options.
2
* Last April the Board of Trade of the City of Chicago (Board of Trade) petitioned us to set aside an order of the SEC approving rule changes of the Chicago Board Options Exchange, Incorporated (CBOE). The CBOE rule changes would have allowed trading on the CBOE of exchange-formed off-set options on GNMA's. The underlying instruments, GNMA's or Ginnie Maes, are the product of a program administered by the Government National Mortgage Association, a Government corporation within the Department of Housing and Urban Development. See 12 U.S.C. §§ 1716 et seq.; 24 C.F.R. ch. III. The program is designed to increase liquidity in the secondary mortgage market and attract new private sources of funds into residential loans. Under this program, GNMA certificates are issued by private institutions (primarily mortgage bankers) to represent interests in pools of Government-underwritten residential mortgages. The owner of a GNMA certificate receives a proportion of the income generated as mortgagors in the pool repay their loans, and the timely payment of principal and interest to the GNMA owner is guaranteed by the Government National Mortgage Association. GNMA's, like most securities or commodities, are fully transferable from one investor to another. As the CBOE has advised us, "Institutional investors of all types have been attracted to GNMA's because such investments have favorable yields, good liquidity and a high degree of safety" (Br. 5). Although the regular payments of principal and interest are guaranteed, they are fixed for the life of the pooled mortgages, and consequently GNMA owners bear the risk that mortgage interest rates may fluctuate, making the GNMA certificates more or less valuable. The two derivative instruments at issue here, GNMA options and GNMA futures, allow GNMA traders to transfer the risks associated with value fluctuations to speculators.
3
The CBOE's proposed market in GNMA options differs from the market in the underlying GNMA's in that when an option contract is traded no GNMA's change hands. The purchaser or "holder" of a GNMA option acquires only the right to buy or sell a specified quantity and quality of GNMA's at a specified price prior to a specified date. Conversely, in return for a premium, the seller or "writer" of the option (here, the CBOE's clearing house) undertakes the obligation of either selling or buying the GNMA's in the event that the holder "exercises" the purchased option. Under the CBOE's proposed rule changes, however, neither party need ever own or deliver any GNMA's in order to profit from the option transaction. The writer of the option may liquidate his position prior to the holder's exercise by purchasing an identical option, in effect transferring the obligation to a new option writer. Likewise, the option holder may recover the value of his option without actually exercising it simply by purchasing an equal but opposite option (an option to buy to match an option to sell, or vice versa). The original option and its opposite, "offsetting" option are then cancelled through the CBOE clearing house. Thus the CBOE's proposed options market could exist and prosper without any of the traders ever exercising the options and buying or selling the GNMA's.
4
The Board of Trade, a separate market from the CBOE, has since 1975 traded a different GNMA derivative-futures on GNMA's-pursuant to the designation of the other regulatory agency involved in this case, the CFTC. GNMA futures are obligations to make or take delivery of a specified quantity and quality of GNMA's at a particular time in the future and at an agreed price. Both parties to a futures contract are obligated to perform; there is no choice by either party to exercise a right to performance as there is with options. Nevertheless, investors may deal in GNMA futures without ever intending to deliver or take delivery of GNMA's because, like the proposed options, futures contracts may be offset by purchase or sale of an equal and opposite contract. Indeed, futures markets generally are not used to obtain actual delivery of a commodity. Most contracts are fulfilled by entering into an offsetting contract, and fewer than 3% of all futures contracts are fulfilled by taking (or making) actual delivery of the underlying commodity. See Commodity Futures Trading Commission Act of 1974: Hearings on H.R. 11955 Before the House Committee on Agriculture, 93d Cong., 2d Sess. 238 (1974) (statement of Sen. R. Clark); G. Clark, Genealogy and Genetics of "Contract of Sale of a Commodity For Future Delivery" in the Commodity Exchange Act, 27 Emory L.J. 1175 , 1176 (1978). The differences between options and futures may be quite technical, see, e.g., Moriarty, Phillips & Tosini, A Comparison of Options and Futures in the Management of Portfolio Risk, Financial Analysts J. 61 (Jan./Feb. 1981), but a complete understanding of the differences has not been necessary to decide this case. 1
5
Important for understanding the motivation behind this and related lawsuits, however, is the great similarity of functions served by the two GNMA derivatives and the tremendous revenue they may generate for the exchanges on which they are traded. Both options and futures allow GNMA traders to shift to speculators the risk of changing mortgage interest rates, Moriarty, Phillips & Tosini, supra, and the volume of risk-shifting and speculation has been tremendous. In 1981, for example, there were approximately 2,293,000 sales of GNMA futures contracts on the Board of Trade, each contract representing $100,000 in unpaid mortgage principal. Thus when the CBOE proposed rule changes with the SEC to accommodate the creation of a market in exchange-formed off-set options on GNMA's, the Board of Trade filed comments criticizing the CBOE proposal. 2 The Board of Trade argued to the SEC that the proposed options are prohibited under Section 4c(c) of the Commodity Exchange Act, 7 U.S.C. § 6c(c), and that they fall within the CFTC's exclusive jurisdiction over commodity options under Sections 2(a)(1) and 4c(b) of the Act, 7 U.S.C. §§ 2 and 6c(b). 3
6
The SEC nevertheless approved the proposed rule changes on February 28, 1981, and the Board of Trade filed this petition for review as a person "aggrieved" by the SEC order. Securities Exchange Act of 1934, § 25(a)(1), 15 U.S.C. § 78y(a)(1). 4 The Board of Trade's petition reiterates its objections to the SEC order based on the Commodity Exchange Act and various CFTC regulations. In addition, the petition for review urges that even apart from prohibitions of the Commodity Exchange Act, under Sections 3(a)(12), 9(b), and 9(f) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78c(a)(12), 78i(b) and 78i(f), the SEC has no authority to regulate options on GNMA certificates. We will consider the Board of Trade's claims based on the Securities Exchange Act of 1934 although arguably they were not raised before the SEC 5 because the SEC has not objected to our consideration of them and because if the claims are correct the SEC has clearly and unambiguously exceeded its statutory jurisdiction. See K.C. Davis, Administrative Law Treatise § 20.00 at 127-128 (Supp.1980) ("No matter how clear the statutory or nonstatutory law may be that exhaustion is required, the reviewing court will not require exhaustion if the agency fails to oppose review on grounds of lack of exhaustion."); First Jersey Securities, Inc. v. Bergen, 605 F.2d 690, 696 (3d Cir. 1979). The Board of Trade's failure to raise these claims is therefore excusable under Section 25(c)(1) of the Securities Exchange Act of 1934, 15 U.S.C. § 78y(c)(1). Cf. Sartain v. Securities and Exchange Commission, 601 F.2d 1366, 1375 (9th Cir. 1979) (denial of due process need not have been raised before SEC). 6
7
We permitted the CBOE to intervene as a respondent and have had the further benefit of amicus briefs filed by the CFTC, the North American Securities Administrators Association, the Philadelphia Stock Exchange, and the Securities Investor Protection Corporation. After hearing oral argument from both Government agencies and both exchanges on November 4, 1981, we stayed the SEC order pending our resolution of this dispute. 7 II
8
The CFTC and SEC have taken opposite stands with respect to their jurisdiction to regulate GNMA options. 8 In its order under review, the SEC has taken the position that the Commodity Exchange Act (CEA) is inapplicable to the trading of options on securities on a national securities exchange such as the CBOE and that it has authority under the Securities Exchange Act of 1934 (SEA) to allow such trading. The CFTC, on the other hand, agrees with the Board of Trade that the attempted SEC designation of commodity options trading is flatly prohibited by Sections 4c(b) and 4c(c) of the CEA. Moreover, the CFTC and Board of Trade argue that the CEA provides a comprehensive and in this instance exclusive regulatory scheme for commodity futures and commodity options transactions. The dispute arises primarily because GNMA's are both "securities" under SEA § 3(a)(10), 15 U.S.C. § 78c(a)(10), and "commodities" under CEA § 2(a)(1), 7 U.S.C. § 2 . In disentangling the agencies' jurisdictions, we begin with a review of their respective powers under the CEA.
9
Expanded Definition of "Commodity"
10
Before 1974, the Commodity Exchange Act of 1936 applied mostly to agricultural commodities. Essentially all commodity options transactions were prohibited. CEA of 1936, § 4c (current version at § 4c(a), 7 U.S.C. § 6c(a)). In 1974, Congress enacted the Commodity Futures Trading Commission Act, which amended the CEA's definition of "commodity" to include "all other goods and articles, except onions * * *, and all services, rights, and interests in which contracts for future delivery are presently or in the future dealt in * * *." CEA § 2(a)(1), 7 U.S.C. § 2 . By this amendment, literally anything other than onions 9 could become a "commodity" and thereby subject to CFTC regulation simply by its futures being traded on some exchange. The legislative history shows that the purpose of the enlarged definition was to allow regulation of futures contracts and other transactions in a growing number of commodities such as coffee, sugar, and foreign currencies that were then being traded on and off commodity exchanges and that had been unregulated under the prior version of the CEA. This language was also meant to encompass futures markets that were expected to be expanded to cover non-traditional goods and services such as GNMA's. See S.Rep.No.1131, 93d Cong., 2d Sess. 19, reprinted in (1974) U.S.Code Cong. & Ad.News 5843, 5859; H.R.Rep.No.975, 93d Cong., 2d Sess. 41-42, 62 (1974); Philip F. Johnson, The Commodity Futures Trading Commission Act: Preemption as Public Policy, 29 Vand.L.Rev. 1, 25 (1976) ("Congress was well aware, for example, that a futures contract based upon mortgage interest rates was under development in 1973 and 1974."). Under the expanded definition, the SEC concedes that GNMA's became a commodity when the Board of Trade began trading GNMA futures in 1975.
Bans on Options Trading
11
At the same time that Congress expanded the definition of commodity, it gave the CFTC the power to regulate all options transactions involving any of the new commodities. CEA § 4c(b), 7 U.S.C. § 6c(b). 10 Section 4c(b) provides that "no person" may trade in the new commodity options except in accordance with the CFTC's rules. Thus "Congress gave the Commission (CFTC) power to extend (the prior prohibition on 'old' commodities) to options involving the previously unregulated commodities and to any 'new' commodities or to allow the offer and sale of these options subject to terms and conditions prescribed by the Commission." S.Rep.No.850, 95th Cong., 2d Sess. 10, reprinted in (1978) U.S.Code Cong. & Ad.News 2087, 2098. In 1976, the CFTC exercised this "plenary rule-making power" to promulgate comprehensive options regulations. British American Commodity Options Corp. v. Bagley, 552 F.2d 482, 486-487 (2d Cir. 1977), certiorari denied, 434 U.S. 938 , 98 S.Ct. 427 , 54 L.Ed.2d 297 . See 17 C.F.R. Part 32. The new regulations failed to check persistent commodity options abuses, however, and the CFTC reacted in the Spring of 1978 pursuant to its Section 4c(b) power by suspending all commodity options trading indefinitely. 17 C.F.R. § 32.11 . Congress ratified the ban on options trading later that year by adding Section 4c(c) to the CEA, 7 U.S.C. § 6c(c). By Section 4c(c), "no person" may enter into "any commodity option transaction involving any" of the new commodities-including GNMA's 11 -until the CFTC lifts the ban on trading by submitting to Congress for thirty days any proposal for renewed options trading. 12
12
The CFTC has not lifted the ban on GNMA options trading 13 and therefore the CBOE cannot trade GNMA options. Moreover, the proposed options trading would not conform with the regulations promulgated by the CFTC pursuant to Section 4c(b) that were in effect at the time of the SEC order, 14 and would also violate various of the new CFTC regulations that on a limited basis permit options trading on commodity futures. 15 For these reasons, the SEC order under review must be set aside.The CFTC Exclusive Jurisdiction and SEC Savings Clauses
13
The SEC and CBOE make several arguments that Section 4c(c) and the regulations promulgated under Section 4c(b) do not apply to GNMA options traded on a national securities exchange. The first argument is based upon Congress' attempt in 1974 to divide jurisdiction between the CFTC and SEC with two proviso clauses to Section 2(a)(1) of the CEA, 7 U.S.C. § 2 , the "CFTC exclusive jurisdiction" and "SEC savings" clauses:
14
Provided, That the Commission (CFTC) shall have exclusive jurisdiction with respect to accounts, agreements (including any transaction which is of the character of, or is commonly known to the trade as, an "option", "privilege", "indemnity", "bid", "offer", "put", "call", "advance guaranty", or "decline guaranty"), and transactions involving contracts of sale of a commodity for future delivery, traded or executed on a contract market designated pursuant to section 5 of this Act ( 7 U.S.C. § 7 ) or any other board of trade, exchange, or market
15
And provided further, That except as hereinabove provided, nothing contained in this section shall (i) supersede or limit the jurisdiction at any time conferred on the Securities and Exchange Commission or other regulatory authorities under the laws of the United States or of any State, or (ii) restrict the Securities and Exchange Commission and such other authorities from carrying out their duties and responsibilities in accordance with such laws.
