[Federal Register Volume 85, Number 105 (Monday, June 1, 2020)]
[Notices]
[Pages 33454-33491]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-11651]
[[Page 33453]]
Vol. 85
Monday,
No. 105
June 1, 2020
Part IV
Securities and Exchange Commission
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Self-Regulatory Organizations; BOX Exchange LLC; Notice of Filing of
Proposed Rule Change To Adopt Rules Governing the Trading of Equity
Securities on the Exchange Through a Facility of the Exchange Known as
the Boston Security Token Exchange LLC; Notice
Federal Register / Vol. 85, No. 105 / Monday, June 1, 2020 /
Notices
[[Page 33454]]
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-88946; File No. SR-BOX-2020-14]
Self-Regulatory Organizations; BOX Exchange LLC; Notice of Filing
of Proposed Rule Change To Adopt Rules Governing the Trading of Equity
Securities on the Exchange Through a Facility of the Exchange Known as
the Boston Security Token Exchange LLC
May 26, 2020.
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 May 21, 2020, BOX Exchange LLC (the ``Exchange'') filed with the
Securities and Exchange Commission (``Commission'') the proposed rule
change as described in Items I and II 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
Pursuant to the provisions of Section 19(b)(1) of the Securities
Exchange Act of 1934 as amended (``Exchange Act''),\3\ BOX Exchange LLC
(``BOX or the ``Exchange'') is filing with the Securities and Exchange
Commission (``SEC'' or ``Commission'') a proposed rule change to adopt
rules to govern the trading of equity securities on the Exchange
through a facility of the Exchange known as Boston Security Token
Exchange LLC (``BSTX''). As described more fully below, BSTX would
operate a fully automated, price/time priority execution system for the
trading of ``security tokens,'' which would be equity securities that
meet BSTX listing standards and for which ancillary records of
ownership would be able to be created and maintained using distributed
ledger (or ``blockchain'') technology. The proposed additions to the
Exchange's Rules setting forth new Rule Series 17000-28000 are included
as Exhibit 5A [sic]. All text set forth in Exhibit 5A [sic] would be
added to the Exchange's rules and therefore underlining of the text is
omitted to improve readability. Forms proposed to be used in connection
with the proposed rule change, such as the application to become a BSTX
Participant, are included as Exhibits 3A through 3N [sic].
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\3\ 15 U.S.C. 78s(b)(1).
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In addition, the Exchange proposes to make certain amendments to
several existing BOX Rules to facilitate trading on BSTX. The proposed
changes to the existing BOX Rules would not change the core purpose of
the subject Rules or the functionality of other BOX trading systems and
facilities. Specifically, the Exchange is seeking to amend BOX Rules
100, 2020, 2060, 3180, 7130, 7150, 7230, 7245, IM-8050-3, 11010, 11030,
12030, and 12140. These proposed changes are set forth in Exhibit 5B
[sic]. Material proposed to be added to the Rule as currently in effect
is underlined and material proposed to be deleted is bracketed.
All capitalized terms not defined herein have the same meaning as
set forth in the Exchange's Rules.\4\
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\4\ The Exchange's Rules can be found on the Exchange's public
website: https://boxoptions.com/regulatory/rulebook-filings/.
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The text of the proposed rule change is available from the
principal office of the Exchange, at the Commission's Public Reference
Room and also on the Exchange's internet website at http://
http://boxoptions.com">boxoptions.com.
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 self-regulatory organization
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 self-regulatory organization
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 Exchange is proposing to adopt a series of rules to govern the
trading of equity securities through a facility of the Exchange known
as BSTX and make certain amendments to the existing BOX rules to
facilitate trading on BSTX. As described more fully below, BSTX would
operate a fully automated, price/time priority execution system (``BSTX
System'') for the trading of securities that will be considered
``security tokens'' under the proposed rules. The ``security tokens''
under the proposed rules would be equity securities that meet BSTX
listing standards, and that trade on the BSTX System, and for which
ancillary records of ownership would be able to be created and
maintained using distributed ledger technology. These ancillary records
of ownership that would be maintained using distributed ledger
technology would not be official records of security token ownership.
Instead, as described further herein, such records would be ancillary
records that would reflect certain end-of-day security token position
balance information as reported by market participants. All BOX
Participants would be eligible to participate in BSTX provided that
they become a BSTX Participant pursuant to the proposed rules. Under
the proposed rules, BSTX would serve as the listing market for eligible
companies that wish to issue their registered securities as security
tokens. Security tokens would trade as NMS stock.\5\ The Exchange is
not proposing rules that would support its extension of unlisted
trading privileges to other NMS stock, and accordingly the Exchange
does not intend to extend any such unlisted trading privileges in
connection with this proposal. The Exchange would therefore only trade
security tokens listed on BSTX unless and until it proposes and
receives Commission approval for rules that would support trading in
other types of securities, including through any extension of unlisted
trading privileges to other NMS stock. A guide to the structure of the
proposed rule change is described immediately below.
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\5\ 17 CFR 242.600(b)(48).
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I. Guide to the Scope of the Proposed Rule Change
The proposal for trading of securities that will be ``security
tokens'' (under the BSTX Rules, as defined below) through BSTX
generally involves changes to existing BOX Rules and new BOX Rules
pertaining specifically to BSTX (``BSTX Rules''). In addition, BSTX
corporate governance documents as well as certain discrete changes to
existing BOX corporate governance documents are necessary, which the
Exchange has submitted to the Commission through separate proposed rule
changes. To support the trading of security tokens through BSTX,
certain conforming changes are proposed to existing BOX Rules and
entirely new BSTX Rules are also proposed as Rule Series 17000 through
28000.\6\ Each of those new Rule Series and the provisions thereunder
are
[[Page 33455]]
described in greater detail below. Where the BSTX Rules are based on
existing rules of another national securities exchange, the source rule
from the relevant exchange is noted along with a discussion of notable
differences between the source rule and the proposed BSTX Rule. The
proposed BSTX Rules are addressed in Part III below and they generally
cover the following areas:
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\6\ The proposed changes to BOX Rules and the proposed BSTX
Rules are attached as Exhibits 5B and 5A [sic], respectively.
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Section 17000--General Provisions of BSTX;
Section 18000--Participation on BSTX;
Section 19000--Business Conduct for BSTX Participants;
Section 20000--Financial and Operational Rules for BSTX
Participants;
Section 21000--Supervision;
Section 22000--Miscellaneous Provisions;
Section 23000--Trading Practice Rules;
Section 24000--Discipline and Summary Suspension;
Section 25000--Trading Rules;
Section 25200--Market Making on BSTX;
Section 26000--BSTX Listing Rules;
Section 27000--Suspension and Delisting;
Section 27100--Guide to Filing Requirements;
Section 27200--Procedures for Review of Exchange Listing
Determinations; and
Section 28000--Dues, Fees, Assessments and Other Charges.
II. Overview of BSTX and Considerations Related to the Listing, Trading
and Clearance and Settlement of Security Tokens
A. The Joint Venture and Ownership of BSTX
On June 19, 2018, t0.com Inc. (``tZERO'') and BOX Digital Markets
LLC (``BOX Digital'') announced a joint venture to facilitate the
trading of security tokens on the Exchange.\7\ As part of the joint
venture, BOX Digital, which is a subsidiary of BOX Holdings Group LLC,
and tZERO each own 50% of the voting class of equity and over 45%
economic interest of BSTX LLC. Pursuant to the BSTX LLC Agreement, BOX
Digital and tZERO will perform certain specified functions with respect
to the operation of BSTX. As noted, these details, as well as the
proposed governance structure of the joint venture and accompanying
changes to the Exchange's current governance documents and bylaws, will
be the subject of a separate proposed rule change that the Exchange
plans to submit to the Commission.
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\7\ See tZERO and BOX Digital Markets Sign Deal to Create Joint
Venture, Business Wire (June 19, 2018), available at https://www.businesswire.com/news/home/20180619005897/en/tZERO-BOX-Digital-Markets-Sign-Deal-Create.
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B. BSTX Is a Facility of BOX That Would Support Trading in the New
Asset Class of Security Tokens
BSTX would operate as a facility \8\ of BOX, which is a national
securities exchange registered with the SEC. As a facility of BOX,
BSTX's operations would be subject to applicable requirements in
Sections 6 and 19 of the Exchange Act, among other applicable rules and
regulations.\9\ Currently, BOX functions as an exchange only for
standardized options. While BSTX may eventually support a wider variety
of securities, subject to Commission approval, at the time that BSTX
commences operations it would only support trading in security tokens
that are equity securities. Accordingly, this represents a new asset
class for BOX, and this proposal sets forth the changes and additions
to the Exchange's rules to support the trading of equity securities as
security tokens on BSTX.
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\8\ 15 U.S.C. 78c(a)(2). Section 3(a)(2) of the Exchange Act,
provides that ``the term `facility' when used with respect to an
exchange includes its premises, tangible or intangible property
whether on the premises or not, any right to the use of such
premises or property or any service thereof for the purpose of
effecting or reporting a transaction on an exchange (including,
among other things, any system of communication to or from the
exchange, by ticker or otherwise, maintained by or with the consent
of the exchange), and any right of the exchange to the use of any
property or service.'' Because BSTX will share certain systems of
the Exchange, BSTX is a facility of the Exchange.
\9\ 15 U.S.C. 78f; 15 U.S.C. 78s.
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The Exchange proposes to use the term ``security token'' \10\ to
describe the BSTX-listed securities that would use blockchain
technology as an ancillary recordkeeping mechanism, as described in
further detail below. However, ownership of securities that are
security tokens under the BSTX rules would still be able to be
transferred without regard to the blockchain-based ancillary
recordkeeping functionality (as also described further below).
Notwithstanding this, the Exchange believes that it is appropriate to
describe these securities as ``security tokens'' to distinguish them
from other securities for which there is no related legal and
regulatory structure that is designed to use blockchain technology as
an ancillary recordkeeping mechanism and as a way of indicating the
additional proposed obligations of BSTX Participants trading security
tokens to obtain a wallet address and report end-of-day security token
balances to BSTX.\11\ The legal significance, therefore, of a security
token is that a ``security token'' will be an equity security that is
approved for listing on BSTX, and that trades on the BSTX System, and
for which BSTX Participants are therefore required under BSTX Rule
17020 to obtain a whitelisted wallet address and report certain end-of-
day security token position balance information to BSTX. A security
that is offered by an issuer with the intent of it becoming listed on
BSTX would therefore not become a ``security token'' under the proposed
BSTX Rules unless and until it actually does become listed on BSTX and
trades on the BSTX System. The Exchange believes that the obligations
on a BSTX Participant under the proposal to obtain a wallet address and
to report certain end-of-day security token position balance
information to BSTX are the only legal rights or obligations associated
with security tokens that would differ from how NMS stock is generally
traded by market participants today.\12\
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\10\ The Exchange proposes to define the term ``security token''
to mean a NMS stock, as defined in Rule 600(b)(47) of the Exchange
Act, trading on the BSTX System. References to a ``security'' or
``securities'' in the Rules include security tokens. See proposed
Rule 17000(a)(30).
\11\ See Part II, Sections G and J for further description of
these obligations.
\12\ The Exchange notes that its proposed Rule 17000(a)(30)
defines ``security token'' to mean an ``NMS stock, as defined in
Rule 600(b)(47) of the Exchange Act, trading on the BSTX System.''
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C. Security Tokens Would Be NMS Stocks
The security tokens would qualify as NMS stocks pursuant to
Regulation NMS,\13\ which defines the term ``NMS security'' in relevant
part to mean ``any security or class of securities for which
transaction reports are collected, processed and made available
pursuant to an effective transaction reporting plan . . . .'' \14\ The
Exchange plans to join existing transaction reporting plans, as
discussed in Part VIII below, for the purposes of security token
quotation and transaction reporting.\15\ The term ``NMS stock'' means
``any NMS security other than an option'' \16\ and therefore security
tokens traded on BSTX that
[[Page 33456]]
represent equity securities will be classified as NMS stock.
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\13\ 17 CFR 242.600 through 613.
\14\ 17 CFR 242.600(b)(47).
\15\ 17 CFR 242.601(a)(1). The Rule states in relevant part that
``every national securities exchange shall file [with the SEC] a
transaction reporting plan regarding transactions in listed equity
and Nasdaq securities executed through its facilities . . . .''
\16\ 17 CFR 242.600(b)(47).
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D. BSTX Would Support Trading of Registered Securities
All security tokens traded on BSTX would generally be required to
be registered with the Commission under both Section 12 of the Exchange
Act \17\ and Section 6 of the Securities Act of 1933 (``Securities
Act'').\18\ BSTX would not support trading of security tokens offered
under an exemption from registration for public offerings, with the
exception of certain offerings under Regulation A that meet the
proposed BSTX listing standards.
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\17\ 15 U.S.C. 78l.
\18\ 15 U.S.C. 77f.
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E. Clearance and Settlement of Security Tokens
BSTX would maintain certain rules, as described below, to address
custody, clearance and settlement in connection with security tokens.
All transactions in security tokens would clear and settle in
accordance with the rules, policies and procedures of registered
clearing agencies. Specifically, BSTX anticipates that at the time it
commences operations, security tokens that are listed and traded on
BSTX would be securities that have been made eligible for services by
The Depository Trust Company (``DTC'') and that DTC would serve as the
securities depository \19\ for such security tokens. It is also
expected that confirmed trades in security tokens on BSTX would be
transmitted to National Securities Clearing Corporation (``NSCC'') for
clearing such that NSCC would clear the trades through its systems to
produce settlement obligations that would be due for settlement between
participants at DTC. BSTX believes that this custody, clearance and
settlement structure is the same general structure that exists today
for other exchange traded equity securities. Importantly, for purposes
of NSCC's clearing activities and DTC's settlement activities in
respect of the security tokens, the relevant securities will be cleared
and settled by NSCC and DTC in exactly the same manner as those
activities are performed by NSCC and DTC currently regarding a class of
NMS Stock. This is because the tokenized ancillary recordkeeping
process that will be implemented through the operation of the proposed
BSTX Rules will occur separate and apart from the clearance and
settlement process and the security itself will not exist in tokenized
form. Rather, the security will be an ordinary equity security for
NSCC's and DTC's purposes. The tokenized feature in connection with the
security that will be implemented through the operation of BSTX's Rules
is that there will also be a separate, ancillary recordkeeping process
that will use distributed ledger technology to record BSTX Participant
end-of-day position balance information for the relevant security.
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\19\ 15 U.S.C. 78c(a)(23)(A). Section 3(a)(23)(A) of the
Exchange Act defines the term ``clearing agency'' to include ``any
person, such as a securities depository, who (i) acts as a custodian
of securities in connection with a system for the handling of
securities whereby all securities of a particular class or series of
any issuer deposited within the system are treated as fungible and
may be transferred, loaned, or pledged by bookkeeping entry without
physical delivery of securities certificates, or (ii) otherwise
permits or facilitates the settlement of securities transactions or
the hypothecation or lending of securities without physical delivery
of securities certificates.''
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1. Issuance of Equity Securities Eligible to Become a Security Token
With the exception of certain offerings under Regulation A that
meet the proposed BSTX listing standards, all security tokens traded on
BSTX will have been offered and sold in registered offerings under the
Securities Act, which means that purchasers of the security tokens will
benefit from all of the protections of registration. The Division of
Corporation Finance will need to make a public interest finding in
order to accelerate the effectiveness of the registration statements
for these offerings. Because BSTX is a facility of a national
securities exchange, all security tokens will be registered under
Section 12(b) of the Exchange Act, thereby subjecting all of these
issuers to the reporting regime in Section 13(a) of the Exchange Act.
All offerings of securities that are intended to be listed as
security tokens on BSTX will be conducted in the same general manner in
which offerings of exchange-listed equity securities are conducted
today under the federal securities laws. An issuer will enter into a
firm commitment or best efforts underwriting agreement with a sole
underwriter or underwriting syndicate; the underwriter(s) will market
the securities and distribute them to purchasers; and secondary trading
in the securities (that are intended to trade on BSTX as security
tokens) will thereafter commence on BSTX. The ancillary recordkeeping
function associated with the security token will not commence until the
conclusion of the first day of the security token's secondary trading
on BSTX pursuant to proposed BSTX Rule 17020.\20\
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\20\ Although the smart contract that would be used to carry out
the ancillary recordkeeping function related to the security would
need to be built by or at the direction of the issuer prior to the
commencement of the security's trading on BSTX, the corresponding
smart contract would effectively remain dormant until the ancillary
recordkeeping process contemplated under the proposed BSTX Rules is
activated due to trading on the BSTX System in that security token.
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Issuers on BSTX could include both (1) new issuers who do not
currently have any class of securities registered on a national
securities exchange, and (2) issuers who currently have securities
registered on a national securities exchange and who are seeking
registration of a separate class of equity securities for listing on
BSTX. BSTX does not intend for security tokens listed, or intended to
be listed, on BSTX to be fungible with any other class of securities
from the same issuer. If an issuer sought to list securities on BSTX
that are not a separate class of an issuer's securities, BSTX does not
intend to approve such a class of security for listing on BSTX,
pursuant to BSTX's authority under BSTX Rule 26101. At the commencement
of BSTX's operations, only equity securities would be eligible for
listing as security tokens. This would be addressed by BSTX Rules 26102
(Equity Issues), 26103 (Preferred Security Tokens) and 26105 (Warrant
Security Tokens), which would be part of BSTX's listing rules and would
contemplate that only those specified types of equity securities would
be eligible for listing.
2. Securities Depository Eligibility
BSTX would maintain rules that would promote a structure in which
security tokens would be held in ``street name'' with DTC.\21\ BSTX
Rule 26136 would require that for an equity security to be eligible to
be a security token BSTX must have received a representation from the
issuer that a CUSIP number that identifies the security is included in
a file of eligible issues maintained by a securities depository that is
registered with the SEC as a clearing agency. This is based on rules
that are currently maintained by other equities exchanges.\22\ In
practice, BSTX Rule 26136 requires the
[[Page 33457]]
security token to have a CUSIP number that is included in a file of
eligible securities that is maintained by DTC because the Exchange
believes that DTC currently is the only clearing agency registered with
the SEC that provides securities depository services.\23\
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\21\ The term ``street name'' refers to a securities holding
structure in which DTC, through its nominee Cede & Co., would be the
registered holder of the securities and, in turn, DTC would grant
security entitlements in such securities to relevant accounts of its
participants. Proposed BSTX Rule 26135 would also provide, with
certain exceptions, that securities listed on BSTX must be eligible
for a direct registration program operated by a clearing agency
registered under Section 17A of the Exchange Act. DTC operates the
only such program today, known as the Direct Registration System,
which permits an investor to hold a security as the registered owner
in electronic form on the books of the issuer.
\22\ Proposed BSTX Rule 26136 is based on current NYSE Rule 777.
\23\ See Exchange Act Release No. 78963 (September 28, 2016), 81
FR 70744, 70748 (October 13, 2016) (footnote 46 and the accompanying
text acknowledge that DTC is the only registered clearing agency
that provides securities depository services for the U.S. securities
markets).
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3. Book-Entry Settlement at a Securities Depository
BSTX would also maintain Proposed BSTX Rule 26137 regarding uniform
book-entry settlement. The rule would require each BSTX Participant to
use the facilities of a securities depository for the book-entry
settlement of all transactions in depository eligible securities with
another BSTX Participant or a member of a national securities exchange
that is not BSTX or a member of a national securities association.\24\
Proposed BSTX Rule 26137 is based on the depository eligibility rules
of other equities exchanges and Financial Industry Regulatory Authority
(``FINRA'').\25\ Those rules were first adopted as part of a
coordinated industry effort in 1995 to promote book-entry settlement
for the vast majority of initial public offerings and ``thereby reduce
settlement risk'' in the U.S. national market system.\26\
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\24\ FINRA is currently the only national securities association
registered with the SEC.
\25\ See e.g., FINRA Rule 11310. Book-Entry Settlement and NYSE
Rule 776. Book-Entry Settlement of Transactions.
\26\ These coordinated depository eligibility rules resulted
from proposed listing rules amendments developed by the Legal and
Regulatory Subgroup of the U.S. Working Committee, Group of Thirty
Clearance and Settlement Project. See Securities Exchange Act
Release Nos 35774 (May 26, 1995) (SR-NASD-95-24), 60 FR 28813 (June
2, 1995); 35773 (May 26, 1995), 60 FR 28817 (June 2, 1995) (SR-NYSE-
95-19).
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4. Participation in a Registered Clearing Agency That Uses a Continuous
Net Settlement System
Under proposed BSTX Rule 25140, each BSTX Participant would be
required to either (i) be a member of a registered clearing agency that
uses a continuous net settlement (``CNS'') system, or (ii) clear
transactions executed on BSTX through a member of such a registered
clearing agency. The Exchange believes that today NSCC is the only
registered clearing agency that uses a CNS system to clear equity
securities, and proposed BSTX Rule 25140 further specifies that BSTX
will maintain connectivity and access to the Universal Trade Capture
system of NSCC to transmit confirmed trade details to NSCC regarding
trades executed on BSTX. The proposed rule would also address the
following: (i) A requirement that each security token transaction
executed through BSTX must be executed on a locked-in basis for
automatic clearance and settlement processing; (ii) the circumstances
under which the identity of contra parties to a security token
transaction that is executed through BSTX would be required to remain
anonymous or may be revealed; and (iii) certain circumstances under
which a security token transaction may be cleared through arrangements
with a member of a foreign clearing agency. Proposed BSTX Rule 25140 is
based on a substantially identical rule of the Investor's Exchange, LLC
(``IEX''), which, in turn, is consistent with the rules of other
equities exchanges.\27\
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\27\ See IEX Rule 11.250 (Clearance and Settlement; Anonymity),
which was approved by the Commission in 2016 as part of its approval
of IEX's application for registration as a national securities
exchange. Exchange Act Release No. 78101 (June 17, 2016); 81 FR
41142 (June 23, 2016); see also Cboe BZX Rule 11.14 (Clearance and
Settlement; Anonymity).
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BSTX believes that the operation of its depository eligibility rule
and its book-entry services rule would promote a framework in which
security tokens that would be eligible to be listed and traded on BSTX
would be equity securities that have been made eligible for services by
a registered clearing agency that operates as a securities depository
and that are settled through the facilities of the securities
depository by book-entry. The Exchange believes that because DTC
currently is the only clearing agency registered with the SEC that
provides securities depository services, at the commencement of BSTX's
operations, security tokens would be securities that have been made
eligible for services by DTC, including book-entry settlement services.
5. Settlement Cycle
Proposed BSTX Rule 25100(d) would address settlement cycle
considerations regarding trades in security tokens. Security token
trades that result from orders matched against the electronic order
book of BSTX would be required to clear and settle pursuant to the
rules, policies and procedures of a registered clearing agency.
Additionally, Rule 25100(d) would provide that such security token
transactions occurring through BSTX would settle one business day after
the trade date (i.e., T+1) where that settlement cycle timing is
permitted under the rules, policies and procedures of the relevant
registered clearing agency. This creates a presumption of T+1
settlement for security token trades because, as described below, NSCC
already processes trades for T+1 settlement pursuant to the authority
in its approved rules, policies and procedures. However, market
participants, including BSTX Participants, that are parties to a
security token trade that occurs away from BTSX would have the ability
to agree to a shorter or longer settlement cycle for the settlement of
the security token trade as is permitted by applicable law, including
under the rules, policies and procedures of a relevant registered
clearing agency.
As noted above in connection with the description of proposed BSTX
Rule 25140, BSTX expects at the commencement of its operations that it
would transmit confirmed trade details to NSCC regarding security token
trades that occur on BSTX and that NSCC would be the registered
clearing agency that clears security token trades. BSTX believes that
NSCC already has authority under its rules, policies and procedures to
clear certain trades on a T+1 or T+0 basis, which are shorter
settlement cycles than the longest settlement cycle of T+2 that is
generally permitted under SEC Rule 15c6-1 for a security trade that
involves a broker-dealer.\28\ Furthermore, BSTX understands that NSCC
does already clear trades in accordance with this authority. For
example, based on information provided by a representative of DTCC to
outside counsel for BSTX, BSTX understands that on average for each
business day for the months of November and December 2019, NSCC cleared
over 19,000 trades designated for T+1 settlement and over 2,000 trades
designated for T+0 settlement.\29\ As described above regarding BSTX
Rules 26136 and 26137, all security token trades occurring on BSTX that
are cleared by NSCC, including those for which the T+1 settlement
presumption would apply, would be settled through book-entry settlement
at DTC pursuant to its rules, policies and procedures.
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\28\ 17 CFR 240.15c6-1. Under SEC Rule 15c6-1, with certain
exceptions, a broker-dealer is not permitted to enter a contract for
the purchase or sale of security that provides for payment of funds
and delivery of securities later than the second business day after
the date of the contract unless otherwise expressly agreed to by the
parties at the time of the transaction.
\29\ Mike McClain, Managing Director and General Manager of
Equity Clearing and DTC Settlement Services at DTCC provided this
information to BSTX's outside counsel, Andrew Blake, Partner, Sidley
Austin LLP during a telephone conference on February 13, 2020.
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[[Page 33458]]
In adopting amendments to SEC Rule 15c6-1 in 2017 to shorten the
standard settlement cycle for most broker-dealer transactions in
securities from T+3 to T+2, the Commission stated its belief that the
shorter settlement cycle would have positive effects regarding the
liquidity risks and costs faced by members in a clearing agency, like
NSCC, that performs central counterparty \30\ (``CCP'') services, and
that it would also have positive effects for other market participants.
Specifically, the Commission stated its belief that the resulting
``reduction in the amount of unsettled trades and the period of time
during which the CCP is exposed to risk would reduce the amount of
financial resources that the CCP members may have to provide to support
the CCP's risk management process . . .'' and that ``[t]his reduction
in the potential need for financial resources should, in turn, reduce
the liquidity costs and capital demands clearing broker-dealers face .
. . and allow for improved capital utilization.'' \31\ The Commission
went on to state its belief that shortening the settlement cycle
``would also lead to benefits to other market participants, including
introducing broker-dealers, institutional investors, and retail
investors'' such as ``quicker access to funds and securities following
trade execution'' and ``reduced margin charges and other fees that
clearing broker-dealers may pass down to other market participants[.]''
\32\ The Commission also ``noted that a move to a T+1 standard
settlement cycle could have similar qualitative benefits of market,
credit, and liquidity risk reduction for market participants[.]'' \33\
BSTX agrees with these statements by the Commission and has therefore
proposed BSTX Rule 25100(d) in a form that would promote the benefits
of a T+1 settlement cycle regarding security token trades where T+1
settlement is already permitted pursuant to the rules, policies and
procedures of NSCC and DTC today.
---------------------------------------------------------------------------
\30\ See 17 CFR 240.17Ad-22(a)(2) (defining the term ``central
counterparty'' to mean ``a clearing agency that interposes itself
between the counterparties to securities transactions, acting
functionally as the buyer to every seller and the seller to every
buyer'').
\31\ Exchange Act Release No. 80295 (March 22, 2017), 82 FR
15564, 15570-71 (March 29, 2017).
\32\ Id. at 15571.
\33\ Id. at 15582.
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F. Compatibility With the BSTX Security Token Protocol for BSTX-Listed
Security Tokens to Facilitate Ancillary Recordkeeping
BSTX would maintain listing standards that would enable security
tokens to have an ancillary record of ownership recorded on the
Ethereum blockchain using a protocol standard determined by BSTX (the
``BSTX Security Token Protocol'' or the ``Protocol'').\34\ In this way,
the Ethereum blockchain would serve as a complementary recordkeeping
mechanism to official records of security token ownership maintained by
market participants.
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\34\ While BSTX initially intends to support only the trading of
eligible security tokens that are compatible with the Ethereum
public blockchain, BSTX may support tokens compatible with other
blockchains that support smart contract functionality in the future.
---------------------------------------------------------------------------
1. Background on Blockchain Technology
In general, a blockchain is an open, decentralized ledger that can
maintain digital records of assets and transactions that are accessible
to anyone running the same protocol.\35\ The blockchain's central
function is to encode transitions or changes to the ledger, such as the
movement of an asset from one person to another person. Whenever one
change to the blockchain ledger occurs to record a state transition,
the entire blockchain is immutably changed to reflect the state
transition. The purpose of requiring security tokens to adopt the BSTX
Security Token Protocol is to enable security token ownership to be
recorded on the public Ethereum blockchain as an ancillary
recordkeeping mechanism and to ensure uniformity among security tokens
rather than permitting each security token to have its own unique
specifications that might complicate updates to the blockchain and add
unnecessary complexity.
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\35\ A ``protocol'' for this purpose is a set of rules governing
the format of messages that are exchanged between the participants.
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2. Background on the Ethereum Blockchain
The Ethereum blockchain is an open-source, public blockchain that
operates as a computing platform and operating system that supports
smart contract functionality.\36\ Smart contracts are computer
protocols designed to digitally facilitate, verify, and enforce the
performance of a contract. Ethereum-based smart contracts are executed
on the Ethereum Virtual Machine, which can be thought of as a global
computer network upon which the smart contracts run. Ether is the
digital currency used to pay fees associated with operating smart
contracts (known as ``gas'') on the Ethereum networks. This is because
there are costs involved in performing the computations necessary to
execute a smart contract and to record any state transitions onto the
Ethereum blockchain.\37\ Thus, moving tokens from one address to
another address (i.e., a state transition) requires some amount of
Ether to pay the fee (i.e., ``gas'') associated with recording the
movement of tokens to the Ethereum blockchain. Parties to a transaction
in Ethereum-based smart contracts can determine what those gas costs
are depending on how quickly they would like the transaction to be
reflected on the Ethereum blockchain.
