Options Disclosure Document

Part VI

Securities and Exchange Commission

_______________________________________________________________________

17 CFR Parts 230 and 240

Options Disclosure Document; Amendment to Rule 9b-1 Under the

Securities Exchange Act Relating to the Options Disclosure Document;

Proposed Rules

Proposed Rules

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 230

[Release No. 33-7550; File No. S7-19-98]

RIN 3235-AH31

Options Disclosure Document

AGENCY: Securities and Exchange Commission.

ACTION: Proposed Rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is

proposing to revise Rule 135b under the Securities Act of 1933 to

provide that an options disclosure document prepared in accordance with

Rule 9b-1 under the Securities Exchange Act of 1934 is not a prospectus

and, accordingly, is not subject to civil liability under Section

12(a)(2) of the Securities Act. This proposal is intended to codify a

long-standing interpretive position that was issued immediately after

the Commission adopted the current registration and disclosure system

applicable to standardized options. The proposal also is intended to

eliminate any legal uncertainty in this area.

DATES: Comments should be received on or before July 31, 1998.

ADDRESSES: Comment letters should be submitted in triplicate to

Jonathan G. Katz, Secretary, U.S. Securities and Exchange Commission,

Mail Stop 6-9, 450 Fifth Street, N.W., Washington, D.C. 20549. Comments

also may be submitted electronically at the following E-mail address:

[email protected]. All comment letters should refer to File Number

S7-19-98; this file number should be included on the subject line if e-

mail is used. All comments received will be available for public

inspection and copying in the Commission's Public Reference Room at the

same address

W., Washington, D.C. 20549. Comments

also may be submitted electronically at the following E-mail address:

[email protected]. All comment letters should refer to File Number

S7-19-98; this file number should be included on the subject line if e-

mail is used. All comments received will be available for public

inspection and copying in the Commission's Public Reference Room at the

same address. Electronically submitted comment letters will be posted

on the Commission's Internet web site (http://www.sec.gov).

FOR FURTHER INFORMATION CONTACT: David Lavan, at (202) 942-1840, Office

of Chief Counsel, Division of Corporation Finance, U.S. Securities and

Exchange Commission, Mail Stop 3-3, 450 Fifth Street, N.W., Washington,

D.C. 20549.

SUPPLEMENTARY INFORMATION: In order to clarify that an options

disclosure document prepared in accordance with Rule 9b-1 1

under the Securities Exchange Act of 1934 (``Exchange Act'')

2 is not a prospectus for purposes of Section 12(a)(2)

3 of the Securities Act of 1933 (``Securities

Act''),4 the Commission is proposing to revise Rule 135b

5 under the Securities Act.

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\1\ 17 CFR 240.9b-1.

\2\ 15 U.S.C. 78a et seq.

\3\ 15 U.S.C. 77l(a)(2) (renumbered). Before the Securities

Litigation Reform Act of 1995, Public Law No. 104-67, 109 Stat. 737,

this provision was contained in Section 12(2) of the Securities Act.

\4\ 15 U.S.C. 77a et seq.

\5\ 17 CFR 230.135b.

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I. Proposed Amendment

-

\1\ 17 CFR 240.9b-1.

\2\ 15 U.S.C. 78a et seq.

\3\ 15 U.S.C. 77l(a)(2) (renumbered). Before the Securities

Litigation Reform Act of 1995, Public Law No. 104-67, 109 Stat. 737,

this provision was contained in Section 12(2) of the Securities Act.

\4\ 15 U.S.C. 77a et seq.

\5\ 17 CFR 230.135b.

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I. Proposed Amendment

The Commission has a simplified registration and disclosure system

for investors in standardized options 6, which the

Commission adopted in 1982. 7 Under this system, the issuer

of the standardized options (generally a clearing corporation) may

register the options under the Securities Act on Form S-20.