16
The SEC and CBOE contend that options on GNMA's do not fall within the CFTC exclusive jurisdiction clause and therefore are "saved" from the options ban by the SEC savings clause. The Board of Trade, to the contrary, asserts that because the savings clause is limited by the introductory phrase "nothing contained in this section," any SEC jurisdiction over GNMA options is not saved to the extent it is taken away by other Sections, such as the options ban Sections 4c(b) and 4c(c). The "thing" contained in Section 2(a)(1) of concern to the SEC and CBOE, however, is the expanded definition of "commodity." The SEC and CBOE would have us read Sections 4c(b) and 4c(c) as limited by the breadth of "commodity," which being defined in "this section" (Section 2(a)(1)) cannot be used to derogate from "jurisdiction at any time conferred" on the SEC. We agree with this part of their interpretation; the options ban would not possibly impinge on SEC jurisdiction unless the definition of commodity grew to include "securities" regulated by the SEC. Since the definition of commodity occurs in "this section," the savings clause may indeed limit the options ban. Furthermore, the other limiting introductory phrase-"except as hereinabove provided"-does not except the definition of commodity from the savings clause, although the definition occurs "hereinabove." "(E)xcept as hereinabove provided" refers only to above-mentioned proviso clauses, of which there is but one in Section 2(a)(1), the exclusive jurisdiction clause. 16
17
Thus we interpret the savings clause so that an expanded definition of commodity does not divest the SEC of jurisdiction, via the options ban or otherwise, except where SEC jurisdiction is divested by the CFTC exclusive jurisdiction clause. Our construction of the savings clause does not aid the SEC and CBOE position, however, because we conclude that GNMA options are within the exclusive jurisdiction of the CFTC and also that under the SEA, the SEC has no power to be saved over GNMA options.
18
The Exclusive Jurisdiction Clause Covers Commodity Options
19
Since options are among the listed agreements with respect to which the CFTC has exclusive jurisdiction, GNMA options come within the exclusive jurisdiction clause provided they "involv(e) contracts of sale of a commodity for future delivery." CEA § 2(a)(1). The difficulty lies in the word "involve." The SEC and CBOE argue that GNMA options do not "involve" futures contracts because by their interpretation of the exclusive jurisdiction clause, options can "involve" futures contracts only by being on futures contracts. That is, the CFTC would have exclusive jurisdiction for options on futures contracts, but not for options merely on the underlying commodity.
20
We disagree. Congress understood the difference between "transactions in" and "transactions involving." 17 Had Congress meant to limit CFTC exclusive jurisdiction to transactions in commodity futures, it would have said so. See American Stock Exchange, Inc. v. CFTC, 528 F.Supp. 1145, 1151-1152 (S.D.N.Y.1982) (recognizing that commodity options are within CFTC exclusive jurisdiction).
21
Instead, the legislative history clearly indicates that Congress intended "transactions involving" to import something more than "transactions in" (or options on) commodity futures. Following lobbying led by the Chicago Board of Trade to give a single agency exclusive jurisdiction over commodity transactions, the House Committee on Agriculture revised its draft bill to read: "the Commission (CFTC) shall have exclusive jurisdiction of transactions dealing in, resulting in, or relating to contracts of sale of a commodity for future delivery * * *." Hearings on S. 2485, S. 2578, S. 2837 & H.R. 13,113 Before the Senate Committee on Agriculture & Forestry, 93d Cong., 2d Sess. pt. 1 at 140-141 (1974) (emphasis added). See Johnson, supra, 29 Vand.L.Rev. at 10-11. 18 Since "transactions dealing in (and) resulting in" futures contracts cover trading in both futures and options on futures, by including the third category "transactions * * * relating to" futures the House draft would have extended CFTC exclusive jurisdiction to trading of futures-related instruments such as commodity options. Similarly, the Senate committee, whose version of the exclusive jurisdiction clause was adopted by the conference committee 19 and enacted, explained that "(a) the Commission's (CFTC's) jurisdiction over futures contract markets or other exchanges is exclusive and includes the regulation of commodity accounts, commodity trading agreements, and commodity options ; (b) the Commission's jurisdiction, where applicable, supersedes State as well as Federal agencies * * *." S.Rep.No.1131, 93d Cong., 2d Sess. 6 (1974), reprinted in (1974) U.S.Code Cong. & Ad.News 5843, 5848 (emphasis added). 20
22
One difficulty in searching the legislative history for evidence of an intended distinction between options and options on futures is that the phrase "commodity option" may have been used ambiguously to mean either. 21 The only distinction between the two options was made by sponsoring Chairman Poage of the House Committee on Agriculture, who explained that the CFTC was created in order "to fill all regulatory gaps-to regulate trading in futures and in options relating to commodities or commodity futures, because such trading is now poorly regulated if it is regulated at all." 120 Cong.Rec. 34736 (1974) (emphasis added).
23
We conclude that Congress chose the phrase " 'option' * * * involving contracts of sale of a commodity for future delivery" in order to give the CFTC exclusive jurisdiction over at least some commodity options, although it is less clear how far the exclusive jurisdiction was meant to extend into options on commodities like GNMA's that double as securities. Given the possible expansion of "commodity" to include even corporate securities on which options have traditionally been regulated by the SEC, the CFTC exclusive jurisdiction clause must have some limits.
24
Congress Did Not Limit Power Over Commodities to Non-Securities
25
The SEC and CBOE argue that even if a distinction cannot be made between commodity options and options on commodity futures, Congress did not intend to give the CFTC exclusive jurisdiction over transactions involving securities. The SEC and CBOE base their argument upon snippets in the legislative history that purportedly suggest a clean jurisdictional division between commodities and securities. For example, the Senate Committee on Agriculture and Forestry discussed the scope of the CFTC's option authority under Section 4c(b) in these terms:
26
The Committee intends that options not be traded except on organized exchanges and in conformity with the rules and regulations of the Commission (CFTC). However, the Commission would not have authority to regulate trading in puts and calls for securities. Where traded on exchanges, these puts and calls are regulated by the Securities and Exchange Commission.
27
S.Rep.No.1131, 93d Cong., 2d Sess. 26, reprinted in (1974) U.S.Code Cong. & Ad.News 5843, 5866. This passage does not describe CFTC power under the exclusive jurisdiction clause of Section 2(a)(1), although it does describe an important grant of CFTC power regarding options regulation, Section 4c(b). But crucially the passage fails to define what is meant by "securities"; the Senate Committee makes no distinction between traditional, corporate stocks and the extension of "security" here to include non-traditional instruments traded and regulated under the CEA for some six years as "commodities." 22 Similarly, a passage such as "The Commission will have exclusive jurisdiction over options trading in commodities (but not in securities)" does not cleave the agencies' jurisdictions but instead perhaps reflects a committee member's belief that commodities and securities could remain mutually exclusive. Id. at 31, (1974) U.S.Code Cong. & Ad.News at 5870. The Senate Committee, of course, had no reason to make subtle distinctions between traditional stocks and their new commodities because in 1974 the SEC had not yet attempted to regulate trading of the latter. 23
28
The dissent argues that Congress did not intend to preempt SEC jurisdiction on national securities exchanges subject to its regulation. There are a few places in the legislative history that could be strained to suggest this interpretation. For example, House Committee Chairman Poage stated:
29
This grant of exclusive jurisdiction (to the CFTC) is not to be construed as preempting the jurisdiction of the Securities and Exchange Commission over securities, including stock options, traded on any national securities exchange or any other U.S. securities market.
30
120 Cong.Rec. 34737 (1974) (emphasis supplied). If jurisdiction were to be assigned by market, the dissent does not state how it would then limit the SEC jurisdiction so that the CBOE could not trade wheat options or onion futures, but we need not speculate what the CBOE may do in order to refute the argument. The exclusive jurisdiction clause states specifically that the CFTC has exclusive jurisdiction over the enumerated transactions whenever "traded or executed on a contract market designated pursuant to section 5 of this Act ( 7 U.S.C. § 7 ) or any other board of trade, exchange, or market * * *." 7 U.S.C. § 2 (emphasis added). The dissent thus reads the legislative history inconsistently with the clear words of the statute, which divide jurisdiction by transactions rather than markets, and the statute must control. The statute also suggests a more plausible reading of the legislative history: that Congress in 1974 meant to protect SEC jurisdiction over the sorts of corporate stock options then being traded on national securities exchanges. Accordingly, the legislative history's reference to national securities exchanges is only illustrative of the instruments within the SEC's saved jurisdiction and does not compel a division of power according to what market an instrument is traded on.
31
Our construction of the exclusive jurisdiction clause as including power over at least some commodity/security options is reinforced by subsequent legislative events. In 1975, the SEC attempted to add a provision in the 1975 amendments to the SEA that would have repealed the CFTC's grant of exclusive jurisdiction with respect to all "transactions involving a 'security.' " Hearings on S. 249 Before the Senate Subcommittee on Banking, Housing, and Urban Affairs, 94th Cong., 1st Sess. 244 (1975). SEC Chairman Ray Garrett, Jr. stated in a letter of comment requested by Chairman Harley O. Staggers of the House Committee on Interstate and Foreign Commerce that without the amendment, the CFTC's exclusive jurisdiction "may well call into question the continuing jurisdiction of the Securities and Exchange Commission over options trading, including that on the Chicago Board Options Exchange and the American Stock Exchange, Inc." Id. at 204, 209 . 24 Congress rejected the proposed reduction of CFTC jurisdiction, and the CFTC retains its exclusive jurisdiction over options that "involve" commodity futures even though the commodities may also be securities.
32
In 1978, the SEC again attempted to have "securities" withdrawn from CFTC power and also to extend the definition of security in each of the five Federal securities laws. Extend Commodity Exchange Act: Hearings on H.R. 10285 Before the House Subcommittee on Conservation and Credit, 95th Cong., 2d Sess. 181-210 (1978) (testimony of SEC Chairman Harold M. Williams); H.R.Rep.No.1181, 95th Cong., 2d Sess. 12-14 (1978); S.Rep.No.850, 95th Cong., 2d Sess. 20, 21, 52-55, reprinted in (1978) U.S.Code Cong. & Ad.News 2087, 2108, 2109, 2140-2143. 25 Congress again rejected the SEC proposals, but added 7 U.S.C. § 4a(g)(2) to the CEA, which directs the CFTC to "maintain communications" with the SEC and other agencies in order to keep "such agencies fully informed of Commission activities" relative to their responsibilities. See Bromberg, Securities Law-Relationship to Commodities Law, 35 Bus.Law. 787, 791 (1980) ("(T)he SEC has never really accepted the (CFTC) exclusive jurisdiction language, and has continued to argue that the language does not say what it pretty obviously does say and what Congress said in 1978 it obviously meant."). As noted above, Congress in 1978 was aware that GNMA's were among the new commodities but made no distinctions when imposing the options ban between GNMA's (or other commodity/securities) and other new commodities. See International Trading, Ltd. v. Bell, 262 Ark. 244 , 556 S.W.2d 420, 424-425 (1977) (In Banc) ("The argument that (CFTC exclusive jurisdiction) relates only to regulation of commodities, not securities, is unavailing here because of the clear language of the act bringing commodity options within the purview of the act.").
33
The above discussion does not mean there are no limits to CFTC power over options on securities but only that we reject (as did Congress) the SEC's and CBOE's contention that the CFTC has no power over options on securities. The need for some limits upon CFTC power, however, remains.
34
Limits on the Exclusive Jurisdiction Clause
35
Since this is only the first case construing the extension of CFTC exclusive jurisdiction into options on securities, we have not attempted to divine the limits that a series of cases involving different commodity/securities may better establish. Rather, we have considered several rationales for separating exclusive CFTC jurisdiction from that reserved to the SEC based in the legislative materials and the logic of the overall legislative scheme.
