Proposed Amendment to Article III, Section 33 of the Rules of Fair Practice — "Options"
IMPORTANT MAIL VOTE
OFFICERS, PARTNERS AND PROPRIETORS
TO: All NASD Members
LAST VOTING DATE IS APRIL 15, 1985
Enclosed herewith is a proposed amendment to Article III, Section 33 of the Rules of Fair Practice. This amendment has been approved by the Association's Board of Governors for submission to the membership for a vote. If approved, the amendment must then be filed with, and approved by, the Securities and Exchange Commission.
BACKGROUND OF THE PROPOSED AMENDMENT
Article III, Section 33 of the Rules of Fair Practice (the "Rule") authorizes the Board of Governors to adopt rules, regulations and procedures relating to members' transactions in options contracts, including transactions in options displayed on the NASDAQ System ("NASDAQ Options").
In 1977, when the Rule was adopted, only stock options were commonly traded or proposed for display in NASDAQ. Therefore, the language of the Rule did not contemplate trading in index options and other options where the underlying vehicle is not technically a security.
The amendment to the Rule proposed herein is intended to broaden the definition of the term "option" contained in the Rule to encompass the various new options products trading in today's marketplace, and to provide for the effective regulation of index options products which may be introduced in the future, including NASDAQ index options. Thus, the changes proposed by the Board are more technical rather than substantive in nature and reflect similar actions by other self-regulatory organizations.
In view of the above, the Board has determined that this proposal should be circulated to the membership for approval.
DISCUSSION OF THE PROPOSED RULE AMENDMENT
Paragraph (d) of the Rule defines the term "option" for purposes of the Rule as a put, call, straddle or other option or privilege to buy or sell a security. Therefore, the definition of an option contained in the Rule would exclude an index option, which is an option to receive or deliver a cash amount based on the value of an index of securities.
To expand the definition of the term "option" contained in the Rule, the proposed amendment will reference Section 2(1) of the Securities Act of 1933 which was recently amended to specifically define index options as securities.
By relying on this 1933 Act definition, the amendments to Article III, Section 33 will make clear the Board's authority to adopt rules relating to members' transactions in all options which are securities as defined in the 1933 Act.
* * *
The text of the proposed rule is attached and merits your immediate attention. Please mark the enclosed ballot according to your convictions and return it in the enclosed stamped envelope to "The Corporation Trust Company." Ballots must be postmarked no later than April 15, 1985.
The Board of Governors believes the proposed amendment is necessary and appropriate and recommends that members vote their approval.
Questions concerning this notice may be directed to Peter T. Canada, Assistant Director, NASDAQ Operations, at (202) 728-8479, or to your District Director.
TEXT OF PROPOSED REVISIONS
* * *
New language underlined; deleted language stricken.