8 This form is quite streamlined. It requires limited

information about the clearing corporation issuer and the options it

issues in a prospectus filed as Part I of the registration statement,

and more detailed information (including the issuer's financial

statements) in Part II of the registration statement. 9 The

options issuer may satisfy its prospectus delivery requirement by

delivering the prospectus to each options market on which the options

are traded, for the purpose of redelivery to options customers on

request. 10

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\6\ Standardized options are ``options contracts trading on a

national securities exchange, an automated quotations system of a

registered securities association, or a foreign securities exchange

which relate to options classes the terms of which are limited to

specific expiration dates and exercise prices, or such other

securities as the Commission may, by order, designate.'' Rule 9b-

1(a)(4) under the Exchange Act [17 CFR 240.9b-1(a)(4)].

\7\ Securities Act Release No. 6426 (Sept. 16, 1982) [47 FR

41950] (``Adopting Release'').

\8\ 17 CFR 239.20

\9\ Information about the companies whose shares underlie the

options is not required

delivered to a customer at or before

the time that a broker or dealer approves the customer's account for

options trading. Typically, the exchanges work closely with the

clearing corporation in preparing the ODD. 11

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\11\ See Adopting Release.

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The Commission adopted this simplified registration and disclosure

system in part to reduce the expense of preparing and updating a

detailed prospectus, and to provide investors with a document that is

easier to read than the options prospectus that investors received

before adoption of these rules. 12 Rule 135b under the

Securities Act is one rule of this system. This rule provides that an

ODD prepared in accordance with Rule 9b-1 under the Exchange Act

``shall not be deemed to constitute an offer to sell or offer to buy

any security'' 13 for purposes of Section 5 of the

Securities Act. 14 In the Adopting Release, the Commission

stated that ``if the disclosure document is deemed not to be an offer

to sell or buy, it cannot be deemed to be a prospectus.'' 15

In addition, the Commission stated that Rule 135b ``is intended to

relieve the preparers of the disclosure document from liability under

Section [12(a)(1)] of the Act for distributing a disclosure document to

investors which might, absent such relief, violate Section 5 of the

Act.'' 16

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deemed to be a prospectus.'' 15

In addition, the Commission stated that Rule 135b ``is intended to

relieve the preparers of the disclosure document from liability under

Section [12(a)(1)] of the Act for distributing a disclosure document to

investors which might, absent such relief, violate Section 5 of the

Act.'' 16

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\12\ Id.; see also Securities Act Release No. 6494, n.2 (Oct.

27, 1983) [48 FR 51328] (discussing the Commission's 1979 Special

Study of the Options Market, which suggested the simplified

registration and disclosure scheme).

\13\ Securities Act Rule 135b.

\14\ 15 U.S.C. 77e. However, as stated in the release that

proposed Rule 135b, the ODD is subject to liability under the anti-

fraud provisions. Securities Act Release No. 6411 (June 24, 1982)

[47 FR 28688] (``Proposing Release'').

\15\ Adopting Release at Sec. I.C.

\16\ Adopting Release. Because Rule 135b states that Section 5

does not apply to distribution of the ODD, it is clear that Section

12(a)(1) liability is inapplicable because that section provides

recourse only for offers or sales made in violation of Section 5.

See 15 U.S.C. 77l(a)(1).

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However, Rule 135b and the Adopting Release both are silent as to

whether Rule 135b was intended to address liability under Section

12(a)(2) of the Securities Act. Section 12(a)(2) generally imposes

civil liability for a prospectus that contains material misstatements

or omissions. 17

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\17\ Section 12(a)(2) also imposes civil liability for oral

communications containing material misstatements or omissions. 15

U.S.C. 77l(a)(2).

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lly imposes

civil liability for a prospectus that contains material misstatements

or omissions. 17

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\17\ Section 12(a)(2) also imposes civil liability for oral

communications containing material misstatements or omissions. 15

U.S.C. 77l(a)(2).

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Shortly after the Commission adopted the rule, the Options Clearing

Corporation (``OCC'') requested interpretive advice from the Division

of Corporation Finance (``Division'') regarding the applicability of

liability under Section 12(a)(2) of the Securities Act to an ODD. After

considering the Adopting Release, the Division advised the OCC that in

its view, an ODD ``is not a prospectus within the meaning of

Section [2(a)(10)] of the Securities Act and, thus, is not subject to

liability under Section [12(a)(2)] of the Securities Act.''