36
One set of limits for the options aspect of the exclusive jurisdiction clause arises from the 1974 legislative history suggestion that only "traditional" SEC authority over corporate securities was to be preserved. See note 22 supra. GNMA's are not traditional securities; the regular payments of principal and interest that they represent, unlike corporate dividends, are guaranteed by the Government for the life of the certificate. Accordingly, GNMA's are exempted from many of the provisions of the Federal Securities Acts that apply to traditional stocks. See pages 1154, 1159 infra. It would seem then Congress intended non-traditional securities such as GNMA's to be within the CFTC's exclusive jurisdiction once the underlying security became a commodity by the opening of a legitimate futures market.
37
Another reasoned limitation on the scope of the exclusive jurisdiction clause is based on the purposes for which the commodity future or commodity option is traded. The district court in Mullis v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 492 F.Supp. 1345 (D.Nev.1980) took this tack. In summarizing the 1974 legislative history it stated:
38
The jurisdiction of the CFTC preempts all other agency regulation in the commodities field, even regulation of a security, so long as the dominant purpose for the existence of the security is to trade in commodity futures * * *.
39
492 F.Supp. at 1350 (emphasis added). During the 1978 amendments to the CEA, the Senate Committee on Agriculture, Nutrition, and Forestry suggested a similar, functional approach:
40
The committee has followed with interest the changing nature of futures markets. The nature of the underlying commodity is not an adequate basis to divide regulatory authority. Further, the fact that a futures contract market does not fit into the traditional mold where there are both hedging and price-discovery functions should not be the determining factor in whether the contract is to be regulated by the CFTC. So long as the futures contract serves a legitimate function, Congress has vested the Commodity Futures Trading Commission with jurisdiction.
41
S.Rep.No.850, 95th Cong., 2d Sess. 22, reprinted in (1978) U.S.Code Cong. & Ad.News 2087, 2110 (emphasis added).
42
None of the parties suggests that GNMA's are not "legitimate" commodities. 26 The parties also agree that GNMA futures serve the legitimate and important functions of allowing mortgage bankers to better anticipate changes in mortgage interest rates and to transfer the risks due to fluctuation in mortgage interest rates to speculators willing to assume them. The "dominant purpose" for the existence of GNMA's is not that they be traded as futures, but a sort of converse is correct: "by providing a degree of liquidity for mortgage investments," GNMA futures further the purposes for the existence of the underlying GNMA's. 12 U.S.C. § 1716 (a). Indeed, the CBOE proposal under review was greeted with enthusiasm by both mortgage bankers and the Government National Mortgage Association as a new means to facilitate their activities in the housing market. SEA Release No. 17577, at 4-6 (Feb. 26, 1981); SEC Record 327-472. GNMA futures or options are in this respect functionally quite similar to soybean futures or options, in that their trading serves legitimate hedging and price discovery functions, thereby facilitating production of the underlying commodity. See S.Rep.No.850, 95th Cong., 2d Sess. 13 (quoted in note 11 supra).
43
GNMA futures are not identical to GNMA options, however, and there is some indication that mortgage bankers would prefer to trade in GNMA options. 27 Nevertheless, both instruments are claimed to serve more or less the same purposes, and the prices in each market assumedly would affect one another. 28 Moreover, the fears that prompted the 1974 and earlier legislation, concerning manipulation of commodity prices by speculators in commodity derivatives, apply equally to both options and futures. 7 U.S.C. § 5 ; Hearings on H.R. 6772 Before the Senate Committee on Agriculture and Forestry 18-22, 172-173, 182-185, 186-187, 214 (1936); Greenstone, The CFTC and Government Reorganization: Preserving Regulatory Independence, 33 Bus.Law. 163, 177-181 (1977). And the evidence presented to the SEC overwhelmingly indicated that opportunities for manipulation would be increased by addition of a GNMA options market regulated by a separate agency, although the effects of increased attempts at manipulation could not be foreseen. See, e.g., SEC Record 527, 636-640. 29 Congress quite clearly intended "to create one federal agency with the expertise to regulate the commodities industry," 30 and its prudent choice should be given effect here. Since GNMA's are not traditional stocks and GNMA options have the character of a legitimate commodity derivative, we hold that the proposed GNMA options "involve" the pre-existing GNMA futures and therefore are within the exclusive jurisdiction of the CFTC. 31 The Treasury Amendment
44
The SEC and CBOE make one final argument that the CFTC has no power over GNMA options based upon a clause within Section 2(a)(1) of the CEA, 7 U.S.C. § 2 , known as the "Treasury amendment." The Treasury amendment provides that:
45
Nothing in this Act shall be deemed to govern or in any way be applicable to transactions in foreign currency, security warrants, security rights, resales of installment loan contracts, repurchase options, government securities, or mortgages and mortgage purchase commitments, unless such transactions involve the sale thereof for future delivery conducted on a board of trade.
46
The SEC and CBOE argue that GNMA options come within this list of transactions excluded from CFTC power as either "security rights" or "transactions in * * * government securities." The argument fails. "Security rights" might be characterizable as options to purchase securities ("call" options), but there is no similar exclusion from the CEA for the other half of the CBOE proposal, options to sell securities ("put" options). In fact, Congress refused to adopt that part of the Treasury amendment which would have excluded "puts and calls for securities" from the provisions of the Commodity Exchange Act. See S.Rep.No.1131, 93d Cong., 2d Sess. 51, reprinted in (1974) U.S.Code Cong. & Ad.News 5843, 5889 (draft of the amendment submitted by the Treasury to the Senate Committee on Agriculture and Forestry). 32 In effect, the SEC and CBOE are asking us to reinsert language in the Treasury amendment that Congress had before it but deleted prior to passage.
47
Nor are GNMA options "transactions in * * * government securities." "The option transaction is a long step removed from a transaction in the commodity involved, since the option purchaser, if he or she does nothing more when the specified date arrives, will simply see the option die." Commodity Futures Trading Commission v. American Board of Trade, 473 F.Supp. 1177, 1183 (S.D.N.Y.1979); see also Commodity Futures Trading Commission & State of Georgia v. Sterling Capital Co., 2 Comm.Fut.L.Rep. (CCH) P 21,169, at 24,783-24,784 (N.D.Ga.), modified, 2 Comm.Fut.L.Rep. (CCH) P 21,170 (N.D.Ga.1981). Only when the option holder exercises the option is there a transaction in a government security. Under the CBOE proposal, however, an option holder never has to exercise the option in order to profit from the position. Thus the options market may exist without any transactions in the commodity itself. Accordingly, the Treasury amendment does not affect CFTC power over GNMA options.
48
On the other hand, if one of the transactions listed in the Treasury amendment included GNMA options, the "unless" clause would apply. As we have already held, the GNMA options "involve" GNMA futures contracts presently being traded on the various contract markets including the Board of Trade. Thus the Treasury amendment does not affect CFTC jurisdiction over GNMA options. 33 From the legislative history, it is quite clear that the Treasury amendment was adopted by Congress only to prevent dual regulation by the CFTC and bank regulatory agencies of the banks and other sophisticated institutions that ordinarily trade in the enumerated financial instruments. See S.Rep.No.1131, 93d Cong., 2d Sess. 6, 23, reprinted in (1974) U.S.Code Cong. & Ad.News 5843, 5848, 5863-5864. 34 III
49
Apart from whether GNMA options are within the CFTC's exclusive jurisdiction, we find that the SEC has no power under the SEA to approve the CBOE's proposed rule changes. Therefore the order under review is void for want of jurisdiction and also for violating the options ban of CEA § 4c(c) and 17 C.F.R. § 32.11 . 35
GNMA Options Are Not Securities
50
The SEC first claims that it has plenary power over the trading of securities on stock exchanges, and that GNMA options are securities. Indeed, SEC power is broad. Section 5 of the SEA, 15 U.S.C. § 78e, makes unlawful any exchange trading in any security unless the exchange has been registered under Section 6, 15 U.S.C. § 78f. Section 6, in turn, gives the SEC power to prescribe rules for exchange registration. Other Sections of the SEA give the SEC various powers to require registration of securities to be traded on particular exchanges (Section 12, 15 U.S.C. § 78l ), to prohibit manipulative and deceptive devices (Section 10, 15 U.S.C. § 78j), to regulate brokers and dealers (Section 15, 15 U.S.C. § 78o ), and to investigate and require public disclosures (Sections 21 and 13, 15 U.S.C. §§ 78u, 78m). Such power, however, is with respect to trading in securities, and the exchange-formed off-set GNMA options that would be traded on the CBOE are not securities.
51
Section 3(a)(10) of the SEA, 15 U.S.C. § 78c(a)(10), defines "security":
52
When used in this title, unless the context otherwise requires-
53
(10) The term "security" means any note, stock, treasury stock, bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit, for a security, or in general, any instrument commonly known as a "security"; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase, any of the foregoing; but shall not include currency or any note, draft, bill of exchange, or banker's acceptance which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited.
54
The commodity underlying the proposed options, the GNMA certificate, falls within the definition of "security," being a "note, * * * bond, (or) debenture" with a maturity exceeding nine months. See Davidson v. Dean Witter Reynolds, Inc., 478 F.Supp. 494, 495 (D.Colo.1979) (anti-fraud provisions of SEA are applicable to GNMA's); but see Marine Bank v. Weaver, --- U.S. ----, 102 S.Ct. 1220 , 71 L.Ed.2d ---- (1982) (certificates of deposit issued by FDIC-insured bank are not securities for anti-fraud purposes). Exchange-formed off-set options, however, are not within the definition. 36
55
The SEC argues that the proposed options are "warrants or rights to subscribe to or purchase" the GNMA's. Warrants and rights are distinguishable from the proposed options, however. Ordinarily, warrants or rights are issued in connection with a transaction in which there is a genuine probability that the subscriber or purchaser will exercise the option because of a special interest in the underlying security itself. In the proposed market for GNMA options, on the other hand, the interest more often would be in the price of the underlying security and the identity of the security would be secondary. "The usual 'warrant' is 'issued with bonds and shares of stock,' " for example, in connection with a corporate reorganization or merger, or as an incentive to employees of the company whose stock underlies the warrant. Miller v. General Outdoor Advertising Co., 223 F.Supp. 790, 794 (S.D.N.Y.1963) (quoting 1 Dewing, The Financial Policy of Corporations 265 (5th ed.)), reversed on other grounds, 337 F.2d 994 (2d Cir. 1964). "The 'right to subscribe' properly refers to the right given by an issuer to its stockholders to buy additional stock; if the corporation is to issue new stock often these rights are required by law to be given to the old stockholders because they have preemptive rights to the new stock." Id.
56
"(P)uts" and "calls" are in a different category from "warrants" and "rights," although all are forms of options. * * * (The former) instruments are generally written in bearer form by more or less professional investors, endorsed by stock exchange houses, and then bought and sold in the market. * * * The( ) option dealers rarely write the options themselves. * * * (The put and call options') economic raison d' etre is to serve as insurance against future market movements. For example, a person who is long may purchase a put as insurance that he will be able to sell if the market falls to a certain level, and a person who is short may purchase a call to ensure that he will be able to cover (buy) if the market rises to a certain figure. At the same time, these instruments provide a cheap form of speculation. Since they have served as manipulative devices in the past, the Commission (SEC) was given authority in the Securities Exchange Act of 1934 * * * to regulate puts and calls by rule. (citing § 9(b)-(d) * * *.)
57
I L. Loss, Securities Regulation 467-468 (2d ed. 1961). In contrast to put and call options, warrants and rights generally have the more limited economic function of facilitating actual transfers of particular securities. 37
58
When Congress wrote "warrant or right to subscribe to or purchase" a security, it did not intend to include the exchange-formed off-set options that the CBOE would trade here. Congress knew what security options were 38 but did not see fit to include them in its listing as separate securities.
