THE ATTORNEY GENEIRAL
OF TEXAS
October 21:“197,3. :t ,i’ ,,,:
The Honorable Roy W. Mouer Opinion Nb. H- 116
Securities Commissioner
709 State Finance ,Building Re: The aqlication of the
Box 13167 Capitol Station Texas,, S.ecurities Act
Austin, Texas ,787ll to. the ‘C’hi,cago Board
Op,tions E’xchange
..:.‘( Diar' ‘Mr. Mouer:
You have requested’our opinion onethe~ioli~~ing.~uestions:
>.’ I
I(l).Whether a.Chicago Board”&tion isa,
,!security’ as that term i”de!f~ned:in,Sect,ion~~~.
: ), A
of The Securiiieb .Act.
< :’
“‘I( 2) Whether the Chicago Boaid:~~~~~~‘.,~~xchange
is”! ‘stock exchange’ as. that, ter.m.:is &~‘$$$$ection 6. F
,
of The Securities Act. Ii’ :”:i,:; !: ‘,:;;
,.. .1. q,. ,;_,;,,
You have further advised: ~.i.:.:‘.,:;
I .,
3: !:icij:.,
,.: ,$e &&ago B.oard’ ‘&&ns,‘E&ha~ge &de
.,:1.. V&Rlicat$n to~;:~t.~~~‘Sec~,~j~i.~~, @d fo,Fi,L9p,proval
~, : .as ,a:r;ecognis+d, and,res,ponsJble . ~..
‘:stoc,h
‘.:!,” ,..,.,>~,k.I>... under
.exchange
,, :, ,&ticle ,58& Sect$m 6:.~~(‘~he,‘.,Secqrlti~.p:,~!:~,),?,,:A hear-
~..,:&g!,/n )h: ma!ier.Tyafl ,J=t$, ,p May iT$.!,:,,
f~&c#p= it
was establi,shed that the ,.Chicago Board :$3@&s Exchange
,has registered withthe Securities’and Ex&nge Cqmmis-
sion as ‘a national s’ecurities exchange ::,‘a+.‘ the,options
,, :I:; ,.,,
traded on the exchange, called Chicago Board ,Options.
,have been regis,tered under,,the s~ecuri~~~cs:r~~gistration
._.: .,,
provisions of The Securities Act of 193,3.,“. :~.~,I_
p. 555
The Honorable Roy W. Mouer, page 2 (H-116)
The information provided us indicates that the Chicago Board Options
Exchange does not deal directly in corporate stock but confines its activities
to the exchange of corporate stock options, known in the trade as “puts” and
“calls”. The business of the exchange is described in its prospectus dated
April 5, 1973, which you have provided us, as follows:
“The Chicago Board Options covered by this
prospectus are call options which give the holder
the right to purchase from the Clearing Corporation
a fixed number of shares of a specified security
(referred to as the ‘underlying stock’) for a fixed
purchase price (the ‘exercise price’) prior to a
fixed expiration date. . . . A Chicago Board Option
may be purchased only in a transaction on the Ex-
change. The ‘writer’ of an Option is a person who,
through his broker, has sold an. Option on the Exchange
and has thereby undertaken with the Clearing Corpora-
tion to deliver the underlying stock upon the timely
assignment of an exercise notice to him against pay-
ment of the specified exercise price. The Clearing
Corporation does not itself own the underlying stock.
and the writer may not own the underlying stock (in
which event he is known as an ‘uncovered writer’ and
is subject to Exchange’s margin requirements appli-
cable to uncovered writers. . . . ), As consideration
for the rights and obligations represented by an
Option,, the buyer ‘(often referred to herein as ‘holder’)
pays ‘and’the writer receives an amount known as the
-prkiniur;li” “’ The premium is determined in the Ex-
changel,s auction market on the basis of supply and
demand, although it also depends upon considerations
such as the duration of the Option, the difference be-
tween the exercise price and the market price of the
underlying stock, and the price volatility and other
characteristics of the underlying stock. In addition,
buyers and writers of Options must pay commissions
to their brokers in every Option transaction. ”
p. 556
.
The Honorable Roy W. Mouer, page 3 (H-116)
In our opinion the options traded on the Chicago Board Options
Exchange are “securities” as defined in Article 581-4. A (The Securities
Act),: Vernon’s Texas Civil Statutes.~
“The term ‘security’ or ‘securities’ shall
include any share, stock, treasury stock, stock
certificate under a voting trust agreement, colla-
teral trust certificate, equipment trust certificate,
pre-organization certificate ‘or receipt, subacrip-
tion or reorganization certificate, note, bond,
,debenture, mortgage certificate or other evidence
of indebtedness, any form of commercial paper,
certificate in or undera profit sharing or partici-
pation agreement, certificate or any instrument
repre’senting any inter~est in ‘or under an oil, gas
or mining lease, fee or title, or any certificate or
instrument representing ‘or secured by an interest
in any or all of the capital, property, assets, profits
or earnings of ,any company, investment contract, or
any other instrument commonly known as, a security,
whether similar to those herein referred to or not.