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\36\ See Ethereum White Paper (last updated Aug. 1, 2018)
available at https://github.com/ethereum/wiki/wiki/White-Paper.
\37\ See What Is Gas, MyEtherWallet (2018) available at https://kb.myetherwallet.com/posts/transactions/what-is-gas/.
---------------------------------------------------------------------------
3. Background on Smart Contracts
The term ``smart contract'' is commonly used to describe computer-
coded functions in connection with the Ethereum blockchain. An Ethereum
smart contract is neither ``smart'' nor a legal contract in the
traditional sense. Smart contracts in this context refer to immutable
\38\ computer programs that run deterministically \39\ in the context
of the Ethereum Virtual Machine. Smart contracts operate within a very
limited execution context. They can access their own state, the context
of the transaction that called them, and some information about the
most recent blocks (i.e., the most recent recording of transactions and
other events recorded to the Ethereum blockchain).
---------------------------------------------------------------------------
\38\ Smart contracts are immutable in that, once deployed, the
code of a smart contract cannot change. Unlike with traditional
software, the only way to modify a smart contract is to deploy a new
instance.
\39\ Deterministic in this context means that the outcome of the
execution of a smart contract is the same for everyone who runs it,
given the context of the transaction that initiated its execution.
---------------------------------------------------------------------------
In the context of security tokens, smart contracts generally may
have three components: (i) Functions, (ii) configurations; (iii) and
events.\40\ Functions describe the basic operations of a smart
contract, such as the ability to query a particular address to
determine how many tokens belong to that address.\41\ Configurations
are
[[Page 33459]]
attributes of a smart contract that are typically set at the launch of
a smart contract, such as designating the name of the smart contract
(e.g., as XYZ security token). Events describe the functions of a smart
contract that, when executed, result in a log or record being recorded
to the Ethereum blockchain, such as the transfer of tokens from one
address to another. Not all functions of a smart contract result in a
log or record being recorded to the Ethereum blockchain. Smart
contracts only run if they are called by a transaction.\42\
---------------------------------------------------------------------------
\40\ However, a smart contract need not necessarily have each of
these components. Some smart contracts may simply be used to support
the functioning of other smart contracts and may not itself result
in events being recorded to the Ethereum blockchain.
\41\ An ``address'' in this context refers to a number that is
associated with a particular market participant within the smart
contract that can be updated to reflect changes in ownership of
tokens.
\42\ The term ``transaction'' in this context refer not to an
actual execution or transaction occurring on BSTX or in the
marketplace, but rather to an operation triggering a smart contract
to carry out its specified function, which must ultimately originate
from a human source.
---------------------------------------------------------------------------
Smart contracts can call another smart contract, which can call
another contract, and so on. Smart contracts never run ``on their own''
or ``in the background,'' but rather lie dormant until a transaction
triggers them to carry out a specified operation pursuant to the
protocol on which they operate. All transactions execute in their
entirety or not at all, regardless of how many smart contracts they
call or what those smart contracts do. Only if a transaction
successfully executes in its entirety is there an ``event''
representing a change to the state of the blockchain with respect that
transaction. If an execution of a smart contract's operation fails due
to an error, all of its effects (e.g., events) are rolled back as if
the transaction never ran.
4. Background on Tokens
Tokens historically referred to privately issued, special-purpose
coin-like items (e.g., laundry tokens or arcade game tokens). In the
context of blockchain technology, tokens generally mean blockchain-
based abstractions that can be owned and that represent assets,
currency, or access rights. A security token on the blockchain used for
ancillary recordkeeping of ownership can be thought of as a digital
representation of shareholder equity in a legal entity organized under
the authority of state or federal law and that meet BSTX's listing
standards. Having a security token attributed to a particular address,
however, would not convey ownership of shareholder equity in the issuer
because the official records of ownership would be maintained by
participants at DTC.\43\
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\43\ Rather, a digital representation of a security token
associated with a particular address reflects an ancillary record of
security token ownership based on data provided to BSTX by BSTX
Participants. The records reflected on the Ethereum blockchain
regarding security tokens may not be current to reflect the most
recent transactions in the marketplace and may not reflect ownership
by all market participants.
---------------------------------------------------------------------------
To create a new token on Ethereum, including for purposes of
facilitating ancillary recordkeeping of security token ownership, one
must create a new smart contract. The smart contract would be
configured to detail, among other things, the name of the issuer and
the total supply of the tokens. Smart contracts can be designed to
carry out any event that one wants, but using a set standard or
protocol allows for participants transacting in those smart contracts
to have uniform expectations and functionality with respect to the
tokens.
5. Background on Protocols
A protocol (also sometimes referred to as a ``standard'' or
``protocol standard'') defines the functions, events, configurations,
and other features of a given smart contract. The most common protocol
used with Ethereum is the ERC-20 protocol, which describes the minimum
functions that are necessary to be considered an ERC-20 token.\44\ The
ERC-20 protocol offers basic functionalities to transfer tokens, obtain
account balances, and query the total supply of tokens, among other
features. The BSTX Security Token Protocol is compliant with the ERC-20
protocol but adds additional requirements and functionality, as
described below.
---------------------------------------------------------------------------
\44\ See e.g., Jesus Najera, Understanding ERC20, Coin Central
(Jan. 8, 2018), available at https://coincentral.com/understanding-erc20/; Alfonso de la Rocha, Anatomy of an ERC: An Exhaustive
Survey, Medium (May 7, 2018), available at https://medium.com/coinmonks/anatomy-of-an-erc-an-exhaustive-survey-8bc1a323b541.
---------------------------------------------------------------------------
As noted above, Ether is the digital currency used to pay fees
associated with operating smart contracts (known as ``gas'') on the
Ethereum network. Payment of gas is required to operate smart contracts
because there are costs involved in performing the computations
necessary to execute a smart contract and to record any state
transitions onto the Ethereum blockchain.
There is an important conceptual distinction between ERC-20 tokens,
including security tokens, and Ether itself. Where Ether is transferred
by a transaction that has a recipient address as its destination, token
transfers occur within the specific token contract state and have the
token smart contract as their destination, not the recipient's address.
The token smart contract tracks balances and issues events to the
Ethereum blockchain. In a token transfer,\45\ no transaction is
actually sent to the recipient of the token. Instead, the recipient's
address is added to a map within the token smart contract itself. In
contrast, a transaction sending Ether to an address changes the state
of an address. A transaction transferring a token to an address only
changes the state of the token contract, not the state of the recipient
address. Thus, an address is not really full of tokens; rather it is
the token smart contract that has the addresses and balances associated
with each address in it.
---------------------------------------------------------------------------
\45\ A ``transfer'' in the context of the BSTX Security Token
Protocol regarding a security token refers to a reallocation of the
digital representation of a security token on the Ethereum
blockchain as an ancillary recordkeeping mechanism to reflect
corresponding changes in ownership of the security token.
---------------------------------------------------------------------------
6. BSTX Security Token Protocol
BSTX Rule 26138 requires that a BSTX listed company's security
tokens must comply with the Protocol to trade on BSTX. The purpose of
this requirement is to ensure that all security tokens are governed by
the same set of specifications and controls that allow for ownership of
security tokens to be recorded to the Ethereum blockchain as an
ancillary recordkeeping mechanism.
The Protocol involves three smart contracts. The Asset Smart
Contract is the primary smart contract that contains the balances of
security tokens associated with each address and carries out the
functions necessary to reflect changes in ownership. There are two
ancillary smart contracts that are called by the Asset Smart Contract
in executing transactions. The first of these is the Registry Smart
Contract (``Registry''), which contains the list of permissioned (or
``whitelisted'') addresses, and the second is the Compliance Smart
Contract, which includes a variable list of additional compliance
related rules that the Asset Smart Contract must comply with in
executing a transaction. Each of these three smart contracts are
described in greater detail below:
(1) Asset Smart Contract--The Asset Smart Contract defines and
establishes the security tokens (e.g., the maximum number of security
tokens available for a particular issuance) for purposes of the
Ethereum blockchain ancillary recordkeeping function and records a list
of market participant addresses and the security tokens associated with
each address.
(2) Registry Smart Contract--The Registry Smart Contract (or
``Registry'') defines the permissions available to different types of
market participants to perform certain functions. Under the
[[Page 33460]]
Protocol, there are five different types of market participants
connected with the Registry, each with different abilities and
permissions (as detailed below): \46\ (1) Contract Owner, (2)
Custodian, (3) Broker Dealer, (4) Custodial-Account, and (5) Investor.
The Registry also contains the list of whitelisted addresses to which
security tokens may be sent and additional information associated with
each address (e.g., whether an address has been suspended).
---------------------------------------------------------------------------
\46\ There are additional roles that are not technically part of
the Registry and are instead specific to certain smart contracts.
For example, an ``Issuer'' is an Asset Smart Contract-specific role.
Also, an ``Administrator'' is a Compliance Smart Contract-specific
role that allows such a user to, for example, freeze the transfer of
tokens for purposes of the ancillary recordkeeping function under
certain circumstances and modify or add compliance rules to govern a
security token.
---------------------------------------------------------------------------
(3) Compliance Smart Contract--The Compliance Smart Contract is the
set of rules held in a separate smart contract that a security token
can be configured to abide by to ensure compliance with applicable laws
and regulations (e.g., by restricting a movement of security tokens to
an address that has not been added to the Registry for purposes of the
Ethereum blockchain ancillary recordkeeping mechanism). The Compliance
Smart Contract can be modified to add or remove applicable rules in
light of changes to applicable regulatory requirements.
Each of these three smart contracts work together to facilitate the
ancillary recordkeeping mechanism for Security Tokens using the
Ethereum blockchain. The details of the specific functions,
configurations, and events under the Protocol are set forth in greater
detail in Exhibit 3N [sic].
The Exchange selected the Ethereum blockchain among other possible
blockchains that support smart contracts as the blockchain upon which
security tokens would be built in accordance with the BSTX Security
Token Protocol for ancillary recordkeeping purposes because of, among
other reasons, its widespread use, the public's familiarity with
Ethereum, and its smart contract functionality. Ethereum has maintained
the second largest market capitalization behind Bitcoin among
blockchain-based digital assets for at least two years and is widely
recognized by the public.\47\ Over 200,000 different ERC-20 tokens have
been built on the Ethereum blockchain, demonstrating its wide-spread
use and functionality. The Exchange believes that the Ethereum
blockchain is able to support all of the necessary functions of the
BSTX Security Token Protocol to carry out the security token ancillary
recordkeeping function. The Exchange also believes that using a widely-
known smart contract platform as opposed to a lesser-known smart
contract platform may help issuers become more comfortable with the
ancillary recordkeeping process as well as allow them to more-readily
locate service providers as necessary to assist them in building their
security tokens in accordance with the BSTX Security Token Protocol. As
noted, the Exchange may consider the use of other blockchains
supporting smart contract functionality in the future, subject to
applicable rule filing requirements with the Commission pursuant to
Section 19 of the Exchange Act.\48\
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\47\ The Commission has also publicly recognized Ethereum and
its native currency Ether. See William Hinman, Director, Division of
Corporation Finance, Digital Asset Transactions: When Howey Met Gary
(Plastic) (June 14, 2018) available at https://www.sec.gov/news/speech/speech-hinman-061418.
\48\ 15 U.S.C. 78s.
---------------------------------------------------------------------------
G. Obtaining a Whitelisted Wallet Address
Pursuant to proposed Rule 17020(a), a BSTX Participant must, either
directly or through its carrying firm, establish a wallet address to
which its end-of-day security token balances may be recorded by
contacting BSTX.\49\ A BSTX Participant that is a carrying broker-
dealer for other BSTX Participants would be assigned the wallet address
with the status of a Custodian, which would allow that BSTX Participant
to request wallet addresses on behalf of other BSTX Participants (for
which it serves as the carrying broker-dealer) as either a Custodial
Account or Broker-Dealer wallet address, as described above. A BSTX
Participant that is not a carrying broker-dealer could request a
Broker-Dealer wallet address, a Custodial Account wallet address in
coordination with its carrying firm, and an Investor wallet address on
behalf of a customer that would like its ownership of security tokens
to be reflected at its own address for purposes of the Ethereum
blockchain as an ancillary recordkeeping mechanism.\50\
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\49\ Multiple security token issuances can be attributed to a
BSTX Participant's wallet address. A BSTX Participant would not need
a separate wallet address for each security token issuance that it
trades.
\50\ A BSTX Participant that is a carrying broker-dealer, and
which therefore has a Custodial Account address, could also request
Investor wallet addresses on behalf of customers.
---------------------------------------------------------------------------
Contact information for BSTX for the purpose of establishing a
wallet address will be published on the BSTX website. Proposed BSTX
Rule 17020(a) requires a BSTX Participant to establish a wallet address
by contacting BSTX directly or through its carrying firm acting on its
behalf. BSTX expects that this process (i.e., contacting the Exchange
and establishing a wallet address) would occur contemporaneously with
the application by a market participant to become a BSTX Participant.
However, under proposed BSTX Rule 17020(a), a BSTX Participant would
have up until five business days from the date that the Exchange
approves the application of the BSTX Participant to satisfy the
obligation to obtain a wallet address. In the event that a BSTX
Participant has not obtained a wallet address prior to the Exchange's
approval of its application, the BSTX Participant would become subject
to the end-of-day security token balance reporting requirements in
proposed BSTX Rules 17020(b) and (c). However, because the BSTX
Participant would not yet have a wallet address to which the position
balance information could be attributed by a Wallet Manager, any
security token position balances of such BSTX Participant would be
attributed to the omnibus wallet address for the security token (as
described below) until the time the BSTX Participant obtains a wallet
address. For the avoidance of doubt, having end-of-day position balance
information related to a security token attributed to a particular
wallet address would not convey ownership of shareholder equity in the
issuer to the person or entity with whom such wallet address is
associated. BSTX-listed security tokens will be cleared and settled in
the same manner as other NMS stocks through the facilities of a
registered clearing agency, and the official records of ownership would
be maintained as discussed above in Part II.E. Therefore, any lack of a
wallet address would not affect the official records of ownership of
the BSTX-listed security token.
Once a BSTX Participant has been assigned a particular wallet
address, the only further obligation of that BSTX Participant is to
report its end-of-day security token position balances to BSTX, as
described below. Non-BSTX Participants that may trade security tokens
are not subject to the requirement that they obtain a wallet address
prior to trading a security token or to the end-of-day security token
balance position reporting requirements. The Exchange will not accept
voluntary reports of end-of-day security token balances from non-BSTX
Participants, but may consider doing so in the future, subject to any
applicable or necessary rule filing requirements with the Commission.
The Exchange believes that the proposed requirement in Rule
[[Page 33461]]
17020(a) to obtain a wallet address is consistent with the Exchange Act
and Section 6(b)(5) \51\ in particular because it would help foster
cooperation and coordination with persons engaged in regulating and
facilitating transactions in security tokens by setting forth a process
through which BSTX Participants may obtain a wallet address to which
their end-of-day security token balances may be recorded to the
Ethereum blockchain as an ancillary recordkeeping mechanism. The
Exchange believes that the proposed requirement is similar to obtaining
a market participant identifier (``MPID'') in that it establishes an
identifier that can be attributed to a particular BSTX Participant for
reporting purposes. The proposed requirement to obtain a wallet address
is the same for all BSTX Participants, and is therefore not unfairly
discriminatory, and the Exchange does not propose to charge a fee for
obtaining a wallet address.
---------------------------------------------------------------------------
\51\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
H. Wallet Manager 52
---------------------------------------------------------------------------
\52\ A ``Wallet Manager'' is defined as a party approved by BSTX
to operate software compatible with the BSTX Protocol. See proposed
Rule 17000(a)(31). A Wallet Manager would be a third-party service
provider for the Exchange that will help facilitate establishing
wallet addresses for BSTX Participants and facilitate updates to the
Ethereum blockchain as an ancillary recordkeeping mechanism
regarding changes in ownership resulting from trading. Approved
Wallet Managers will be listed on the Exchange's website.
---------------------------------------------------------------------------
As described further below, following the end of a trading day,
BSTX Participants (or their carrying firms) will be required to send
security token position balance information to BSTX. Based on the
information that BSTX receives, BSTX will deliver that information to
one or more Wallet Managers who will be responsible for updates to the
security token position balances on the Ethereum blockchain by
allocating balances among the wallet addresses of BSTX Participants and
the omnibus wallet address.
The Exchange would enter into a contractual arrangement with a
Wallet Manager as a service provider to the Exchange performing the
function described above. The Exchange does not believe that performing
the ancillary recordkeeping process would make a Wallet Manager a
facility of the Exchange because the Wallet Manager's functions do not
meet the definition of ``facility'' under the Exchange Act. Section
3(a)(2) of the Exchange Act provides that ``the term `facility' when
used with respect to an exchange includes its premises, tangible or
intangible property whether on the premises or not, any right to the
use of such premises or property or any service thereof for the purpose
of effecting or reporting a transaction on an exchange (including,
among other things, any system of communication to or from the
exchange, by ticker or otherwise, maintained by or with the consent of
the exchange), and any right of the exchange to the use of any property
or service.'' \53\ A Wallet Manager is neither property of the Exchange
nor does a Wallet Manager provide services for effecting or reporting a
transaction taking place on the Exchange. Rather, a Wallet Manager
performs the function of updating end-of-day security token position
balance information provided by the Exchange as part of an ancillary
recordkeeping mechanism. The Ethereum blockchain would not reflect any
particular transaction(s) that occurred in the marketplace but would
instead record allocations of end-of-day security token position
balances--which may result from a variety of activities in the
marketplace for the relevant security tokens such as trading activity,
lending activity, and free-of-payment transfers between DTC accounts.
The definition of ``facility'' in Section 3(a) of the Exchange Act is
instead focused on ``effecting or reporting a transaction'' as part of
the operations of an exchange, namely the bringing together of orders
for securities of multiple buyers and sellers using non-discretionary
methods under which such orders interact with each other, and the
buyers and sellers entering such orders agree to the terms of a
trade.\54\ Thus, systems of communication to the Exchange used to
effect trades or to receive market data would likely be considered
facilities of the Exchange, but an end-of-day ancillary recordkeeping
reporting process that does not provide any real or near-time
information regarding transactions in the market should not.\55\ The
Commission ``long has recognized that there must be some practical
limitations on entities encompassed within the broad definition of the
term `exchange.' '' \56\ The ancillary recordkeeping process would have
no impact on, or perform a function related to, the bringing together
of buyers and sellers' orders, clearance, settlement, market data or
routing functions of the exchange (i.e., all of these functions can
continue upon any suspension of the ancillary recordkeeping process),
and therefore cannot reasonably be considered a ``facility'' of the
exchange. The Exchange intends to enter into a contractual arrangement
with at least one Wallet Manager.\57\ The Exchange intends to evaluate
each potential Wallet Manager's capability to receive information from
BSTX related to BSTX Participants' end-of-day security token balances
along with its ability to update the Ethereum blockchain upon receipt
of such information. Further, the Exchange intends to perform due
diligence on potential Wallet Managers, including but not limited to
checking the list produced by the U.S. Treasury Department of persons
with whom U.S. citizens are prohibited from doing business (``OFAC
List''). Finally, the Exchange intends to require each Wallet Manager
in its service agreement with the Wallet Manager to agree to comply
with all applicable securities laws. The Exchange believes that using
the criteria listed above for evaluating potential Wallet Managers may
prevent fraudulent and manipulative acts and practices, consistent with
Section 6(b)(5) of the Exchange Act.\58\ The Exchange believes that
requiring every Wallet Manager to act in a manner consistent with
applicable securities laws and not be on the OFAC List would help
ensure that persons reputed to have committed illegal acts and who
violate securities laws, including any such laws meant to prevent fraud
and market manipulation, will not operate as Wallet Managers.
---------------------------------------------------------------------------
\53\ 15 U.S.C. 78c(a)(2).
\54\ 17 CFR 240.3b-16.
\55\ The Commission has not defined the term ``facility.'' See
Exchange Act Release No. 26708 (Apr. 11, 1989), 54 FR 15429 (Apr.
18, 1989) (noting that the term ``facility'' has not changed since
it was originally adopted and that no hearing testimony referred to
it because ``the Committee felt that the definition was `self-
explanatory' '').
\56\ Id.
\57\ The Exchange expects that it will initially operate with
one Wallet Manager, but there is nothing to preclude the use of
another Wallet Manager provided the prospective Wallet Manager is
capable of operating software compatible with the BSTX Security
Token Protocol. The Exchange expects that tZERO would operate as the
initial Wallet Manager. BOX Exchange LLC, the self-regulatory
organization of which BSTX is a facility, neither controls, directly
or indirectly, nor is under common control with tZERO. The voting
class of equity of the BSTX facility is 50% owned by tZERO and BOX
Digital Markets, which is 100% owned by BOX Holdings Group LLC. BOX
Exchange LLC does not have direct or indirect ownership interest in
BOX Holdings LLC or its subsidiaries. As a result, because BOX
Exchange LLC does not exercise control over tZERO or its affiliates,
tZERO would not constitute ``property'' of the Exchange for purposes
of determining whether it is a facility. In any case, it is the
functions of the particular entity that should matter for purposes
of determining whether an entity or function is a facility of an
exchange rather than whether an entity is affiliated or not with an
exchange. See e.g., Exchange Act Release No. 54538 (Sept. 28, 2006),
71 FR 59184 (Oct. 6, 2006) (order approving PHLX's new equity
trading system and operation of optional outbound router as a
facility of PHLX, where PHLX had no ownership interest in the third
party operator).
\58\ 15 U.S.C. 78f(b)(5).
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[[Page 33462]]
I. Coordination Between BSTX, Registered Clearing Agencies, and Wallet
Managers
Upon the occurrence of a transaction on BSTX due to the completion
of its order matching process,\59\ BSTX would generate an execution
report, and it would deliver drop copies to its own front-end systems
to update the BSTX Participants and to NSCC.\60\ Where a BSTX
transaction creates a settlement obligation to transfer registered
ownership of a security token, clearance and settlement would be
performed in accordance with the rules, policies and procedures of a
registered clearing agency as described in Part II.E. above. The Wallet
Manager would be provided with end-of-day position balance information
of BSTX Participants necessary to update the Ethereum blockchain
through the end of day reporting mechanism discussed below.
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\59\ Order matching would occur through a price-time priority
model, as discussed in greater detail below.
\60\ The last sale transaction data would also be publicly
disseminated pursuant to the transaction reporting plan, which would
occur before delivery of drop copies to these parties.
---------------------------------------------------------------------------
J. Reporting End-of-Day Security Token Balances To Facilitate Ancillary
Recordkeeping
To update the Ethereum blockchain to reflect ownership of security
tokens as an ancillary recordkeeping mechanism, the Exchange proposes
to require that each BSTX Participant, either directly or through its
carrying firm, report each business day to BSTX certain end-of-day
security token balances in a manner and form acceptable to BSTX.\61\ A
BSTX Participant that is a participant at DTC would be required to
report to BSTX the total number of security tokens for each class of
security token that is credited to each DTC account of the BSTX
Participant.\62\ For a BSTX Participant that is not a DTC participant,
the BSTX Participant would be required to report the total number of
security tokens for each class of security token that are credited to
the BSTX Participant by its carrying firm.\63\ Pursuant to proposed
Rule 17020(d), upon receipt of the end-of-day security token balances
from BSTX Participants, the Exchange would provide such information to
the Wallet Manager(s) to update the Ethereum blockchain as an ancillary
recordkeeping mechanism to reflect updates in security token
balances.\64\ Proposed Rule 17020(d) would also provide that unreported
security token balances will be determined and allocated to an omnibus
wallet address for each security token as described further below. The
Exchange would determine the number of security tokens to be allocated
to the omnibus wallet address by the Wallet Manager(s) by subtracting
the sum of the security token position balances reported for a
particular security token by BSTX Participants from the total
outstanding number of that particular security token. BSTX expects that
each security token would have a dedicated omnibus wallet address that
the Wallet Manager(s) would use to allocate the resulting balance to
that address.
---------------------------------------------------------------------------
\61\ See Proposed Rule 17020(b).
\62\ See Proposed Rule 17020(b)(1). As described above in Part
II.E., BSTX would maintain rules that would promote a structure in
which security tokens would be held in ``street name'' with DTC.
\63\ See Proposed Rule 17020(b)(2).
\64\ Notably, because the Ethereum blockchain is updated each
day using the end-of-day security token balance reports, and is, in
any case, only functioning at this time as an ancillary
recordkeeping function, concerns regarding a loss of private keys or
disruption to the Ethereum blockchain are fully mitigated. For
example, assume a BSTX Participant owns 100 security tokens of XYZ
at the end of Day 1 and, as a result of trading on Day 2, ends Day 2
with a balance of 200 security tokens of XYZ. If the BSTX
Participant's wallet address were somehow compromised during the
trading day on Day 2 and the 100 security tokens were moved to
another address (which could only be moved to another whitelisted
address), this would not substantively impact the functioning of the
blockchain as an ancillary recordkeeping tool. At the end of trading
on Day 2, the BSTX Participant would report its ownership of 200
security tokens of XYZ to BSTX, which would then update the Ethereum
blockchain to reflect this end of day balance.
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The Exchange proposes that these end-of-day security token balance
reports would be required each business day when DTC is also open for
business, but after such time as DTC has completed its end-of-day
settlement process.\65\ The Exchange believes that once DTC has
completed its end-of-day settlement process, DTC participants would be
able to determine the number of security tokens credited to their DTC
account(s) and to other market participants that settle through that
DTC participant. Thereafter, BSTX Participants, or their carrying
firms, would be able to obtain their security token balance information
and report it to BSTX by the end of the day. The Exchange understands
that DTC typically makes end-of-day security position reports available
to DTC participants at approximately 7:30 p.m. Eastern time. Therefore,
the Exchange will notify BSTX Participants via Regulatory Circular of
the time after 7:30 p.m. Eastern time by which end-of-day security
position balance reports will be required to be provided to BSTX
pursuant to BSTX Rule 17020(c). The Exchange will also notify BSTX
Participants via Regulatory Circular of the time by which it will
provide security token position balance information to the Wallet
Manager(s) so that the Wallet Manager(s) will have sufficient time to
carry out their contractual obligation to update the Ethereum
blockchain as an ancillary recordkeeping mechanism prior to the
commencement of trading on BSTX on the next trading day.
---------------------------------------------------------------------------
\65\ See Proposed Rule 17020(c).
---------------------------------------------------------------------------
The Exchange acknowledges that, in certain circumstances, a BSTX
Participant subject to the requirements of proposed Rule 17020 could
fail to report end-of-day security token balances to BSTX in a timely
manner, inaccurately report such balances, or fail to obtain a wallet
address prior to acquiring a position in a security token. Such
failures would impair the ability of the Exchange to report complete
end-of-day security token balance information regarding a security
token to the Wallet Manager(s) who will be responsible for using that
information, in turn, to update the security token balance information
that is reflected on the Ethereum blockchain. The Exchange notes that
BSTX Participants would be required to comply with applicable Exchange
Rules, including the requirement to report their end-of-day security
token balances, and may be subject to disciplinary action for failing
to comply with applicable rules pursuant to proposed Rule Series 24000
(Discipline and Summary Suspension).
As noted above, to account for instances in which a BSTX
Participant fails to report or to accurately report its end-of-day
security token balance pursuant to proposed Rule 17020, as well as to
account for the positions of security token holders who are not BSTX
Participants and therefore not subject to the end-of-day security token
balance reporting requirement, the Exchange proposes to use an omnibus
wallet address to account for such security tokens in the ancillary
records that would be published on the Ethereum blockchain.
Specifically, the Exchange would know the total number of security
tokens outstanding and would provide information to the Wallet
Manager(s) to allow the Wallet Manager(s) to attribute the unreported
security token balance for a given security token to an omnibus wallet
address for each security token. For example, assume that on Day 1
there are 1,000 security tokens for company XYZ outstanding, 800 are
held at DTC in accounts for the benefit of eight BSTX Participants and
200 are otherwise held at DTC. Assume further that BSTX receives timely
and accurate end-of-day
[[Page 33463]]
XYZ security token balance reports from all eight BSTX Participants in
respect of 800 XYZ security tokens. At the end of Day 1 as part of the
end-of-day reporting process, the Exchange would provide information to
the Wallet Manager(s) allowing the Wallet Manager(s) to allocate the
800 XYZ security tokens among the BSTX Participants consistent with
their end-of-day security token balance reports and to allocate the
remaining balance of 200 security tokens to the omnibus wallet address.
In this same example, assume a BSTX Participant who holds 100 XYZ
security tokens failed to report its XYZ security token balance to
BSTX. In this case, the Exchange would provide information to the
Wallet Manager(s) allowing the Wallet Manager(s) to allocate 300 XYZ
security tokens to the omnibus wallet address for XYZ security token.
