                        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
