82 FR 31638 - Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Regarding Delivery of Options Disclosure Documents and Special Statement for Uncovered Options Writers

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 82, Issue 129 (July 7, 2017)

[Federal Register Volume 82, Number 129 (Friday, July 7, 2017)]
[Notices]
[Pages 31638-31640]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2017-14247]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81069; File No. SR-Phlx-2017-49]


Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change Regarding Delivery 
of Options Disclosure Documents and Special Statement for Uncovered 
Options Writers

June 30, 2017.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 20, 2017 NASDAQ PHLX LLC (``Phlx'' or ``Exchange'') filed with 
the Securities and Exchange Commission (``SEC'' or ``Commission'') the 
proposed rule change as described in Items I, II, and III, below, which 
Items have been prepared by the Exchange. The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Rule 1029, Delivery of Options 
Disclosure Documents.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaqphlx.cchwallstreet.com/, at the principal 
office of the Exchange, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchanges proposes to amend Rule 1029 in two respects, first in 
connection with the required delivery to customers of any amended 
Options Disclosure Document (``ODD''), and second to set forth for the 
use of members and member organizations a Special Statement for 
Uncovered Options Writers for delivery to customers.
Delivery of Amended Options Disclosure Documents
    Rule 1029 currently requires every member and member organization 
to deliver a current ODD to each customer at or prior to the time such 
customer's account is approved for options trading. The rule also 
contains a requirement that each amended ODD shall be distributed to 
every customer having an account approved for trading the options 
class(es) to which such ODD relates, or, the alternative, shall be 
distributed not later than the time a confirmation of a transaction is 
delivered to each customer who enters into an option transaction 
pertaining to such an options class. The language concerning amended 
Options Disclosure Documents is somewhat awkward and cumbersome, with 
the required timing of the provision of the amended ODD presented as 
``an alternative'' to a requirement that the amended ODD be distributed 
in the first place to every customer having an account approved for 
trading the options classes(es) to which such ODD relates. The Exchange 
proposes to delete this language, and to replace it with more 
straightforward language requiring a copy of each amendment to an ODD 
to be furnished to each customer who was previously furnished the ODD 
to which the amendment pertains, not later than the time a confirmation 
of a transaction in the category of options to which the amendment 
pertains is delivered to such customer. This language is based upon 
comparable language in Chapter 11, Section 15(a)(ii), of the Nasdaq 
Options Market rules, Nasdaq ISE Rule 616(a)(2), and Chicago Board 
Options Exchange (``CBOE'') Rule 9.15(a). The Exchange is also making a 
minor edit to the introductory sentence, substituting the word 
``transactions'' for the word ``trading'' in order to conform to the 
terminology used by the foregoing exchanges.
Special Statement for Uncovered Options Writers
    Rule 1024(c)(v) requires every member organization transacting 
business with the public in uncovered option contracts develop, 
implement and maintain specific written procedures governing the 
conduct of such business, including requirements that customers 
approved for writing uncovered short options transactions be provided 
with a special written description of the risks inherent in writing 
uncovered short option transactions, at or prior to the initial 
uncovered short option transaction. This written disclosure document 
must be furnished to customers in addition to the ODD required to be 
provided to customers trading in options pursuant to Rule 1029(a). 
Current Rule 1029(b) states that the written description of risks 
required by Rule 1024(c)(v) shall be in a format prescribed by the

[[Page 31639]]

Exchange or in a format developed by the member organization, provided 
it contains substantially similar information as the prescribed 
Exchange format and has received prior written approval of the 
Exchange.
    The Exchange now proposes to add Rule 1029(c), which will set forth 
a sample risk description captioned ``Special Statement for Uncovered 
Options Writers'' (the ``Special Statement'') for use by member 
organizations to satisfy the requirements of Rule 1029(b). The Special 
Statement alerts customers to the special risks associated with 
uncovered options writing which may expose investors to potentially 
significant loss, and states that this type of strategy may therefore 
not be suitable for all customers approved for options transactions. 
The Special Statement describes potential losses of uncovered call and 
put option writing, the possibility of significant margin calls, 
strategies where the potential risk is unlimited, consequences of 
unavailability of a secondary market in options, and the risk born by 
the writer of an American-style option subject to assignment of an 
exercise at any time after he has written the option until the option 
expires. The proposed rules are intended to increase customer awareness 
of the risks entailed in selling uncovered short option contracts.\3\ 
This language is almost identical to language contained in Chapter 11, 
Section 15 (c) of the NOM rules, CBOE Rule 9.15(b), and ISE Rule 
616(d).
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    \3\ The Special Statement was originally based upon a prototype 
developed by the Options Self-Regulatory Council consisting of 
representatives of the American Stock Exchange, Chicago Board 
Options Exchange, Midwest Stock Exchange, National Association of 
Securities Dealers, New York Exchange, Philadelphia Stock Exchange 
and Pacific Stock Exchange. See Securities Exchange Act Release No. 
26952 (June 21, 1989), 54 FR 27256 (June 28, 1989). The language of 
the Special Statement was included as an exhibit to SR-Phlx-89-24 
which was approved in the foregoing approval order, but was not 
submitted as part of the rule text in that filing. The Exchange is 
now adding the Special Statement language into the actual rule text.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\4\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\5\ in particular, in that it is designed to promote 
just and equitable principles of trade, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general to protect investors and the public interest. 
The amendment of the portion of the rule requiring the delivery to 
customers of any amended ODD should protect investors by making this 
regulatory obligation more clear to members and member organizations, 
thus ensuring that amendments will be delivered to each customer who 
was previously furnished the ODD to which the amendment pertains. The 
proposed rule setting forth the Special Statement is intended to 
protect investors by facilitating increased customer awareness of the 
particular risks associated with selling uncovered short option 
contracts. The distribution to customers of this short succinct written 
statement that describes the risks associated with uncovered options 
writing will help ensure investor protection because it will increase 
customer awareness of the potential for significant losses in writing 
uncovered short options contracts. Since disclosure is an important 
component of investor protection under the federal securities laws, 
providing investors with this special uncovered short options risk 
statement may help ameliorate problems associated with uncovered short 
options transactions (e.g., significant margin calls), especially 
during volatile markets.
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    \4\ 15 U.S.C. 78f(b).
    \5\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. The language which is proposed 
to be added to Rule 1029 has previously been considered and approved by 
the Commission for use in other exchanges' rulebooks as discussed 
above.\6\
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    \6\ See footnote 3 above.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \7\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\8\
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    \7\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \8\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-Phlx-2017-49 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-Phlx-2017-49. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be

[[Page 31640]]

available for Web site viewing and printing in the Commission's Public 
Reference Room, 100 F Street NE., Washington, DC 20549, on official 
business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of 
the filing also will be available for inspection and copying at the 
principal office of the Exchange. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-Phlx-2017-49 and should be submitted on or before July 
28, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2017-14247 Filed 7-6-17; 8:45 am]
 BILLING CODE 8011-01-P