Interpretive Letter to J. Craig Long, Esq., Foley & Lardner
March 5, 1999
J. Craig Long, Esq.
Foley & Lardner
One IBM Plaza
330 North Wabash Avenue
Chicago, Illinois 60611-3608
Dear Mr. Long:
I am responding to your letter of November 9, 1998, wherein you request confirmation that NASD Rule 2220 does not apply to conventional options.
The relevant facts are as follows. NASD Rule 2220 addresses options communications with the public. Rule 2220, among other things, (i) applies general and specific content standards to options communications with the public, (ii) mandates that all advertisements and educational material be submitted to the Advertising/Investment Companies Regulation Department ("Department") of the NASD for approval prior to usage (subject to certain conditions), and (iii) mandates that all advertisements, sales literature, and educational materials issued by a member or member organization pertaining to options be reviewed by the Compliance Registered Options Principal or designee prior to usage.
Rule 2220 does not distinguish between "standardized options" and "conventional options." However, NASD Notice to Members 94-46 defines "standardized options" as "exchange traded options issued by the Options Clearing Corporation that have standard terms for strike prices, expiration dates, and the amount of the underlying security." NASD Rule 2860 defines a "conventional option" as "any option contract not issued, or subject to issuance, by The Options Clearing Corporation." You state that conventional options are typically purchased and sold pursuant to private transactions with terms that have been individually negotiated. It is your view that Rule 2220 was never intended to apply to conventional options.
First, you note that some of the standards in subparagraph (d)(2) to Rule 2220, which sets forth specific standards applicable to options communications, are clearly inapplicable in the context of a conventional option. For example, the standards described in subparagraph (d)(2)(B) require that all advertisements "meet the requirements of SEC Rule 134 under the Securities Act of 1933" ("Act"). SEC Rule 134 governs communications that are not deemed to be prospectuses. You state that since conventional options are privately negotiated transactions and are typically sold pursuant to Section 4(2) of the Act and not part of a public offering, it would be illogical to require communications regarding conventional options to conform to Rule 134. You also note that under subparagraph (d)(2)(b), such advertisements "may contain a description of the option which includes a statement that the issuer of every such option is the Options Clearing Corporation ("OCC") and a brief description of OCC." You state that since conventional options are not issued by OCC, such a statement would be incorrect and any such description of the OCC would be unnecessary.
Second, you state that education material relating to conventional options appears to be excluded from Rule 2220 because (i) the definition of "educational material" set forth in Rule 2220 includes only material that is "limited to information describing the general nature of the standardized options markets or one or more strategies," and (ii) the specific standards relating to educational material requires that such material meet the requirements of SEC Rule 134A under the Act, which governs materials relating to options that are not deemed to be prospectuses and specifically addresses only "written materials…relating to standardized options," and does not include conventional options.
You request NASD Regulation’s concurrence that advertisements, educational material and sales literature relating to conventional options are not covered by Rule 2220, and thus are not required to be submitted to the Department prior to usage.
The staff believes that Rule 2220 was intended to apply only to standardized options, and thus concurs with your conclusion that advertisements, educational material and sales literature regarding conventional options do not need to be submitted to the Department for pre-use review and approval. However, the staff notes that such advertisements, educational material and sales literature regarding conventional options remain subject to the general standards in both Rules 2210 and 2220 that prohibit untrue, false or misleading statements.
I hope this letter is responsive to your inquiry. Please note that the opinions expressed herein are staff opinions only and have not been reviewed or endorsed by the Board of Directors of NASD Regulation. This letter responds only to the issues that you have raised based on the facts you have described, and does not address any other rule or interpretation of the Association, or all the possible regulatory and legal issues involved.
Robert J. Smith
Office of General Counsel
NASD Regulation, Inc.