18

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\18\ Letter dated September 23, 1982, from then Division of

Corporation Finance Director, Lee B. Spencer, Jr. to Mr. Marc L.

Berman, then Senior Vice President and General Counsel, of the

Options Clearing Corporation. On its face, the text of Rule 135b

does not address the applicability of Section 12 liability. In its

interpretive letter, the Division noted that the limiting language

``for purposes only of Section 5 of the Act'' appearing in Rule 135b

is intended to clarify that the ODD would be subject to the

antifraud provisions of Section 17(a) of the Securities Act [15

U.S.C. 77q(a)] and Section 10(b) of the Exchange Act [15 U.S.C.

78j(b)], but is not intended to suggest that the ODD remains subject

to Section 12(a)(2) liability.

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he Act'' appearing in Rule 135b

is intended to clarify that the ODD would be subject to the

antifraud provisions of Section 17(a) of the Securities Act [15

U.S.C. 77q(a)] and Section 10(b) of the Exchange Act [15 U.S.C.

78j(b)], but is not intended to suggest that the ODD remains subject

to Section 12(a)(2) liability.

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Despite this long-standing interpretive position, uncertainty

exists about the applicability of Section 12(a)(2) liability to an ODD.

19 In response to informal requests from the Chicago Board

Options Exchange and the OCC, the Commission believes that it is

appropriate and in the public interest to eliminate any uncertainty in

this area. Accordingly, the Commission proposes to modify Rule 135b to

codify the Division's position that an ODD prepared in accordance with

Rule 9b-1 under the Exchange Act is not subject to liability under

Section 12(a)(2) because it is not a prospectus. 20

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\19\ See, e.g., Spicer v. Chicago Board Options Exchange, No. 88

C 2139 (N.D. Ill. Oct. 24, 1990), motion to reconsider denied (Jan.

24, 1991) (holding that an ODD that is incorporated by reference as

a matter of law into the prospectus could be subject to Section

12(2) [now Section 12(a)(2)] liability).

\20\ Of course, the document would continue to be subject to the

anti-fraud liability provisions of Section 17(a) of the Securities

Act [15 U.S.C. 77q(a)], Section 10(b) of the Exchange Act [15 U.S.C.

78j(b)], and Rule 10b-5 under the Exchange Act [17 CFR 240.10b-5].

Thus, the Commission believes that the rule, if amended as proposed,

would continue to be consistent with protection of investors.

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II. Request for Comment

tion 17(a) of the Securities

Act [15 U.S.C. 77q(a)], Section 10(b) of the Exchange Act [15 U.S.C.

78j(b)], and Rule 10b-5 under the Exchange Act [17 CFR 240.10b-5].

Thus, the Commission believes that the rule, if amended as proposed,

would continue to be consistent with protection of investors.

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II. Request for Comment

The Commission seeks comments on any aspect of the proposed

amendment to Rule 135b. Any interested persons wishing to submit

written comments relating to the rule proposal are invited to do so by

submitting them in triplicate to Jonathan G. Katz, Secretary, U.S.

Securities and Exchange Commission, Mail Stop 6-9, 450 Fifth Street,

N.W., Washington, D.C. 20549. Comments also may be submitted

electronically at the following E-mail address: [email protected].

Comments will be considered by the Commission in complying with its

responsibilities under Section 19(a) of the Securities Act.

21 Commentators should refer to File No. S7-19-98; this file

number should be included on the subject line if E-mail is used.

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\21\ 15 U.S.C. 77s(a).

