Texas Law Review
Response or Comment
The Chicago Board Options Exchange (“CBOE”) provided the Securities and Exchange Commission (“SEC”) with an opportunity to exercise regulatory rules to protect the public and economy. The options market was an appropriate testing ground, as options presented complex and untested risks in the broader securities market. Before the CBOE attempted to add security and balance, options existed in an unorganized and underfinanced market. The market needed to expand. However, the SEC was faced with a few problems of its own making. Rule 9b-1 undermined the SEC’s regulatory intent by providing loopholes that would leave it powerless to intervene in any necessary or meaningful way if the regulatory scheme proved ineffective. Rule 9b-2, on the other hand, failed to guarantee that the required customer disclosure was sufficient.
The SEC proposed regulations that would provide information to customers in a way that helped them make trade decisions. The disclosures required that investors be capable of evaluating the supplied information and understand the risks before the trade. In contrast, the Federal Reserve Board (“FRB”) has responded with rigid prohibitions. The FRB excluded the call from covering short trades and arbitrage maneuvers, although it has not rejected similar uses of warrants. The FRB should reconsider its ruling that calls are not securities so that the SEC may continue to develop a needed market injecting revenue into a depressed economy.
George Lee Flint, Jr., SEC and FRB Treatment of Options: An Experiment in Market Regulation (comment), 53 Tex. L. Rev. 1243 (1975).