The omnibus wallet address in this example would thus reflect the sum
of XYZ security tokens held by non-BSTX Participants who are not
subject to the end-of-day security token balance reporting requirement
as well as any missing end-of-day security token balance reports among
BSTX Participants.\66\ In all cases, the security token balances
displayed on the Ethereum blockchain would reflect end-of-day security
token balances reported to BSTX pursuant to Rule 17020 and an omnibus
wallet address for any type of security token for which the sum of the
reported positions is less than the number of security tokens known by
the Exchange to be issued and outstanding. In this way, it is possible
that the end-of-day balances published on the Ethereum blockchain may
not reflect the precise distribution of a security token among holders
of the security token, even among BSTX Participants.\67\ The Ethereum
blockchain could also reflect information that is not accurate to the
extent that BSTX Participants inaccurately report end-of-day security
token balances to BSTX. There could conceivably be situations where the
number of reported security tokens exceeds the number of outstanding
security tokens of a particular issuance (e.g., if security token XYZ
were held entirely by BSTX Participants and one BSTX Participant over-
reports). There could also be situations in which the Exchange is
unable to communicate end-of-day security token balances to the Wallet
Manager(s) or the Wallet Manager(s) is/are unable to update the
blockchain. Additionally, it is also possible that there could be a
disruption to the website through which security token balances may be
observed (i.e., Etherscan.io, discussed below), to the Ethereum
blockchain itself that prevents the updating of end-of-day security
token balances as an ancillary recordkeeping mechanism, or potentially
to the architecture or functioning of a particular security token.\68\
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\66\ The omnibus wallet address for each security token could
also have greater or fewer security tokens as a result of a
misreport by a BSTX Participant. In the case of an under-report by a
BSTX Participant (e.g., owns 100 of XYZ security tokens, but reports
only 90), the omnibus address for XYZ would have an additional 10
XYZ security tokens allocated to it. In the case of an over-report
(e.g., owns 100 of XYZ security tokens, but reports 110), the
omnibus address for XYZ may have 10 additional XYZ security tokens
allocated to it.
\67\ The Exchange notes, however, that even in such a case, the
total number of shares of the security token outstanding should
still be reflected on the blockchain due to unreported balances
being attributed to the omnibus wallet address. It is also possible
the omnibus wallet address could display the entire outstanding
balance of a security token to the extent only non-BSTX Participants
held the entire outstanding balance of a particular security token.
\68\ This could potentially occur if, for example, the Ethereum
Virtual Machine were to suffer a ``51% Attack'' whereby an
individual or group acting together gain 51% or more of the
computing power, essentially giving the attackers control over the
Ethereum blockchain and the ability to disrupt or modify
transactions on the Ethereum blockchain. The Exchange believes that
this possibility is remote, but the Exchange will nonetheless
monitor for such possibilities either directly or by using a vendor,
which may include Wallet Managers that agree to perform this
function and promptly alert the Exchange to any compromise of the
Ethereum blockchain or other type of disruption that might impact
the end-of-day security token balance reporting process as an
ancillary recordkeeping mechanism (e.g., inability to access
Etherscan.io).
---------------------------------------------------------------------------
To account for these types of situations, proposed Rule 17020(e)
provides that the Exchange may suspend the requirements in paragraphs
17020(a) through (d) regarding any BSTX Participant and/or regarding
one or more security tokens, as applicable, in its discretion and in
any such case the Exchange will provide prompt notice thereof and the
reason(s) therefore to BSTX Participants.\69\ The Exchange will notify
the Commission within two hours of its determination to make any such
suspension and the suspension may continue in effect for no more than
thirty calendar days from the date the determination is made unless the
Exchange has submitted a proposed rule change with the Commission
seeking approval of such suspension, in which case the suspension may
continue in effect until the Commission approves or disapproves the
proposed rule change.\70\
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\69\ The particular details included in such notice to BSTX
Participants will vary based on the facts and circumstances giving
rise to the suspension, but the Exchange expects that such notice
would describe: (i) The impacted security token(s); (ii) the nature
of the disruption; (iii) the anticipated length of the suspension;
and (iv) any changes to BSTX Participants' obligations to report
end-of-day security token balances.
\70\ See proposed Rule 17020(e). The Exchange believes that
proposed Rule 17020(e) may foster coordination with persons
processing information with respect to securities and is not
designed to permit unfair discrimination because such provision will
allow the Exchange to suspend certain Rule requirements in events
where there may be difficulty coordinating or sharing pertinent
information with BSTX Participants and/or Wallet Manager(s).
Further, Rule 17020(e) is designed to apply to all market
participants equally and to provide notice to affected market
participants and regulators of BSTX, in order to allow such
individuals and entities to coordinate with the Exchange and react
to potential issues as deemed necessary.
---------------------------------------------------------------------------
In all such cases involving these types of disruptions relating to
the end-of-day security token balance reporting process, there would be
no impact on the ability to trade, clear, or settle security token
transactions in the ordinary course.\71\ This is because the end-of-day
security token balance reporting is solely as an ancillary record-
keeping mechanism and because the actual trading, clearance, and
settlement of security tokens would occur in the same manner as other
NMS stock.
---------------------------------------------------------------------------
\71\ The Exchange acknowledges, of course, that certain issues
such as a widespread power outage that prevents the Exchange from
being able to transmit information to the Wallet Manager(s) could
also result in a disruption to trading on BSTX and potentially the
declaration of a halt in trading of the security token by the
Exchange.
---------------------------------------------------------------------------
The Exchange would set forth via Regulatory Circular the precise
manner in which security tokens should be reported. In general, the
report would simply require certain identifying information regarding
the BSTX Participant (e.g., name, carrying firm, MPID) and a list of
the end-of-day security token position balances of the BSTX
Participant.\72\
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\72\ Pursuant to the BSTX Listing Rules, BSTX will allow listing
of three types of security tokens: Equity security tokens, preferred
security tokens, and warrant security tokens. These three types of
security tokens will have similar end-of-day reporting processes;
each BSTX Participant will be required to provide end-of-day
security token position balance information to BSTX related to each
security token issuance based on such BSTX Participant's DTC account
balance. The BSTX Listing Rules also discuss paired security tokens,
which are security tokens that may be transferred and traded only in
combination with one another as a single economic unit. For paired
security tokens, BSTX expects that BSTX Participants, when
submitting position balance information to BSTX, will specify the
end-of-day balances for each constituent security token that
comprises a paired security token.
---------------------------------------------------------------------------
As a result of this process, the Ethereum blockchain would in the
ordinary course reflect for each security token the end-of-day balance
associated with each BSTX Participant's wallet address. Wallet
addresses are essentially just a string of numbers and characters, and
it would not be made public which
[[Page 33464]]
BSTX Participant is associated with which wallet address or which
address is the omnibus wallet address.\73\ An observer of security
token balances associated with a particular address would not be able
to determine whether a particular address represented, for example, a
carrying firm reporting end-of-day balances on behalf of multiple BSTX
Participants, an individual BSTX Participant, or the omnibus wallet
address. Neither could an observer determine which underlying
customer(s) of a BSTX Participant associated with a particular wallet
address held the security tokens or whether the BSTX Participant owned
the security tokens proprietarily. In addition, an observer of the
security token balances would not be able to tell whether a particular
wallet address was long or short the shares.\74\ For these reasons, the
Exchange believes that the security token balance information that
would be publicly available on the Ethereum blockchain would be
sufficiently anonymous to address privacy concerns related to such
information. Security token balance information for the Ethereum
blockchain is available at Etherscan.io (``Etherscan''). From
Etherscan.io, an observer would be able to search for the name of the
particular security token and see the holders of tokens and the
associated quantity, as well as other information (e.g., transfers made
as a result of the Wallet Manager(s) reallocation process).\75\
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\73\ The Wallet Manager(s) would have information regarding
security token balance information associated with a particular BSTX
Participant. However, as noted in Part II.H, a condition of serving
as a Wallet Manager would include, among other things, a
representation to comply with the federal securities laws, including
trading on the basis of material non-public information.
\74\ This is because the end-of-day ancillary recordkeeping
process captures only end-of-day balances as reported by DTC to BSTX
Participants or their carrying firms. Thus, if a BSTX Participant
borrowed security tokens and the borrowed security tokens were moved
to its DTC account (or the DTC account of its carrying firm on its
behalf), the borrowed security tokens would appear to be a long
position in the security token, when in fact the BSTX Participant
was taking a short position.
\75\ This process can be done presently with ERC-20 tokens or
other digital assets built on Ethereum.
---------------------------------------------------------------------------
The Exchange does not believe that the ancillary records of
security token balance information published on the Ethereum blockchain
would be likely to cause investor confusion because there is no similar
source of information with which an observer of the blockchain data
could be confused. That is, the resting position balances related to
security token ownership of BSTX Participants and other market
participants are not available through another medium (e.g., such as by
DTC making such information available) in a manner that could lead an
investor to be confused as to whether the Ethereum blockchain or some
other source of security token balance information is accurate.
Moreover, security token position balance information as recorded on
the Ethereum blockchain will not reflect legal ownership of security
tokens and the identities of BSTX Participants corresponding to each
wallet address (as well as the omnibus wallet address) would not be
made public. The Exchange believes that the proposed end-of-day
security token balance reporting requirement is consistent with the
Exchange Act, and Section 6(b)(5) \76\ in particular, because it is
designed to foster cooperation and coordination with persons engaged in
regulating, clearing, settling, and processing information with respect
to transactions in security tokens and would not unfairly discriminate
among BSTX Participants, all of whom are subject to the same reporting
requirement. The purpose of the reporting obligation is to allow the
Exchange to receive information from BSTX Participants regarding end-
of-day balances in security tokens so that the Exchange can provide
that information to the Wallet Manager(s) and the Wallet Manager(s)
can, in turn, use the information to update the Ethereum blockchain as
an ancillary recordkeeping mechanism reflecting changes in security
token ownership (i.e., the recording of end-of-day balance
information). Without this information, all of the outstanding balances
regarding a security token would be attributed by the Wallet Manager(s)
to the omnibus wallet address rather than allocated to multiple wallet
addresses belonging to corresponding BSTX Participants. Accordingly, to
the extent that BTSX Participants have end-of-day balances in security
tokens, the allocation of the security token balances to their
respective wallet addresses by the Wallet Manager(s) will reflect a
relatively more robust use of the functionality of the smart contracts
than if the entire outstanding balance of a security token is
attributed to the omnibus wallet address. Promoting this more robust
use of the functionality of the smart contracts and their ability to
allocate and re-allocate security token balances across multiple wallet
addresses will enhance the ability of market participants, including
the Exchange, to observe and evaluate the capabilities of blockchain
technology as an ancillary recordkeeping mechanism. The Exchange notes
that under the existing authority of other equity exchanges, the
exchange is able to request that exchange members/participants furnish
to the exchange records pertaining to transactions executed on or
through the exchange in a time and manner required by such
exchange.\77\ Accordingly, BSTX believes that the proposed end-of-day
security token balance reporting requirement would be consistent with
authority that the Commission has already approved regarding
furnishment of records by members of exchanges.
---------------------------------------------------------------------------
\76\ 15 U.S.C. 78f(b)(5).
\77\ See e.g., BOX Rule 10000(a) and (b), Cboe BZX Rule 4.2, and
IEX Rule 4.540. Broker-dealers are also subject to daily or real-
time reporting obligations in a variety of other contexts. For
example, pursuant to the FINRA Rule 7000 Series. See e.g., FINRA
Rule 7230A(b) (noting that ``Participants shall transmit trade
reports to the System for transactions in Reportable Securities as
soon as practicable but no later than 10 seconds after execution . .
.''). Trades in municipal securities are generally required within
15 minutes of the time of trade. See MSRB Rule G-14(a)(ii).
---------------------------------------------------------------------------
The Exchange recognizes that there are limitations in what the
Ethereum blockchain will reflect with regard to end-of-day security
token balances as an ancillary recordkeeping mechanism given that all
non-BSTX Participants' balances will be aggregated and reflected in an
omnibus wallet address for each security token.\78\ In addition, the
end-of-day security token balances may be inaccurate or unavailable
such as when a BSTX Participant misreports its balance or under
circumstances in which BSTX is unable to send the balances to the
Wallet Manager or the Wallet Manager is unable to update the Ethereum
blockchain, as discussed above. For these reasons, among others, the
Exchange believes that initially using blockchain technology as an
ancillary recordkeeping mechanism pursuant to which the security tokens
represented on the blockchain would not convey legal ownership is the
appropriate way to explore the potential benefits of blockchain
technology consistent with the protection of investors and the public
interest.\79\ In
[[Page 33465]]
the event of any disruption to the blockchain, the architecture of the
security token, or to the end-of-day security token balance reporting
process, there would be no impact on the ability of market participants
to trade security tokens or current balances of security tokens
actually held by each market participant through the facilities of DTC,
which the Exchange believes furthers the protection of investors and
the public interest, consistent with Section 6(b)(5) of the Exchange
Act.\80\ Moreover, the Exchange believes that the public has an
interest in exploring the use of new technology, such as blockchain
technology, and that such technology may be able to help perfect the
mechanism of a free and open market and a national market system,
consistent with Section 6(b)(5) of the Exchange Act.\81\ Finally, the
Exchange believes that use of anonymized wallet addresses to track end-
of-day security token balances may prevent fraudulent and manipulative
acts and practices, consistent with Section 6(b)(5) of the Exchange
Act,\82\ because obscuring the identities of the wallet address owners
may make it difficult to misuse any private information associated with
these wallet addresses. The Exchange believes that the proposal is
reasonably designed to introduce blockchain technology in a gradual way
and in coordination and cooperation with the industry, the Commission,
and the existing regulatory framework.
---------------------------------------------------------------------------
\78\ The Exchange does not believe that imposing the end-of-day
security token reporting requirement on BSTX Participants is
unfairly discriminatory or burdens competition because all market
participants are free to choose whether to become a BSTX Participant
or not and there is no limitation imposed by the Exchange on the
ability to trade security tokens on other markets. Market
participants that voluntarily choose to become BSTX Participants
must comply with the rules of the Exchange, but they remain free to
become a member of another exchange that supports trading of
security tokens or to purchase the security tokens OTC. The Exchange
further notes that it believes the end-of-day security token balance
reporting process would not impose a substantial burden on BSTX
Participants, because it would not require significant resources or
time.
\79\ 15 U.S.C. 78f(b)(5).
\80\ Id.
\81\ Id.
\82\ Id.
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K. Trading Security Tokens on Other National Securities Exchanges
Security tokens would be eligible for trading on other national
securities exchanges that extend unlisted trading privileges (``UTP'')
to them. As described above in Part II.E, security tokens would be held
in ``street name'' at DTC, have a CUSIP number, and would clear and
settle through the facilities of a clearing agency registered with the
SEC (i.e., NSCC and DTC respectively). As a result, security tokens
would be able to trade on other exchanges and OTC in the same manner as
other NMS stock. Accordingly, other exchanges would be able to extend
unlisted trading privileges to security tokens in accordance with
Commission rules. The end-of-day security token position balance
reporting by BSTX Participants and the publication of such balance
information on the blockchain does not impact the ability of security
tokens to trade on other exchanges or OTC.
The Exchange proposes to include certain rules that contemplate the
trading of security tokens that may be listed on other national
securities exchanges.\83\ Since there are currently no other national
securities exchanges trading security tokens, these rules would be
implemented in anticipation of other exchanges eventually listing and
trading their own security tokens. BSTX recognizes that another
exchange trading security tokens, or the equivalent thereof, may
require BSTX to adopt certain rules specific to such other exchange in
order to extend unlisted trading privileges to the other exchange's
security tokens consistent with Rule 12f-5.\84\
---------------------------------------------------------------------------
\83\ See e.g., proposed Rule 25040(e).
\84\ 17 CFR 240.12f-5.
---------------------------------------------------------------------------
L. Benefits of a Security Token
As described above, the proposed BSTX Rules contemplate the use of
smart contract functionality to record end-of-day security token
position balance information to the Ethereum blockchain as an ancillary
recordkeeping mechanism. The Exchange's proposal thereby represents an
ancillary pairing of blockchain technology with the existing equities
market infrastructure, in a manner consistent with Section 6(b)(5) and
other relevant provisions of the Exchange Act, as described herein. The
Commission has stated that it is ``mindful of the benefits of
increasing use of new technologies for investors and the markets, and
has encouraged experimentation and innovation . . .'' \85\ stating
further that ``[i]nformation and communications technologies are
critical to healthy and efficient primary and secondary markets.'' \86\
Regarding the judgment of whether the benefits of certain technologies
are meritorious, the Commission has explained its view that ``[t]he
market will ultimately prove the worth of technology--whether the
benefits to the industry and its investors of developing and using new
services are greater than the associated costs.'' \87\ Consistent with
these statements, the Exchange believes that promoting use of the
functionality of smart contracts and their ability to allocate and re-
allocate security token balances across multiple addresses in
connection with end-of-day security token position balance information
of BSTX Participants will allow market participants to observe and
increase their familiarity with the capabilities and potential benefits
of blockchain technology in a context that parallels current equity
market infrastructure and thereby advance and protect the public's
interest in the use and development of new data processing techniques
that may create opportunities for more efficient, effective and safe
securities markets.\88\ As noted, because the blockchain and security
token balances recorded on the Ethereum blockchain do not reflect legal
ownership of the actual securities of BSTX-listed issuers, any
disruption to the Ethereum blockchain, the security token architecture,
or the end-of-day reporting process would have no impact on the ability
of security tokens to trade on BSTX or otherwise, which the Exchange
believes furthers the protection of investors and the public interest,
consistent with Section 6(b)(5) of the Exchange Act.\89\
---------------------------------------------------------------------------
\85\ Securities and Exchange Commission, The Impact of Recent
Technological Advances on the Securities Markets (Sep. 1997),
available at: https://www.sec.gov/news/studies/techrp97.htm.
\86\ Id.
\87\ Id.
\88\ Report of the Senate Committee on Banking, Housing & Urban
Affairs, S. Rep. No. 94-75, at 8 (1975) (expressing Congress'
finding that new data processing and communications systems create
the opportunity for more efficient and effective markets). While the
Exchange believes that its proposal represents an introductory step
in pairing the benefits of blockchain technology with the current
equity market infrastructure, other market participants and FINRA
have recognized additional potential benefits to blockchain
technology in various applications related to the securities
markets. FINRA has stated ``[o]ne of the proposed benefits of
[blockchain technology] is the ability to offer a timestamped,
sequential, audit trail of transaction records. This may provide
regulators and other interested parties (e.g., internal audit,
public auditors) with the opportunity to leverage the technology to
view the complete history of a transaction where it may not be
available today and enhance existing records related to securities
transactions.'' Financial Industry Regulatory Authority, Distributed
Ledger Technology: Implications of Blockchain for the Securities
Industry (January 2017), available at: https://www.finra.org/sites/default/files/FINRA_Blockchain_Report.pdf. Further, Paxos Trust
Company echoed similar themes in connection with its receipt of no-
action relief from the Commission staff, and explained in its
request letter certain benefits of blockchain technology including
``greater data accuracy and transparency, advanced security, and
increased levels of availability and operational efficiency[.]'' the
Exchange believes such benefits may be generally relevant to future
potential applications of blockchain technology. See Letter from
Jeffrey S. Mooney, Division of Trading and Markets, Securities and
Exchange Commission to Charles Cascarilla and Daniel Burstein, Paxos
Trust Company, LLC re: Clearing Agency Registration Under Section
17A(b)(1) of the Securities Exchange Act of 1934 (October 28, 2019),
available at: https://www.sec.gov/divisions/marketreg/mr-noaction/2019/paxos-trust-company-102819-17a.pdf.
\89\ 15 U.S.C. 78f(b)(5).
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III. Proposed BSTX Rules
The discussion in this Part III addresses the proposed BSTX Rules
that would be adopted as Rule Series 17000 through 28000.
[[Page 33466]]
A. General Provisions of BSTX and Definitions (Rule 17000 Series)
The Exchange proposes to adopt as its Rule 17000 Series (General
Provisions of BSTX) a set of general provisions relating to the trading
of security tokens and other rules governing participation on BSTX.
Proposed Rule 17000 sets forth the defined terms used throughout the
BSTX Rules. The majority of the proposed definitions are substantially
similar to defined terms used in other equities exchange rulebooks,
such as with respect to the term ``customer.'' \90\ The Exchange
proposes to set forth new definitions for certain terms to specifically
identify systems, agreements, or persons as they relate to BSTX and as
distinct from other Exchange systems, agreements, or persons that may
be used in connection with the trading of other options on the
Exchange.\91\ The Exchange also proposes to define certain unique terms
relating to the trading of security tokens, including ``security
token,'' \92\ and ``Wallet Manager.'' \93\ The term ``Wallet Manager''
is defined to provide context to the wallet address whitelisting and
end-of-day security token balance reporting processes used to update
the Ethereum blockchain as an ancillary recordkeeping mechanism.\94\
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\90\ Proposed Rule 17000(a)(16) defines the term ``customer'' to
not include a broker or dealer, which parallels the same definition
in other exchange rulebooks. See e.g., IEX Rule 1.160(j). Similarly,
the Exchange proposes to define the term ``Regular Trading Hours''
as the time between 9:30 a.m. and 4:00 p.m. Eastern Time. See
proposed Rule 17000(a)(28) cf. IEX Rule 1.160(gg) (defining
``Regular Market Hours'' in the same manner).
\91\ For example, the Exchange proposes to define the term
``BSTX'' to mean the facility of the Exchange for executing
transaction in security tokens, the term ``BSTX Participant'' to
mean a Participant or Options Participant (as those terms are
defined in the Exchange's Rule 100 Series) that is authorized to
trade security tokens, and the term ``BSTX System'' to mean the
automated trading system used by BSTX for the trading of security
tokens. See proposed Rule 17000(a)(8), (11), and (14).
\92\ Proposed Rule 17000(a)(30) provides that the term
``security token'' means a NMS stock, as defined in Rule 600(b)(47)
of the Exchange Act, trading on the BSTX System. The proposed
definition further specifies that references to a ``security'' or
``securities'' in the Rules include security tokens.
\93\ Proposed Rule 17000(a)(31) defines the term ``Wallet
Manager'' as a party approved by BSTX to operate software compatible
with the BSTX Protocol. See also supra Sections II.G and H. for a
discussion of the role of a Wallet Manager.
\94\ See supra note 49.
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In addition to setting forth proposed definitions used throughout
the proposed Rules, the Exchange proposes to specify in proposed Rule
17010 (Applicability) that the Rules set forth in the Rule 17000 Series
to Rule 28000 Series apply to the trading, listing, and related matters
pertaining to the trading of security tokens. Proposed Rule 17010(b)
provides that, unless specific Rules relating to security tokens govern
or unless the context otherwise requires, the provisions of any
Exchange Rule (i.e., including Exchange Rules in the Rule 100 through
16000 Series) shall be applicable to BSTX Participants.\95\ This is
intended to make clear that BSTX Participants are subject to all of the
Exchange's Rules that may be applicable to them, notwithstanding that
their trading activity may be limited solely to trading security
tokens. The Exchange believes that the proposed definitions set forth
in Rule 17000 are consistent with Section 6(b)(5) of the Exchange Act
\96\ because they protect investors and the public interest by setting
forth clear definitions that help BSTX Participants understand and
apply Exchange Rules. Without clearly defining terms used in the
Exchanges Rules and providing clarity as to the Exchange Rules that may
apply, market participants could be confused as to the application of
certain rules, which could cause harm to investors.
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\95\ Proposed Rule 17010 further specifies that to the extent
the provisions of the Rules relating to the trading of security
tokens contained in Rule 17000 Series to Rule 28000 Series are
inconsistent with any other provisions of the Exchange Rules, the
Rules relating to security token trading shall control.
\96\ 15 U.S.C. 78f(b)(5).
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Proposed Rule 17020 sets forth the requirements to obtain a
whitelisted wallet address from BSTX, and the end-of-day security token
balance reporting, which are discussed in greater detail above in Parts
II.G through L.
B. Participation on BSTX (Rule 18000 Series)
The Exchange proposes to adopt as its Rule 18000 Series
(Participation on BSTX), three rules setting forth certain requirements
relating to participation on BSTX. Proposed Rule 18000 (BSTX
Participation) establishes ``BSTX Participants'' as a new category of
Exchange participation for effecting transactions on the BSTX System,
provided they: (i) Complete the BSTX Participant Application,
Participation Agreement, and User Agreement; \97\ (ii) be an existing
Options Participant or become a Participant of the Exchange pursuant to
the Rule 2000 Series; and (iii) provide such other information as
required by the Exchange.\98\ Proposed Rule 18010 (Requirements for
BSTX Participants) sets forth certain requirements for BSTX
Participants including requirements that each BSTX Participant comply
with Rule 15c3-1 under the Exchange Act, comply with applicable books
and records requirements, and be a member of a registered clearing
agency or clear security token transactions through another BSTX
Participant that is a member/participant of a registered clearing
agency.\99\ Finally, proposed Rule 18020 (Associated Persons) provides
that associated persons of a BSTX Participant are bound by the Rules of
the Exchange to the same extent as each BSTX Participant.
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\97\ The BSTX Participant Application, Participation Agreement,
and User Agreement are attached as Exhibits 3A, 3B, and 3C [sic]
respectively.
\98\ Proposed Rule 18000 also sets forth the Exchange's review
process regarding BSTX Participation Agreements and certain
limitations on the ability to transfer BSTX Participant status
(e.g., in the case of a change of control). In addition proposed
Rule 18000(b)(2) provides that a BSTX Participant shall continue to
abide by all applicable requirements of the Rule 2000 Series, which
would include, for example, IM-2040-5, which specifies continuing
education requirements of Exchange Participants and their associated
persons.
\99\ Proposed Rule 18010(b) is similar to the rules of existing
exchanges. See e.g., IEX Rule 2.160(c). Proposed Rule 18010(a) is
also similar to the rules of existing exchanges. See e.g., IEX Rule
1.160(s) and Cboe BZX Rule 17.2(a).
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The Exchange believes that the proposed Rule 18000 Series
(Participation on BSTX) is consistent with Section 6(b)(5) of the
Exchange Act \100\ because these proposed rules are designed to promote
just and equitable principles of trade, and protect investors and the
public interest by setting forth the requirements to become a BSTX
Participant and specifying that associated persons of a BSTX
Participant are bound by Exchange Rules. Under proposed Rule 18000, a
BSTX Participant must first become an Exchange Participant pursuant to
the Exchange Rule 2000 Series which the Exchange believes would help
assure that BSTX Participants meet the appropriate standards for
trading on BSTX in furtherance of the protection of investors.\101\
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\100\ 15 U.S.C. 78f(b)(5).
\101\ The Exchange notes that the approach of requiring members
of a facility of an exchange to first become members of the exchange
is consistent with the approach used by another national securities
exchange. See Cboe BZX Rule 17.1(b)(3) (requiring that a Cboe BZX
options member be an existing member or become a member of the Cboe
BZX equities exchange pursuant to the Cboe BZX Chapter II Series).
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C. Business Conduct for BSTX Participants (Rule 19000 Series)
The Exchange proposes to adopt as its Rule 19000 Series (Business
Conduct for BSTX Participants), twenty two rules relating to business
conduct requirements for BSTX Participants that are substantially
similar to business
[[Page 33467]]
conduct rules of other exchanges.\102\ The proposed Rule 19000 Series
would specify business conduct requirements with respect to: (i) Just
and equitable principles of trade; \103\ (ii) adherence to law;\104\
(iii) use of fraudulent devices; \105\ (iv) false statements; \106\ (v)
know your customer; \107\ (vi) fair dealing with customers; \108\ (vii)
suitability; \109\ (viii) the prompt receipt and delivery of
securities; \110\ (ix) charges for services performed; \111\ (x) use of
information obtained in a fiduciary capacity; \112\ (xi) publication of
transactions and quotations; \113\ (xii) offers at stated prices; \114\
(xiii) payments involving publications that influence the market price
of a security; \115\ (xiv) customer confirmations; \116\ (xv)
disclosure of a control relationship with an issuer of security tokens;
\117\ (xvi) discretionary accounts; \118\ (xvii) improper use of
customers' securities or funds and a prohibition against guarantees and
sharing in accounts; \119\ (xviii) the extent to which sharing in
accounts is permissible; \120\ (xix) communications with customers and
the public; \121\ (xx) gratuities; \122\ (xxi) telemarketing; \123\ and
(xxii) mandatory systems testing.\124\ The Exchange notes that the
proposed financial responsibility rules are virtually identical to
those of other national securities exchanges other than changes to
defined terms and certain other provisions that would not apply to the
trading of security tokens on the BSTX System.\125\
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\102\ See Cboe BZX Chapter 5 rules. See also IEX Rule 5.150 with
respect to proposed Rule 21040 (Prevention of the Misuse of
Material, Non-Public Information).
\103\ Proposed Rule 19000 (Just and Equitable Principles of
Trade) provides that no BSTX Participant, including its associated
persons, shall engage in acts or practices inconsistent with just
and equitable principles of trade.
\104\ Proposed Rule 19010 (Adherence to Law) generally requires
BSTX Participants to adhere to applicable laws and regulatory
requirements.
\105\ Proposed Rule 19020 (Use of Fraudulent Devices) generally
prohibits BSTX Participants from effecting a transaction in any
security by means of a manipulative, deceptive or other fraudulent
device or contrivance.
\106\ Proposed Rule 19030 (False Statements) generally prohibits
BSTX Participants and their associated persons from making false
statements or misrepresentations in communications with the
Exchange.
\107\ Proposed Rule 19040 (Know Your Customer) requires BSTX
Participants to comply with FINRA Rule 2090 as if such rule were
part of the Exchange Rules.
\108\ Proposed Rule 19050 (Fair Dealing with Customers)
generally requires BSTX Participants to deal fairly with customers
and specifies certain activities that would violate the duty of fair
dealing (e.g., churning or overtrading in relation to the objectives
and financial situation of a customer).
\109\ Proposed Rule 19060 (Suitability) provides that BSTX
Participants and their associated persons shall comply with FINRA
Rule 2111 as if such rule were part of the Exchange Rules.
\110\ Proposed Rule 19070 (Prompt Receipt and Delivery of
Securities) would generally prohibit a BSTX Participant from
accepting a customer's purchase order for a security until it can
determine that the customer agrees to receive the securities against
payment.