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III. Costs and Benefits of the Proposed Rule Change and its effects

on Efficiency, Competition and Capital Formation

The Commission does not anticipate that the proposed amendment

will, in and of itself, result in any economic costs. The rule proposal

is not intended to change current practice under the federal securities

laws. Rather, the proposal is intended to make it clear that an ODD

prepared in accordance with Exchange Act Rule 9b-1 is not a prospectus

and thus is not subject to liability under Section 12(a)(2) of the

Securities Act. By eliminating any uncertainty over the applicability

of Section 12(a)(2) liability to an ODD, it is anticipated that the

proposal will result in some unquantifiable economic benefits

er, the proposal is intended to make it clear that an ODD

prepared in accordance with Exchange Act Rule 9b-1 is not a prospectus

and thus is not subject to liability under Section 12(a)(2) of the

Securities Act. By eliminating any uncertainty over the applicability

of Section 12(a)(2) liability to an ODD, it is anticipated that the

proposal will result in some unquantifiable economic benefits.

However, commentators are encouraged to provide views and data

relating to any costs or benefits associated with the rule proposal. In

particular, please identify any costs or benefits associated with the

rule proposal relating to the preparation of the disclosure document.

Will the proposal have no substantial effect as anticipated, or will

the proposal result in additional costs and/or benefits? Please

describe, and quantify where possible, any foreseeable significant

effects. In addition, address whether the proposal will affect the

current compliance burden of exchanges or options issuers.

Because the proposed amendment is intended to codify long-standing

Commission interpretations, the Commission does not currently believe

that the proposed amendments to Rule 135b will impose any additional

burdens on competition. Nevertheless, the Commission seeks comments on

any anti-competitive effects the rule, as amended, may have.

In addition, by eliminating any uncertainty in this area, the

Commission currently believes that the proposed rule amendments will

have a positive, but unquantifiable, effect on efficiency, competition

and capital formation. The Commission seeks comments on this

preliminary view.

For purposes of the Small Business Regulatory Enforcement Fairness

Act of 1996, the Commission is also requesting information regarding

the potential impact of the proposals on the economy on an annual

basis

t the proposed rule amendments will

have a positive, but unquantifiable, effect on efficiency, competition

and capital formation. The Commission seeks comments on this

preliminary view.

For purposes of the Small Business Regulatory Enforcement Fairness

Act of 1996, the Commission is also requesting information regarding

the potential impact of the proposals on the economy on an annual

basis. The Commission does not currently believe that the amendments,

if adopted, would result or be likely to result in (i) an annual effect

on the economy of $100 million or more; (ii) a major increase in costs

or prices for consumers or individual industries; or (iii) significant

adverse effects on competition, investment, or innovation.

Nevertheless, the Commission solicits comment on this preliminary view.

Commentators should provide empirical data to support their views.

IV. Regulatory Flexibility Act Certification

Pursuant to Section 605(b) of the Regulatory Flexibility Act, 5

U.S.C. Sec. 605(b), the Chairman of the Commission has certified that

the proposal would not, if adopted, have a significant economic impact

on a substantial number of small entities. This certification,

including the reasons therefore, is attached to this release as

Appendix A. We encourage written comments on the Certification.

Commentators are asked to describe the nature of any impact on small

business entities and provide empirical data to support the extent of

the impact.

V. Paperwork Reduction Act

nificant economic impact

on a substantial number of small entities. This certification,

including the reasons therefore, is attached to this release as

Appendix A. We encourage written comments on the Certification.

Commentators are asked to describe the nature of any impact on small

business entities and provide empirical data to support the extent of

the impact.

V. Paperwork Reduction Act

Certain sections of Rule 135b contain ``collection of information''

requirements within the meaning of the Paperwork Reduction Act of 1995

(``PRA'') (44 U.S.C. 3501 et seq.). The Commission has previously

submitted the rule to the Office of Management and Budget (``OMB'') for

review in accordance with 44 U.S.C. 3507(d), and OMB has assigned the

rule OMB control number 3235-0200. Because the proposed rule changes

should not materially affect the collection of information obligations

under the rule, there is no requirement that the Commission resubmit

the rule with the proposed amendment to OMB for review under the PRA.

VI. Statutory Bases

The amendment to Securities Act Rule 135b is being proposed

pursuant to Sections 2(a)(10), 22 7, 23 10,

24 12, 25 and 19(a) 26 of the

Securities Act, as amended.

