SEC Division of Corporate Finance No-Action Letter to the Options Clearing Corporation Regarding Securities Act Section 18 (with Parness Comment)

In a February 19, 2013 interpretive letter, the Chief Counsel of the SEC's Division of Corporation Finance confirmed that over-the-counter options cleared by The Options Clearing Corporation (the "OCC") would qualify as "covered securities" under Sec. 18(b)(1)(C)of the Securities Act. The letter principally relied on an opinion by the OCC's counsel that such options were equal in seniority to OCC-issued standardized options listed on a national securities exchange named in Sec. 18(b)(1)(A) of the Securities Act or Rule 146(b) thereunder. Cross-Reference(s): See generally Blue Sky Law Registration Requirements, by Alan M. Parness and Steven Lofchie.

Parness Comment: This no-action letter doesn't break new ground because it's premised on the facts of the particular inquiry: by reason of Sec. 18(b)(1)(C) of the Securities Act, any security of the same issuer which is equal in seniority (or senior) to a security listed on an exchange designated in Sec. 18(b)(1)(A) of the Securities Act, or SEC Rule 146(b) thereunder, qualifies as a "covered security" under Sec. 18(b)(1). The principal advantage of qualifying under Sec. 18(b)(1) is that state Blue Sky law securities registration (and notice filing) provisions are totally preempted with regard to the offer and sale of such securities. Unfortunately, when revising Sec. 18 back in 1996 in the course of drafting the NSMIA legislation, Congress failed to include unlisted options, warrants and subscription rights for exchange-listed securities as a class of Sec. 18(b)(1) covered securities, despite the fact that most Blue Sky laws already recognize such instruments as securities exempt from registration. As a result of this omission, because such options, warrants and subscription rights would generally not be equal in seniority or senior to the listed securities to which they relate, sellers of such instruments have had to look to each applicable Blue Sky law for an exemption (or register the particular instrument), rather than rely on preemptive "covered security" status.

Click here to view letter in full (links externally to SEC website).