\111\ Proposed Rule 19080 (Charges for Services Performed)
generally requires that charges imposed on customers by broker-
dealers shall be reasonable and not unfairly discriminatory.
\112\ Proposed Rule 19090 (Use of Information Obtained in a
Fiduciary Capacity) generally restricts the use of information as to
the ownership of securities when acting in certain capacities (e.g.,
as a trustee).
\113\ Proposed Rule 19100 (Publication of Transactions and
Quotations) generally prohibits a BSTX Participant from
disseminating a transaction or quotation information unless the BSTX
Participant believes it to be bona fide.
\114\ Proposed Rule 19110 (Offers at Stated Prices) generally
prohibits a BSTX Participant from offering to transact in a security
at a stated price unless it is in fact prepared to do so.
\115\ Proposed Rule 19120 (Payments Involving Publications that
Influence the Market Price of a Security) generally prohibits direct
or indirect payments with the aim of disseminating information that
is intended to effect the price of a security.
\116\ Proposed Rule 19130 (Customer Confirmations) requires that
BSTX Participants comply with Rule 10b-10 of the Exchange Act. 17
CFR 240.10b-10.
\117\ Proposed Rule 19140 (Disclosure of Control Relationship
with Issuer) generally requires BSTX Participants to disclose any
control relationship with an issuer of a security before effecting a
transaction in that security for the customer.
\118\ Proposed Rule 19150 (Discretionary Accounts) generally
provides certain restrictions on BSTX Participants handling of
discretionary accounts, such as by effecting excessive transactions
or obtained authorization to exercise discretionary powers.
\119\ Proposed Rule 19160 (Improper Use of Customers' Securities
or Funds and Prohibition against Guarantees and Sharing in Accounts)
generally prohibits BSTX Participants from making improper use of
customers securities or funds and prohibits guarantees to customers
against losses.
\120\ Proposed Rule 19170 (Sharing in Accounts; Extent
Permissible) generally prohibits BSTX Participants and their
associated persons from sharing directly or indirectly in the profit
or losses of the account of a customer unless certain exceptions
apply such as where an associated person receives prior written
authorization from the BSTX Participant with which he or she is
associated.
\121\ Proposed Rule 19180 (Communications with Customers and the
Public) generally provides that BSTX Participants and their
associated persons shall comply with FINRA Rule 2210 as if such rule
were part of the Exchange Rules.
\122\ Proposed Rule 19200 (Gratuities) requires BSTX
Participants to comply with the requirements set forth in BOX
Exchange Rule 3060 (Gratuities).
\123\ Proposed Rule 19210 (Telemarketing) requires that BSTX
Participants and their associated persons comply with FINRA Rule
3230 as if such rule were part of the Exchange's Rules.
\124\ Proposed Rule 19220 (Mandatory Systems Testing) requires
that BSTX Participants comply with Exchange Rule 3180 (Mandatory
Systems Testing).
\125\ For example, the Exchange is not proposing to adopt a rule
contained in other exchanges' business conduct rules relating to
disclosures that broker-dealers give to their customers regarding
the risks of effecting securities transactions during times other
than during regular trading hours (e.g., higher volatility, possibly
lower liquidity) because executions may only occur during regular
trading hours on the BSTX System. See e.g., IEX Rule 3.290, Cboe BZX
Rule 3.21.
---------------------------------------------------------------------------
The Exchange believes that the proposed Rule 19000 Series (Business
Conduct) is consistent with Section 6(b)(5) of the Exchange Act \126\
because these proposed rules are designed to prevent fraudulent and
manipulative acts and practices, promote just and equitable principles
of trade, and protect investors and the public interest by setting
forth appropriate standards of conduct applicable to BSTX Participants
in carrying out their business activities. For example, proposed Rule
19000 (Just and Equitable Principles of Trade) and 19010 (Adherence to
Law) would prohibit BSTX Participants from engaging in acts or
practices inconsistent with just and equitable principles of trade or
that would violate applicable laws and regulations. Similarly, proposed
Rule 19050 (Fair Dealing with Customers) would require that BSTX
Participants deal fairly with their customers and proposed Rule 19030
(False Statements) would generally prohibit BSTX Participants, or their
associated persons from making false statements or misrepresentations
to the Exchange. The Exchange believes that requiring that BSTX
Participants comply with the proposed business conduct rules in the
Rule 19000 Series would further the protection of investors and the
public interest by promoting high standards of commercial honor and
integrity. In addition, each of the rules in the proposed Rule 19000
Series (Business Conduct) is substantially similar to supervisory rules
of other exchanges.\127\
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\126\ 15 U.S.C. 78f(b)(5).
\127\ See supra note 102.
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D. Financial and Operational Rules for BSTX Participants (Rule 20000
Series)
The Exchange proposes to adopt as its Rule 20000 Series (Financial
and Operational Rules), ten rules relating to financial and operational
requirements for BSTX Participants that are substantially similar to
financial and operational rules of other exchanges.\128\ The proposed
Rule 20000 Series would specify financial and operational requirements
with respect to: (i) Maintenance and furnishing of books
[[Page 33468]]
and records; \129\ (ii) financial reports; \130\ (iii) net capital
compliance; \131\ (iv) early warning notifications pursuant to Rule
17a-11 under the Exchange Act; \132\ (v) authority of the Chief
Regulatory Officer to impose certain restrictions; \133\ (vi) margin;
\134\ (vii) day-trading margin; \135\ (viii) customer account
information; \136\ (ix) maintaining records of customer complaints;
\137\ and (x) disclosure of financial condition.\138\
---------------------------------------------------------------------------
\128\ See Cboe BZX Chapter 6 rules and IEX Chapter 5 rules.
\129\ Proposed Rule 20000 (Maintenance, Retention and Furnishing
of Books, Records and Other Information) requires that BSTX
Participants comply with current Exchange Rule 1000 (Maintenance,
Retention and Furnishing of Books, Records and Other Information)
and that BSTX Participants shall submit to the Exchange order,
market and transaction data as the Exchange may specify by
Information Circular.
\130\ Proposed Rule 20010 (Financial Reports) provides that BSTX
Participants shall comply with the requirements of current Exchange
Rule 10020 (Financial Reports).
\131\ Proposed Rule 20020 (Capital Compliance) provides that
each BSTX Participant subject to Rule 15c3-1 under the Exchange Act
(17 CFR 240.15c3-1) shall comply with such rule and other financial
and operational rules contained in the proposed Rule 20000 series.
\132\ 17 CFR 240.17a-11. Proposed Rule 20030 (``Early Warning''
Notification) provides that BSTX Participants subject to the
reporting or notifications requirements of Rule 17a-11 under the
Exchange Act (17 CFR 240.17a-11) or similar ``early warning''
requirements imposed by other regulators shall provide the Exchange
with certain reports and financial statements.
\133\ Proposed Rule 20040 (Power of CRO to Impose Restrictions)
generally provides that the Exchange's Chief Regulatory Officer may
impose restrictions and conditions on a BSTX Participant subject to
the early warning notification requirements under certain
circumstances.
\134\ Proposed Rule 20050 (Margin) sets forth the required
margin amounts for certain securities held in a customer's margin
account.
\135\ Proposed Rule 20060 (Day Trading Margin) sets forth
additional requirements with respect to customers that engage in day
trading.
\136\ Proposed Rule 20070 (Customer Account Information)
requires that BSTX Participants comply with FINRA Rule 4512 as if
such rule were part of the Exchange Rules and further clarifies
certain cross-references within FINRA Rule 4512.
\137\ Proposed Rule 20080 (Record of Written Customer
Complaints) requires that BSTX Participants comply with FINRA Rule
4513 as if such rule were part of the Exchange Rules.
\138\ Proposed Rule 20090 (Disclosure of Financial Condition)
generally requires that BSTX Participants make available certain
information regarding the BSTX Participant's financial condition
upon request of a customer.
---------------------------------------------------------------------------
The Exchange believes that the proposed Rule 20000 (Financial and
Operational Rules) Series is consistent with Section 6(b)(5) of the
Exchange Act \139\ because these proposed rules are designed to prevent
fraudulent and manipulative acts and practices, promote just and
equitable principles of trade, and protect investors and the public
interest by subjecting BSTX Participants to certain recordkeeping,
disclosure, and related requirements designed to ensure that BSTX
Participants conduct themselves in a financially responsible manner.
For example, proposed Rule 20000 would require BSTX Participants to
comply with existing Exchange Rule 1000, which sets forth certain
recordkeeping responsibilities and the obligation to furnish these to
the Exchange upon request so that the Exchange can appropriately
monitor the financial condition of a BSTX Participant and its
compliance with applicable regulatory requirements. Similarly, proposed
Rule 20050 would set forth the margin requirements that BSTX
Participants must retain with respect to customers trading in a margin
account to ensure that BSTX Participants are not extending credit to
customers in a manner that might put the financial condition of the
BSTX Participant in jeopardy. Each of the proposed rules in the Rule
20000 Series (Financial and Operational Rules) is substantially similar
to existing rules of other exchanges or incorporates an existing rule
of the Exchange or another self-regulatory organization (``SRO'') by
reference.
---------------------------------------------------------------------------
\139\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
E. Supervision (Rule 21000 Series)
The Exchange proposes to adopt as its Rule 21000 Series
(Supervision), six rules relating to certain supervisory requirements
for BSTX Participants that are substantially similar to supervisory
rules of other exchanges.\140\ The Proposed Rule 21000 Series would
specify supervisory requirements with respect to: (i) Enforcing written
procedures to appropriately supervise the BSTX Participant's conduct
and compliance with applicable regulatory requirements; \141\ (ii)
designation of an individual to carry out written supervisory
procedures; \142\ (iii) maintenance and keeping of records carrying out
the BSTX Participant's written supervisory procedures; \143\ (iv)
review of activities of each of a BSTX Participant's offices, including
periodic examination of customer accounts to detect and prevent
irregularities or abuses; \144\ (v) the prevention of the misuse of
material non-public information; \145\ and (vi) implementation of an
anti-money laundering (``AML'') compliance program.\146\ These rules
are designed to ensure that BSTX Participants are able to appropriately
supervise their business activities, review and maintain records with
respect to such supervision, and enforce specific procedures relating
insider-trading and AML.
---------------------------------------------------------------------------
\140\ See Cboe BZX Chapter 5 rules. See also IEX Rule 5.150 with
respect to proposed Rule 21040 (Prevention of the Misuse of
Material, Non-Public Information).
\141\ Proposed Rule 21000 (Written Procedures).
\142\ Proposed Rule 21010 (Responsibility of BSTX Participants)
would also require that a copy of a BSTX's written supervisory
procedures be kept in each office and makes clear that final
responsibility for proper supervision rests with the BSTX
Participant.
\143\ Proposed Rule 21020 (Records).
\144\ Proposed Rule 21030 (Review of Activities).
\145\ Proposed Rule 21040 (Prevention of the Misuse of Material,
Non-Public Information) generally requires BSTX Participants to
enforce written procedures designed to prevent misuse of material
non-public information and sets forth examples of conduct that would
constitute a misuse of material, non-public information.
\146\ Proposed Rule 21050 (Anti-Money Laundering Compliance
Program). The Exchange already has rules with respect to Exchange
Participants enforcing an AML compliance program set forth in
Exchange Rule 10070 (Anti-Money Laundering Compliance Program), so
proposed Rule 21050 specifies that BSTX Participants shall comply
with the requirements of that pre-existing rule.
---------------------------------------------------------------------------
The Exchange believes that the proposed Rule 21000 (Supervision)
Series is consistent with Section 6(b)(5) of the Exchange Act \147\
because these proposed rules are designed to prevent fraudulent and
manipulative acts and practices, promote just and equitable principles
of trade, and protect investors and the public interest by ensuring
that BSTX Participants have appropriate supervisory controls in place
to carry out their business activities in compliance with applicable
regulatory requirements. For example, proposed Rule 21000 (Written
Procedures) would require BSTX Participants to enforce written
procedures which enable them to supervise the activities of their
associated persons and proposed Rule 21010 (Responsibility of BSTX
Participants) would require a BSTX Participant to designate a person in
each office to carry out written supervisory procedures. Requiring
appropriate supervision of a BSTX Participant's business activities and
associated persons would promote compliance with the federal securities
laws and other applicable regulatory requirements in furtherance of the
protection of investors and the public interest.\148\ In addition, each
of the rules in the proposed Rule 21000 Series (Supervision) is
substantially similar to supervisory rules of other exchanges.\149\
---------------------------------------------------------------------------
\147\ 15 U.S.C. 78f(b)(5).
\148\ Id.
\149\ See supra note 140.
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F. Miscellaneous Provisions (Rule 22000 Series)
The Exchange proposes to adopt as its Rule 22000 Series
(Miscellaneous Provisions), six rules relating to a variety of
miscellaneous requirements applicable to BSTX Participants that are
[[Page 33469]]
substantially similar to rules of other exchanges.\150\ These
miscellaneous provisions relate to: (i) Comparison and settlement
requirements; \151\ (ii) failures to deliver and failures to receive;
\152\ (iii) forwarding of proxy and other issuer-related materials;
\153\ (iv) commissions; \154\ (v) regulatory services agreements; \155\
and (vi) transactions involving Exchange employees.\156\ These rules
are designed to capture additional regulatory requirements applicable
to BSTX Participants, such as setting forth their obligation to deliver
proxy materials at the request of an issuer and to incorporate by
reference Rule 200[dash]203 of Regulation SHO.\157\
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\150\ See Cboe BZX Chapter 13 rules. See also IEX Rule 6.180
with respect to proposed Rule 22050 (Transactions Involving BOX
Employees).
\151\ Proposed Rule 22000 (Comparison and Settlement
Requirements) provides that a BSTX Participant that is a member of a
registered clearing agency shall implement comparison and settlement
procedures as may be required under the rules of such entity. The
proposed rule would further provide that, notwithstanding this
general provision, the Board may extend or postpone the time of
delivery of a BSTX transaction whenever the Board determines that it
is called for by the public interest, just and equitable principles
of trade or to address unusual conditions. In such a case, delivery
will occur as directed by the Board.
\152\ Proposed Rule 22010 (Failure to Deliver and Failure to
Receive) provides that borrowing and deliveries must be effected in
accordance with Rule 203 of Regulation SHO (17 CFR 242.203) and
incorporates Rules 200-203 of Regulation SHO by reference into the
rule (17 CFR 242.200-203).
\153\ Proposed Rule 22020 (Forwarding of Proxy and Other
Information; Proxy Voting) generally provides that BSTX Participants
shall forward proxy materials when requested by an issuer and sets
forth certain conditions and limitations for BSTX Participants to
give a proxy to vote stock that is registered in its name.
\154\ Proposed Rule 22030 (Commissions) provides that the
Exchange Rules or practices shall not be construed to allow a BSTX
Participant or its associated persons to agree or arrange for the
charging of fixed rates commissions for transactions on the
Exchange.
\155\ Proposed Rule 22040 (Regulatory Service Agreement)
provides that the Exchange may enter into regulatory services
agreements with other SROs to assist in carrying out regulatory
functions, but the Exchange shall retain ultimate legal
responsibility for, and control of, its SRO responsibilities.
\156\ Proposed Rule 22040 (Transactions Involving Exchange
Employees) sets forth conditions and limitations on a BSTX
Participant providing loans or supporting the account of an Exchange
employee (e.g., promptly obtaining and implementing an instruction
from the employee to provide duplicate account statement to the
Exchange) in order to mitigate any potential conflicts of interest
that might arise from such a relationship.
\157\ 17 CFR 242.200-203.
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The Exchange believes that the proposed Rule 22000 (Miscellaneous
Provisions) Series is consistent with Section 6(b)(5) of the Exchange
Act \158\ because these proposed rules are designed to prevent
fraudulent and manipulative acts and practices, promote just and
equitable principles of trade, and protect investors and the public
interest by ensuring that BSTX Participants comply with additional
regulatory requirements, such as Rule 203 of Regulation SHO \159\ as
provided in proposed Rule 22010 (Failure to Deliver and Failure to
Receive), in connection with their participation on BSTX. For example,
proposed Rule 22030 (Commissions) prohibits BSTX Participants from
charging fixed rates of commissions for transactions on the Exchange
consistent with Section 6(e)(1) of the Exchange Act.\160\ Similarly,
proposed Rule 22050 (Transactions involving Exchange Employees) sets
forth certain requirements and prohibitions relating to a BSTX
Participant providing certain financial services to an Exchange
employee, which the Exchange believes helps prevent potentially
fraudulent and manipulative acts and practices and furthers the
protection of investors and the public interest.
---------------------------------------------------------------------------
\158\ 15 U.S.C. 78f(b)(5).
\159\ 17 CFR 242.203.
\160\ 15 U.S.C. 78f(e)(1).
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G. Trading Practice Rules (Rule 23000 Series)
The Exchange proposes to adopt as its Rule 23000 Series (Trading
Practice Rules), 14 rules relating to trading practice requirements for
BSTX Participants that are substantially similar to trading practice
rules of other exchanges.\161\ The proposed Rule 23000 series would
specify trading practice requirements related to: (i) Market
manipulation; (ii) fictitious transactions; (iii) excessive sales by a
BSTX Participant; (iv) manipulative transactions; (v) dissemination of
false information; (vi) prohibition against trading ahead of customer
orders; (vii) joint activity; (viii) influencing data feeds; (ix) trade
shredding; (x) best execution; (xi) publication of transactions and
changes; (xii) trading ahead of research reports; (xiii) front running
of block transactions; and (xiv) a prohibition against disruptive
quoting and trading activity. The purpose of the trading practice rules
is to set forth standards and rules relating to the trading conduct of
BSTX Participants, primarily with respect to prohibiting forms of
market manipulation and specifying certain obligations broker-dealers
have to their customers, such as the duty of best execution. For
example, proposed Rule 23000 (Market Manipulation) sets forth a general
prohibition against a BSTX Participant purchasing a security at
successively higher prices or sales of a security at successively lower
prices, or to otherwise engage in activity for the purpose of creating
or inducing a false, misleading or artificial appearance of activity in
such security.\162\ Proposed Rule 23010 (Fictitious Transactions)
similarly prohibits BSTX Participants from fictitious transaction
activity, such as executing a transaction which involves no beneficial
change in ownership, and proposed Rule 23020 (Excessive Sales by a BSTX
Participant) prohibits a BSTX Participant from executing purchases or
sales in any security trading on the Exchange for any account in which
it has an interest, which are excessive in view of the BSTX
Participant's financial resources or in view of the market for such
security.\163\ Proposed Rule 23060 (Joint Activity) prohibits a BSTX
Participant from directly or indirectly holding any interest or
participation in any joint account for buying or selling a security
traded on the Exchange unless reported to the Exchange with certain
information provided and proposed Rule 23090 (Best Execution) reaffirms
BSTX Participants best execution obligations to their customers.\164\
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\161\ See Cboe BZX Chapter 12 rules.
\162\ Proposed Rule 23030 (Manipulative Transactions) specifies
further prohibitions relating to potential manipulation by
prohibiting BSTX Participants from, among other things,
participating or having any direct or indirect interest in the
profits of a manipulative operation or knowingly managing or
financing a manipulative operation.
\163\ Other proposed rules relating to potential manipulation
include: (i) Rule 23040 (Dissemination of False Information), which
generally prohibits, consistent with Exchange Rule 3080, BSTX
Participants from spreading information that is false or misleading;
(ii) Rule 23070 (Influencing Data Feeds), which generally prohibits
transactions to influence data feeds; (iii) Rule 23080 (Trade
Shredding), which generally prohibits conduct that has the intent or
effect of splitting any order into multiple smaller orders for the
primary purpose of maximizing remuneration to the BSTX Participant;
(iv) Rule 23110 (Trading Ahead of Research Reports), which generally
prohibits BSTX Participants from trading based on non-public advance
knowledge of a research report and requires BSTX Participants to
enforce policies and procedures to limit information flow from
research personnel to trading personnel that might trade on such
information; (v) Rule 23120 (Front Running Block Transactions),
which incorporates FINRA Rule 5270 as though it were part of the
Exchange's Rules; and (vi) Rule 23130 (Disruptive Quoting and
Trading Activity Prohibited), which incorporates Exchange Rule 3220
by reference.
\164\ In addition, proposed Rule 23100 (Publication of
Transactions and Changes) provides that the Exchange will
disseminate transaction information to appropriate data feeds, BSTX
participants must provide information necessary to facilitate the
dissemination of such information, and that an Exchange official
shall be responsible for approving corrections to any reports
transmitted over data feeds.
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Proposed Rule 23050 (Prohibition against Trading Ahead of Customer
Orders) is substantially similar to FINRA 5320 and rules adopted by
other
[[Page 33470]]
exchanges,\165\ and generally prohibits BSTX Participants from trading
ahead of customer orders unless certain enumerated exceptions are
available and requires BSTX Participants to have a written methodology
in place governing execution priority to ensure compliance with the
Rule. The Exchange proposes to adopt each of the exceptions to the
prohibition against trading ahead of customer orders as provided in
FINRA Rule 5320 other than the exception related to trading outside of
normal market hours, since trading on the Exchange would be limited to
regular trading hours.
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\165\ See e.g., Cboe BZX Rule 12.6.
---------------------------------------------------------------------------
The Exchange proposes to adopt the order handling procedures
requirement in proposed Rule 23050(i) consistent with the rules of
other exchanges.\166\ Specifically, proposed Rule 23050(i) would
provide that a BSTX Participant must make every effort to execute a
marketable customer order that it receives fully and promptly and must
cross customer orders when they are marketable against each other
consistent with the proposed Rule.
---------------------------------------------------------------------------
\166\ See e.g., Cboe BZX Rule 12.6.07.
---------------------------------------------------------------------------
The Exchange proposes to adopt a modified version of the exception
set forth in FINRA Rule 5320.06 relating to minimum price improvement
standards as proposed in Rule 23050(h). Under proposed Rule 23050(h),
BSTX Participants would be permitted to execute an order on a
proprietary basis when holding an unexecuted limit order in that same
security without being required to execute the held limit order
provided that they give price improvement of $0.01 to the unexecuted
held limit order. While FINRA Rule 5320.06 sets forth alternate, lower
price improvement standards for securities priced below $1, the
Exchange proposes to adopt a uniform price improvement requirement of
$0.01 for securities traded on the BSTX System consistent with the
Exchange's proposed uniform minimum price variant of $0.01 set forth in
proposed Rule 25030.
In addition, the Exchange proposes to adopt an exception for bona
fide error transactions as proposed in Rule 25030(g) which would allow
a BSTX Participant to trade ahead of a customer order if the trade is
to correct a bona fide error, as defined in the rule. This proposed
exception is nearly identical to similar exceptions of other exchanges
\167\ except that other exchange rules also provide an exception
whereby firms may submit a proprietary order ahead of a customer order
to offset a customer order that is in an amount other than a round lot
(i.e., 100 shares). The Exchange is not adopting an exception for odd-
lot orders under these circumstances because the minimum unit of
trading for security tokens pursuant to proposed Rule 25020 is one
security token. The Exchange believes that there may be a notable
amount of trading in amounts of less than 100 security tokens (i.e.,
trading in odd-lot amounts), and the Exchange accordingly does not
believe that it is appropriate to allow BSTX Participants to trade
ahead of customer orders just to offset an odd-lot customer order.
---------------------------------------------------------------------------
\167\ See e.g., Cboe BZX Rule 12.5.05.
---------------------------------------------------------------------------
The Exchange believes that the proposed Rule 23000 Series relating
to trading practice rules is consistent with Section 6(b)(5) of the
Exchange Act \168\ because these proposed rules are designed to prevent
fraudulent and manipulative acts and practices that could harm
investors and to promote just and equitable principles of trade. The
proposed rules in the Rule 23000 Series are substantially similar to
the rules of other exchanges and generally include a variety of
prohibitions against types of trading activity or other conduct that
could potentially be manipulative, such as prohibitions against market
manipulation, fictitious transactions, and the dissemination of false
information. The Exchange has proposed to exclude certain provisions
from, or make certain modifications to, comparable rules of other SROs,
as detailed above, in order to account for certain unique aspects
related to the proposed trading of security tokens. The Exchange
believes that it is consistent with applicable requirements under the
Exchange Act to exclude these provisions and exceptions because they
set forth requirements that would not apply to BSTX Participants
trading in security tokens and are not necessary for the Exchange to
carry out its functions of facilitating security token transactions and
regulating BSTX Participants.
---------------------------------------------------------------------------
\168\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
H. Disciplinary Rules (Rule 24000 Series)
With respect to disciplinary matters, the Exchange proposes to
adopt Rule 24000 (Discipline and Summary Suspension), which provides
that the provisions of the Exchange Rule 11000 Series (Summary
Suspension), 12000 Series (Discipline), 13000 Series (Review of Certain
Exchange Actions), and 14000 Series (Arbitration) of the Exchange Rules
shall be applicable to BSTX Participants and trading on the BSTX
System. The Exchange already has Rules pertaining to discipline and
suspension of Exchange Participants that it proposes to extend to BSTX
Participants and trading on the BSTX System. The Exchange also proposes
to adopt as Rule 24010 a minor rule violation plan with respect to
transactions on BSTX.\169\
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\169\ The proposed additions to the Exchange's minor rule
violation plan pursuant to proposed Rule 25010 are discussed below
in Part IV.
---------------------------------------------------------------------------
Proposed Rule 24000 incorporates by reference existing rules that
have already been approved by the Commission.
I. Trading Rules and the BSTX System (Rule 25000 Series)
1. Rule 25000--Access to and Conduct on the BSTX Marketplace
The Exchange proposes to adopt Rule 25000 (Access to and Conduct on
the BSTX Marketplace) to set forth rules relating to access to the BSTX
System and certain conduct requirements applicable to BSTX
Participants. Specifically, proposed Rule 25000 provides that only BSTX
Participants, including their associated persons, that are approved for
trading on the BSTX System shall effect any transaction on the BSTX
System. Proposed Rule 25000(b) generally requires that a BSTX
Participant maintain a list of authorized traders that may obtain
access to the BSTX System on behalf of the BSTX Participant, have
procedures in place reasonably designed to ensure that all authorized
traders comply with Exchange Rules and to prevent unauthorized access
to the BSTX System, and to provide the list of authorized traders to
the Exchange upon request. Proposed Rule 25000(c) and (d) restate
provisions that are already set forth in Exchange Rule 7000, generally
providing that BSTX Participants shall not engage in conduct that is
inconsistent with the maintenance of a fair and orderly market or the
ordinary and efficient conduct of business, as well as conduct that is
likely to impair public confidence in the operations of the Exchange.
Examples of such prohibited conduct include failure to abide by a
determination of the Exchange, refusal to provide information requested
by the Exchange, and failure to adequately supervise employees.
Proposed Rule 25000(f) provides the Exchange with authority to suspend
or terminate access to the BSTX System under certain circumstances.
The Exchange believes that proposed Rule 25000 is consistent with
Section 6(b)(5) of the Exchange Act \170\ because it is designed to
protect investors and
[[Page 33471]]
the public interest and promote just and equitable principles of trade
by ensuring that BSTX Participants would not allow for unauthorized
access to the BSTX System and would not engage in conduct detrimental
to the maintenance of fair and orderly markets.
---------------------------------------------------------------------------
\170\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
2. Rule 25010--Days/Hours
Proposed Rule 25010 sets forth the days and hours during which BSTX
would be open for business and during which transactions may be
effected on the BSTX System. Under the proposed rule, transactions may
be executed on the BSTX System between 9:30 a.m. and 4:00 p.m. Eastern
Time. The proposed rule also specifies certain holidays BSTX would be
not be open (e.g., New Year's Day) and provides that the Chief
Executive Officer, President, or Chief Regulatory Officer of the
Exchange, or such person's designee who is a senior officer of the
Exchange, shall have the power to halt or suspend trading in any
security tokens, close some or all of BSTX's facilities, and determine
the duration of any such halt, suspension, or closing, when such person
deems the action necessary for the maintenance of fair and orderly
markets, the protection of investors, or otherwise in the public
interest.
The Exchange believes that proposed Rule 25010 is designed to
protect investors and the public interest, consistent with Section
6(b)(5) of the Exchange Act,\171\ by setting forth the days and hours
that trades may be effected on the BSTX System and by providing
officers of the Exchange with the authority to halt or suspend trading
when such officers believe that such action is necessary or appropriate
to maintain fair and orderly markets or to protect investors or in the
public interest.
---------------------------------------------------------------------------
\171\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
3. Rule 25020--Units of Trading
Proposed Rule 25020 sets forth the minimum unit of trading on the
BSTX System, which shall be one security token. The Exchange believes
that proposed Rule 25020 is consistent with Section 6(b)(5) of the
Exchange Act \172\ because it fosters cooperation and coordination of
persons engaged in facilitating transactions in securities by
specifying the minimum unit of trading of security tokens on the BSTX
System. In addition, other exchanges similarly provide that the minimum
unit of trading is one share for their market and/or for certain
securities.\173\
---------------------------------------------------------------------------
\172\ 15 U.S.C. 78f(b)(5).
\173\ See e.g., IEX Rule 11.180.
---------------------------------------------------------------------------
4. Rule 25030--Minimum Price Variant
Proposed Rule 25030 provides the minimum price variant for security
tokens shall be $0.01. The Exchange believes that proposed Rule 25030
is consistent with Section 6(b)(5) of the Exchange Act because it
fosters cooperation and coordination of persons engaged in facilitating
transactions in securities by specifying the minimum price variant for
security tokens and promotes compliance with Rule 612 of Regulation
NMS.\174\ Under Rule 612 of Regulation NMS, the Exchange is, among
other things, prohibited from displaying, ranking or accepting from any
person a bid or offer or order in an NMS stock in an increment smaller
than $0.01 if that bid or offer or order is priced equal to or greater
than $1.00 per share. Where a bid or offer or order is priced less than
or equal to $1.00 per share, the minimum acceptable increment is
$0.0001. Proposed Rule 25030 sets a uniform minimum price variant for
all security tokens of $0.01 irrespective of whether the security token
is trading below $1.00.