59
Moreover, "warrants or rights" would cover only options to purchase ("call" options) and the CBOE off-set program requires the complementary trading of options to sell ("put" options). The SEC argues that the broad definitions of "purchase" and "sale" of a security under Sections 3(a)(13) and 3(a)(14) of the SEA, 15 U.S.C. §§ 78c(a)(13) and 78c(a)(14), remedy the disparity between puts and calls. But even supposing that call options are securities, no reasonable combination of buying or selling them turns the deal into the transfer of a put option. Cf. Marine Bank v. Weaver, --- U.S. ----, ---- n.2, ---- n.9, 102 S.Ct. 1220 , 1222 n.2, 1225 n.9, 71 L.Ed.2d ---- (1982) (although "a pledge of stock is equivalent to a sale for the purposes of the antifraud provisions of the Federal securities laws," argument rejected that a "certificate of deposit (deemed not a security by itself) was somehow transformed into a security when it was pledged"). Although the transfer of an option may be deemed a purchase or sale for some purposes, e.g., Bershad v. McDonough, 428 F.2d 693 (7th Cir. 1970), it is always the purchase or sale of the underlying security, not a purchase or sale of the option qua security. Thus we are in agreement with the Supreme Court's statement in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 750-751 , 95 S.Ct. 1917, 1932 , 44 L.Ed.2d 539 that option holders "have been recognized as 'purchasers' or 'sellers' of securities for purposes of Rule 10b-5 * * *." Blue Chip Stamps stands for the proposition that § 10(b) of the SEA and Rule 10b-5 may be invoked only by purchasers or sellers of securities, and says nothing about the purchase or sale of security options except insofar as options may facilitate purchase or sale of the underlying security. 39
60
The SEC and CBOE also argue that the GNMA options are "investment contracts" or interests "commonly known as a security." Their authority for this proposition is I L. Loss, Securities Regulation 469 (2d ed. 1961), which speculates with regard to whether options should be deemed securities for purposes of registration under the Securities Act of 1933 and the "insider" trading restrictions of SEA § 16: "both (puts and calls) are such an integral part of securities trading that it seems entirely reasonable to subsume them under the phrases 'investment contract' and 'interest or instrument commonly known as a "security." ' " But GNMA's are "exempted securities" under both the Securities Act of 1933 40 and the SEA, 41 and therefore need not be registered under the former Act 42 nor are subject to the insider rules of SEA § 16. 43 Accordingly, the purposes to be served by Professor Loss' analysis are inapplicable to the underlying GNMA's, and he suggests no reason for treating options on GNMA's any differently.
61
For purposes of this case, we need not distinguishbetween an "investment contract" and an "instrument commonly known as a 'security.' " In either case, the basic test for distinguishing the transaction from other commercial dealings is
62
"whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others." (SEC v. W. J.) Howey, 328 U.S. (293,) 301 ( 66 S.Ct. 1100, 1104 , 90 L.Ed. 1244 ).
63
This test, in shorthand form, embodies the essential attributes that run through all of the Court's decisions defining a security. The touchstone is the presence of an investment in a common venture premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.
64
United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 852 , 95 S.Ct. 2051, 2060 , 44 L.Ed.2d 621 (footnote omitted) (holding that shares of stock in a cooperative apartment house are not "securities" within Securities Acts). Courts have consistently held that commodity futures are not "investment contract" securities. E.g., Milnarik v. M-S Commodities, Inc., 457 F.2d 274 , 275 n.1 (7th Cir. 1972) (per then Circuit Judge Stevens), certiorari denied, 409 U.S. 887 , 93 S.Ct. 113 , 34 L.Ed.2d 144 ; McCurnin v. Kohlmeyer & Co., 340 F.Supp. 1338, 1341 (E.D.La.1972), affirmed per curiam, 477 F.2d 113 (5th Cir. 1973); American Grain Ass'n v. Canfield, Burch & Mancuso, 530 F.Supp. 1339 (W.D.La.1982); Saitlin, Exclusive CFTC Jurisdiction of Commodity Trading Vehicles May Depend Upon Form Over Substance, 33 Bus. Law. 241, 241-242 (1977); Bromberg, Commodities Law and Securities Law-Overlaps and Preemptions, 1 J.Corp.L. 217, 243-245 (1976). Judge Higginbotham of the Northern District of Texas held recently that a "standby commitment" to take delivery of GNMA's-essentially a put option in GNMA's between two commercial GNMA traders 44 -is not an "investment contract" either. LTV Federal Credit Union v. UMIC Government Securities, Inc., 523 F.Supp. 819, 828-833 (N.D.Tex.1981). Judge Higginbotham stated:
65
This court here sees no functional distinction between the Standby Commitment and commodity contracts for future delivery, as regarding their possible status as "investment contracts," that would justify a different holding here. The economic realities of this transaction are that there is no "common enterprise"-no common business venture from which both parties can hope to generate profits to be distributed among them. And even if there were a "common enterprise," the profits each party can hope to derive, are derived solely from the movement of a market over which neither has control or the ability to influence. The Standby Commitment thus is not an "investment contract" within the meaning of the Securities Act or the Exchange Act.
66
Id. at 830 . Exactly the same analysis applies to the GNMA options program proposed here.
67
SEC v. G. Weeks Securities, Inc., 483 F.Supp. 1239 (W.D.Tenn.1980), cited by the SEC, is not to the contrary. The transaction in Weeks, known as a "standby with pair-off," involved only a "book" transfer of GNMA's used to camouflage a loan from investor to issuer. See 483 F.Supp. at 1242 (hypothetical example explaining in steps how the "standby with pair-off" works). In substance, the investor would receive a stated amount of "interest" (plus some possibility of extra gain due to fluctuation in the price of GNMA's) in return for use of his funds, while taking the risk that the issuer might be unable to invest the loans profitably enough to meet the "interest" payments. The district court quite reasonably held this transaction to be both an "investment contract" and an "evidence of indebtedness" within the definition of security. Cf. Glazer v. National Commodity Research & Statistical Service, Inc., 547 F.2d 392, 393 (7th Cir. 1977) (rejecting SEC argument that options to buy or sell commodity futures are "investment contracts," "interests commonly known as securities," or "evidence of indebtedness"). 45
68
The Context Requires That GNMA Options Are Not Securities
69
Section 3(a) of the SEA, 15 U.S.C. § 78c(a), states that the meaning of "security" will not be frozen in the terms of the listed transactions when "the context otherwise requires." Similarly, the Supreme Court has cautioned that "a 'literal approach' to defining a security is misplaced." United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 849 , 95 S.Ct. 2051, 2059 , 44 L.Ed.2d 621 . Rather, "one must apply a test in terms of the purposes of the Federal Acts * * *." Teamsters v. Daniel, 439 U.S. 551, 559 , 99 S.Ct. 790, 796 , 58 L.Ed.2d 808 (quoting SEC v. Variable Annuity Life Ins. Co., 359 U.S. 65, 80 , 79 S.Ct. 618, 626 , 3 L.Ed.2d 640 (Brennan, J., concurring)).
70
In Daniel, the Supreme Court considered the existence of an alternative, comprehensive regulatory framework relevant to how "security" should be construed. The Supreme Court held in effect that the Employment Retirement Income Security Act of 1974 (ERISA) preempted the application of the Securities Acts to certain pension plans. 439 U.S. at 557, 569-570 , 99 S.Ct. at 795, 801-02 . "The existence of this comprehensive legislation governing the use and terms of employee pension plans severely undercuts all arguments for extending the Securities Acts to noncontributory, compulsory pension plans. Congress believed that it was filling a regulatory void when it enacted ERISA, * * * (and) in light of ERISA(, application of the Securities Acts) serves no general purpose." Id. at 569-570 , 99 S.Ct. 801 -02. See also Marine Bank v. Weaver, --- U.S. ----, ----, 102 S.Ct. 1220, 1224 , 71 L.Ed.2d 409 (1982) (even though a six-year bank certificate of deposit would appear to be a "note * * * (or) bond" within the statutory definition, comprehensive banking regulation and FDIC insurance "otherwise required" that it not be deemed a security).
71
In the same fashion here, the CEA and the CFTC's consistent regulation of GNMA futures have displaced any prior SEC authority over GNMA options. CFTC authority to regulate commodity options under CEA §§ 4c(b) and 4c(c) is plenary; there is no need for compounding the regulation by adding the SEC. In enacting the CEA, Congress believed it was filling a regulatory void, see, e.g., 120 Cong.Rec. 34736-34737 (1974) (remarks of Rep. Poage), and it intended the agencies' powers to be non-redundant, as is apparent from the complementary CFTC exclusive jurisdiction and SEC savings clauses in CEA § 2(a)(1), 7 U.S.C. § 2 , and the legislative history. See, e.g., S.Rep.No.850, 95th Cong., 2d Sess. 22, reprinted in (1978) U.S.Code Cong. & Ad.News 2087, 2110 ("the basic conclusion reached in 1974 that there should be a single regulatory agency responsible for futures trading is as valid now as it was then"). Consequently, "security" should be construed to exclude GNMA options in order to avoid duplicative regulation over them by the SEC.
SEC Power Under Section Nine of the SEA
72
Another potential source of SEC power over options, SEA § 9, 15 U.S.C. § 78i, does not depend on the options being securities. Section 9(b), in particular, gives the SEC power to regulate exchange trading of "any put, call, straddle, or other option." Since Section 9(f) withdraws SEC authority regarding options on exempted securities, 46 however, the SEC has no power to permit trading of GNMA options.
73
That authority over options is specifically granted under Section 9 is further evidence that the SEC lacks authority over options under other sections of the SEA. Indeed, the SEC consistently has relied upon Section 9 for its authority to regulate exchange-traded options. For example, in 1961, in its study on puts and calls, the SEC stated that its authority over such transactions came from Sections 9(b) and 9(c). SEC Division of Trading & Exchanges, Report on Put and Call Options 1 (1961); 17th Annual Report of the SEC 67 (1961). In 1973, when it first authorized the CBOE stock options market, the SEC relied on its authority under Sections 9(b) and 9(c) to permit stock options trading through promulgation of Rule 9b-1. SEA Release No. 9930, 38 Fed.Reg. 1646 (Jan. 17, 1973); SEA Release No. 10552, 38 Fed.Reg. 34665 (Dec. 17, 1973). In 1975, following Congress' 1975 amendments to the SEA, the SEC rescinded Rule 9b-1 and adopted the more general Rule 19b-4. Nevertheless, in the SEC's view, "the 1975 Amendments have not affected the Commission's authority under Section 9 of the Act," and "the Commission will, of course, continue to review option trading closely in light of its broad authority under Section 9 of the Act." SEA Release No. 11604, 40 Fed.Reg. 40509, 40511 (Sept. 3, 1975). Finally, as recently as 1980, the SEC stated: "Pursuant to Section 9(b) of the Securities Exchange Act of 1934 ('Act'), the Commission has been granted plenary authority to regulate all aspects of options trading on exchanges * * *." SEA Release No. 16701, 45 Fed.Reg. 21426 (April 1, 1980).
74
In enacting the SEA, Congress viewed security options not as securities themselves, but as dangerous mechanisms used primarily for manipulating the prices of the underlying securities. See S.Rep.No.1455, 73d Cong., 2d Sess. 37-39, 45-47, 51-52 (1934); S.Rep.No.792, 73d Cong., 2d Sess. 9 (1934); H.R.Rep.No.1383, 73d Cong., 2d Sess. 10-11 (1934). Congress also recognized that there would be less potential for manipulation with respect to exempted securities, since they are issued or guaranteed by the Government. See Stock Exchange Regulation: Hearings on H.R. 7852 and H.R. 8720 Before the House Committee on Interstate and Foreign Commerce, 73d Cong., 2d Sess. 818-820 (1934); Federal Securities Act: Hearings on H.R. 4314 Before the House Committee on Interstate and Foreign Commerce, 73d Cong., 1st Sess. 110 (1933). 47 Accordingly, by Section 9(f), Congress removed SEC power over options on exempted securities because their regulation was unnecessary. Thus the forty-year history of securities and commodities legislation can be construed sensibly by recognizing that the "guaranteed" value of exempted securities makes them closer in nature to traditional commodities, such as corn or pork bellies, than to traditional corporate stocks. 48 In 1934, there was no need for the SEC to monitor options on exempted securities such as GNMA's; in 1974, when the need arose for commodity option regulation generally, Congress endowed the CFTC with the necessary authority.
Other Sources of Options Power
75
The SEC purported to approve the CBOE rule changes pursuant to SEA § 19(b)(1), 15 U.S.C. § 78s(b)(1), and Rule 19b-4 thereunder. SEA Release No. 17577 (Feb. 26, 1981). Section 19(b)(1) simply provides that exchanges may file rule changes with the SEC and that with exceptions, rule changes become effective upon SEC approval. Section 19(b)(2), 15 U.S.C. § 78s(b)(2), states in part that the SEC "shall approve a proposed rule change of a self-regulatory organization if it finds that such proposed rule change is consistent with the requirements of this title * * *." Thus neither Section 19(b)(1) nor Section 19(b)(2) expands SEC jurisdiction with respect to rule changes beyond what has already been granted elsewhere in the SEA; otherwise, the rule changes would not be "consistent with the requirements of this title."