Provided, however, that this definition shall not
apply to any insurance policy, endowment policy,
annuity contract, optional annuity contract, or any
contract or agreement in relation.to and in conse-
quence of any such policy or contract, issued by an
insurance company subject to the supervision or con-
trol of the Board of Insurance Commissioners when
the form of such policy or contract has been duly filed
with the Board as, now or hereafter required by law. ”
Your letter states ,that at the hearing, “It was established that. . .
the options traded on the exchange, called Chicago Board Options, have
been registered under the securities registration provisions of the Securities
Act of 1933. ” Accordingly, it is plain that the phrase in the definition in
$‘4A of the Securities Act “or any other instrument commonly known as a
security, whether similar to those herein referred to or not” would cover
the investments in question.
p. 557
The Honorable Roy W. Mouer, page 4 (H-116)
We recognize that the definitions of “securities” in $ 2B of The
Securities Act of 1933 (15 USC 5 77b) and in the statutues of many states
recognizing such options as securities, contain the phrase “right to
subscribe to or purchase any of the foregoing, ” which phrase is not
contained in the Texas act; however we do not believe this manifests
any legislative attempt to eliminate such options from the Texas Securi-
ties Act.
Other provisions in 5 4 of Article 581 that persuade us that the
Legislature intended the inclusion of options in the definition of securities
are found in its definitions of “dealer. ” “salesman” and “sell”:
“C. The term ‘dealer’ shall include every
person or company, other than a salesman, who
engages in this state, either for all or part of his
or its time, directly or through an agent, in selling,
offering for sale or delivery or soliciting subscrip-
tions to or orders for, or undertaking to dispose
of, or to invite offers for, or rendering services
as an investment adviser, or dealing in any other
manner in any security ‘or securities within this
state.
“D. The term ‘salesman’ shall include every
person or company employed or appointed or autho-
riced by a dealer to sell, offer for sale or delivery,
or, solicit s,ubscriptions to or orders for, or deal in
any .other manner, in securities within this state. . . .
“E. . . . . The term ‘sell’ means any act by
which a sale is made, and the term ‘sale’ or ‘offer
for sale’ shall include a subscription, fan option. for
sale, a solicitation of sale, a solicitation of an offer
to buy, an attempt to sell, or an offer to sell, directly
or by an agent or salesman, by a circular, letter, or
adver,tisement or otherwise . . , . ” (emphasis added)
p. 558
The Honorable Roy W. Mouer, page 5 (H-116)
In answer to your second question we hold that the Chicago Board
Options Exchange is a “stock exchange” as referred to under 5 6F of
Articlec~581, the Texas Securities Act, which reads:
“Except as hereinafter in this Act expressly
provided, the provisions of this Act shall not apply
to any of rhe following securities when ,offered for
sale, or sold, or dealt in by a registered dealer or
salesmen of a registered dealer: . . . .
“F. Securities which at the time of sale have
been fully.listed up,on the American Stock Exchange,
the Boston Stock Exchange, the Midwest Stock Ex-
change or the New York Stock Exchange, or upon any
recognized and responsible stock exchange approved
by the Commissioner as hereinafter in this section
provided. . . . . ‘I
“Stock exchange ” is not defined in the statute and accordingly we
are relegated tothe meaning in which it is ordinarily understood. Satterfield
v. Satterfield,. 448 S. W. ,2d 456 (Tex. 1969); cf. Article 10, V. T. C. S. In
this situation, “It is proper and sometimes necessary to consult a dictionary
to ascertain the meaning to be attached to a word. ” Board of Ins. Comlrs.
V. Duncan. 174 S. W. 2d 326 (Tex. Civ. App. 1943); 53 Tex. Sur. Zd, Statutes,
§147, p. 214.
Webster’s Third New International Dictionary (1961) defines “stock
exchange ” to mean:
“a building or room in which security trading is
conducted on an organized system. . . an asso-
ciation or group of people organized to provide
an auction market among themselves for the pur-
chase and sale of securities. ”
Under this definition and the general understanding referred to itiArt-
cl= 581,. a “stock exchange” is not limited to an exchange that trades in
p. 559
The Honorable Roy W. Mouer, page 6 (H-116)
“stocks. ‘I Rather, it embraces the concept of an exchange market in
securities. Accordingly, Chicago Board Options Exchange, as a regis-
tered national securities exchange, plainly is a stock exchange as that
term is generally understood and as it is used in $ 6. F.
We are further persuaded in this conclusion by the information you
have provided to the ,effect thatat your hearing “it was established that
the Chicago Board Options Exchange has registered with the Securities
and Exchange ,Commission as a national securities exchange. . . . ”
By our affirmative answer to your second question we should not
be understood a’s expressing any opinion on the question of whether the
Chicago Board Options Exchange is a “recognized and responsible stock
exchange. ‘I We are merely holding that it is a “stock exchange” and you
are advised that the question of whether it is “recognized and responsible”
is a factual matter entirely within your prerogative to determine.
SUMMARY
Ii ‘The, stock options which are the subject of
investments on the Chicago Board OptionsExchange
are ,“securities” as defined in Article 581-4A, V. T. C. S.
Z., The Chicago Board Options Exchange is a
“stock ,exchange” under Article 581-6, F, Vi T,: C. S; .,. .~~~.~
Very truly yours,
J~OHN L. H.IL&:“~~~ .;.’ :,
Attorney General of ‘Texas..
DAVJD M. KENDALL, Chairman
Opitiion Committee
p. 560