---------------------------------------------------------------------------
\174\ 17 CFR 242.611.
---------------------------------------------------------------------------
5. Rule 25040--Opening the Marketplace
Proposed Rule 25040 sets forth the opening process for the BSTX
System for BSTX-listed security tokens and non-BSTX-listed security
tokens. For BSTX-listed security tokens, the Exchange proposes to allow
for order entry to commence at 8:30 a.m. ET during the Pre-Opening
Phase. Proposed Rule 25040(a) provides that orders will not execute
during the Pre-Opening Phase, which lasts until regular trading hours
begin at 9:30 a.m. ET.\175\ Similar to how the Exchange's opening
process works for options trading, BSTX would disseminate a theoretical
opening price (``TOP'') to BSTX Participants, which is the price at
which the opening match would occur at a given moment in time.\176\
Under the proposed rule, the Exchange will also broadcast other
information during the Pre-Opening Phase. Specifically, in addition to
the TOP, the Exchange would disseminate pursuant to proposed Rule
25040(a)(3): (i) ``Paired Tokens,'' which is the quantity of security
tokens that would execute at the TOP; (ii) the ``Imbalance Quantity,''
which is the number of security tokens that may not be matched with
other orders at the TOP at the time of dissemination; and (iii) the
``Imbalance Side,'' which is the buy/sell direction of any imbalance at
the time of dissemination (collectively, with the TOP, ``Broadcast
Information'').\177\ Broadcast Information will be recalculated and
disseminated every time a new order is received or cancelled and where
such event causes the TOP or Paired Tokens to change. With respect to
priority during the opening match for all security tokens, consistent
with proposed Rule 25080 (Execution and Price/Time Priority), among
multiple orders at the same price, execution priority during the
opening match is determined based on the time the order was received by
the BSTX System.
---------------------------------------------------------------------------
\175\ As a result, orders marked IOC submitted during the Pre-
Opening Phase will be rejected by the BSTX System. See proposed Rule
25040(a)(7).
\176\ The TOP can only be calculated where the BSTX Book is
crossed during the Pre-Opening Phase. See proposed Rule 25040(a)(2).
\177\ Pursuant to proposed Rule 25040(a)(3), any orders which
are at a better price (i.e., bid higher or offer lower) than the TOP
will be shown only as a total quantity on the BSTX Book at a price
equal to the TOP.
---------------------------------------------------------------------------
Consistent with the manner in which the Exchange opens options
trading, the BSTX System would determine a single price at which a
BSTX-listed security token will be opened by calculating the optimum
number of security tokens that could be matched at a price, taking into
consideration all the orders on the BSTX Book.\178\ Proposed Rule
25040(a)(5) provides that the opening match price is the price which
results in the matching of the highest number of security tokens. If
two or more prices would satisfy this maximum quantity criteria, the
price leaving the fewest resting security tokens in the BSTX Book will
be selected at the opening price and where two or more prices would
satisfy the maximum quantity criteria and leave the fewest security
tokens in the BSTX Book, the price closest to the previous day's
closing price will be selected.\179\ Unexecuted trading interest during
the opening match will move to the BSTX Book and will preserve price
time priority.\180\ When the BSTX System cannot determine an opening
price of a BSTX-listed security token at the start of regular trading
hours, BSTX would nevertheless open the security token for trading and
move all trading interest received during the Pre-Opening Phase to the
BSTX Book.\181\
---------------------------------------------------------------------------
\178\ See proposed Rule 25040(a)(4)(ii).
\179\ With respect to an initial public offering of a security
token where there is no previous day's closing price, the opening
price will be the price assigned to the security token by the
underwriter for the offering, referred to as the ``ISTO Reference
Price.'' See Proposed Rule 25040(a)(5)(ii)(3).
\180\ See proposed Rule 25040(a)(6).
\181\ Id.
---------------------------------------------------------------------------
For initial public offerings of security tokens (``ISTOs''), the
process will be generally the same as regular market
[[Page 33472]]
openings. However, in advance of an ISTO auction (``ISTO Auction''),
the Exchange shall announce a ``Quote-Only Period'' that shall be
between fifteen (15) and thirty (30) minutes plus a short random period
prior to the ISTO Auction.\182\ The Quote-Only Period may be extended
in certain cases.\183\ As with regular market openings the Exchange
would disseminate Broadcast Information at the commencement of the
Quote Only Period, and Broadcast Information would be re-calculated and
disseminated every time a new order is received or cancelled and where
such event causes the TOP price or Paired Tokens to change.\184\ In the
event of any extension to the Quote-Only Period or a trading pause, the
Exchange will notify market participants regarding the circumstances
and length of the extension.\185\ Orders will be matched and executed
at the conclusion of the Quote-Only Period, rather than at 9:30 a.m.
Eastern Time.\186\ Following the initial cross at the end of the Quote-
Only Period wherein orders will execute based on price/time priority
consistent with proposed Rule 25080, the Exchange will transition to
normal trading pursuant to proposed Rule 25040(a)(6).\187\
---------------------------------------------------------------------------
\182\ See proposed Rule 25040(b)(1).
\183\ Such cases are when: (i) There is no TOP; (ii) the
underwriter requests an extension; (iii) the TOP moves the greater
of 10% or fifty (50) cents in the fifteen (15) seconds prior to the
initial cross; or (iv) in the event of a technical or systems issue
at the Exchange that may impair the ability of BSTX Participants to
participate in the ISTO or of the Exchange to complete the ISTO. See
proposed Rule 25040(b)(2).
\184\ See proposed Rule 25040(b)(3).
\185\ See proposed Rule 25040(b)(4). The Exchange also proposes
that if a trading pause is triggered by the Exchange or if the
Exchange is unable to reopen trading at the end of the trading pause
due to a systems or technology issue, the Exchange will immediately
notify the single plan processor responsible for consolidation of
information for the security pursuant to Rule 603 of Regulation NMS
under the Securities Exchange Act of 1934. Id.
\186\ See proposed Rule 25040(b)(5).
\187\ As with the regular opening process, orders marked IOC
submitted during the Pre-Opening Phase of an ISTO Auction would be
rejected. See proposed Rule 25040(b)(6).
---------------------------------------------------------------------------
The Exchange also proposes a process for reopening trading
following a Limit Up-Limit Down Halt or trading pause (``Halt
Auctions''). For Halt Auctions, the Exchange proposes that in advance
of reopening, the Exchange shall announce a Quote-Only Period that
shall be five (5) minutes prior to the Halt Auction.\188\ This Quote-
Only Period may be extended in certain circumstances.\189\ The Exchange
proposes to disseminate the same Broadcast Information as it does for
an ISTO Auction and would similarly provide notification of any
extension to the quote-only period as with an ISTO Auction.\190\ The
transition to normal trading would also occur in the same manner as
ISTO Auctions, as described above.\191\
---------------------------------------------------------------------------
\188\ See proposed Rule 25040(c)(1). Orders marked IOC submitted
during the Quote-Only Period would be rejected.
\189\ See proposed Rule 25040(c)(2). The Quote-Only Period shall
be extended for an additional five (5) minutes should a Halt Auction
be unable to be performed due to the absence of a TOP (``Initial
Extension Period''). After the Initial Extension Period, the
Exchange proposes that the Quote-Only Period shall be extended for
additional five (5) minute periods should a Halt Auction be unable
to be performed due to absence of a TOP (``Additional Extension
Period'') until a Halt Auction occurs. Under the proposed Rule, the
Exchange shall attempt to conduct a Halt Auction during the course
of each Additional Extension Period. Id.
\190\ See proposed Rule 25040(c)(3)-(5).
\191\ Id.
---------------------------------------------------------------------------
The Exchange also proposes to adopt certain contingency procedures
in proposed Rule 25040(d) that would provide that when a disruption
occurs that prevents the execution of an ISTO Auction the Exchange will
publicly announce the Quote-Only Period for the ISTO Auction, and the
Exchange will then cancel all orders on the BSTX Book and disseminate a
new scheduled time for the Quote-Only Period and opening match.\192\
Similarly, when a disruption occurs that prevents the execution of a
Halt Auction, the Exchange will publicly announce that no Halt Auction
will occur, and all orders in the halted security token on the BSTX
Book will be canceled after which the Exchange will open the security
token for trading without an auction.\193\
---------------------------------------------------------------------------
\192\ See proposed Rule 25040(d)(1).
\193\ See proposed Rule 25040(d)(2). The Exchange notes that
these contingency procedures are substantially similar to those of
another exchange (see e.g., IEX Rule 11.350(c)(4)) and are designed
to ensure that the Exchange has appropriate mechanisms in place to
address possible disruptions that may arise in an ISTO Auction or
Halt Auction, consistent with the protection of investors and the
public interest pursuant to Section 6(b)(5) of the Exchange Act. 15
U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The opening process with respect to non-BSTX-listed security tokens
is set forth in proposed Rule 25040(e). Pursuant to that Rule, BSTX
Participants who wish to participate in the opening process may submit
orders and quotes for inclusion in the BSTX Book, but such orders and
quotes cannot execute until the termination of the Pre-Opening Phase
(``Opening Process''). Orders that are canceled before the Opening
Process will not participate in the Opening Process. The Exchange will
attempt to perform the Opening Process and will match buy and sell
orders that are executable at the midpoint of the NBBO.\194\ Generally,
the price of the Opening Process will be at the midpoint of the first
NBBO subsequent to the first two-sided quotation published by the
listing exchange after 9:30:00 a.m. Eastern Time. Pursuant to proposed
Rule 25040(e)(4), if the conditions to establish the price of the
Opening Process set forth above do not occur by 9:45:00 a.m. Eastern
Time, orders will be handled in time sequence, beginning with the order
with the oldest time stamp, and will be placed on the BSTX Book
cancelled, or executed in accordance with the terms of the order. A
similar process will occur for re-opening a non-BSTX-listed security
token subject to a halt.\195\ The proposed opening process for security
tokens listed on another exchange serves as a placeholder in
anticipation of other exchanges eventually listing and trading security
tokens, or the equivalent thereof, given that there are no other
exchanges currently trading security tokens. The proposed process for
opening security tokens listed on another exchange is similar to
existing exchange rules governing the opening of trading of a security
listed on another exchange.\196\
---------------------------------------------------------------------------
\194\ See proposed Rule 25040(e)(2).
\195\ See proposed Rule 25040(e)(5).
\196\ See e.g., Cboe BZX Rule 11.24.
---------------------------------------------------------------------------
Consistent with Section 6(b)(5) of the Exchange Act,\197\ the
Exchange believes that the proposed process for opening trading in
BSTX-listed security tokens and security tokens listed on other
exchanges will promote just and equitable principles of trade and will
help perfect the mechanism of a free and open market by establishing a
uniform process to determine the opening price of security tokens.\198\
Proposed Rule 25040 provides a mechanism by which BSTX Participants may
submit orders in advance of the start of regular trading hours, perform
an opening cross, and commence regular hours trading in security tokens
listed on BSTX or otherwise. Where an opening cross is not possible in
a BSTX-
[[Page 33473]]
listed security token, the Exchange will proceed by opening regular
hours trading in the security token anyway, which is consistent with
the manner in which other exchanges open trading in securities.\199\
With respect to initial public offerings of security tokens and
openings after a Limit Up-Limit Down halt or trading pause, BSTX
proposes to use a process with features similar to its normal opening
process. There are a variety of different ways in which an exchange can
open trading in securities, including with respect to an initial public
offering of a security token, and the Exchange believes that proposed
Rule 25040 provides a simple and clear method for opening transactions
that is consistent with the protection of investors and the public
interest.\200\ Additionally, proposed Rule 25040 applies to all BSTX
Participants in the same manner and is therefore not designed to permit
unfair discrimination among BSTX Participants.
---------------------------------------------------------------------------
\197\ 15 U.S.C. 78f(b)(5).
\198\ The Exchange has not proposed to operate a closing auction
at this time. As a result, the closing price of a security token on
BSTX would be the last regular way transaction occurring on BSTX,
which the Exchange believes is a simple and fair way to establish
the closing price of a security token that does not permit unfair
discrimination among customers, issuers, or broker-dealers
consistent with Section 6(b)(5) of the Exchange Act. Id. This
proposed process is consistent with the overall proposed simplified
market structure for BSTX, which does not include a variety of order
types offered by other exchanges such as market-on-close and limit-
on-close orders. The Exchange believes that a simplified market
structure, including the proposed manner in which a closing price
would be determined, promotes the public interest and the protection
of investors consistent with Section 6(b)(5) of the Exchange Act
through reduced complexity. Id.
\199\ See e.g., BOX Rule 7070.
\200\ The Exchange notes that its proposed opening, ISTO
Auction, and Halt Auction processes are substantially similar to
those of another exchange. See Cboe BZX Rule 11.23. The key
differences between the Exchange's proposed processes and those of
the Cboe BZX exchange are that the Exchange has substantially fewer
order types, which make its opening process less complex, and that
the Exchange does not proposes to use order auction collars to limit
the price at which a security token opens. The Exchange does not
believe that auction collars are necessary at this time because
there are a variety of other mechanisms in place to prevent
erroneous orders and the execution of an opening cross at an
erroneous price (e.g., market access controls pursuant to Rule 15c3-
5 and the ability of an underwriter to request an extension to the
Quote-Only Period in an ISTO Auction).
---------------------------------------------------------------------------
6. Rule 25050--Trading Halts
BSTX proposes to adopt rules relating to trading halts \201\ that
are substantially similar to other exchange rules adopted in connection
with the NMS Plan to Address Extraordinary Market Volatility (``LULD
Plan''), with certain exceptions that reflect Exchange functionality.
BSTX intends to join the LULD Plan prior to the commencement of trading
security tokens. Below is an explanation of BSTX's approach to certain
categories of orders during a trading halt:
---------------------------------------------------------------------------
\201\ The Exchange notes that rules on opening trading for non-
BSTX-listed security token are set forth in proposed Rule 25040(e).
---------------------------------------------------------------------------
[ssquf] Short Sales--BSTX cancels all orders on the book during a
halt and rejects any new orders, so rules relating to the repricing of
short sale orders during a trading halt that certain other exchanges
have adopted have been omitted.
[ssquf] Pegged Orders--BSTX would not support pegged orders, at
least initially, so rules relating to pegged orders during a trading
halt have been omitted.
[ssquf] Routable Orders--Pursuant to proposed Rule 25130, the BSTX
System will reject any order or quotation that would lock or cross a
protected quotation of another exchange (rather than routing such order
or quotation), and therefore rules relating to handling of routable
orders during a trading halt have been omitted.
[ssquf] Limit Orders--Because BSTX would cancel resting order
interest and reject incoming orders during a trading halt, specific
rules relating to the repricing of limit-priced interest that certain
other exchanges have adopted have been omitted.\202\
---------------------------------------------------------------------------
\202\ See e.g., Cboe BZX 11.18(e)(5)(B).
---------------------------------------------------------------------------
[ssquf] Auction Orders, Market Orders, and FOK Orders--BSTX would
not support these order types, at least initially, so rules relating to
these order types during a trading halt have been omitted.\203\
---------------------------------------------------------------------------
\203\ IOC orders will be handled pursuant to proposed Rule
25050(g)(5).
Pursuant to proposed Rule 25050(d), the Exchange would cancel all
resting orders in a non-BSTX listed security token subject to a trading
halt, reject any incoming orders in that security token, and will only
resume accepting orders following a broadcast message to BSTX
Participants indicating a forthcoming re-opening of trading.\204\
---------------------------------------------------------------------------
\204\ Trading would resume pursuant to proposed Rule
25040(e)(5). See proposed Rule 25050(g)(7).
---------------------------------------------------------------------------
BSTX believes that it is in the public interest and furthers the
protection of investors, consistent with Section 6(b)(5) of the
Exchange Act \205\ to provide for a mechanism to halt trading in
security tokens during periods of extraordinary market volatility
consistent with the LULD Plan. However, the Exchange has excluded rules
relating to order types and other aspects of the LULD Plan that would
not be supported by the Exchange, such as market orders and auction
orders. The Exchange has also reserved the right in proposed Rule
25050(f) to halt or suspend trading in other circumstances where the
Exchange deems it necessary to do so for the protection of investors
and in the furtherance of the public interest.
---------------------------------------------------------------------------
\205\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Exchange believes that canceling resting order interest during
a trading halt and rejecting incoming orders received during the
trading halt is consistent with Section 6(b)(5) of the Exchange Act
\206\ because it is not designed to permit unfair discrimination among
BSTX Participants. The orders and trading interest of all BSTX
Participants would be canceled in the event of a trading halt and each
BSTX Participant would be required to resubmit any orders they had
resting on the order book.
---------------------------------------------------------------------------
\206\ Id.
---------------------------------------------------------------------------
7. Rule 25060--Order Entry
Proposed Rule 25060 sets forth the manner in which BSTX
Participants may enter orders to the BSTX System. The BSTX System would
initially only support limit orders.\207\ Orders that do not designate
a limit price would be rejected.\208\ The BSTX System would also only
support two time-in-force (``TIF'') designations initially: (i) DAY;
and (ii) immediate or cancel (``IOC''). DAY orders will queue during
the Pre-Opening Phase, may trade during regular market hours, and, if
unexecuted at the close of the trading day (4:00 p.m. ET), are canceled
by the BSTX System.\209\ All orders are given a default TIF of DAY.
BSTX Participants may also designate orders as IOC, which designation
overrides the default TIF of DAY. IOC orders are not accepted by the
BSTX System during the Pre-Opening Phase. During regular trading hours,
IOC orders will execute in whole or in part immediately upon receipt by
the BSTX System. The BSTX System will not support modification of
resting orders. To change the price or quantity of an order resting on
the BSTX Book, a BSTX Participant must cancel the resting order and
submit a new order, which will result in a new time stamp for purposes
of BSTX Book priority. In addition, all orders on BSTX will be
displayed, and the BSTX System will not support hidden orders or
undisplayed liquidity, as set forth in proposed Rule 25100.
---------------------------------------------------------------------------
\207\ The BSTX System will also accept incoming Intermarket
Sweep Orders (``ISO'') pursuant to proposed Rule 25060(c)(2). ISOs
must be limit orders, are ineligible for routing, may be submitted
with a limit price during Regular Trading Hours, and must have a
time-in-force of IOC. Proposed Rule 25060(c)(2) is substantially
similar to rules of other national securities exchanges. See e.g.,
Cboe BZX Rule 11.9(d).
\208\ Proposed Rule 25060(c)(1).
\209\ Proposed Rule 25060(d)(1).
---------------------------------------------------------------------------
Consistent with Section 6(b)(5) of the Exchange Act,\210\ the
Exchange believes that the proposed order entry rules will promote just
and equitable principles of trade and help perfect the mechanism of a
free and open market by establishing the types of orders and modifiers
that all BSTX Participants may use in entering orders to the BSTX
System. Because these order types and TIFs are available to all BSTX
Participants, the proposed rule does not unfairly discriminate among
market participants, consistent with Section 6(b)(5) of the Exchange
Act. The proposed rule sets forth a very
[[Page 33474]]
simple exchange model whereby there is only one order type--limit
orders--and two TIFs. Upon the initial launch of BSTX, there will be no
hidden orders, price sliding, pegged orders, or other order type
features that add complexity. The Exchange believes that creating a
simplified exchange model is designed to protect investors and is in
the public interest because it reduces complexity, thereby helping
market participants better understand how orders would operate on the
BSTX System.
---------------------------------------------------------------------------
\210\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
8. Rule 25070--Audit Trail
Proposed Rule 25070 (Audit Trail) is designed to ensure that BSTX
Participants provide the Exchange with information to be able to
identify the source of a particular order and other information
necessary to carry out the Exchange's oversight functions. The proposed
rule is substantially similar to existing BOX Rule 7120 but eliminates
certain information unique to orders for options contracts (e.g.,
exercise price) because security tokens are equity securities. The
proposed rule also provides that BSTX Participants that employ an
electronic order routing or order management system that complies with
Exchange requirements will be deemed to comply with the Rule if the
required information is recorded in an electronic format. The proposed
rule also specifies that order information must be kept for no less
than three years and that where specific customer or account number
information is not provided to the Exchange, BSTX Participants must
maintain such information on their books and records.
The Exchange believes that proposed Rule 25070 is designed to
protect investors and the public interest, consistent with Section
6(b)(5) of the Exchange Act,\211\ because it will provide the Exchange
with information necessary to carry out its oversight role. Without
being able to identify the source and terms of a particular order, the
Exchange's ability to adequately surveil its market, with or through
another SRO, for trading inconsistent with applicable regulatory
requirements would be impeded. In order to promote compliance with Rule
201 of Regulation SHO, proposed Rule 25080(b)(3) provides that when a
short sale price test restriction is in effect, the execution price of
the short sale order must be higher than (i.e., above) the best bid,
unless the sell order is marked ``short exempt'' pursuant to Regulation
SHO.
---------------------------------------------------------------------------
\211\ 15 U.S.C. 78f(b)(5).
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9. Rule 25080--Execution and Price Time Priority
Proposed Rule 25080 governs the execution of orders on the BSTX
System, providing a price-time priority model. The proposed rule
provides that orders of BSTX Participants shall be ranked and
maintained in the BSTX Book according to price-time priority, such that
within each price level, all orders shall be organized by the time of
entry. The proposed rule further provides that sell orders may not
execute a price below the best bid in the marketplace and buy orders
cannot execute at a price above the best offer in the marketplace.
Further, the proposed rule ensures compliance with Regulation SHO,
Regulation NMS, and the LULD Plan, in a manner consistent with the
rulebooks of other national securities exchanges.\212\
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\212\ See e.g., Cboe BZX Rule 11.13(a)(2)-(3) governing regular
trading hours.
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The Exchange believes that proposed Rule 25080 is consistent with
Section 6(b)(5) of the Exchange Act \213\ because it is designed to
promote just and equitable principles of trade and foster cooperation
and coordination with persons facilitating transactions in securities
by setting forth the order execution priority scheme for security token
transactions. Numerous other exchanges similarly operate a price-time
priority structure for effecting transactions. The proposed rule also
does not permit unfair discrimination among BSTX Participants because
all BSTX Participants are subject to the same price-time priority
structure. In addition, the Exchange believes that specifying in
proposed Rule 25080(b)(3) that execution of short sale orders when a
short sale price test restriction is in effect must occur at a price
above the best bid unless the order is market ``short exempt,'' is
consistent with the Exchange Act because it is intended promote
compliance with Regulation SHO in furtherance of the protection of
investors and the public interest.
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\213\ 15 U.S.C. 78f(b)(5).
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10. Rule 25090--BSTX Risk Controls
Proposed Rule 25090 sets forth certain risk controls applicable to
orders submitted to the BSTX System. The proposed risk controls are
designed to prevent the submission and execution of potentially
erroneous orders. Under the proposed rule, the BSTX System will reject
orders that exceed a maximum order size, as designated by each BSTX
Participant. The Exchange, however may set default values for this
control. The proposed rule also provides a means by which all of a BSTX
Participant's orders will be canceled in the event that the BSTX
Participant loses its connection to the BSTX System. Proposed Rule
25090(c) provides a risk control that prevents incoming limit orders
from being accepted by the BSTX System if the order's price is more
than a designated percentage away from the National Best Bid or Offer
in the marketplace. Proposed Rule 25090(d) provides a maximum order
rate control whereby the BSTX System will reject an incoming order if
the rate of orders received by the BSTX System exceeds a designated
threshold. With respect to both of these risk controls (price
protection for limit orders and maximum order rate), BSTX Participants
may designate the appropriate thresholds, but the Exchange may also
provide default values and mandatory minimum levels.
The Exchange believes the proposed risk controls in Rule 25090 are
consistent with Section 6(b)(5) of the Exchange Act \214\ because they
are designed to help prevent the execution of potentially erroneous
orders, which furthers the protection of investors and the public
interest. Among other things, erroneous orders can be disruptive to the
operation of an exchange marketplace, can lead to temporary price
dislocations, and can hinder price formation. The Exchange believes
that offering configurable risk controls to BSTX Participants, along
with default values where a BSTX Participant has not designated its
desired controls, will protect investors by reducing the number of
erroneous executions on the BSTX System and will remove impediments to
and perfect the mechanism of a free and open market system. The
proposed risk controls are also similar to existing risk controls
provided by the Exchange to Options Participants.
---------------------------------------------------------------------------
\214\ 15 U.S.C. 78f(b)(5).
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11. Rule 25100--Trade Execution, Reporting, and Dissemination of
Quotations
Proposed Rule 25100 provides that the Exchange shall collect and
disseminate last sale information for transactions executed on the BSTX
system. The proposed rule further provides that the aggregate of the
best-ranked non-marketable Limit Order(s), pursuant to Rule 25080, to
buy and the best-ranked non-marketable Limit Order(s) to sell in the
BSTX Book shall be collected and made available to quotation vendors
for dissemination. Proposed Rule 25100 further provides that the BSTX
System will operate as an
[[Page 33475]]
``automated market center'' within the meaning of Regulation NMS and
will display ``automated quotations'' at all times except in the event
of a system malfunction.\215\ In addition, the proposed Rule specifies
that the Exchange shall identify all trades executed pursuant to an
exception or an exemption of Regulation NMS. The Exchange will
disseminate last sale and quotation information pursuant to Rule 602 of
Regulation NMS and will maintain connectivity to the securities
information processors for dissemination of quotation information.\216\
BSTX Participants may obtain access to this information through the
securities information processors.
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\215\ 17 CFR 242.600(b)(4) and (5). The general purpose of an
exchange being deemed an ``automated trading center'' displaying
``automated quotations'' relates to whether or not an exchange's
quotations may be considered protected under Regulation NMS. See
Exchange Act Release No. 51808, 70 FR 37495, 37520 (June 29, 2005).
Other trading centers may not effect transactions that would trade
through a protected quotation of another trading center. The
Exchange believes that it is useful to specify that it will operate
as an automated trading center at this time to make clear to market
participants that it is not operating a manual market with respect
to security tokens.
\216\ 17 CFR 242.602.
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Proposed Rule 25100(d) provides that executions that occur as a
result of orders matched against the BSTX Book, pursuant to Rule 25080,
shall clear and settle pursuant to the rules, policies, and procedures
of a registered clearing agency and shall settle on a T+1 basis (i.e.,
trade date plus one additional business day) where permitted under the
rules, policies, and procedures of the relevant registered clearing
agency. Rule 25100(e) obliges BSTX Participants, or a clearing member/
participant clearing on behalf of a BSTX Participant to honor trades
effected on the BSTX System on the scheduled settlement date, and the
Exchange shall not be liable for the failure of BSTX Participants to
satisfy these obligations.\217\
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\217\ These proposed provisions are substantially similar to
those of exchanges. See e.g., Nasdaq Rule 4627 and IEX Rule 10.250.
---------------------------------------------------------------------------
The Exchange believes that proposed Rule 25100 is consistent with
Section 6(b)(5) of the Exchange Act \218\ because it will foster
cooperation and coordination with persons processing information with
respect to, and facilitating transactions in securities by requiring
the Exchange to collect and disseminate quotation and last sale
transaction information to market participants. BSTX Participants will
need last sale and quotation information to effectively trade on the
BSTX System, and proposed Rule 25100 sets forth the requirement for the
Exchange to provide this information as well as the information to be
provided. The proposed rule is similar to rules of other exchanges
relating to the dissemination of last sale and quotation information.
The Exchange believes that requiring BSTX Participants (or firms
clearing trades on behalf of other BSTX Participants) to honor their
trade obligations on the settlement date is consistent with the
Exchange Act because it will foster cooperation with persons engaged in
clearing and settling transactions in security tokens, consistent with
Section 6(b)(5) of the Exchange Act.\219\
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\218\ 15 U.S.C. 78f(b)(5).
\219\ Id.
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12. Rule 25110--Clearly Erroneous
Proposed Rule 25110 sets forth the manner in which BSTX will
resolve clearly erroneous executions that might occur on the BSTX
System and is substantially similar to comparable clearly erroneous
rules on other exchanges. Under proposed Rule 25100, transactions that
involve an obvious error such as price or quantity, may be canceled
after review and a determination by an officer of BSTX or such other
employee designee of BSTX (``Official'').\220\ BSTX Participants that
believe they submitted an order erroneously to the Exchange may request
a review of the transaction, and must do so within thirty (30) minutes
of execution and provide certain information, including the factual
basis for believing that the trade is clearly erroneous, to the
Official.\221\ Under proposed Rule 25100(c), an Official may determine
that a transaction is clearly erroneous if the price of the transaction
to buy (sell) that is the subject of the complaint is greater than
(less than) the ``Reference Price'' \222\ by an amount that equals or
exceeds specified ``Numerical Guidelines.'' \223\ The Official may
consider additional factors in determining whether a transaction is
clearly erroneous, such as whether trading in the security had recently
halted or overall market conditions.\224\ Similar to other exchanges
`clearly erroneous rules, the Exchange may determine that trades are
clearly erroneous in certain circumstances such as during a system
disruption or malfunction, on a BSTX Officer's (or senior employee
designee) own motion, during a trading halt, or with respect to a
series of transactions over multiple days.\225\ Under proposed Rule
25110(e)(2), BSTX Participants affected by a determination by an
Official may appeal this decision to the Chief Regulatory Officer of
BSTX, provided such appeal is made within thirty (30) minutes after the
party making the appeal is given notice of the initial determination
being appealed.\226\ The Chief Regulatory Officer's determination shall
constitute final action by the Exchange on the matter at issue pursuant
to proposed Rule 25110(e)(2)(ii).