76
Section 23(a)(1), 15 U.S.C. § 78w(a)(1), which allows the SEC to promulgate "such rules and regulations as may be necessary or appropriate to implement the provisions of this title," does not reach GNMA options either. Assuming that Section 23(a)(1) can ever enlarge SEC jurisdiction, we find it inapplicable here. It is unnecessary for the SEC to promulgate rules regarding GNMA options when the CFTC has the necessary statutory jurisdiction 49 and inappropriate in the face of the Congressional options ban of CEA § 4c(c). Our upholding the jurisdiction of the CFTC will not foreclose the CBOE from instituting a program of options on GNMA's once the CFTC promulgates appropriate rules and the options ban is lifted through a proper submission to and approval by Congress.
77
As already mentioned, pages 1149-1150 supra, Congress was given at least two opportunities since passage of the Commodity Futures Trading Commission Act of 1974 to adjust SEC jurisdiction, but each time Congress chose to make no adjustments. This Court would be remiss to do differently. The SEC simply is without power to authorize trading in GNMA options.
IV
78
The statutes at issue in this case are complex enough to admit different opinions of their proper construction. The dissent, however, has shown itself to be motivated by more "practical" matters such as whether the CFTC is healthy enough to handle its statutory jurisdiction. Indeed the dissent notes that the CFTC has been criticized in testimony before Congress as unfit to regulate and that Congress may soon be legislating anew. That Congress presently is reconsidering the two agencies' jurisdictions, however, means there is less need for "judicial first-aid" and a greater need for telling Congress the plain meaning of the laws now in force.
79
Our disposition of this case is based upon statutory construction and legislative history. Our task should not reflect a value judgment as to which of the competing agencies is best equipped to regulate these options. If Congress disagrees with our interpretation it can of course amend the applicable statutes. To approve the SEC's order of February 28, 1981, would be contrary to the present Congressional scheme giving the CFTC exclusive jurisdiction over GNMA options trading while giving no authority over such trading to the SEC. Therefore, the SEC order of February 28, 1981, is set aside and our prior stay is dissolved. 50 Our mandate shall issue forthwith, with costs to be taxed to respondents.APPENDIX
CEA § 2(a)(1), 7 U.S.C. § 2 :
Definitions
80
For the purposes of this chapter "contract of sale" shall be held to include sales, agreements of sale, and agreements to sell. The word "person" shall be construed to import the plural or singular, and shall include individuals, associations, partnerships, corporations, and trusts. The word "commodity" shall mean wheat, cotton, rice, corn, oats, barley, rye, flaxseed, grain sorghums, mill feeds, butter, eggs, Solanum tuberosum (Irish potatoes), wool, wool tops, fats and oils (including lard, tallow, cottonseed oil, peanut oil, soybean oil and all other fats and oils), cottonseed meal, cottonseed, peanuts, soybeans, soybean meal, livestock, livestock products, and frozen concentrated orange juice, and all other goods and articles, except onions as provided in section 13-1 of this title, and all services, rights, and interests in which contracts for future delivery are presently or in the future dealt in: Provided, That the Commission shall have exclusive jurisdiction with respect to accounts, agreements (including any transaction which is of the character of, or is commonly known to the trade as, an "option", "privilege", "indemnity", "bid", "offer", "put", "call", "advance guaranty", or "decline guaranty"), and transactions involving contracts of sale of a commodity for future delivery, traded or executed on a contract market designated pursuant to section 7 of this title or any other board of trade, exchange, or market, and transactions subject to regulation by the Commission pursuant to section 23 of this title: And provided further, That, except as hereinabove provided, nothing contained in this section shall (i) supersede or limit the jurisdiction at any time conferred on the Securities and Exchange Commission or other regulatory authorities under the laws of the United States or of any State, or (ii) restrict the Securities and Exchange Commission and such other authorities from carrying out their duties and responsibilities in accordance with such laws. Nothing in this section shall supersede or limit the jurisdiction conferred on courts of the United States or any State. Nothing in this chapter shall be deemed to govern or in any way be applicable to transactions in foreign currency, security warrants, security rights, resales of installment loan contracts, repurchase options, government securities, or mortgages and mortgage purchase commitments, unless such transactions involve the sale thereof for future delivery conducted on a board of trade.
CEA § 2(a)(8)(B), 7 U.S.C. § 4a(g)(2):
81
(i) The Commission shall maintain communications with the Department of the Treasury, the Board of Governors of the Federal Reserve System, and the Securities and Exchange Commission for the purpose of keeping such agencies fully informed of Commission activities that relate to the responsibilities of those agencies, for the purpose of seeking the views of those agencies on such activities, and for considering the relationships between the volume and nature of investment and trading in contracts of sale of a commodity for future delivery and in securities and financial instruments under the jurisdiction of such agencies.
82
(ii) When a board of trade applies for designation as a contract market involving transactions for future delivery of any security issued or guaranteed by the United States or any agency thereof, the Commission shall promptly deliver a copy of such application to the Department of the Treasury and the Board of Governors of the Federal Reserve System. The Commission may not designate a board of trade as a contract market based on such application until forty-five days after the date the Commission delivers the application to such agencies or until the Commission receives comments from each of such agencies on the application, whichever period is shorter. Any comments received by the Commission from such agencies shall be included as part of the public record of the Commission's designation proceeding. In designating, or refusing, suspending, or revoking the designation of, a board of trade as a contract market involving transactions for future delivery referred to in this clause or in considering possible emergency action under section 12a(9) of this title with respect to such transactions, the Commission shall take into consideration all comments it receives from the Department of the Treasury and the Board of Governors of the Federal Reserve System and shall consider the effect that any such designation, suspension, revocation, or emergency action may have on the debt financing requirements of the United States Government and the continued efficiency and integrity of the underlying market for government securities.
83
(iii) The provisions of this paragraph shall not create any rights, liabilities, or obligations upon which actions may be brought against the Commission.
CEA § 4c, 7 U.S.C. § 6c:
Prohibited transactions
Commodities specifically listed
84
(a) It shall be unlawful for any person to offer to enter into, enter into, or confirm the execution of, any transaction involving any commodity, which is or may be used for (1) hedging any transaction in interstate commerce in such commodity or the products or by-products thereof, or (2) determining the price basis of any such transaction in interstate commerce in such commodity, or (3) delivering any such commodity sold, shipped, or received in interstate commerce for the fulfillment thereof-
85
(A) if such transaction is, is of the character of, or is commonly known to the trade as, a "wash sale," "cross trade," or "accommodation trade," or is a fictitious sale;
86
(B) if such transaction involves any commodity specifically set forth in section 2 of this title, prior to October 23, 1974, and if such transaction is of the character of, or is commonly known to the trade as, an "option", "privilege", "indemnity", "bid", "offer", "put", "call", "advance guaranty", or "decline guaranty", or
87
(C) if such transaction is used to cause any price to be reported, registered or recorded which is not a true and bona fide price.
88
Nothing in this section shall be construed to prevent the exchange of futures in connection with cash commodity transactions or of futures for cash commodities, or of transfer trades or office trades if made in accordance with board of trade rules applying to such transactions and such rules shall have been approved by the Commission.
89
Commodities regulated but not specifically listed
90
(b) No person shall offer to enter into, enter into, or confirm the execution of, any transaction subject to the provisions of subsection (a) of this section involving any commodity regulated under this chapter, but not specifically set forth in section 2 of this title, prior to October 23, 1974, which is of the character of, or is commonly known to the trade as, an "option", "privilege", "indemnity", "bid", "offer", "put", "call", "advance guaranty", or "decline guaranty", contrary to any rule, regulation, or order of the Commission prohibiting any such transaction or allowing any such transaction under such terms and conditions as the Commission shall prescribe within one year after the effective date of the Commodity Futures Trading Commission Act of 1974 unless the Commission determines and notifies the Senate Committee on Agriculture, Nutrition, and Forestry and the House Committee on Agriculture that it is unable to prescribe such terms and conditions within such period of time: Provided, That any such order, rule, or regulation may be made only after notice and opportunity for hearing: And provided further, That the Commission may set different terms and conditions for different markets.
91
Commodity option transaction; conditions ending prohibition;
92
excepted persons
93
(c) Notwithstanding the provisions of subsection (b) of this section, no person may, after September 30, 1978, offer to enter into, enter into, or confirm the execution of any commodity option transaction involving any commodity regulated under this chapter but not specifically set forth in section 2 of this title prior to October 23, 1974, until (1) the Commission transmits to the House Committee on Agriculture and the Senate Committee on Agriculture, Nutrition, and Forestry documentation of its ability to regulate successfully such transactions, including a copy of the Commission's proposed rules and regulations, and (2) the expiration of thirty calendar days of continuous session of Congress after the date of such transmittal. The Commission is not precluded from transmitting, at any time, documentation relating to its ability to regulate such transactions regarding individual commodities, classes of commodities, or regulation of such transactions on specific boards of trade. Nothing in this subsection shall affect any rights or obligations arising out of any transactions subject to the provisions of this subsection entered into, or the execution of which was confirmed, prior to October 1, 1978: Provided, That this prohibition shall not apply to any transaction expressly permitted under rules or regulations prescribed by the Commission, before or after September 30, 1978, to be offered to be entered into, entered into, or confirmed, in which the purchaser is a producer, processor, commercial user of, or a merchant handling, the commodity involved in the transaction, or the products or by-products thereof.
SEA § 3(a), 15 U.S.C. § 78c(a):
Definitions and application
Definitions
94
When used in this chapter, unless the context otherwise requires-
95
(10) The term "security" means any note, stock, treasury stock, bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit, for a security, or in general, any instrument commonly known as a "security"; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase, any of the foregoing; but shall not include currency or any note, draft, bill of exchange, or banker's acceptance which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited.
96
(12) The term "exempted security" or "exempted securities" includes securities which are direct obligations of, or obligations guaranteed as to principal or interest by, the United States; such securities issued or guaranteed by corporations in which the United States has a direct or indirect interest as shall be designated for exemption by the Secretary of the Treasury as necessary or appropriate in the public interest or for the protection of investors; municipal securities, as defined in paragraph (29) of this subsection: Provided, however, That municipal securities shall not be deemed to be "exempted securities" for purposes of sections 78o, 78o-3 (except subsections (b)(6), (b)(11), and (g)(2) thereof), and 78q-1 of this title; any interest or participation in any common trust fund or similar fund maintained by a bank exclusively for the collective investment and reinvestment of assets contributed thereto by such bank in its capacity as trustee, executor, administrator, or guardian; any interest or participation in a single trust fund, or a collective trust fund maintained by a bank, or any security arising out of a contract issued by an insurance company, which interest, participation, or security is issued in connection with (A) a stock bonus, pension, or profit-sharing plan which meets the requirements for qualification under section 401 of Title 26, (B) an annuity plan which meets the requirements for the deduction of the employer's contribution under section 404(a)(2) of Title 26, or (C) a governmental plan as defined in section 414(d) of Title 26 which has been established by an employer for the exclusive benefit of its employees or their beneficiaries for the purpose of distributing to such employees or their beneficiaries the corpus and income of the funds accumulated under such plan, if under such plan it is impossible, prior to the satisfaction of all liabilities with respect to such employees and their beneficiaries, for any part of the corpus or income to be used for, or diverted to, purposes other than the exclusive benefit of such employees or their beneficiaries, other than any plan described in clause (A), (B), or (C) of this paragraph (i) which covers employees some or all of whom are employees within the meaning of section 401(c) of Title 26, or (ii) which is a plan funded by an annuity contract described in section 403(b) of Title 26; and such other securities (which may include, among others, unregistered securities, the market in which is predominantly intrastate) as the Commission may, by such rules and regulations as it deems consistent with the public interest and the protection of investors, either unconditionally or upon specified terms and conditions or for stated periods, exempt from the operation of any one or more provisions of this chapter which by their terms do not apply to an "exempted security" or to "exempted securities".
97
(13) The terms "buy" and "purchase" each include any contract to buy, purchase, or otherwise acquire.
98
(14) The terms "sale" and "sell" each include any contract to sell or otherwise dispose of.