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\22\ 15 U.S.C. 77b(10).

\23\ 15 U.S.C. 77g.

\24\ 15 U.S.C. 77j.

\25\ 15 U.S.C. 77l.

\26\ 15 U.S.C. 77s(a).

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List of Subjects in 17 CFR Part 230

Reporting and recordkeeping requirements, Securities.

Text of the Proposal

In accordance with the foregoing, Title 17, chapter II of the Code

of Federal Regulations is proposed to be amended as follows:

PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

1. The authority citation for Part 230 continues to read in part as

follows:

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List of Subjects in 17 CFR Part 230

Reporting and recordkeeping requirements, Securities.

Text of the Proposal

In accordance with the foregoing, Title 17, chapter II of the Code

of Federal Regulations is proposed to be amended as follows:

PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

1. The authority citation for Part 230 continues to read in part as

follows:

Authority: 15 U.S.C. 77b, 77f, 77g, 77h, 77j, 77r, 77s, 77sss,

78c, 78d, 78l, 78m, 78n, 78o, 78w, 78ll(d), 79t, 80a-8, 80a-24, 80a-

29, 80a-30, and 80a-37, unless otherwise noted.

* * * * *

2. Section Sec. 230.135b is revised to read as follows:

Sec. 230.135b Materials not deemed an offer to sell or offer to

buy nor a prospectus.

Materials meeting the requirements of Sec. 240.9b-1 of this chapter

shall not be deemed an offer to sell or offer to buy a security for

purposes solely of Section 5 27 of the Act, nor shall such

materials be deemed a prospectus for purposes of Sections 2(a)(10)

28 and 12(a)(2) 29 of the Act.

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\27\ 15 U.S.C. 77e.

\28\ 15 U.S.C. 77b(10).

\29\ 15 U.S.C. 77l(a)(2).

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By the Commission.

Dated: June 25, 1998.

BILLING CODE 8010-01-P

Margaret H. McFarland,

Deputy Secretary.

Appendix A

[Note: This Appendix A to the preamble will not appear in the Code

of Federal Regulations]

Regulatory Flexibility Act Certification

\ 15 U.S.C. 77e.

\28\ 15 U.S.C. 77b(10).

\29\ 15 U.S.C. 77l(a)(2).

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By the Commission.

Dated: June 25, 1998.

BILLING CODE 8010-01-P

Margaret H. McFarland,

Deputy Secretary.

Appendix A

[Note: This Appendix A to the preamble will not appear in the Code

of Federal Regulations]

Regulatory Flexibility Act Certification

I, Arthur Levitt, Chairman of the Securities and Exchange

Commission, hereby certify, pursuant to 5 U.S.C. 605(b), that the

proposed amendment to Rule 135b under the Securities Act, as set

forth in Securities Act Release No. 33-7550, would not, if adopted,

impose additional disclosure or delivery requirements or otherwise

alter current requirements, and therefore would not have a

significant economic impact on a substantial number of small

entities.

The amendment proposed in Securities Act Release No. 33-7550 is

intended to codify a long standing interpretive position by

clarifying that an Options Disclosure Document complying with the

requirements of Exchange Act Rule 9b-1 is not subject to liability

under Section 12(a)(2) of the Securities Act. No new disclosure or

delivery obligations are proposed, nor are old methods of disclosure

or delivery being terminated. Because the proposed amendment is

consistent with the current interpretive position, no new liability

would be imposed and the current liability system would not be

altered. Since no changes to substantive disclosure or delivery

requirements are being proposed, the proposal will not have a

significant economic impact on businesses, large or small.

Economic benefits resulting from the proposed amendment are

anticipated. In particular, the proposed amendment would eliminate

uncertainty over the applicability of Section 12(a)(2) liability to

an Options Disclosure Document.

Dated: June 24, 1998.

Arthur Levitt,

Chairman.

[FR Doc. 98-17438 Filed 6-30-98; 8:45 am]

BILLING CODE 8010-01-M