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\220\ A transaction made in clearly erroneous error and canceled
by both parties or determined by the Exchange to be clearly
erroneous will be removed from the Consolidated Tape. Proposed Rule
25110(a).
\221\ Proposed Rule 25110(b). The Official may also consider
certain ``outlier'' transactions on a case by case basis where the
request for review is submitted after 30 minutes but no longer than
sixty (60) minutes after the transaction. Proposed Rule 2511(d).
\222\ The Reference Price will be equal to the consolidated last
sale immediately prior to the execution(s) under review except for
in circumstances, such as, for example, relevant news impacting a
security or securities, periods of extreme market volatility,
sustained illiquidity, or widespread system issues, where use of a
different Reference Price is necessary for the maintenance of a fair
and orderly market and the protection of investors and the public
interest. Proposed Rule 25110(c)(1).
\223\ The proposed Numerical Guidelines are 10% where the
Reference Price ranges from $0.00 to $25.00, 5% where the Reference
Price is greater than $25.00 up to and including $50.00, and 3%
where the Reference Price ranges is greater than $50. Proposed Rule
25110(c)(1).
\224\ Proposed Rule 25110(c)(1).
\225\ See proposed Rule 25110(f)-(j). These provisions are
virtually identical to similar provisions of other exchanges'
clearly erroneous rules other than by making certain administrative
edits (e.g., replacing the term ``security'' with ``security
token'').
\226\ Determinations by an Official pursuant to proposed Rule
25110(f) relating to system disruptions or malfunctions may not be
appealed if the Official made a determination that the nullification
of transactions was necessary for the maintenance of a fair and
orderly market or the protection of invests and the public interest.
Proposed Rule 25110(d)(2).
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The Exchange believes that proposed Rule 25110 is consistent with
Section 6(b)(5) of the Exchange Act,\227\ because it would promote just
and equitable principles of trade, remove impediments to, and perfect
the mechanism of, a free and open market and a national market system
by setting forth the process by which clearly erroneous trades on the
BSTX System may be identified and remedied. Proposed Rule 25110 would
apply equally to all BSTX Participants and is therefore not designed to
permit unfair discrimination among BSTX Participants, consistent with
Section 6(b)(5) of the Exchange Act.\228\ The proposed rule is
substantially similar to the clearly erroneous rules of other
[[Page 33476]]
exchanges.\229\ For example, proposed Rule 25110 does not include
provisions related to clearly erroneous transactions for routed orders
because orders for security tokens will not route to other
exchanges.\230\ Security tokens would also only trade during regular
trading hours (i.e., 9:30 a.m. ET to 4:00 p.m. ET), so provisions from
comparable exchange rules relating to clearly erroneous executions
occurring outside of regular trading hours have been excluded. Proposed
Rule 25110 also excludes provisions from comparable clearly erroneous
rules of certain other exchanges relating to clearly erroneous
executions in: (i) Leverage ETF/ETNs; and (ii) unlisted trading
privileges securities that are subject to an initial public
offering.\231\
---------------------------------------------------------------------------
\227\ 15 U.S.C. 78f(b)(5).
\228\ Id.
\229\ See e.g., Cboe BZX Rule 11.17. Similar to other exchanges'
comparable rules, proposed Rule 25110 provides BSTX with the ability
to determine clearly erroneous trades that result from a system
disruption or malfunction, a BSTX Official acting on his or her own
motion, trading halts, multi-day trading events, multi-stock events
involving five or more (but less than twenty) securities whose
executions occurred within a period of five minutes or less, multi-
stock events involving twenty or more securities whose executions
occurred within a period of five minutes or less, and securities
subject to the LULD Plan.
\230\ Other exchange clearly erroneous rules reference removing
trades from the Consolidated Tape. Because security token
transactions will be reported pursuant to a separate transaction
reporting plan, proposed Rule 25110 eliminates references to the
``Consolidated Tape'' and provides that clearly erroneous security
token transactions will be removed from ``all relevant data feeds
disseminating last sale information for security token
transactions.'' See proposed Rule 25110(a).
\231\ The Exchange notes that not all equities exchanges have a
provision with respect to trade nullification for UTP securities
that are the subject of an initial public offering. See IEX Rule
11.270. With respect to leveraged ETFs/ETNs, the Exchange does not
expect to support trading of such products at this time, so the
Exchange does not believe it is necessary to include provisions
related to them.
---------------------------------------------------------------------------
The Exchange believes that its proposed process for BSTX
Participants to appeal clearly erroneous execution determinations made
by an Exchange Official pursuant to proposed Rule 25110 to the Chief
Regulatory Officer of BSTX is consistent with Section 6(b)(5) of the
Exchange Act \232\ because it promotes just and equitable principles of
trade and fosters cooperation and coordination with persons regulating,
settling, and facilitating transactions in securities by providing a
clear and expedient process to appeal determinations made by an
Official. BSTX Participants benefit from having a quick resolution to
potentially clearly erroneous executions and giving the Chief
Regulatory Officer discretion to decide any appeals of an Official's
determination provides an efficient means to resolve potential appeals
that applies equally to all BSTX Participants and therefore does not
permit unfair discrimination among BSTX Participants, consistent with
Section 6(b)(5) of the Exchange Act. The Exchange notes that, with
respect to options trading on the Exchange, the Exchange's Chief
Regulatory Officer similarly has sole authority to overturn or modify
obvious error determinations made by an Exchange Official and that such
determination constitutes final Exchange action on the matter at
issue.\233\ In addition, proposed Rule 25110(e)(2)(iii) provides that
any determination made by an Official or the Chief Regulatory Officer
of BSTX under proposed Rule 25110 shall be rendered without prejudice
as to the rights of the parties to the transaction to submit their
dispute to arbitration. Accordingly, there is an additional safeguard
in place for BSTX Participants to seek further review of the Exchange's
clearly erroneous determination.
---------------------------------------------------------------------------
\232\ 15 U.S.C. 78f(b)(5).
\233\ See BOX Rule 7170(n).
---------------------------------------------------------------------------
To the extent security tokens become tradeable on other national
securities exchanges or other changes arise that may necessitate
changes to proposed Rule 25110 to conform more closely with the clearly
erroneous execution rules of other exchanges, the Exchange intends to
implement changes as necessary through a proposed rule change filed
with the Commission pursuant to Section 19 of the Exchange Act \234\ at
such future date.
---------------------------------------------------------------------------
\234\ 15 U.S.C. 78s.
---------------------------------------------------------------------------
13. Rule 25120--Short Sales
Proposed Rule 25120 sets forth certain requirements with respect to
short sale orders submitted to the BSTX System that is virtually
identical to similar rules on other exchanges.\235\ Specifically,
proposed Rule 25120 requires BSTX Participants to appropriately mark
orders as long, short, or short exempt and provides that the BSTX
System will not execute or display a short sale order not marked short
exempt with respect to a ``covered security'' \236\ at a price that is
less than or equal to the current national best bid if the price of
that security decreases by 10% or more, as determined by the listing
market for the covered security, from the covered security's closing
price on the listing market as of the end of Regular Trading Hours on
the prior day (the ``Trigger Price''). The proposed rule further
specifies the duration of the ``Short Sale Price Test'' and that the
BSTX System shall determine whether a transaction in a covered security
has occurred at a Trigger Price and shall immediately notify the
responsible single plan processor.\237\
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\235\ See e.g., IEX Rule 11.290.
\236\ Proposed Rule 25120(b) provides that the terms ``covered
security,'' ``listing market,'' and ``national best bid'' shall have
the same meaning as in Rule 201 of Regulation SHO. 17 CFR
242.201(a).
\237\ Proposed Rule 25120(d). The proposed rule further provides
in paragraph (d)(1) that if a covered security did not trade on BSTX
on the prior trading day, BSTX's determination of the Trigger Price
shall be based on the last sale price on the BSTX System for that
security token on the most recent day on which the security token
traded.
---------------------------------------------------------------------------
The Exchange believes that proposed Rule 25120 is consistent with
Section 6(b)(5) of the Exchange Act,\238\ because it would promote just
and equitable principles of trade and further the protection of
investors and the public interest by enforcing rules consistent with
Regulation SHO. Pursuant to Regulation SHO, broker-dealers are required
to appropriately mark orders as long, short, or short exempt,\239\ and
trading centers are required to establish, maintain, and enforce
written policies and procedures reasonably designed to, among other
things, prevent the execution or display of a short sale order of a
covered security at a price that is less than or equal to the current
national best bid if the price of that covered security decreases by
10% or more from its closing price on the primary listing market on the
prior day.\240\ Proposed Rule 25120 is designed to promote compliance
with Regulation SHO, is nearly identical to similar rules of other
exchanges, and would apply equally to all BSTX Participants.
---------------------------------------------------------------------------
\238\ 15 U.S.C. 78f(b)(5).
\239\ 17 CFR 242.200(g).
\240\ 17 CFR 242.201(b)(1).
---------------------------------------------------------------------------
14. Rule 25130--Locking or Crossing Quotations in NMS Stocks
Proposed Rule 25130 sets forth provisions related to locking or
crossing quotations. The proposed rule is substantially similar to the
rules of other national securities exchanges.\241\ Proposed Rule 25130
is designed to promote compliance with Regulation NMS and prohibits
BSTX participants from engaging in a pattern or practice of displaying
quotations that lock or cross a protected quotation unless an exception
applies. The Exchange notes that there may be no other national
securities exchanges trading security tokens upon the launch of BSTX
that may be displaying protected quotations. Notwithstanding that there
may be no other away markets displaying a protected quotation when
trading on BSTX commences, the Exchange proposes in Rule 25130(d) that
the BSTX System will reject any order or quotation that would lock or
cross a
[[Page 33477]]
protected quotation of another exchange at the time of entry.
---------------------------------------------------------------------------
\241\ See IEX Rule 25130.
---------------------------------------------------------------------------
The Exchange believes proposed Rule 25130 is consistent with
Section 6(b)(5) of the Exchange Act \242\ because it is designed to
promote just and equitable principles of trade and foster cooperation
and coordination with persons facilitating transactions in securities
by ensuring that the Exchange prevents display of quotations that lock
or cross any protected quotation in an NMS stock, in compliance with
applicable provisions of Regulation NMS.
---------------------------------------------------------------------------
\242\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
15. Rule 25140--Clearance and Settlement: Anonymity
Proposed Rule 25140 provides that each BSTX Participant must either
(1) be a member of a registered clearing agency that uses a CNS system,
or (2) clear transactions executed on the Exchange through another
Participant that is a member of such a registered clearing agency. The
Exchange would maintain connectivity and access to the UTC of NSCC for
transmission of executed transactions. The proposed Rule requires a
Participant that clears through another participant to obtain a written
agreement, in a form acceptable to the Exchange, that sets out the
terms of such arrangement. The proposed Rule also provides that BSTX
transaction reports shall not reveal contra party identities and that
transactions would be settled and cleared anonymously. In certain
circumstances, such as for regulatory purposes, the Exchange may reveal
the identity of a Participant or its clearing firm such as to comply
with a court order.
The Exchange believes that proposed Rule 25140 is consistent with
Section 6(b)(5) of the Exchange Act \243\ because it would foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities. Proposed Rule 25140 is similar
to rules of other exchanges relating to clearance and settlement.\244\
---------------------------------------------------------------------------
\243\ 15 U.S.C. 78f(b)(5).
\244\ See e.g. IEX Rule 11.250.
---------------------------------------------------------------------------
J. Market Making on BSTX (Rule 25200 Series)
The BSTX Market Making Rules (Rules 25200-25240) provide for
registration and describe the obligations of Market Makers on the
Exchange. The proposed Market Making Rules also provide for
registration and obligations of Designated Market Makers (``DMMs'') in
a given security token, allocation of a DMM to a particular security
token, and parameters for business combinations of DMMs.
Proposed Rule 25200 sets forth the basic registration requirement
for a BSTX Market Maker by noting that a Market Maker must enter a
registration request to BSTX and that such registration shall become
effective on the next trading day after the registration is entered,
or, in the Exchange's discretion, the registration may become effective
the day that it is entered (and the Exchange will provide notice to the
Market Maker in such cases). The proposed Rule further provides that a
BSTX Market Maker's registration shall be terminated by the Exchange if
the Market Maker fails to enter quotations within five business days
after the registration becomes effective.\245\
---------------------------------------------------------------------------
\245\ Proposed Rule 25200 is substantially similar to IEX Rule
11.150.
---------------------------------------------------------------------------
Proposed Rule 25210 sets forth the obligations of Market Makers,
including DMMs. Under the proposed Rule, a BSTX Participant that is a
Market Maker, including a DMM, is generally required to post two-sided
quotes during the regular market session for each security token in
which itis registered as a Market Maker.\246\ The Exchange proposes
that such quotes must be entered within a certain percentage, called
the ``Designated Percentage,'' of the National Best Bid (Offer) price
in such security token (or last sale price, in the event there is no
National Best Bid (Offer)) on the Exchange.\247\ The Exchange proposes
that the Designated Percentage would be 30%.\248\ The Exchange notes
that the proposed Designated Percentage is substantially similar to the
corresponding Designated Percentage for NYSE American market makers
with respect to Tier 2 NMS stocks (as defined under the LULD
plan).\249\ The Exchange believes that the proposed Designated
Percentage for quotation obligations of Market Makers would be
sufficient to ensure that there is adequate liquidity sufficiently
close to the National Best Bid or Offer (``NBBO'') in security tokens
and to ensure fair and orderly markets. The Exchange notes that
pursuant to proposed Rule 25210(a)(1)(iii), there is nothing to
preclude a Market Maker from entering trading interest at price levels
that are closer to the NBBO, so Market Makers have the ability to quote
must closer to the NBBO than required by the Designated Percentage
requirement if they so choose.
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\246\ See proposed Rule 25210(a)(1).
\247\ See proposed Rule 25210(a)(1)(ii)(A).
\248\ See proposed Rule 25210(a)(1)(ii)(B).
\249\ See NYSE American Rule 7.23E(a)(1)(B)(iii) (providing
that, other than during certain time periods around the market open
and close, the Designated Percentage for Tier 2 NMS stocks priced
below $1.00 is 30% and for Tier 2 NMS stocks priced above $1.00 is
28%).
---------------------------------------------------------------------------
The Exchange proposes in Rule 25210(a)(4) that, in the event that
price movements cause a Market Maker or DMM's quotations to fall
outside of the National Best Bid (Offer) (or last sale price in the
event there is no National Best Bid (Offer)) by a given percentage,
with such percentage called the ``Defined Limit,'' in a security token
for which they are a Market Maker, the Market Maker or DMM must enter a
new bid or offer at not more than the Designated Percentage away from
the National Best Bid (Offer) in that security token. The Exchange
proposes that the Defined Limit shall be 31.5%.\250\ Under the proposed
Rules, a Market Maker's quotations must be firm and automatically
executable for their size, and, to the extent the Exchange finds that a
Market Maker has a substantial or continued failure to meet its
quotation obligations, such Market Maker may face disciplinary action
from the Exchange.\251\ Under the proposed Market Maker and DMM Rules,
Market Makers and DMMs' two-sided quotation obligations must be
maintained for a quantity of a ``normal unit of trading'' which is
defined as one security token.\252\ The Exchange believes that security
tokens may initially trade in smaller increments relative to other
listed equities and that reducing the two-sided quoting increment from
one round lot (i.e., 100 shares) to one security token will be
sufficient to meet liquidity demands and would make it easier for
Market Makers and DMMs to meet their quotation obligations, which in
turn incentivize more Market Maker participation.
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\250\ See proposed Rule 25210(a)(1)(ii)(3).
\251\ See proposed Rule 25210(b) and (c). Pursuant to proposed
Rule 25310(d), a BSTX Market Maker, other than a DMM, may apply for
a temporary withdrawal from its Market Maker status provided it
meets certain conditions such a demonstrating legal or regulatory
requirements that necessitate its temporary withdrawal.
\252\ See proposed Rule 25210(a)(1).
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The Exchange notes that proposed Rule 25210 is substantially
similar to NYSE American Rule 7.23E, with the exceptions of: (i) The
modified normal unit of trading, Designated Percentage, and Defined
Limit (as discussed above); (ii) specifying that the minimum quotation
increment shall be $0.01; and (iii) specifying that Market Maker
quotations must be firm for their displayed size and automatically
executable. The Exchange believes that
[[Page 33478]]
the additional specifications with respect to the minimum quotation
increment and firm quotation requirement will add additional clarity to
the expectations of Market Makers on the Exchange.
Proposed Rule 25220 sets forth the registration requirements for a
DMM. Under proposed Rule 25220, a DMM must be a registered Market Maker
and be approved as a DMM in order to receive an allocation of security
tokens pursuant to proposed Rule 25230, which is described below.\253\
For security tokens in which a Participant serves as a DMM, it must
meet the same obligations as if it were a Market Maker and must also
maintain a bid or offer at the National Best Bid and Offer at least 25%
of the day measured across all security tokens in which such
Participant serves as DMM.\254\ The proposed Rule provides, among other
things, that a there will be no more than one DMM per security token
and that a DMM must maintain information barriers between the trading
unit operating as a DMM and the trading unit operating as a BSTX Market
Maker in the same security token (to the extent applicable).\255\ The
Rule further provides a process by which a DMM may temporarily withdraw
from its DMM status, which is similar to the same process for a BSTX
Market Maker \256\ and similar to the same process for DMMs on other
exchanges.\257\ The Exchange notes that proposed Rule 25220 is
substantially similar to NYSE American Rule 7.24E with the exception
that the Exchanges proposes to add a provision stating that the
Exchange is not required to assign a DMM if the security token has an
adequate number of BSTX Market Makers assigned to such security token.
The purpose of this requirement is to acknowledge the possibility that
a security token need not necessarily have a DMM provided that each
security token has been assigned at least three active Market Makers at
initial listing and two Market Makers for continued listing, consistent
with proposed Rule 26106 (Market Maker Requirement), which is discussed
further below.
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\253\ See proposed 25220(b). DMMs would be approved by the
Exchange pursuant to an application process an
\254\ See proposed Rule 25220(c).
\255\ See proposed Rule 25220(b).
\256\ See proposed Rule 25210(d).
\257\ See e.g., NYSE American Rule 7.24E(b)(4).
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In proposed Rule 25230, the Exchange proposes to set forth the
process by which a DMMs are allocated and reallocated responsibility
for a particular security token. Proposed Rule 25230(a) sets forth the
basic eligibility criteria for a when a security token may be allocated
to a DMM, providing that this may occur when the security token is
initially listed on BSTX, when it is reassigned pursuant to Rule 25230,
or when it is currently listed without a DMM assigned to the security
token.\258\ Proposed Rule 2530(a) also specifies that a DMM's
eligibility to participate in the allocation process is determined at
the time the interview is scheduled by the Exchange and specifies that
a DMM must meet with the quotation requirements set forth in proposed
Rule 25220(c) (DMM obligations). The proposed Rule further specifies
how the Exchange will handle several situations in which the DMM does
not meet its obligations, such as, for example, by issuing an initial
warning advising of poor performance if the DMM fails to meet its
obligations for a one-month period.\259\
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\258\ As previously noted, pursuant to proposed Rule 26106, a
security token may, in lieu of having a DMM assigned to it, have a
minimum of three non-DMM Market Makers at initial listing and two
non-DMM Market Makers for continued listing to be eligible for
listing on the Exchange. Consequently, a security token might not
have a DMM when it initially begins trading on BSTX, but may acquire
a DMM later.
\259\ See proposed Rule 25230(a)(4). The proposed handling of
these scenarios where a DMM does not meet its obligations is
substantially similar to parallel requirements in NYSE American Rule
7.25E(a)(4).
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Proposed Rule 25230(b) sets forth the manner in which a DMM may be
selected and allocated a security token. Under proposed Rule 25230(b),
an issuer may select its DMM directly, delegate the authority to the
Exchange to selects its DMM, or may opt to proceed with listing without
a DMM, in which case a minimum of three non-DMM Market Makers at
initial listing and two non-DMM Market Makers for continued listing
must be assigned to its security token consistent with proposed Rule
26106. Proposed Rule 25230(b) further sets forth provisions relating to
the interview between the issuer and DMMs, the Exchange selection by
delegation, and a requirement that a DMM serve as a DMM for a security
token for at least one year unless compelling circumstances exist for
which the Exchange may consider a shorter time period. Each of these
provisions is substantially similar to corresponding provisions in NYSE
American Rule 7.25E(b)(1)-(3), with the exception that the Exchange may
shorten the one year DMM commitment period in compelling
circumstances.\260\ Proposed Rule 25230(b) further sets forth specific
provisions related to a variety of different issuances and types of
securities, including spin-offs or related companies, warrants, rights,
relistings, equity security token listing after preferred security
token, listed company mergers, target security tokens, and closed-end
management investment companies.\261\ Each of these provisions is
substantially similar to corresponding provisions in NYSE American Rule
7.25E(b)(4)-(11).
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\260\ The Exchange believes that providing the Exchange with
flexibility to shorten the one year commitment period is appropriate
to accommodate unforeseen events or circumstances that might arise
with respect to a DMM, such as a force majeure event, preventing a
DMM from being able to carry out its functions.
\261\ See proposed Rule 25230(b)(4)-(11).
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Proposed Rule 25230(c) sets forth the reallocation process for a
DMM in a manner that is substantially similarly to corresponding
provisions in NYSE American Rule 7.25E(c). Generally, under the
proposed Rule, an issuer may request a reallocation to a new DMM and
Exchange staff will review this request, along with any DMM response
letter, and eventually make a determination.\262\ Proposed Rule
25230(d), (e), and (f), set forth provisions governing an allocation
freeze, allocation sunset, and criteria for applicants that are not
currently DMMs to be eligible to be allocated a security token as a DMM
respectively. Each of these provisions are likewise substantially
similar to corresponding provisions in NYSE American Rule 7.25E(d)-(f).
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\262\ In addition, proposed Rule 25230(c)(2) sets forth
provisions that allow for the Exchange's CEO to immediately initiate
a reallocation proceeding upon written notice to the DMM and the
issuer when the DMM's performance in a particular market situation
was, in the judgment of the Exchange, so egregiously deficient as to
call into question the Exchange's integrity or impair the Exchange's
reputation for maintaining an efficient, fair, and orderly market.
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Finally, proposed Rule 25240 sets forth the DMM combination review
policy. The proposed Rule, among other things, defines a proposed
combination among DMMs, requires that DMMs provide a written submission
to the Office of the Corporate Secretary of the Exchange and specifies,
among other things, the items to be disclosed in the written
submission, the criteria that the Exchange will use to evaluate a
proposed combination, and the timing for a decision by the Exchange,
subject to the Exchange's right to extend such time period. The
Exchange notes that proposed Rule 25240 is substantially similar to
NYSE American Rule 7.26E.
The Exchange believes that the proposed Market Making Rules set
forth in the Rule 25200 Series are consistent with Section 6(b)(5) of
the Exchange Act \263\ because they are designed to
[[Page 33479]]
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in facilitating transactions in
securities, and to remove impediments to and perfect the mechanism of a
free and open market and a national market system. The Exchange notes
that the proposed Rules are substantially similar to the market making
rules of other exchanges, as detailed above,\264\ and that all BSTX
Participants are eligible to become a Market Maker or DMM provided they
comply with the proposed requirements.\265\ The proposed Market Maker
Rules set forth the quotation and related expectations of BSTX Market
Makers which the Exchange believes will help ensure that there is
sufficient liquidity in security tokens. Although the corresponding
NYSE American rules upon which the proposed Rules are based provide for
multiple tiers and classes of stocks that were each associated with a
different Designated Percentage and Defined Limit, the Exchange has
collapsed all such classes in to one category and provided a single
Designated Percentage of 30% and Defined Limit of 31.5% for all
security token trading on BSTX. The Exchange believes that simplifying
the Rules in this manner can reduce the potential for confusion and
allows for easier compliance and will still adequately serve the
liquidity needs of investors of security token investors, which the
Exchange believes promotes the removal of impediments to and perfection
of the mechanism of a free and open market and a national market
system, consistent with Section 6(b)(5) of the Exchange Act.\266\
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\263\ 15 U.S.C. 78f(b)(5).
\264\ See NYSE American Rule 7, Section 2.
\265\ In this regard, the Exchange believes the proposed Market
Making Rules are not designed to permit unfair discrimination
between BSTX Participants, consistent with Section 6(b)(5) of the
Exchange Act. 15 U.S.C. 78f(b)(5).
\266\ 15 U.S.C. 78f(b)(5).
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The Exchange has also proposed that the minimum quotation size of
Market Makers will be one security token. As noted above, the Exchange
believes that security tokens may initially trade in smaller increments
relative to other listed equities and that reducing the two-sided
quoting increment from one round lot (i.e., 100 shares) to one security
token would be sufficient to meet liquidity demands and would make it
easier for Market Makers and DMMs to meet their quotation obligations,
which in turn incentivize more Market Maker participation. The Exchange
believes that adopting quotation requirements and parameters that are
appropriate for the nature and types of securities that will trade on
the Exchange will promote the protection of investors and the public
interest by assuring that the Exchange Rules are appropriately tailored
to its market.
K. BSTX Listing Rules (Rule 26000 and 27000 Series)
The BSTX Listing Rules, which include the Rule 26000 and 27000
Series, have been adapted from, and are substantially similar to, Parts
1-12 of the NYSE American LLC Company Guide.\267\ Except as described
below, each proposed Rule in the BSTX 26000 and 27000 series is
substantially similar to a Section of the NYSE American Company
Guide.\268\ Below is further detail.
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\267\ All references to various ``Sections'' in the discussion
of these Listing Rules refer to the various Sections of the NYSE
American Company Guide.
\268\ The Exchange notes that while the numbering of BSTX's
Listing Rules generally corresponds to a Section of the NYSE
American LLC Company Guide, BSTX did not integrate certain Sections
of the NYSE American Company Guide that the Exchange deemed
inapplicable to its operations, such as with respect to types of
securities which the Exchange is not proposing to make eligible for
listing (e.g., foreign issuers, other than those from Canada).
Further, the Exchange formulated a small amount of new rules to
reflect requirements relating to the use of blockchain technology as
an ancillary recordkeeping mechanism, as described more fully
herein. The Exchange also proposes to modify cross-references in the
proposed Listing Rules to accord with its Rules.
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The BSTX Listing Rules (26100 series) are based on the
NYSE American Original Listing Requirements (Sections 101-146).\269\
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\269\ Pursuant to proposed Rule 26135, all securities initially
listing on BSTX, except securities which are book-entry only, must
be eligible for a Direct Registration Program operated by a clearing
agency registered under Section 17A of the Exchange Act. 15 U.S.C.
78q-1.
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The BSTX Original Listing Procedures (26200 series) are
based on the NYSE American Original Listing Procedures (Sections 201-
222).
The BSTX Additional Listings Rules (26300 series) are
based on the NYSE American Additional Listings Sections (Sections 301-
350).
The BSTX Disclosure Policies (26400 series) are based on
the NYSE American Disclosure Policies (Sections 401-404).
The BSTX Dividends and Splits Rules (26500 series) are
based on the NYSE American Dividends and Stock Splits Sections
(Sections 501-522).
The BSTX Accounting; Annual and Quarterly Reports Rules
(26600 series) are based on the NYSE American Accounting; Annual and
Quarterly Reports Sections (Sections 603-624).
The BSTX Shareholders' Meetings, Approval and Voting of
Proxies Rules (26700 series) are based on the NYSE American
Shareholders' Meetings, Approval and Voting of Proxies Sections
(Sections 701-726).\270\
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\270\ The Exchange notes that the proposed fees for certain
items in the proposed Listing Rules (e.g., proxy follow-up mailings)
are the same as those charged by NYSE American. See e.g., proposed
IM-26722-8 cf. NYSE American Section 722.80.
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The BSTX Corporate Governance Rules (26800 series) are
based on the NYSE American Corporate Governance Sections (Sections 801-
809).
The BSTX Additional Matters Rules (26900 series) are based
on the NYSE American Additional Matters Sections (Sections 920-994).
The BSTX Suspension and Delisting Rules (27000 series) are
based on the NYSE American Suspension and Delisting Sections (Sections
1001-1011).
The BSTX Guide to Filing Requirements (27100 series) are
based on the NYSE American Guide to Filing Requirements (Section 1101).
The BSTX Procedures for Review of Exchange Listing
Determinations (27200 series) are based on the NYSE American Procedures
for Review of Exchange Listing Determinations (Sections 1201-1211).
Notwithstanding that the proposed BSTX Listing Rules are
substantially similar to those of other exchanges, BSTX proposes
certain additions or modifications to these rules specific to its
market. For example, BSTX proposes to add definitions that apply to the
proposed BSTX Listing Rules. The definitions set forth in proposed Rule
26000 are designed to facilitate understanding of the BSTX Listing
Rules by market participants. Increased clarity may serve to remove
impediments to and perfect the mechanism of a free and open market and
a national market system and may also foster cooperation and
coordination with persons engaged in regulating, clearing, settling,
processing information with respect to, and facilitating transactions
in securities, consistent with Section 6(b)(5) of the Exchange
Act.\271\
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\271\ 15 U.S.C. 78f(b)(5).