SEA § 9, 15 U.S.C. § 78i:
Manipulation of security prices
99
Transactions relating to puts, calls, straddles, or options
100
(b) It shall be unlawful for any person to effect, by use of any facility of a national securities exchange, in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors-
101
(1) any transaction in connection with any security whereby any party to such transaction acquires any put, call, straddle, or other option or privilege of buying the security from or selling the security to another without being bound to do so; or
102
(2) any transaction in connection with any security with relation to which he has, directly or indirectly, any interest in any such put, call, straddle, option, or privilege; or
103
(3) any transaction in any security for the account of any person who he has reason to believe has, and who actually has, directly or indirectly, any interest in any such put, call, straddle, option, or privilege with relation to such security.
104
Endorsement or guarantee of puts, calls, straddles, or options
105
(c) It shall be unlawful for any member of a national securities exchange directly or indirectly to endorse or guarantee the performance of any put, call, straddle, option, or privilege in relation to any security registered on a national securities exchange, in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.
106
Registered warrant, right, or convertible security not
107
included in "put", "call", "straddle", or "option"
108
(d) The terms "put", "call", "straddle", "option", or "privilege" as used in this section shall not include any registered warrant, right, or convertible security.
109
Section not applicable to exempted securities
110
(f) The provisions of this section shall not apply to an exempted security.
SEA § 19(b), 15 U.S.C. § 78s(b):
Proposed rule changes; notice; proceedings
111
(b)(1) Each self-regulatory organization shall file with the Commission, in accordance with such rules as the Commission may prescribe, copies of any proposed rule or any proposed change in, addition to, or deletion from the rules of such self-regulatory organization (hereinafter in this subsection collectively referred to as a "proposed rule change") accompanied by a concise general statement of the basis and purpose of such proposed rule change. The Commission shall, upon the filing of any proposed rule change, publish notice thereof together with the terms of substance of the proposed rule change or a description of the subjects and issues involved. The Commission shall give interested persons an opportunity to submit written data, views, and arguments concerning such proposed rule change. No proposed rule change shall take effect unless approved by the Commission or otherwise permitted in accordance with the provisions of this subsection.
112
(2) Within thirty-five days of the date of publication of notice of the filing of a proposed rule change in accordance with paragraph (1) of this subsection, or within such longer period as the Commission may designate up to ninety days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or as to which the self-regulatory organization consents, the Commission shall-
113
(A) by order approve such proposed rule change, or
114
(B) institute proceedings to determine whether the proposed rule change should be disapproved. Such proceedings shall include notice of the grounds for disapproval under consideration and opportunity for hearing and be concluded within one hundred eighty days of the date of publication of notice of the filing of the proposed rule change. At the conclusion of such proceedings the Commission, by order, shall approve or disapprove such proposed rule change. The Commission may extend the time for conclusion of such proceedings for up to sixty days if it finds good cause for such extension and publishes its reasons for so finding or for such longer period as to which the self-regulatory organization consents.
115
The Commission shall approve a proposed rule change of a self-regulatory organization if it finds that such proposed rule change is consistent with the requirements of this chapter and the rules and regulations thereunder applicable to such organization. The Commission shall disapprove a proposed rule change of a self-regulatory organization if it does not make such finding. The Commission shall not approve any proposed rule change prior to the thirtieth day after the date of publication of notice of the filing thereof, unless the Commission finds good cause for so doing and publishes its reasons for so finding.
SEA § 23(a)(1), 15 U.S.C. § 78w(a)(1):
116
Rules, regulations, and orders; annual reports
117
Power to make rules and regulations; considerations; public disclosure
118
(a)(1) The Commission, the Board of Governors of the Federal Reserve System, and the other agencies enumerated in section 78c(a)(34) of this title shall each have power to make such rules and regulations as may be necessary or appropriate to implement the provisions of this chapter for which they are responsible or for the execution of the functions vested in them by this chapter, and may for such purposes classify persons, securities, transactions, statements, applications, reports, and other matters within their respective jurisdictions, and prescribe greater, lesser, or different requirements for different classes thereof. No provision of this chapter imposing any liability shall apply to any act done or omitted in good faith in conformity with a rule, regulation, or order of the Commission, the Board of Governors of the Federal Reserve System, other agency enumerated in section 78c(a)(34) of this title, any self-regulatory organization, notwithstanding that such rule, regulation, or order may thereafter be amended or rescinded or determined by judicial or other authority to be invalid for any reason.
17 C.F.R. § 32.11 :
119
Suspension of commodity option transactions.
120
(a) Notwithstanding any other provision of this Part 32, it shall be unlawful on and after June 1, 1978, until further rule, regulation or order of the Commission, for any person to solicit or accept orders for, or to accept money, securities or property in connection with, the purchase or sale of any commodity option, or to supervise any person or persons so engaged.
121
(b) The provisions of paragraph (a) of this section shall not apply to any commodity option offered or entered into in accordance with the provisions of § 32.4(a).
122
(c) Nothing in this section shall apply to, or affect the rights, privileges or obligations of any person arising out of any commodity option transaction entered into prior to June 1, 1978.
123
CFTC's new § 33.4 (to be codified at 17 C.F.R. § 33.4 ):
124
Designation as a contract market for the trading of commodity options.
125
The Commission may designate any board of trade located in the United States as a contract market for the trading of options on contracts of sale for future delivery * * *.
17 C.F.R. § 32.2 :
126
Prohibited transactions.
127
No person may offer to enter into, enter into, confirm the execution of, or maintain a position in, any transaction in interstate commerce involving:
128
(a) Wheat, cotton, rice, corn, oats, barley, rye, flaxseed, grain sorghums, mill feeds, butter, eggs, onions, Solanum tuberosum (Irish potatoes), wool, wool tops, fats and oils (including lard, tallow, cottonseed oil, peanut oil, soybean oil and all other fats and oils), cottonseed meal, cottonseed, peanuts, soybeans, soybean meal, livestock, livestock products and frozen concentrated orange juice, or
129
(b) Any contract of sale of any commodity for future delivery traded on or subject to the rules of any contract market or involving the prices of such contracts, except under such terms and conditions as the Commission shall prescribe; if the transaction is or is held out to be of the character of, or is commonly known to the trade as, an "option", "privilege", "indemnity", "bid", "offer", "put", "call", "advance guaranty", or "decline guaranty".
17 C.F.R. § 32.4 :
130
Exemptions.
131
(a) Except for the provisions of §§ 32.2, 32.8 and 32.9, which shall in any event apply to all commodity option transactions, the provisions of this part shall not apply to a commodity option offered by a person which has a reasonable basis to believe that the option is offered to a producer, processor, or commercial user of, or a merchant handling, the commodity which is the subject of the commodity option transaction, or the products or by-products thereof, and that such producer, processor, commercial user or merchant is offered or enters into the commodity option transaction solely for purposes related to its business as such.
132
(b) The Commission may, by order, upon written request or upon its own motion, exempt any other person, either unconditionally or on a temporary or other conditional basis, from any provisions of this part, other than §§ 32.2, 32.8 and 32.9, if it finds, in its discretion, that it would not be contrary to the public interest to grant such exemption.
133
WILLIAM J. CAMPBELL, Senior District Judge, concurring.
134
As noted by Judge Cudahy in his opinion, I stated at oral argument that I did not appreciate seeing two federal agencies expend their time and resources fighting a jurisdictional dispute in court. I believe their efforts would be more wisely spent in utilizing their expertise to reach a solution which they would jointly recommend to Congress. Much like cases in which two labor unions fight a jurisdictional dispute, I believe the situation imposed on the Courts by the SEC's headstrong approval of GNMA options trading represents inexcusable intransigence and misguided priorities. (The SEC could at least have waited for the memorandum on jurisdiction due from the CFTC.) Apparently my comments were heeded because subsequently the agencies reached an agreement which will result in the submission of certain proposed legislation to Congress. This course could and should have been pursued at the inception of this controversy and the courts ignored.
135
However, the agencies initially chose to "dig in" and litigate the issue. They presented this court with a task of statutory interpretation which presents the complexity of the "Gordian Knot" and which, once having been submitted, must be resolved by the court. Not only are we expected to become expert in securities and commodities, master a complex mass of regulatory legislation and historical development, but we must also discern Congressional intent and apply it to a market of financial instruments which did not exist at the time the relevant legislation was enacted. The difficulty of the task would not disturb me if I did not perceive our role in this matter as inappropriate. The proper authority to resolve this matter is, of course, Congress. The fact that Chief Judge Cummings and Judge Cudahy were able to fashion coherent and expert solutions to the problem is not due to the suitability of the task to judicial resolution, but to the individual brilliance and dedication of those men. As is apparent from my vote, I find Chief Judge Cummings' approach more persuasive. Although it is a close and difficult issue, I do not intend by this concurring opinion to qualify in any way my adherence to it. Among other things, I note that Judge Cudahy attaches some weight to "practical considerations" such as the belated compromise of the agencies and the enforcement capabilities of the CFTC. If I were a legislator these considerations might be paramount, but as a judge faced with an issue of statutory interpretation I am restricted to a more limited ambit of considerations. As noted in footnote 8 of the majority opinion, it is clear that the agencies cannot, through a bilateral agreement, alter the jurisdictional limitations set by Congress. Additionally, the issue of the viability of the CFTC as a regulatory body was never raised in this proceeding, and even if it were, this Court has neither the resources nor the authority to address it.
136
While the agencies did reach an agreement, that compromise did not eliminate the necessity of this Court resolving the jurisdictional issue. This could have been done by agreeing to stay further action on the GNMA options market until Congress enacted clarifying legislation.
137
As I have made clear, I believe this dispute should be resolved by Congress and, in the exercise of sound judgment, should never have been brought to this Court. If Congress now chooses to resolve the matter differently it will not necessarily mean that we have erred but that considerations alien to a statutory construction analysis prevailed. However, as the situation stands now, we are relegated the task of unravelling this "Gordian Knot"; Congress can simply cut it.
138
I have written this concurring opinion not to chastise the parties in this suit, but to highlight an aspect of this case that I believe is important. I would hope that in the future, government agencies would exercise their judgment and discretion to work to resolve their disputes quickly, efficiently, and in the proper forum. Their paramount concern should be the public interest and not their own aggrandizement or the financial interest of private parties.
139
CUDAHY, Circuit Judge, dissenting.
140
I commend Chief Judge Cummings for putting to such exemplary use his abundant resources of scholarship and analysis on behalf of what might be in theory a rational and symmetrical outcome of this jurisdictional muddle. But I regret that his opinion for the majority fails at almost every turn to meet the tests of plain language, congressional intent, historical context and practical result. The opinion throws into disarray the agreement just reached between the CFTC and the SEC which would allow GNMA options trading to go forward forthwith on the CBOE. By reaching the extreme conclusion that the Securities Exchange Commission is without power under its own statutes to regulate options trading in what is incontestably a "security"-GNMA's-, the majority seems to have returned all parties to "square one" in this unseemly regulatory debacle.
I.
141
In the first place, had Congress wished to confer exclusive jurisdiction over options on actual commodities (in contrast to options on futures contracts) on the CFTC, it could have explicitly incorporated the term "options" at an appropriate place in the exclusive jurisdiction clause (section 2(a)(1) of the CEA, 7 U.S.C. § 2 ). Congress did just that, for example, in referring expressly to an "option" involving any commodity as one of the species of transactions regulated by section 4c(b) of the CEA (enacted contemporaneously with the exclusive jurisdiction proviso). Instead Congress, in section 2(a)(1) of the Act, used language classically crafted to grant exclusive jurisdiction over the trading of commodity futures, including options on such futures, to the Commodity Futures Trading Commission.
142
The sharp distinction between Congress' non-inclusion of options on GNMA's and other underlying actuals 1 in the exclusive jurisdiction clause and their inclusion in the contemporaneous provisions of section 4c(b) is highlighted in the 1978 Senate Report, which reviewed what Congress had done in 1974:
143
As to the newly-regulated commodities, section 201 of the CFTC Act amended section 2(a)(1) of the Act to grant the Commission exclusive jurisdiction over options involving commodity futures contracts. In addition, section 402 of the CFTC Act added section 4c(b) of the Act (7 U.S.C. 6c(b)). That section permits options transactions involving the newly-regulated commodities, subject to Commission rules and regulations ....
144
S.Rep.No.850, 95th Cong., 2d Sess. 59, reprinted in (1978) U.S.Code Cong. & Ad.News 2147 (emphasis added). If, as the majority contends, the phrase "options involving commodity futures contracts" included options on actuals as well as options on futures contracts, then the "(i)n addition" language, with which the second sentence of the quoted paragraph begins, would make no sense.
