Notice To Members 85-18

Proposed Amendment to Article III, Section 33 of the Rules of Fair Practice — "Options"

Published Date:

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.

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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.

Sincerely,

Gordons. Macklin
President

Enclosure

TEXT OF PROPOSED REVISIONS

Sec. 33

Options

(a) A member or a person associated with a member shall not effect any transaction in an option contract, including an option displayed on the NASDAQ System, except in accordance with the provisions of rules, regulations and procedures adopted by the Board of Governors pursuant to the authorization granted in subsection (b) hereof.
(b) The Board of Governors is authorized, for the purpose of preventing fraudulent and manipulative acts and practices, promoting just and equitable principles of trade, providing safeguards against unreasonable profits or unreasonable rates of commission or other charges, and for the protection of investors and the public interest, to adopt rules, regulations and procedures for transactions in options relating to:
(1) transactions in option contracts, including options displayed on the NASDAQ System, by members for their own account or the accounts of public customers;
(2) the comparison-clearance and settlement of transactions in options;
(3) the reporting of transactions in options;
(4) the qualifications and standards for registered market makers in options;
(5) the standards for authorization of underlying securi ties eligible to be subject to options displayed on the NASDAQ System;
(6) the endorsement and guarantee of performance options; and,
(7) such other areas of options activity and trading as may be required to achieve the above-stated purposes.
(c) The rules, regulations and procedures authorized by subsection (b) hereof shall be incorporated into Appendix E to be attached to and made a part of these Rules of Fair Practice. The Board of Governors shall have the power to adopt, alter, amend, supplement or modify the provisions of Appendix E from time to time without recourse to the membership for approval, as would otherwise be required by Article VII of the By-Laws, and Appendix E shall become effective as the Board of Governors may prescribe unless disapproved by the Securities and Exchange Commission.
(d) For the purposes of this section, the term "option" shall mean any put, call, straddle or other option or privilege of buying a security from or selling a security to another without being bound to do so which is a "security" as defined in Section 2(1) of the Securities Act of 1933, as amended, but shall not include any tender offer, registered warrant, right, convertible security or any other option in respect to which the writer is the issuer of the security which may be purchased or sold upon the exercise of the option.

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New language underlined; deleted language stricken.