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With respect to initial listing standards, which begin at proposed
Rule 26101, the Exchange proposes to adopt listing standards that are
substantially similar to the NYSE American listing rules.\272\ The
Exchange
[[Page 33480]]
believes that adopting listing rules similar to those in place on other
national securities exchanges will facilitate more uniform standards
across exchanges, which helps foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, consistent with Section 6(b)(5) of the Exchange Act.\273\
Market participants that are already familiar with NYSE American's
listing standards will already be familiar with most of the substance
of the proposed listing rules. The Exchange also believes that adopting
proposed listing standards that closely resemble those of NYSE American
may also foster competition among listing exchanges for companies
seeking to publicly list their securities. The Exchange is proposing an
addition (relative to the NYSE American listing rules) to the initial
listing standards for preferred security tokens.\274\ Specifically, the
Exchange proposes an additional standard for preferred security tokens
to list on the Exchange based on NASDAQ Rule 5510.\275\ The Exchange
believes a proposed rule providing an additional initial listing
standard for preferred security tokens consistent with a similar
provision of NASDAQ would expand the possible universe of issuances
that would be eligible to list on the Exchange to include preferred
security tokens. The Exchange believes that such a rule would help
remove impediments to and perfect the mechanism of a free and open
market and a national market system, consistent with Section 6(b)(5) of
the Exchange Act by giving issuers an additional means by which it
could list a different type of security (i.e., a preferred security
token) and investors the opportunity to trade in such preferred
security tokens.\276\ Further, consistent with the public interest,
rules that provide more opportunity for listings may promote
competition among listing exchanges and capital formation for issuers.
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\272\ See NYSE American Section 101. The Exchange understands
that the Commission has extended relief to NYSE American with
respect to certain quantitative listing standards that do not meet
the thresholds of SEC Rule 3a51-1. 17 CFR 240.3a51-1. Initial
listings of securities that do not meet such thresholds and are not
subject to the relief provided to NYSE American would qualify as
``penny stocks'' and would be subject to additional regulation. BSTX
notes that it is not seeking relief related to SEC Rule 3a51-1 and
therefore has clarified proposed Rule 26101(a)(2) to ensure that
issuers have at least one year of operating history. BSTX will also
require new listings pursuant to proposed Rule 26102 to have a
public distribution of 1 million security tokens, 400 public
security token holders, and a minimum market price of $4 per
security token. These provisions meet the requirements in SEC Rule
3a51-1 and are consistent with the rules of other national
securities exchanges. See e.g., Nasdaq Rule 5510. The quantitative
thresholds specified in Rule 26102 are also reflected in the Sample
Underwriter's Letter that is Exhibit 3M [sic] to this proposal. In
addition, the Exchange notes that proposed Rule 26140, which governs
the additional listing requirements of a company that is affiliated
with the Exchange, is based on similar provisions in NYSE American
Rule 497 and IEX 14.205.
\273\ 15 U.S.C. 78f(b)(5).
\274\ See proposed Rule 26103.
\275\ See proposed Rule 26103(b)(2). Preferred Security Token
Distribution Standard 2 requires that a preferred security token
listing satisfy the following conditions: Minimum bid price of at
least $4 per security token; at least 10 Round Lot holders; at least
200,000 Publicly Held Security Tokens; and Market Value of Publicly
Held Security Tokens of at least $3.5 million.
\276\ 15 U.S.C. 78f(b)(5).
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In certain instances, BSTX proposes to add additional provisions
not currently provided for in the NYSE American LLC Company Guide that
are specific to security tokens. For example, pursuant to proposed Rule
26230(a) (Security Token Architecture Responsibility and Audit), prior
to approving a security token for trading on BSTX, the Exchange would
conduct an audit of the security token's architecture to ensure
compliance with the BSTX Protocol as outlined in Rule 26138.\277\ The
purpose of this requirement is to ensure that the design and structure
of a prospective BSTX-listed company's security token is compatible
with the BSTX Protocol for purposes of facilitating updates to the
blockchain as an ancillary recordkeeping mechanism. The Exchange may
use third party service providers that have demonstrated sufficient
technical expertise in blockchain technology and an understanding of
the BSTX Protocol to conduct this audit on behalf of the Exchange. To
the extent an issuer looking to list its shares on BSTX as security
tokens failed the audit by BSTX of its security token architecture, the
issuer would not meet the requirements of BSTX's listing rules and
would therefore not be permitted to list its shares on BSTX until it
successfully passed the security token audit.\278\
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\277\ Proposed Rule 26230 further provides that an applicant
that is denied pursuant to this section may appeal the decision via
the process outlined in the Rule 27200 Series.
\278\ The Exchange expects that some issuers may choose to use
an outside vendor to help build their security token in a manner
that complies with the BSTX Security Token Protocol. The BSTX
Security Token Protocol is open-source, so there is no need to use
any particular vendor over another. The Exchange understands that
there are numerous technology companies that offer these services,
and issuers would be free to select one of their choosing.
---------------------------------------------------------------------------
Further, the Exchange proposes that Rule 26230(b) would provide
that a listed company (i.e., issuer) remains responsible for ensuring
that its security token remains compatible with the BSTX Protocol and
accurately reflects the number of shares outstanding. The Exchange
recognizes that, in certain circumstances, it may be necessary for a
listed company to modify certain aspects of the smart contract
corresponding to a security token. For example, in the case of a stock
split, a listed company may need to increase the total supply of
security tokens as programmed into its security token smart contract.
Proposed Rule 26230(b) would provide that notice of any such
modification of the smart contract corresponding to a security token
(e.g., to increase the total supply) must be provided to the Exchange
at least five calendar days in advance of implementation to allow the
Exchange to audit the proposed modification.\279\ While the Exchange
believes that five calendar days will provide sufficient time for it to
ensure that a security token is appropriately updated in advance of any
implementation, the Exchange recognizes that there could conceivably be
circumstances in which a change takes longer than expected to
implement. Accordingly, the Exchange proposes that Rule 26230(b) would
also provide that, to the extent additional time is needed to
appropriately implement the modification, the Exchange may exercise its
authority to suspend the ancillary recordkeeping process pursuant to
Rule 17020(e). The Exchange notes that the primary circumstances under
which a modification to a smart contract corresponding to a security
token may be necessary is where there is a change to the total supply
of the security token, which could occur in the case of a stock split,
a reverse stock split, a buy-back, or a dividend in kind. The Exchange
notes that any delay in the implementation of a change to a smart
contract that corresponds to a security token shall in no way impact
the record date or ex-dividend date for any dividend, distribution, or
other action. The Exchange believes that proposed Rule 26230 would
foster cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, consistent with Section
6(b)(5) of the Exchange Act,\280\ because it facilitates the ancillary
recordkeeping mechanism for BSTX-listed security tokens which is a
first step toward the potential integration of blockchain technology to
securities transactions. Without ensuring that BSTX-listed companies'
security tokens are compatible with the BSTX Protocol, the use of
blockchain technology as an
[[Page 33481]]
ancillary recordkeeping mechanism could be impaired.
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\279\ The Exchange expects that it will work with issuers to
help ensure that their security tokens comply with the BSTX
Protocol. However, as with all Exchange Rules, failure to comply
could result in potential suspension and delisting in accordance
with the Rule 27000 Series.
\280\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
With respect to the definitions in proposed Rule 26000, these are
designed to facilitate understanding of the BSTX Listing Rules by
market participants. The Exchange believes that allowing market
participants to better understand and interpret the BSTX Listing Rules
removes impediments to and perfects the mechanism of a free and open
market and a national market system, and may also foster cooperation
and coordination with persons engaged in regulating, clearing,
settling, processing information with respect to, and facilitating
transactions in securities, consistent with Section 6(b)(5) of the
Exchange Act.\281\
---------------------------------------------------------------------------
\281\ Id.
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The Exchange also proposes certain enhancements to the notice
requirements for listed companies to communicate to BSTX related to
record dates and defaults.\282\ The Exchange believes that these
additional disclosure and communication obligations can help BSTX in
monitoring for listed company compliance with applicable rules and
regulations; such additional disclosure obligations are designed to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, to foster cooperation and
coordination with persons engaged in regulating, clearing, settling,
processing information with respect to, and facilitating transactions
in securities, 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, consistent with Section
6(b)(5) of the Exchange Act.\283\
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\282\ See Proposed Rule 26502, which requires, among other
things, a listing company to give the Exchange at least ten days'
notice in advance of a record date established for any other
purpose, including meetings of shareholders.
\283\ 15 U.S.C. 78f(b)(5).
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The Exchange's proposed Rules provide additional flexibility for
listed companies in choosing how liquidity would be provided in their
listings by allowing listed companies to meet either the DMM
Requirement or Active Market Maker Requirement for initial listing and
continued trading.\284\ Pursuant to proposed Rule 26205, a company may
choose to be assigned a DMM by the Exchange or to select its own
DMM.\285\ Alternatively, a company may elect, or the Exchange may
determine, that, in lieu of a DMM, a minimum of three (3) market makers
would be assigned to the security token at initial listing; such
requirement may be reduced to two (2) market makers following the
initial listing, consistent with proposed Rule 26106. The Exchange
believes that such additional flexibility would promote the removal of
impediments to and perfection of the mechanism of a free and open
market and a national market system, consistent with Section 6(b)(5) of
the Exchange Act.\286\ The Commission has previously approved exchange
rules providing for three market makers to be assigned to a particular
security upon initial listing and only two for continued listing. \287\
In accordance with these previously approved rules, the Exchange
believes proposed Rule 26205 would ensure fair and orderly markets and
would facilitate the provision of sufficient liquidity for security
tokens.
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\284\ See proposed Rule 26205. BSTX-listed security tokens must
meet the criteria specified in proposed Rule 26106, which provides
that unless otherwise provided, all security tokens listed pursuant
to the BSTX Listing Standards must meet one of the following
requirements: (1) The DMM Requirement whereby a DMM must be assigned
to a given security token; or (2) the Active Market Maker
Requirement which states that (i) for initial inclusion the security
token must have at least three registered and active Market Makers,
and (ii) for continued listing, a security token must have at least
two registered and active Market Makers, one of which may be a
Market Maker entering a stabilizing bid.
\285\ Exchange personnel responsible for managing the listing
and onboarding process will be responsible for determining to which
DMM a security token will be assigned. As provided in proposed Rule
26205, the Exchange makes every effort to see that each security
token is allocated in the best interests of the company and its
shareholders, as well as that of the public and the Exchange.
Similarly, the Exchange anticipates that these same personnel will
be responsible for answering questions relating to the Exchange's
listing rules pursuant to proposed Rule 26994 (New Policies). The
Exchange notes that certain provisions in the NYSE American Listing
Manual contemplate a ``Listing Qualifications Analyst'' that would
perform a number of these functions. The Exchange is not proposing
to adopt provisions that specifically contemplate a ``Listing
Qualifications Analyst,'' but expects to have personnel that will
perform the same basic functions, such as advising issuers and
prospective issuers with respect to the BSTX Listing Rules.
\286\ 15 U.S.C. 78f(b)(5).
\287\ See e.g., IEX Rule 14.206.
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The Exchange also proposes a number of other non-substantive
changes from the baseline NYSE American listing rules, such as to
eliminate references to the concept of a ``specialist,'' since BSTX
will not have a specialist,\288\ or references to certificated
equities, since security tokens will be uncertificated equities.\289\
As another example, NYSE American Section 623 requires that three
copies of certain press releases be sent to the exchange, while the
Exchange proposes only that a single copy of such press release be
shared with the Exchange.\290\ In addition, the Exchange proposes to
adopt Rule 26720 in a manner that is substantially similar to NYSE
American Section 720, but proposes to modify the internal citations to
ensure consistency with its proposed Rulebook.\291\ In its proposed
Rules, the Exchange has not included certain form letters related to
proxy rules that are included in the NYSE American rules; \292\
instead, these forms will be included in the BSTX Listing
Supplement.\293\ The Exchange is not
[[Page 33482]]
proposing to adopt provisions relating to future priced securities at
this time.\294\ In addition, the Exchange is not proposing to allow for
listing of foreign companies, other than Canadian companies,\295\ or to
allow for issuers to transfer their existing securities to BSTX.\296\
Similarly, the Exchange is not proposing at this time to support
security token debt securities, so the Exchange has not proposed to
adopt certain provisions from the NYSE American Listing Manual related
to bonds/debt securities \297\ or the trading of units.\298\ The
Exchange believes that the departures from the NYSE American rules upon
which the proposed Rules are based, as described above, are non-
substantive (e.g., by not including provisions relating to instruments
that will not trade on the Exchange), would apply to all issuers in the
same manner and are therefore not designed to permit unfair
discrimination, consistent with Section 6(b)(5) of the Exchange
Act.\299\
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\288\ See e.g., NYSE American Section 513(f), noting that open
orders to buy and open orders to sell on the books of a specialist
on an ex rights date are reduced by the cash value of the rights.
Proposed Rule 26340(f) deletes this provision because BSTX will not
have specialists. Similarly, because BSTX will not have specialists,
the Exchange is not proposing to adopt a parallel rule to NYSE
American Section 516, which specifies that certain types of orders
are to be reduced by a specialist when a security is quoted ex-
dividend, ex-distribution or ex-rights are set forth in NYSE
American Rule 132.
\289\ See e.g., NYSE American Section 117 including a clause
relating to paired securities for which ``the stock certificates of
which are printed back-to-back on a single certificate'').
Similarly, the Exchange has proposed to replace certain references
to the ``Office of General Counsel'' contained in certain NYSE
American Listing Rule (see e.g., Section 1205) with references to
the Exchange's ``Legal Department'' to accommodate differences in
BSTX's organizational structure. See proposed Rule 27204. As another
example, proposed Rule 27205 refers to the Exchange's ``Hearing
Committee'' as defined in Section 6.08 of the Exchange's By-Laws to
similarly accommodate organizational differences between the
Exchange and NYSE American.
\290\ See proposed Rule 26623.
\291\ Specifically, proposed Rule 26720 would provide that
participants must comply with Rules 26720 through 26725 and BSTX's
Rule 22020 (Forwarding of Proxy and Other Issuer-Related Materials;
Proxy Voting). NYSE American Section 726, upon which proposed Rule
26720 is based, includes cross-references to NYSE American's
corresponding rules to proposed Rules 26720 through 26725, and also
includes cross-references to NYSE American Rules 578 through 585,
for which the Exchange is not proposing corresponding rules. These
NYSE American rules for which the Exchange is not proposing to adopt
a parallel rule relate to certain requirements specific to proxy
voting (e.g., requiring that a member state the actual number of
shares for which a proxy is given--NYSE American Rule 578) or, in
some cases, relate to certificated securities (e.g., NYSE American
Rule 579), which would be inapplicable to the Exchange since it
proposes to only list uncertificated securities. The Exchange
believes that it does not need to propose to adopt parallel rules
corresponding to NYSE American Rules 578-585 at this time and notes
that other listing exchanges do not appear have corresponding
versions of these NYSE American Rules. See e.g., Cboe BZX Rules. The
Exchange believes that proposed Rule 26720 and the Exchange's other
proposed Rules governing proxies, including those referenced in
proposed Rule 26720, are sufficient to govern BSTX Participants'
obligations with respect to proxies.
\292\ The forms found in NYSE American Section 722.20 and 722.40
will be included in the BSTX Listing Supplement.
\293\ The BSTX Listing Supplement would contain samples of
letters containing the information and instructions required
pursuant to the proxy rules to be given to clients in the
circumstances indicated in the appropriate heading. These are
intended to serve as examples and not as prescribed forms.
Participants would be permitted to adapt the form of these letters
for their own purposes provided all of the required information and
instructions are clearly enumerated in letters to clients. Pursuant
to proposed Rule 26212, the BSTX Listing Supplement would also
include a sample application for original listing, which the
Exchange has included as Exhibit 3G [sic]. In addition, proposed
Rule 26350 states that the BSTX Listing Supplement will include a
sample cancellation notice; the Exchange expects such notice to be
substantially in the same form as NYSE American's sample notice in
NYSE American Section 350. Other examples of items that would appear
in the BSTX Listing Supplement include certain certifications to be
completed by the CEO of listed companies pursuant to proposed Rule
26810(a) and (c), and forms of letters to be sent to clients
requesting voting instructions and other letters relating to proxy
votes pursuant to proposed IM-26722-2 and IM-26722-4. The Exchange
expects that these proposed materials in the BSTX Listing Supplement
will be substantially similar to the corresponding versions of such
samples used by NYSE American. The purpose of putting these sample
letters and other information into the BSTX Listing Supplement
rather than directly in the rules is to improve the readability of
the Rules.
\294\ See e.g., NYSE American Section 101, Commentary .02. The
Exchange is also not proposing to adopt a parallel provision to NYSE
American Section 950 (Explanation of Difference between Listed and
Unlisted Trading Privileges) because the Exchange believes that such
provision is not necessary and contains extraneous historical
details that are not particularly relevant to the trading of
security tokens. The Exchange notes that numerous other listing
exchanges do not have a similar provision to NYSE American Section
950. See e.g., IEX Listing Rules.
\295\ See proposed Rule 26109. Because the Exchange does not
propose to allow foreign issuers of security tokens, it does not
propose to adopt a parallel provision to NYSE American Section 110
and other similar provisions relating to foreign issuers--e.g., NYSE
American Section 801(f).
\296\ Consequently, the Exchange does not propose to adopt a
parallel provision to NYSE American Section 113 at this time.
\297\ See e.g., NYSE American Sections 1003(b)(iv) and (e).
\298\ See e.g., NYSE American Sections 106(f), 401(i), and
1003(g).
\299\ 15 U.S.C. 78f(b)(5).
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The Exchange proposes in Rule 26507 to prohibit the issuance of
fractional security tokens and to provide that cash must be paid in
lieu of any distribution or part of a distribution that might result in
fractional interests in security tokens.\300\ The Exchange believes
that disallowing fractional shares reduces complexity. By extension,
the requirement to provide cash in lieu of fractional shares simplifies
the process related to share transfer and tracking of share ownership.
The Exchange believes that this simplification promotes just and
equitable principles of trade, fosters cooperation and coordination
with persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, removes impediments to and perfect the mechanism of a free
and open market and a national market system, and, in general, protects
investors and the public interest, consistent with Section 6(b)(5) of
the Exchange Act.\301\
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\300\ The Exchange also proposes certain conforming changes in
Rule 26503 (Form of Notice) to reiterate that fractional interests
in security tokens are not permitted by the Exchange.
\301\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
Proposed BSTX Rule 26130 (Original Listing Applications) would
require listing applicants to furnish a legal opinion that the
applicant's security token is a security under applicable United States
securities laws. Such a requirement provides assurance to the Exchange
that security token trading relates to appropriate asset classes. The
Exchange believes that this Rule promotes just and equitable principles
of trade and, in general, protects investors and the public interest,
consistent with Section 6(b)(5) of the Exchange Act.\302\
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\302\ Id.
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The Exchange proposes to adopt corporate governance listing
standards as its Rule 26800 series that are substantially similar to
the corporate governance listing standards set forth in Part 8 of the
NYSE American Listing Manual. However, it includes certain
clarifications, most notably that certain proposed provisions are not
intended to restrict the number of terms that a director may serve
\303\ and that, if a limited partnership is managed by a general
partner rather than a board of directors, the audit committee
requirements applicable to the listed entity should be satisfied by the
general partner.\304\ The Exchange also notes that, unlike the current
NYSE American rules upon which the proposed Rules are based, the
proposed Rules on corporate governance do not include provisions on
asset-asset backed securities and foreign issues (other than those from
Canada), since the Exchange does not proposed to allow for such foreign
issuers to list on BSTX at this time.
---------------------------------------------------------------------------
\303\ See proposed Rule 26802(d).
\304\ See proposed Rule 26801(b).
---------------------------------------------------------------------------
The Exchange proposes to adopt additional listing rules as its Rule
26900 series that are substantially similar to the corporate governance
listing standards set forth in Part 9 of the NYSE American Listing
Manual. The only significant difference from the baseline NYSE American
rules is that the proposed BSTX Rules do not include provisions related
to certificated securities, since security tokens listed on BSTX will
be uncertificated.
The Exchange proposes to adopt suspension and delisting rules as
its Rule 27000 series that are substantially similar to the corporate
governance listing standards set forth in Parts 10, 11, and 12 of the
NYSE American Listing Manual. The proposed rules do not include
concepts from the baseline NYSE American rules regarding foreign, fixed
income securities, or other non-equity securities because the Exchange
is not proposing to allow for listing of such securities at this
time.\305\
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\305\ As with all sections of the proposed rules, references to
``securities'' have been changed to ``security tokens'' where
appropriate and, in the Rule 27000 series, certain references have
been conformed from the baseline NYSE American provisions to account
for the differences in governance structure and naming conventions
of BSTX.
---------------------------------------------------------------------------
The Exchange believes that the proposals in the Rule 26800 to Rule
27000 Series, which are based on the rules of NYSE American with the
differences explained above, are designed to foster cooperation and
coordination with persons engaged in facilitating transactions in
securities, 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. Further, the differences in
the proposals compared to the analogous NYSE American provisions
appropriately reflect the differences between the two exchanges. The
Exchange believes that ensuring that its systems are appropriately
described in the BSTX Rules facilitates market participants' review of
such Rules, which serves to remove impediments to and perfect the
mechanism of a free and open market and a national market system by
ensuring that market participants can easily navigate, understand and
comply with the Exchange's rulebook. Therefore, the Exchange believes
its proposals are
[[Page 33483]]
consistent with Section 6(b)(5) of the Exchange Act.\306\
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\306\ 15 U.S.C. 78f(b)(5).
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L. Fees (Rule 28000 Series)
The Exchange proposes to set forth as its Rule 28000 Series (Fees)
the Exchange's authority to prescribe reasonable dues, fees,
assessments or other charges as it may deem appropriate.\307\ As
provided in proposed Rule 28000 (Authority to Prescribe Dues, Fees,
Assessments and Other Charges), these fees may include membership dues,
transaction fees, communication and technology fees, regulatory fees,
and other fees, which will be equitably allocated among BSTX
Participants, issuers, and other persons using the Exchange's
facilities.\308\ Proposed Rule 28010 (Regulatory Revenues) generally
provides that any revenues received by the Exchange from fees derived
from its regulatory function or regulatory fines will not be used for
non-regulatory purposes or distributed to the stockholder, but rather,
shall be applied to fund the legal and regulatory operations of the
Exchange (including surveillance and enforcement activities).
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\307\ As described above, recording information to the Ethereum
blockchain requires payment of gas by the individual or entity who
desires to post such a record. The payment of gas will be performed
by the Wallet Manager as a service provider to the Exchange carrying
out the function of updating the Ethereum blockchain as an ancillary
recordkeeping mechanism. The Exchange does not plan to charge a fee
to cover the costs associated with gas and updating the Ethereum
blockchain. The Exchange also notes that gas costs are typically
negligible and anticipates actual monthly gas expenditures to be of
a de minims amount.
\308\ Proposed Rule 28000 further provides authority for the
Exchange to charge BSTX Participants a regulatory transaction fee
pursuant to Section 31 of the Exchange Act (15 U.S.C. 78ee) and that
the Exchange will set forth fees pursuant to publicly available
schedule of fees.
---------------------------------------------------------------------------
The Exchange believes that the proposed Rule 28000 Series (Fees) is
consistent with Sections 6(b)(5) of the Exchange Act because these
proposed rules are designed to protect investors and the public
interest by setting forth the Exchange's authority to assess fees on
BSTX Participants, which would be used to operate the BSTX System and
surveil BSTX for compliance with applicable laws and rules. The
Exchange believes that the proposed Rule 28000 Series (Fees) is also
consistent with Sections 6(b)(3) of the Exchange Act \309\ because the
proposed Rules specify that all fees assessed by the Exchange shall be
equitably allocated among BSTX Participants, issuers and other persons
using the Exchange's facilities. The Exchange notes that the proposed
Rule 28000 Series is substantially similar to the existing rules of
another exchange.\310\ The Exchange intends to submit a proposed rule
change to the Commission setting forth the proposed fees relating to
trading on BSTX in advance of the launch of BSTX.
---------------------------------------------------------------------------
\309\ 15 U.S.C. 78f(b)(5).
\310\ See Cboe BZX Rules 15.1 and 15.2.
---------------------------------------------------------------------------
IV. Minor Rule Violation Plan
The Exchange's disciplinary rules, including Exchange Rules
applicable to ``minor rule violations,'' are set forth in the Rule
12000 Series of the Exchange's current Rules. Such disciplinary rules
would apply to BSTX Participants and their associated persons pursuant
to proposed Rule 24000. The Exchange's Minor Rule Violation Plan
(``MRVP'') specifies those uncontested minor rule violations with
sanctions not exceeding $2,500 that would not be subject to the
provisions of Rule 19d-1(c)(1) under the Exchange Act \311\ requiring
that an SRO promptly file notice with the Commission of any final
disciplinary action taken with respect to any person or
organization.\312\ The Exchange's MRVP includes the policies and
procedures set forth in Exchange Rule 12140 (Imposition of Fines for
Minor Violations).
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\311\ 17 CFR 240.19d-1(c)(1).
\312\ The Commission adopted amendments to paragraph (c) of Rule
19d-1 to allow SROs to submit for Commission approval plans for the
abbreviated reporting of minor disciplinary infractions. See
Exchange Act Release No. 21013 (June 1, 1984), 49 FR 23828 (June 8,
1984). Any disciplinary action taken by an SRO against any person
for violation of a rule of the SRO which has been designated as a
minor rule violation pursuant to such a plan filed with and declared
effective by the Commission will not be considered ``final'' for
purposes of Section 19(d)(1) of the Exchange Act if the sanction
imposed consists of a fine not exceeding $2,500 and the sanctioned
person has not sought an adjudication, including a hearing, or
otherwise exhausted his administrative remedies.
---------------------------------------------------------------------------
The Exchange proposes to amend its MRVP and Rule 12140 to include
proposed Rule 24010 (Penalty for Minor Rule Violations). The Rules
included in proposed Rule 24010 as appropriate for disposition under
the Exchange's MRVP are: (a) Rule 20000 (Maintenance, Retention and
Furnishing of Records); (b) Rule 25070 (Audit Trail); (c) Rule
25210(a)(1) (Two-Sided Quotation Obligations of BSTX Market Makers);
and Rule 25120 (Short Sales). The rules included in proposed Rule 12140
are the same as the rules included in the MRVPs of other
exchanges.\313\ Upon implementation of this proposal, the Exchange will
include the enumerated trading rule violations in the Exchange's
standard quarterly report of actions taken on minor rule violations
under the MRVP. The quarterly report includes: The Exchange's internal
file number for the case, the name of the individual and/or
organization, the nature of the violation, the specific rule provision
violated, the sanction imposed, the number of times the rule violation
has occurred, and the date of disposition. The Exchange's MRVP, as
proposed to be amended, is consistent with Sections 6(b)(1), 6(b)(5)
and 6(b)(6) of the Exchange Act,\314\ which require, in part, that an
exchange have the capacity to enforce compliance with, and provide
appropriate discipline for, violations of the rules of the Commission
and of the exchange. In addition, because amended Rule 12140 will offer
procedural rights to a person sanctioned for a violation listed in
proposed Rule 24010, the Exchange will provide a fair procedure for the
disciplining of members and associated persons, consistent with Section
6(b)(7) of the Exchange Act.\315\
---------------------------------------------------------------------------
\313\ See e.g., IEX Rule 9.218 and Cboe BZX Rule 8.15.01.
\314\ 15 U.S.C. 78f(b)(1), 78f(b)(5) and 78f(b)(6).
\315\ 15 U.S.C. 78f(b)(7).
---------------------------------------------------------------------------
This proposal to include the rules listed in Rule 24010 in the
Exchange's MRVP is consistent with the public interest, the protection
of investors, or otherwise in furtherance of the purposes of the
Exchange Act, as required by Rule 19d-1(c)(2) under the Exchange
Act,\316\ because it should strengthen the Exchange's ability to carry
out its oversight and enforcement responsibilities as an SRO in cases
where full disciplinary proceedings are unsuitable in view of the minor
nature of the particular violation. In requesting the proposed change
to the MRVP, the Exchange in no way minimizes the importance of
compliance with Exchange Rules and all other rules subject to the
imposition of fines under the MRVP. However, the MRVP provides a
reasonable means of addressing rule violations that do not rise to the
level of requiring formal disciplinary proceedings, while providing
greater flexibility in handling certain violations. The Exchange will
continue to conduct surveillance with due diligence and make a
determination based on its findings, on a case-by-case basis, whether a
fine of more or less than the recommended amount is appropriate for a
violation under the MRVP or whether a violation requires a formal
disciplinary action.
---------------------------------------------------------------------------
\316\ 17 CFR 240.19d-1(c)(2).
---------------------------------------------------------------------------
V. Amendments to Existing BOX Rules
Due to the new BSTX trading facility and the introduction of
trading in security tokens, a type of equity security, on the Exchange,
the Exchange proposes to amend those Exchange Rules that would apply to
BSTX
[[Page 33484]]
Participants, but that currently only contemplate trading in options.
Therefore, the Exchange is seeking to amend the following Exchange
Rules, each of which is set forth in Exhibit 5B [sic]:
Rule 100(a) (Definitions) ``Options Participant'' or
``Participant'': The Exchange proposes to change the definition of
``Options Participant or Participant'' to ``Participant'' to reflect
Options Participants and BSTX Participants and to amend the definition
as follows: ``The term `Participant' means a firm, or organization that
is registered with the Exchange pursuant to the Rule 2000 Series for
purposes of participating in trading on a facility of the Exchange and
includes an `Options Participant' and `BSTX Participant.'''