145
As the legislative history of the CEA makes clear, Congress enacted the exclusive jurisdiction proviso of § 2(a)(1) so that trading in commodity futures, and related activities with a direct nexus to futures trading, such as discretionary futures accounts, and options on futures contracts, would be subject to regulation by the CFTC only. 2 But the same rationale does not apply to options on actuals, which, unlike options on futures, do not have any necessary connection with futures trading. Options on GNMA securities were traded over-the-counter for at least five years prior to the initiation of GNMA futures trading, 3 just as options on stocks have been traded for eight years on the CBOE without the existence of any futures trading in stocks. See SEC Record 399-401, 661-68. The existence of such an autonomous GNMA options market both before and after enactment of the 1974 CEA, renders extremely dubious any claim that Congress intended to put such options under the CFTC's exclusive jurisdiction in 1974. This history of over-the-counter trading also casts considerable doubt on the thesis that options on GNMA securities are among the "commodity options" regulated by sections 4c(b) and 4c(c) of the CEA. See Part V infra.
146
The current Chairman of the CFTC, in a 1975 article, flatly and succinctly rejected the majority's conclusion that the CFTC has exclusive jurisdiction over options on commodity/securities such as GNMAs.
147
The CFTC's exclusive jurisdiction ... (does) not extend to securities options such as those traded on the Chicago Board Options Exchange, since such options when exercised, do not result in the delivery of a futures contract.
148
Johnson, The Perimeters of Regulatory Jurisdiction Under the Commodity Futures Trading Commission Act, 25 Drake L.Rev. 61, 68 (1975) (emphasis supplied). 4 Other commentators have consistently construed the CFTC's exclusive jurisdiction under section 2(a)(1) to reach options on futures, but not options on the underlying tangibles or intangibles. See, e.g., Bromberg, Commodities Law and Securities Law-Overlaps and Preemptions, 1 J.Corp.L. 217, 313 (1976); Long, Commodity Options-Revisited, 25 Drake L.Rev. 75, 132 (1975); Guttman, The Futures Trading Act of 1978: The Reaffirmation of CFTC-SEC Coordinated Jurisdiction over Securities/Commodities, 28 Am.U.L.Rev. 1, 30 (1978).
149
The majority's almost total reliance on the word "involving" in the exclusive jurisdiction clause to bear the crushing burden of options on actuals is to rest the Rock of Gibraltar on a toothpick. The phrase "transactions involving contracts of sale of a commodity for future delivery" is of ancient origin and established meaning. In the Grain Futures Act of 1922 the phrase "(t)ransactions in grain involving the sale thereof for future delivery as commonly conducted on boards of trade" was used to distinguish futures transactions from certain other grain transactions. 5 This section of the Grain Futures Act of 1922 (derived from the Futures Trading Act of 1921) applied only to futures contracts and options on futures. See Trusler v. Crooks, 269 U.S. 475, 481-82 , 46 S.Ct. 165, 166 , 70 L.Ed. 365 (1926). Moreover, the policy declaration currently found in § 5 of the CEA, which has survived intact 6 since the Grain Futures Act of 1922, contains the precise "involving" construction found in the CFTC's exclusive jurisdiction clause. 7 Certainly, it is reasonable to assume that by using an existing phraseology, derived from old statutes of clear meaning, Congress in 1974 intended to encompass only the type of options transactions which had previously been regulated under the CEA and predecessor statutes. 8
150
An additional reason for Congress to use the term "involving" (rather than the preposition "in") in the exclusive jurisdiction clause is that such a construction was necessary to comport with the clause's earlier reference to "accounts" and "agreements." As the current Chairman of the CFTC has explained, the Senate Agriculture and Forestry Committee in 1974 modified the proposed exclusive jurisdiction clause to apply to "accounts" and "agreements" as well as transactions in futures contracts. "This important change extended the Act to the activities surrounding trading, such as the regulation of so-called 'discretionary accounts' or 'discretionary agreements' common in futures trading, which had sometimes been treated as 'securities' in the courts." Johnson, The Commodity Futures Trading Commission Act: Preemption as Public Policy, 29 Vand.L.Rev. 1, 14 (1976). 9 The Senate language prevailed in the Conference Committee. With the addition of "accounts" and "agreements," it was necessary, to achieve any semblance of precision, to employ the term "involving," rather than the preposition "in," and there is no suggestion in the legislative history that this choice of preposition somehow acted to extend the CFTC's exclusive jurisdiction to options on actuals in contrast to options on futures contracts. In fact, by specifying that the term "agreement" in § 2(a)(1) includes an "option," Congress indicated that the complementary phrase "transactions involving contracts of sale ... for future delivery" did not. Any other reading would render Congress' express reference to "option" wholly redundant and would thus violate the fundamental maxim of statutory construction that "a Legislature is presumed to have used no superfluous words." Platt v. Union Pacific R. R. Co., 99 U.S. 48, 58 , 25 L.Ed. 424 (1878).
151
A more fundamental problem with relying on the term "involving" to drag in options on the actual underlying commodity/security is that such a construction proves far, far too much. If, as the majority contends, trading in commodity options necessarily "involves" commodity futures, then all security options could become subject to the CFTC's exclusive jurisdiction as soon as anyone commenced futures trading in the underlying financial instrument. This is not merely a parade of horribles argument since at least one commodities exchange has applied for permission to trade futures in American Telephone and Telegraph Company bonds. 46 Fed.Reg. 30,844 (1981). 10 The Chicago Board of Trade itself has applied for designation as a contract market to trade averages of groups of corporate stocks. 46 Fed.Reg. 7042 (1981). 11
152
The majority of course, recognizes some of the pitfalls into which its "involving" argument must lead. It responds with tortured and unsupportable distinctions between exempt and nonexempt securities and traditional and nontraditional commodities. See ante at 1150-1152. These distinctions are not to be found in the CEA, and they simply do not withstand serious analysis. Moreover, the very need to manufacture such "limits" demonstrates the implausibility of the majority's reliance on the term "involving" to revolutionize (and unfortunately, to disrupt) the jurisdictional relationships among federal security and commodity regulatory agencies.
153
As a practical matter, the view of the majority that trading in GNMA options necessarily "involves" GNMA futures is purely speculative (no pun intended) and finds no support in the record. The SEC in this administrative proceeding found as a fact that options and futures were separate and distinct instruments and that GNMA options could be regulated separately from GNMA futures. 12 We must accept these findings unless they are unsupported by substantial evidence. See 15 U.S.C. § 78y(a). 13 In any event, even the majority admits that futures contracts and options are legally and historically distinct instruments. Ante at 1139, 1151-1152. An option on a GNMA security imposes a duty to perform on only one party, the writer of the option. The holder of the option, by contrast, is under no obligation to exercise the option or enter into any later transaction, having acquired this right through payment of a premium. The unique feature of an options contract is the ability of its holder to limit any potential for loss to the amount of the premium paid for the option. See generally, Moriarty, Phillips & Tossini, A Comparison of Options and Futures in the Management of Portfolio Risk, Financial Analysts Journal 61, 62 (Jan./Feb. 1981). In direct contrast to this feature, each party to a futures contract assumes an unconditional obligation to perform. 14 To be sure, parties trading either options or futures in organized markets will, in practice, generally enter into off-setting transactions to liquidate their positions prior to the expiration of the option or futures contract. The availability of an off-set market, however, cannot duplicate the unique function performed by the option in limiting the extent of the holder's possible loss. See, e.g., SEC Record 350, 438, 466. Anyone who has sold futures in a market which subsequently rises inexorably has no difficulty distinguishing a futures contract from an option. Moreover, both the courts and the CFTC have recognized that commodity options are not the same thing as commodity futures. See Precious Metals Associates, Inc. v. CFTC, 620 F.2d 900, 905 (1st Cir. 1980) (distinguishing between commodity options and commodity futures contracts); CFTC v. U.S. Metals Depository Co., 468 F.Supp. 1149, 1155 (S.D.N.Y.1977) (same); CFTC v. Crown Colony Commodity Options, Ltd., 434 F.Supp. 911, 913-14 (S.D.N.Y.1977) (same); Reauthorization of the Commodity Futures Trading Commission, Hearings Before the Senate Subcomm. on Agricultural Research and General Legislation of the Comm. on Agriculture, Nutrition and Forestry, 95th Cong., 2d Sess. 361-62 (1978) (same distinction made by the then Chairman of the CFTC).
154
I am willing to presume that there is some economic linkage between GNMA options and GNMA futures. The price of both is presumably linked to the inflation rate, the size of the federal deficit, the Federal Reserve Board's growth target for the money supply, prospects for growth or decline in the economy, etc. I am also willing to concede that both options and futures may be used to "shift risks"-to permit those who hold GNMA's in inventory to shift the risk of price decline. But none of this tells me that options and futures must therefore be traded under the roof of the same exchanges or that such trading must necessarily be regulated by the same government agency. It is not for us to torture the plain language of statutes or ignore traditional regulatory arrangements merely because we perceive economic linkages or similarities in economic function among various financial instruments. 15 Presumably Congress has the benefit of these economic insights and may dispose as it sees fit. But certainly there is nothing in the record or elsewhere requiring the conclusion that GNMA options inextricably "involve" GNMA futures and that the regulatory scheme must be recast to reflect such an "involvement." 16
155
The majority's reliance on the statement of the 1974 Senate Committee that "the (CFTC's) jurisdiction over futures contracts markets or other exchanges is exclusive and includes the regulation of commodity accounts, commodity agreements and commodity options," ante at 1146, 1147, is similarly misplaced. This statement expressly limits the CFTC's exclusive jurisdiction to options and trading agreements on commodity futures contracts, since those are the only types of collateral transactions which take place on a futures contract market or other exchange subject to the CFTC's regulatory jurisdiction. 17 Any other reading of the statement would produce unintended and extreme results, since it would give the CFTC exclusive jurisdiction over any commodity/security transaction taking place on any security exchange, a construction which would presumably include accounts and agreements relating to the trading of actual GNMA certificates as well as GNMA options.
156
Nor does the fact, that Congress, in 1975 and 1978, rejected the SEC's attempts to abolish CFTC jurisdiction over all transactions in GNMA's (and other security/commodities) support the majority's broad "involving" theory. The SEC proposals rejected by Congress in 1975 and 1978 would have prohibited the CFTC from exercising jurisdiction over any transaction, including a futures contract, involving any security. 18 See, e.g., Hearings on H.R. 10285 Before the Subcommittee on Conservation and Credit of the House Committee on Agriculture, 95th Cong., 2d Sess. Ser. No. 95-QQ187-88, 209 (1978) (statement of SEC Chairman Harold Williams); Hearings Before the Senate Subcommittee on Banking, Housing and Urban Affairs on § 249, 94th Cong., 1st Sess. 244 (1975). It was this withdrawal of CFTC jurisdiction over futures trading, including options on such futures contracts, that Congress was unwilling to countenance. 19 The majority's attempt to use this Congressional decision to support its thesis that Congress intended to vest the CFTC with exclusive jurisdiction over options on the underlying securities themselves finds no support in the statute or its legislative history. 20 The majority's citation of International Trading, LTD v. Bell, 262 Ark. 244 , 556 S.W.2d 420 , 425-26 is similarly inapposite since the court, in that case, was concerned solely with the CFTC's jurisdiction over options on commodity futures contracts. 21
157
Equally damaging to the majority's interpretation of the subsequent legislative history of the CEA is the fact that at the same time Congress rejected the SEC's attempts to remove CFTC jurisdiction over futures trading in the newly developing security/commodities, it adopted amendments to the CEA specifically directing the CFTC to "maintain communications" with the SEC regarding the potentially overlapping jurisdiction of those two agencies. 7 U.S.C.A. § 41a(g)(2) (1980). If, as the majority contends, the CFTC possessed exclusive jurisdiction over the trading of security options as well as security futures, there would seem to be little purpose in requiring the two agencies to confer and cooperate on jurisdictional matters. Indeed, the 1978 House Conference Report, explaining the import of this amendment, noted that it "requires the (CFTC) to maintain communication with the Department of the Treasury, the Board of Governors of the Federal Reserve System, and the SEC (in order) ... to consider the relationship between the volume and nature of investment and trading in futures, compared to securities and financial instruments within their jurisdiction." H.Conf.Rep. 1628, 95th Cong., 2d Sess. 17 (1978), reprinted in (1978) U.S. Code Cong. & Ad. News 2178 (emphasis added). Such a choice of wording clearly reflects Congress' continuing awareness that only investment and trading in financial futures falls within the exclusive jurisdiction of the CFTC. At the very least, this statutory directive evinces Congress' strong desire that the SEC and the CFTC consult and cooperate for the purpose of devising an acceptable sharing of jurisdiction over instruments in which both agencies possess an interest. It is precisely this statutorily mandated process of cooperation and consultation that the majority opinion now seeks to dismantle.
II.
158
The legislative history of both the 1974 and the 1978 amendments to the CEA indicates that the SEC "Savings Clause" was designed to preserve SEC jurisdiction over all security options, including options on GNMAs. Perhaps the clearest indication of this Congressional intent is found in the Senate Report accompanying the 1974 Amendments:
159
The committee intends that options not be traded except on organized exchanges and in conformity with the rules and regulations of the Commission. However, the Commission would not have the authority to regulate trading in puts and calls for securities. Where traded on exchanges, these puts and calls are regulated by the Securities and Exchange Commission. Where traded among banks, they are regulated by the bank regulatory agencies.
160
1974 Senate Report at 26, reprinted in (1974) U.S. Code Cong. & Ad. News 5866 (emphasis supplied). 22
161
Other portions of the 1974 Senate Report confirm Congress' clear desire to exempt from the CFTC's exclusive jurisdiction all trading in securities and security options not conducted on a commodity futures exchange. Thus, in its "Section-By-Section Analysis" of the 1974 Amendments, the Senate Report states:
162
Section (2(a)(1) ) ... enlarges the definition of "commodity" ... and provides for the exclusive jurisdiction of the Commission over all futures transactions which are executed on domestic boards of trade. The Commission will have exclusive jurisdiction over options trading in commodities (but not in securities).
163
1974 Senate Report at 31, reprinted in (1974) U.S. Code Cong. & Ad. News 5870 (emphasis added). 23 Similarly, the 1974 Conference Report explains:
164
Under the exclusive grant of jurisdiction to the (CFTC), the authority in the Commodity Exchange Act ... would preempt the field insofar as futures regulation is concerned.
165
S.Rep.No.1194, 93d Cong., 2d Sess. 35 (1974) (emphasis added). 24
166
Notwithstanding this careful limitation of the CFTC's exclusive jurisdiction, and Congress' repeated assertions that section 2(a)(1) of the CEA was not intended to usurp the SEC's jurisdiction over securities and security options, several legislators remained concerned about possible unintended effects on SEC jurisdiction. In a final effort to allay this concern, both House Committee Chairman Poage and Senate Committee Chairman Talmadge made the following clarifying statement immediately prior to the vote on the 1974 CEA Amendments:
167
I understand that there is some concern that, in effectuating the intent to fill regulatory gaps, the conference substitute appears to have an unintended impact on the jurisdiction of the Securities and Exchange Commission.
168
This misconception apparently has arisen because of certain provisions in (Section 2(a)(1) ) ..., in particular, the revised definition of commodities, the limited grant of exclusive jurisdiction to the Commodity Futures Trading Commission, and the reference to trading in futures contracts and options, not only on designated contract markets, but also on "any other board of trade, exchange or market."
169
I wish to emphasize that the words "any other board of trade, exchange or market" were included only for the purpose of giving the Commodity Futures Trading Commission jurisdiction over futures contracts purchased and sold in the United States and executed on a foreign board of trade, exchange or market. This grant of exclusive jurisdiction is not to be construed as preempting the jurisdiction of the Securities and Exchange Commission over securities, including stock options, traded on any national securities exchange or any other U.S. securities market.
170
With respect to the definition of commodities, it was intended to apply to a broader class of goods, articles, rights and interests than previously were subject to the Commodity Exchange Act. It was not intended, however, to apply to trading in interests and rights traditionally known as securities, including, for example, stocks, corporate bonds, warrants, and debentures; nor was it intended to apply to trading in options to purchase any of the foregoing.
171
120 Cong. Rec. 34,736-37, 34,997 (1974) (emphasis added).
172
The majority quotes only the final paragraph of this statement and seeks to interpret Chairman Poage's reference to "interests and rights traditionally known as securities" as being limited to "corporate stocks and the like." Ante at 1176-1177 n.22. Such an interpretation is resoundingly wrong. The corporate securities specifically enumerated by Chairman Poage were meant only as illustrative examples of the SEC's traditional jurisdiction and were not in any way intended as limitations. 25 Indeed, the current Chairman of the CFTC (then outside counsel to the CBOT) has himself described GNMA certificates as "traditional securities." Johnson, The Commodity Futures Trading Commission Reauthorization Process: A View from the Trenches, 1974 Det.C.L.Rev. 1, 12. Even the majority does not argue that GNMA's are not "securities," and it seems clear that as a species of mortgage, they are unarguably "traditional." Moreover, the three paragraphs that precede Chairman Poage's reference to trading in traditional security interests underscore the carefully circumscribed boundaries of the CFTC's exclusive jurisdiction.
173
Finally, the CFTC's previous statements of position indicate that it has traditionally viewed the SEC "Savings Clause" as restricting to direct regulation of the futures market its own jurisdiction over security/commodities such as GNMAs. In 1975, in response to an SEC challenge, the CFTC vigorously defended its exclusive authority to approve the trading of GNMA futures on the CBOT. At the same time, however, the CFTC was careful to note that it possessed jurisdiction over government backed security/commodities such as GNMAs "solely with respect to futures trading in those instruments." 26 Indeed, until it prepared its amicus brief in the instant proceeding, the CFTC clearly believed that trading in GNMA options was excluded from the coverage of the CEA. Thus, although GNMA "standby" options 27 have long existed in the over-the-counter markets, the CFTC has never regarded them as being subject to the prohibitions of CEA sections 4c(b) or 4c(c). 28 In its comments to the SEC regarding the CBOE options proposal, the CFTC expressly recognized the existence of the over-the-counter GNMA options market and stated that the proposed CBOE options market would be likely to result in more efficient pricing, greater liquidity, more streamlined clearing and delivery procedures, improved regulation and greater financial integrity than the existing GNMA standby options market. 29 Proposed CFTC Regulation 34.1, which would exempt from the "options ban" in CEA section 4c(c) and from Parts 32 and 33 of the CFTC Regulations "any transaction in an option on exempted securities ... if conducted on a national securities exchange registered with and regulated by the SEC" 30 merely confirms the CFTC's longstanding recognition of this jurisdictional limitation.
III.
174
Even if it were not clear from the language of section 2(a)(1) and from the SEC "Savings Clause" that the CFTC's exclusive jurisdiction does not extend to the trading of security options on a national security exchange, a closely related provision of section 2(a)(1) demonstrates that the CEA cannot be read to prohibit the CBOE's proposed options program:
175
Nothing in this Act shall be deemed to govern or in any way be applicable to transactions in ... security warrants, security rights, ... government securities, or mortgages and mortgage purchase commitments, unless such transactions involve the sale thereof for future delivery conducted on a board of trade.
176
This exclusionary sentence-the so-called Treasury Amendment-was added to the CEA in 1974 at the request of the Department of the Treasury, which feared that absent such a clarifying amendment, the new provisions of the CEA might be construed to apply to forward trading and other kinds of transactions in government-backed financial instruments. See 1974 Senate Report at 51, reprinted in (1974) U.S. Code Cong. & Ad. News 5889. As the 1974 Senate Report makes clear, the Treasury Amendment was designed to establish beyond dispute that trading in the enumerated financial instruments would not be subject to CFTC jurisdiction "unless such trading is conducted on a formally organized futures exchange." 1974 Senate Report at 23, reprinted in (1974) U.S. Code Cong. & Ad. News 5863. The 1978 Senate Report re-emphasized this point:
177
When the 1974 amendment was being considered by Congress, the Treasury recommended that the role of the CFTC with respect to Government securities be limited to futures contracts sold on organized exchanges. Congress adopted this recommendation.
178
1978 Senate Report at 47, reprinted in (1978) U.S. Code Cong. & Ad. News 2135 (emphasis added).
179
The CBOE's proposed GNMA options fall within the plain language of the Treasury Amendment. First, an option is a right to purchase or sell the underlying security; it is, in short, a "security right( )." 31 Second, every GNMA option represents a "mortgage purchase commitment"-that is, a commitment by the writer of the option to purchase (in the case of a put) or to sell (in the case of a call) the pools of mortgages represented by the underlying GNMA. Finally, GNMA securities are unquestionably "government securities." Thus, transactions in GNMA options are "transactions in ... government securities" under the Treasury Amendment. The majority's suggestion that "transactions in ... government securities" covers only transactions in which the underlying securities change hands in flatly contradicted by the structure of this passage. The Treasury Amendment provides that the CEA shall not apply "to transactions in ... government securities, ... unless such transactions involve the sale thereof for future delivery conducted on a board of trade." (emphasis supplied). If, as the majority contends, "transactions in ... government securities" referred only to the purchase and sale of the underlying financial instruments, then the clause "unless such transactions involve the sale thereof for future delivery ..." would be both superfluous and contradictory. As the majority opinion itself makes clear, the GNMA futures market, like the GNMA options market, "may exist without any transactions in the commodity itself." Ante at 1154. See id. at 1139.
180
The majority also seeks to avoid the plain language of the Treasury Amendment by arguing that the Amendment was adopted by Congress "only to prevent dual regulation by the CFTC and bank regulatory agencies of the banks and other sophisticated institutions that ordinarily trade in the enumerated financial instruments." Ante at 1154. While it is true that the Treasury Department advised Congress that trading in the enumerated instruments "generally" took place between banks and other sophisticated institutions, 32 the plain language of the amendment is not qualified in any respect to limit its application to transactions among institutional participants. Where, as here, the language of a statute is unambiguous, we should not hesitate to give the words employed by Congress "their ordinary and common meaning," Perrin v. United States, 444 U.S. 37, 42 , 100 S.Ct. 311, 314 , 62 L.Ed.2d 199 (1979), at least absent "rare and exceptional circumstances." Rubin v. United States, 449 U.S. 424, 430 , 101 S.Ct. 698, 701 , 66 L.Ed.2d 633 (1981). In the instant case, neither the language of the CEA nor its legislative history supports the engrafting of a "sophisticated institution" limitation onto the Treasury Amendment. 33
IV.
181
In Part III of its opinion the majority reaches the startling conclusion that the SEC is without jurisdiction-under its own statutes-to regulate options trading in GNMA securities, a contention which, if true, would render the first two sections of the opinion entirely gratuitous. In the first place, this contention should not even be considered on this appeal, since it was not presented in the administrative proceedings before the SEC. Section 78y(c)(1) of the Securities and Exchange Act of 1934 (SEA), 15 U.S.C.A. § 78y(c)(1) (1980 Supp.), explicitly provides:
182
No objection to an order or rule of the Commission, for which review is sought under this section, may be considered by the court unless it was urged before the Commission or there was reasonable grounds for failure to do so.
183
Although the CBOT, both on its own and through its attorneys, submitted extensive comments to the SEC regarding CBOE's proposed rule change, the CBOT never contended that the SEC lacked jurisdiction, under the SEA, to regulate trading in GNMA options. 34 Indeed the CBOT comments implicitly acknowledge the SEC's jurisdiction. See SEC Record 473-89, 530. Since the CBOT has sought review in this court pursuant to section 78y of the SEA, its failure to object to SEC jurisdiction before that agency should be fatal to any such consideration here. Sartain v. Securities and Exchange Comm., 601 F.2d 1366, 1371-72 (9th Cir. 1979); Berdahl v. Securities and Exchange Comm., 572 F.2d 643, 648-49 (8th Cir. 1978).
184
In any event, despite the strenuous labors of the majority to establish the quite novel proposition that the SEC is without jurisdiction to regulate the trading of GNMA options on a national securities exchange, this thesis simply cannot withstand analysis. Essentially the majority argues that an option to buy or sell GNMA's is not a "security" as defined in the Securities and Exchange Act. But the instruments on which the CBOE proposes to trade options are certainly securities evidencing an interest in a pool of federally-insured mortgages. See Davidson v. Dean Witter Reynolds, Inc., 478 F.Supp. 494, 495 (D.Colo.1979). Section 3(a)(10) of the SEA, 15 U.S.C. § 78c(a)(10) (1976), provides that the term "security" includes "any note, ... bond, (or) debenture ...," and GNMA's fall squarely within this definition. By virtue of the guarantee by GNMA

[Text truncated at 120,000 characters. The full text is on the page linked above.]

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/403691. Public record. Not legal advice.