Rule 100(a) (Definitions) ``Options Participant'': The
Exchange proposes to add a definition of ``Options Participant'' that
would be defined as follows: ``The term `Options Participant' is a
Participant registered with the Exchange for purposes of participating
in options trading on the Exchange.'' \317\
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\317\ In addition, as a result of these new defined terms, the
Exchange proposes to renumber definitions set forth in Rule 100(a)
to keep the definitions in alphabetically order.
---------------------------------------------------------------------------
Rule 2020(g)(2) (Participant Eligibility and
Registration): The Exchange proposes to delete subsection (g)(2) and
replace it with the following: ``(2) persons associated with a
Participant whose functions are related solely and exclusively to
transactions in municipal securities; (3) persons associated with a
Participant whose functions are related solely and exclusively to
transactions in commodities; (4) persons associated with a Participant
whose functions are related solely and exclusively to transactions in
securities futures, provided that any such person is appropriately
registered with a registered futures association; and (5) persons
associated with a Participant who are restricted from accessing the
Exchange and that do not engage in the securities business of the
Participant relating to activity that occurs on the Exchange.'' \318\
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\318\ In addition to revising Rule 2020(g)(2) to broaden it to
include securities activities beyond just options trading, the
Exchange proposes to add greater specificity to define persons that
are exempt from registration, consistent with the approach adopted
by other exchanges. See e.g., IEX Rule 2.160(m).
---------------------------------------------------------------------------
Rule 2060 (Revocation of Participant Status or Association
with a Participant): The Exchange proposes to amend Rule 2060 to refer
to ``securities transactions'' rather than ``options securities
transactions.''
Rule 3180(a) (Mandatory Systems Testing): The Exchange
proposes to amend subsection (a)(1) of Rule 3180 to also include BSTX
Participants, in addition to the categories of Market Makers and OFPs.
Rule 7130(a)(2)(v) Execution and Price/Time Priority: The
Exchange proposes to update the cross reference to Rule 100(a)(58) to
refer to Rule 100(a)(59), which defines the term ``Request for Quote''
or ``RFQ'' under the Rules after the proposed renumbering.
Rule 7150(a)(2) (Price Improvement Period): The Exchange
proposes to amend Rule 7150(a)(2) to update the cross reference to the
definition of a Professional in Rule 100(a)(51) to instead refer to
Rule 100(a)(52), which is where that term would be defined in the Rules
after the proposed renumbering.
Rule 7230 (Limitation of Liability): The Exchange proposes
to amend the references in Rule 7230 to ``Options Participants'' to
simply ``Participants.''
Rule 7245(a)(4) (Complex Order Price Improve Period): The
Exchange proposes to update the cross reference to Rule 100(a)(51) to
refer to Rule 100(a)(52), which defines the term ``Professional'' after
the proposed renumbering.
IM-8050-3: The Exchange proposes to update the cross
reference to Rule 100(a)(55) to refer to Rule 100(a)(56), which defines
the term ``quote'' or ``quotation'' after the proposed
renumbering.\319\
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\319\ Current Exchange Rule 100(a)(55) defines the term
``Quarterly Options Series,'' but the intended reference in IM-8050-
3 was the definition of ``quote'' or ``quotation.'' The term
``quote'' or ``quotation'' is currently defined in Rule 100(a)(56),
but is proposed to be renumbered as Rule 100(a)(57).
---------------------------------------------------------------------------
Rule 11010(a) ``Investigation Following Suspension'': The
Exchange proposes to amend subsection (a) of Rule 11010 to remove the
reference to ``in BOX options contracts'' and to modify the word
``position'' with the word ``security'' as follows: ``. . . the amount
owing to each and a complete list of each open long and short security
position maintained by the Participant and each of his or its
Customers.''
Rule 11030 (Failure to Obtain Reinstatement): The Exchange
proposes to amend Rule 11030 to replace the reference to ``Options
Participant'' to simply ``Participant.''
Rule 12030(a)(1) (Letters of Consent): The Exchange
proposes to amend subsection (a)(1) of Rule 12030 to replace the
reference to ``Options Participant'' to simply ``Participant.''
Rule 12140 (Imposition of Fines for Minor Rule
Violations): The Exchange proposes to amend Rule 12140 to replace
references to ``Options Participant'' to simply ``Participant.'' In
addition, the Exchange proposes to add paragraph (f) to Rule 12140, to
incorporate the aforementioned modifications to the Exchange's MRVP.
New paragraph (f) of Rule 12140 would provide: ``(f) Transactions on
BSTX. Rules and penalties relating to trading on BSTX that are set
forth in Rule 24010 (Penalty for Minor Rule Violations).''
The Exchange believes that the proposed amendments to the
definitions set forth in Rule 100 are consistent with Section 6(b)(5)
of the Exchange Act \320\ because they protect investors and the public
interest by setting forth clear definitions that help BOX and BSTX
Participants understand and apply Exchange Rules. Without defining
terms used in the Exchange Rules clearly, market participants could be
confused as to the application of certain rules, which could cause harm
to investors.
---------------------------------------------------------------------------
\320\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Exchange believes that the proposed amendments to the other
Exchange Rules detailed above are consistent with Section 6(b)(5) of
the Exchange Act \321\ because the proposed rule change is designed to
foster cooperation and coordination with persons engaged in
facilitating transactions in securities, 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 Exchange believes that the proposed rule change would remove
impediments to and perfect the mechanism of a free and open market and
a national market system by ensuring that market participants can
easily navigate, understand and comply with the Exchange's rulebook.
The Exchange believes that the proposed rule change enables the
Exchange to continue to enforce the Exchange's rules. The Exchange
notes that none of the proposed changes to the current Exchange
rulebook would materially alter the application of any of those Rules,
other than by extending them to apply to BSTX Participants and trading
on the BSTX System. As such, the proposed amendments would foster
cooperation and coordination with persons engaged in facilitating
transactions in securities and would remove impediments to and perfect
the mechanism of a free and open market and a national exchange system.
Further, the Exchange believes that, by
[[Page 33485]]
ensuring the rulebook accurately reflects the intention of the
Exchange's rules, the proposed rule change reduces potential investor
or market participant confusion.
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\321\ Id.
---------------------------------------------------------------------------
VI. Forms to Be Used in Connection with BSTX
In connection with the operation of BSTX, the Exchange proposes to
uses a series of new forms to facilitate becoming a BSTX Participant
and for issuers to list their security tokens. These forms have been
attached hereto as Exhibits 3A-3N [sic]. Each are described below.
A. BSTX Participant Application
Pursuant to proposed Rule 18000(b), in order to become a BSTX
Participant, an applicant must complete a BSTX Participant Application,
which is attached as Exhibit 3A [sic]. The proposed BSTX Participant
Application requires the applicant to provide certain basic information
such as identifying the applicants name and contact information,
Designated Examining Authority, organizational structure, and Central
Registration Depository (``CRD'') number. The BSTX Participant
Application also requires applicants to provide additional information
including certain beneficial ownership information, the applicant's
current Form BD, an organization chart, a description of how the
applicant receives orders from customers, how it will send orders to
BSTX, and a copy of written supervisory procedures and information
barrier procedures.
In addition, the BSTX Participant Application allows applicants to
indicate whether they are applying to be a BSTX Market Maker or a
Designated Market Maker. Applicants wishing to become a BSTX Market
Maker or Designated Market Maker must provide certain additional
information including a list of each of the applicant's trading
representatives (including a copy of each representative's Form U4), a
copy of the applicant's written supervisory procedures relating to
market making, a description of the source and amount of the
applicant's capital, and information regarding the applicant's other
business activities and information barrier procedures.
B. BSTX Participant Agreement
Pursuant to Exchange Rule 18000(b), to transact business on BSTX,
prospective BSTX Participants must complete a BSTX Participant
Agreement. The BSTX Participant Agreement is attached as Exhibit 3B
[sic]. The BSTX Participant Agreement provides that a BSTX Participant
must agree with the Exchange as follows:
1. Participant agrees to abide by the Rules of the Exchange and
applicable bylaws, as amended from time to time, and all circulars,
notices, interpretations, directives and/or decisions adopted by the
Exchange.
2. Participant acknowledges that BSTX Participant and its
associated persons are subject to the oversight and jurisdiction of the
Exchange.
3. Participant authorizes the Exchange to make available to any
governmental agency or SRO any information it may have concerning the
BSTX Participant or its associated persons, and releases the Exchange
from any and all liability in furnishing such information.
4. Participant acknowledges its obligation to update any and all
information contained in any part of the BSTX Participant's
application, including termination of membership with another SRO.
These provisions of the BSTX Participant Agreement and others
therein are generally designed to reflect the Exchange's SRO
obligations to regulate BSTX Participants. Accordingly, these
provisions contractually bind a BSTX Participant to comply with
Exchange rules, acknowledge the Exchange's oversight and jurisdiction,
authorize the Exchange to disclose information regarding the
Participant to any governmental agency or SRO and acknowledge the
obligation to update any and all Application contained in the
Participant's application.
C. BSTX User Agreement
In order to become a BSTX Participant, prospective participants
must also execute a BSTX User Agreement pursuant to proposed Rule
18000(b). The BSTX User Agreement, attached as Exhibit 3C [sic],
includes provisions related to the term of the agreement, compliance
with exchange rules, right and obligations under the agreement, changes
to BSTX, proprietary rights under the agreement, use of information
received under the relationship, disclaimer of warranty, limitation of
liability, indemnification, termination and assignment. The information
is necessary to outline the rights and obligations of the prospective
Participant and the Exchange under the terms of the agreement. Both the
BSTX Participant Agreement and BSTX User Agreement will be available on
the Exchange's website (http://boxoptions.com">boxoptions.com).
D. BSTX Security Token Market Designated Market Maker Selection Form
In accordance with proposed Rule 25230(b)(1), BSTX will maintain
the BSTX Security Token Designated Market Maker Selection Form, which
is attached as Exhibit 3D [sic]. The issuer may select its DMM from
among a pool of DMMs eligible to participate in the process. Within two
business days of the issuer selecting its DMM, it will use the BSTX
Security Token Market Designated Market Maker Selection form to notify
BSTX of the selection. The form must be signed by a duly authorized
officer as specified in proposed Rule 25230(b)(1).
E. Clearing Authorization Forms
In accordance with proposed Rule 18010, BSTX Participants that are
not members/participants of a registered clearing agency must clear
their transactions through a BSTX Participant that is a member of a
registered clearing agency. A BSTX Participant clearing through another
BSTX Participant would do so using, as applicable, either the BSTX
Clearing Authorization (non-Market Maker) form (attached as Exhibit 3E
[sic]) or the BSTX Participant Clearing Authorization (Market Maker)
form (attached as Exhibit 3F [sic]). Each form would be maintained by
BSTX and each form specifies that the BSTX Participant clearing on
behalf of the other BSTX Participant accepts financial responsibility
for all transactions on BSTX that are made by the BSTX Participant
designated on the form.
F. BSTX Listing Applications
The Exchange proposes to specify the required forms of listing
application, listing agreement and other documentation that listing
applicants and listed companies must execute or complete (as
applicable) as a prerequisite for initial and ongoing listing on the
Exchange, as applicable (collectively, ``listing documentation''). As
proposed, the listing forms are substantially similar to those
currently in use by NYSE American LLC, with certain differences to
account for the trading of security tokens. All listing documentation
will be available on the Exchange's website (http://boxoptions.com">boxoptions.com). Each of
the listing documents form a duly authorized representative of the
company must sign an affirmation that the information provided is true
and correct as of the date the form was signed. In the event that in
the future the Exchange makes any substantive changes (including
changes to the rights, duties, or obligations of a listed
[[Page 33486]]
company or listing applicant or the Exchange, or that would otherwise
require a rule filing) to such documents, it will submit a rule filing
in accordance with Rule 19b-4.\322\
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\322\ The Exchange will not submit a rule filing if the changes
made to a document are solely typographical or stylistic in nature.
---------------------------------------------------------------------------
Pursuant to Rule 26130 and 26300 of the Exchange Rules, a company
must file and execute the BSTX Original Listing Application (attached
as Exhibit 3G [sic]) or the BSTX Additional Listing Application
(attached as Exhibit 3H [sic]) to apply for the listing of security
tokens on BSTX.\323\ The BSTX Original Listing Application provides
information necessary, and in accordance with Section 12(b) of the
Exchange Act,\324\ for Exchange regulatory staff to conduct a due
diligence review of a company to determine if it qualifies for listing
on the Exchange. The BSTX Additional Listing Application requires
certain further information for an additional listing of security
tokens. Relevant factors regarding the company and securities to be
listed would determine the type of information required. The following
describes each category and use of application information:
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\323\ Pursuant to proposed Exchange Rule 26130, an applicant
seeking the initial listing of its security token must also provide
a legal opinion that the applicant's security token is a security
under applicable United States securities laws.
\324\ 15 U.S.C. 78l(b).
---------------------------------------------------------------------------
1. Corporate information regarding the issuer of the security to be
listed, including company name, address, contact information, Central
Index Key Code (CIK), SEC File Number, state and country of
incorporation, date of incorporation, whether the company is a foreign
private issuer, website address, SIC Code, CUSIP number of the security
being listed and the date of fiscal year end. This information is
required of all applicants and is necessary in order for the Exchange's
regulatory staff to collect basic company information for recordkeeping
and due diligence purposes, including review of information contained
in the company's SEC filings.
2. For original listing applications only, corporate contact
information including the company's Chief Executive Officer, Chief
Financial Officer, Corporate Secretary, General Counsel and Investor
Relations Officer. This information is required of all initial
applicants and is necessary in order for the Exchange's regulatory
staff to collect current company contact information for purposes of
obtaining any additional due diligence information to complete a
listing qualification review of the applicant.
3. For original listing applications only, offering and security
information regarding an offering, including the type of offering, a
description of the issue, par value, number of security tokens
outstanding or offered, total security tokens unissued, but reserved
for issuance, date authorized, purpose of security tokens to be issued,
number of security tokens authorized, and information relating to
payment of dividends. This information is required of all applicants
listing security tokens on the Exchange, and is necessary in order for
the Exchange's regulatory staff to collect basic information about the
offering.
4. For original listing applications only, information regarding
the company's transfer agent. Transfer agent information is required
for all applicants. This information is necessary in order for the
Exchange's regulatory staff to collect current contact information for
such company transfer agent for purposes of obtaining any additional
due diligence information to complete a listing qualification review of
the applicant.
5. For original listing applications only, contact information for
the outside counsel with respect to the listing application, if any.
This information is necessary in order for the Exchange's regulatory
staff to collect applicable contact information for purposes of
obtaining any additional due diligence information to complete a
listing qualification review of the applicant and assess compliance
with Exchange Rule 26130.
6. For original listing applications only, a description of any
security preferences. This information is necessary to determine
whether the Applicant issuer has any existing class of common stock or
equity securities entitling the holders to differential voting rights,
dividend payments, or other preferences.
7. For original listing applications only, type of security token
listing, including the type of transaction (initial public offering of
a security token, merger, spin-off, follow on offering, reorganization,
exchange offer or conversion) and other details related to the
transaction, including the name and contact information for the
investment banker/financial advisor contacts. This information is
necessary in order for the Exchange's regulatory staff to collect
information for such company for purposes of obtaining any additional
due diligence information to complete a listing qualification review of
the applicant.
8. For original listing applications only, exchange requirements
for listing consideration. This section notes that to be considered for
listing, the Applicant Issuer must meet the Exchange's minimum listing
requirements, that the Exchange has broad discretion regarding the
listing of any security token and may deny listing or apply additional
or more stringent criteria based on any event, condition or
circumstance that makes the listing of an Applicant Issuer's security
token inadvisable or unwarranted in the opinion of the Exchange. The
section also notes that even if an Applicant Issuer meets the
Exchange's listing standards for listing on the BSTX Security Token
Market, it does not necessarily mean that its application will be
approved. This information is necessary in order for the Exchange's
regulatory staff to assess whether an Applicant Issuer is qualified for
listing.
9. For original listing applications only, regulatory review
information, including a certification that no officer, board member or
non-institutional shareholder with greater than 10% ownership of the
company has been convicted of a felony or misdemeanor relating to
financial issues during the past ten years or a detailed description of
any such matters. This section also notes that the Exchange will review
background materials available to it regarding the aforementioned
individuals as part of the eligibility review process. This regulatory
review information is necessary in order for the Exchange's regulatory
staff to assess whether there are regulatory matters related to the
company that render it unqualified for listing.
10. For original listing applications only, supporting
documentation required prior to listing approval includes a listing
agreement, corporate governance affirmation, security token design
affirmation, listing application checklist and underwriter's letter.
This documentation is necessary in order to support the Exchange's
regulatory staff listing qualification review (corporate governance
affirmation, listing application checklist and underwriter's letter)
and to effectuate the listed company's agreement to the terms of
listing (listing agreement).
11. For additional listing applications only, transaction details,
including the purpose of the issuance, total security tokens, date of
board authorization, date of shareholder authorization and anticipated
date of issuance. This information is required of all applicants
listing additional security tokens on the Exchange, and is necessary in
order for
[[Page 33487]]
the Exchange's regulatory staff to collect basic information about the
offering.
12. For additional listing applications only, insider participation
and future potential issuances, including whether any director, officer
or principal shareholder of the company has a direct or indirect
interest in the transaction, and if the transaction potentially
requires the company to issue any security tokens in the future above
the amount they are currently applying for. This information is
required of all applicants listing additional security tokens on the
Exchange, and is necessary in order for the Exchange's regulatory staff
to collect basic information about the offering.
13. For additional listing applications only, information for a
technical original listing, including reverse security token splits and
changes in states of incorporation. This information is required of all
applicants listing additional security tokens on the Exchange, and is
necessary in order for the Exchange's regulatory staff to collect basic
information about the offering.
14. For additional listing applications only, information for a
forward security token split or security token dividend, including
forward security token split ratios and information related to security
token dividends. This information is required of all applicants listing
additional security tokens on the Exchange, and is necessary in order
to determine the rights associated with the security tokens.
15. For additional listing applications only, relevant company
documents. This information is required of all applicants listing
additional security tokens on the Exchange, and is necessary to assess
to support the Exchange's regulatory staff listing qualification
review.
16. For additional listing applications only, reconciliation for
technical original listing, including security tokens issued and
outstanding after the technical original event, listed reserves
previously approved for listing, and unlisted reserves not yet approved
by the Exchange. This information is required of all applicants listing
additional security tokens on the Exchange, and is necessary to assess
to support the Exchange's regulatory staff listing qualification review
and to obtain all of the information relevant to the offering.
G. Checklist for Original Listing Application
In order to assist issuers seeking to list its security tokens on
BSTX, the Exchange has provided a checklist for issuers to seeking to
file an original listing application with BSTX. The BSTX Listing
Application Checklist, attached as Exhibit 3I [sic], provides that
issuers must provide BSTX with a listing application, listing
agreement, corporate governance affirmation, BSTX security token design
affirmation, underwriter's letter (for an initial public offering of a
security token only) and relevant SEC filings (e.g., 8-A, 10, 40-F, 20-
F). Each of the above referenced forms are fully described herein. The
checklist is necessary to assist issuers and the Exchange regulatory
staff in assessing the completion of the relevant documents.
H. BSTX Security Token Market Listing Agreement
Pursuant to proposed Exchange Rule 26132, to apply for listing on
the Exchange, a company must execute the BSTX Security Token Market
Listing Agreement (the ``Listing Agreement''), which is attached as
Exhibit 3J [sic]. Pursuant to the proposed Listing Agreement, a company
agrees with the Exchange as follows:
1. Company certifies that it will comply with all Exchange rules,
policies, and procedures that apply to listed companies as they are now
in effect and as they may be amended from time to time, regardless of
whether the Company's organization documents would allow for a
different result.
2. Company shall notify the Exchange at least 20 days in advance of
any change in the form or nature of any listed security tokens or in
the rights, benefits, and privileges of the holders of such security
tokens.
3. Company understands that the Exchange may remove its security
tokens from listing on the BSTX Security Token Market, pursuant to
applicable procedures, if it fails to meet one or more requirements of
Paragraphs 1 and 2 of this agreement.
4. In order to publicize the Company's listing on the BSTX Security
Token Market, the Company authorizes the Exchange to use the Company's
corporate logos, website address, trade names, and trade/service marks
in order to convey quotation information, transactional reporting
information, and other information regarding the Company in connection
with the Exchange. In order to ensure the accuracy of the information,
the Company agrees to provide the Exchange with the Company's current
corporate logos, website address, trade names, and trade/service marks
and with any subsequent changes to those logos, trade names and marks.
The Listing Agreement further requires that the Company specify a
telephone number to which questions regarding logo usage should be
directed.
5. Company indemnifies the Exchange and holds it harmless from any
third-party rights and/or claims arising out of use by the Exchange or,
any affiliate or facility of the Exchange (``Corporations'') of the
Company's corporate logos, website address, trade names, trade/service
marks, and/or the trading symbol used by the Company.
6. Company warrants and represents that the trading symbol to be
used by the Company does not violate any trade/service mark, trade
name, or other intellectual property right of any third party. The
Company's trading symbol is provided to the Company for the limited
purpose of identifying the Company's security in authorized quotation
and trading systems. The Exchange reserves the right to change the
Company's trading symbol at the Exchange's discretion at any time.
7. Company agrees to furnish to the Exchange on demand such
information concerning the Company as the Exchange may reasonably
request.
8. Company agrees to pay when due all fees associated with its
listing of security tokens on the BSTX Security Token Market, in
accordance with the Exchange's rules.
9. Company agrees to file all required periodic financial reports
with the SEC, including annual reports and, where applicable, quarterly
or semi-annual reports, by the due dates established by the SEC.
The various provisions of the Listing Agreement are designed to
accomplish several objectives. First, clauses 1-3 and 6-8 reflect the
Exchange's SRO obligations to assure that only listed companies that
are compliant with applicable Exchange rules may remain listed. Thus,
these provisions contractually bind a listed company to comply with
Exchange rules, provide notification of any corporate action or other
event that will cause the company to cease to be in compliance with
Exchange listing requirements, evidence the company's understanding
that it may be removed from listing (subject to applicable procedures)
if it fails to be in compliance or notify the Exchange of any event of
noncompliance, furnish the Exchange with requested information on
demand, pay all fees due and file all required periodic reports with
the SEC. Clauses four and five contain standard legal representations
and agreements from the listed company to the Exchange regarding use of
its logo, trade names, trade/service markets, and trading symbols as
well as potential legal claims against the Exchange in connection
thereto.
[[Page 33488]]
I. BSTX Security Token Market Company Corporate Governance Affirmation
In accordance with the proposed Rule 26800 Series, companies listed
on BSTX would be required to comply with certain corporate governance
standards, relating to, for example, audit committees, director
nominations, executive compensation, board composition, and executive
sessions. In certain circumstances the corporate governance standards
that apply vary depending on the nature of the company. In addition,
there are phase-in periods and exemptions available to certain types of
companies. The proposed BSTX Security Token Market Corporate Governance
Affirmation, attached as Exhibit 3K [sic], enables a company to confirm
to the Exchange that it is in compliance with the applicable standards,
and specify any applicable phase-ins or exemptions. Companies are
required to submit a BSTX Security Token Market Corporate Governance
Affirmation upon initial listing on the Exchange and thereafter when an
event occurs that makes an existing form inaccurate. This BSTX Security
Token Market Corporate Governance Affirmation assists the Exchange
regulatory staff in monitoring listed company compliance with the
corporate governance requirements.
J. Security Token Design Affirmation for the BSTX Security Token Market
In accordance with proposed Rule 26138, in order for a security
token to be admitted to dealings on BSTX, such security token must
follow the BSTX Security Token Protocol. The BSTX Security Token
Protocol will be provided via Regulatory Circular and posted on the
Exchange's website. The Exchange has included an overview of the BSTX
Security Token Protocol as Exhibit 3N [sic]. The Security Token Design
Affirmation, attached as Exhibit 3L [sic], enables a company to affirm
to the Exchange that it is in compliance with the applicable standards.
Companies are required to submit a Security Token Design Affirmation
upon initial listing on the Exchange. This Security Token Design
Affirmation assists the Exchange's staff in verifying that an issuer's
security tokens meet the requirements of the BXTS security token
protocol.
K. Sample Underwriter's Letter
In accordance with proposed Rule 26101, an initial public offering
of a security token must meet certain listing requirements. The
Exchange seeks to require the issuer's underwriter to execute a letter
setting forth the details of the offering, including the name of the
offering and why the offering meets the criteria of the BSTX rules.
This information, set forth in the proposed Sample Underwriter's Letter
and attached as Exhibit 3M [sic], is necessary to assist the Exchange's
regulatory staff in assessing the offering's compliance with BSTX
listing standards for an initial public offering of a security token.
L. BSTX Security Token Protocol Summary Overview
BSTX Rule 26138 requires that a BSTX listed company's security
tokens must comply with the BSTX Security Token Protocol to trade on
BSTX. Exhibit 3N [sic] provides fundamental information related to the
Ethereum blockchain and background information on the functions,
configurations, and events of the Asset Smart Contract of the BSTX
Security Token Protocol. Exhibit 3N [sic] also provides information on
the Registry and Compliance features of the BSTX Security Token
Protocol.
VII. Regulation
In connection with the operation of BSTX, the Exchange will
leverage many of the structures it established to operate a national
securities exchange in compliance with Section 6 of the Exchange
Act.\325\ Specifically, the Exchange will extend its Regulatory
Services Agreement with FINRA to cover BSTX Participants and trading on
the BSTX System. This Regulatory Services Agreement will govern many
aspects of the regulation and discipline of BSTX Participants, just as
it does for options regulation. The Exchange will perform security
token listing regulation, authorize BSTX Participants to trade on the
BSTX System, and conduct surveillance of security token trading on the
BSTX System.
---------------------------------------------------------------------------
\325\ 15 U.S.C. 78f.
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Section 17(d) of the Exchange Act \326\ and the related Exchange
Act rules permit SROs to allocate certain regulatory responsibilities
to avoid duplicative oversight and regulation. Under Exchange Act Rule
17d-1,\327\ the SEC designates one SRO to be the Designated Examining
Authority, or DEA, for each broker-dealer that is a member of more than
one SRO. The DEA is responsible for the financial aspects of that
broker-dealer's regulatory oversight. Because Exchange Participants,
including BSTX Participants, also must be members of at least one other
SRO, the Exchange would generally not be designated as the DEA for any
of its members.\328\
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\326\ 15 U.S.C. 78q(d).
\327\ 17 CFR 240.17d-1.
\328\ See Exchange Rule 2020(a) (requiring that a Participant be
a member of another registered national securities exchange or
association).
---------------------------------------------------------------------------
Rule 17d-2 under the Exchange Act \329\ permits SROs to file with
the Commission plans under which the SROs allocate among each other the
responsibility to receive regulatory reports from, and examine and
enforce compliance with specified provisions of the Exchange Act and
rules thereunder and SRO rules by, firms that are members of more than
one SRO (``common members''). If such a plan is declared effective by
the Commission, an SRO that is a party to the plan is relieved of
regulatory responsibility as to any common member for whom
responsibility is allocated under the plan to another SRO. The Exchange
plans to join the Plan for the Allocation of Regulatory
Responsibilities Regarding Regulation NMS.\330\ The Exchange may choose
to join certain Rule 17d-2 agreements such as the agreement allocating
responsibility for insider trading rules.\331\
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\329\ 17 CFR 240.17d-2.
\330\ Exchange Act Release No. 85046 (February 4, 2019), 84 FR
2643 (February 7, 2019).
\331\ Exchange Act Release No. 84392 (October 10, 2018), 83 FR
52243 (October 16, 2018).
---------------------------------------------------------------------------
For those regulatory responsibilities that fall outside the scope
of any Rule 17d-2 agreements that the Exchange may join, subject to
Commission approval, the Exchange will retain full regulatory
responsibility under the Exchange Act. However, as noted, the Exchange
will extend its existing Regulatory Services Agreement with FINRA to
provide that FINRA personnel will operate as agents for the Exchange in
performing certain regulatory functions with respect to BSTX. As is the
case with the Exchange's options trading platform, the Exchange will
supervise FINRA and continue to bear ultimate regulatory responsibility
for BSTX. Consistent with the Exchange's existing regulatory structure,
the Exchange's Chief Regulatory Officer shall have general supervision
of the regulatory operations of BSTX, including responsibility for
overseeing the surveillance, examination, and enforcement functions and
for administering all regulatory services agreements applicable to
BSTX. Similarly, the Exchange's existing Regulatory Oversight Committee
will be responsible for overseeing the adequacy and effectiveness of
Exchange's regulatory and self-regulatory organization
responsibilities, including those applicable to BSTX. Finally, as it
does with options, the Exchange will
[[Page 33489]]
perform automated surveillance of trading on BSTX for the purpose of
maintaining a fair and orderly market at all times and monitor BSTX to
identify unusual trading patterns and determine whether particular
trading activity requires further regulatory investigation by FINRA.
In addition, the Exchange will oversee the process for determining
and implementing trade halts, identifying and responding to unusual
market conditions, and administering the Exchange's process for
identifying and remediating ``clearly erroneous trades'' pursuant to
proposed Rule 25110. The Exchange shall also oversee the onboarding and
application process for BSTX Participants as well as compliance by
issuers of security tokens with the applicable initial and continuing
listing requirements, including compliance with the BSTX Protocol.\332\
---------------------------------------------------------------------------
\332\ See proposed Exchange Rules 26230 (Security Token
Architecture Audit) and 26138 (BSTX Security Token Protocol).
---------------------------------------------------------------------------
VIII. NMS Plans
The Exchange intends to join the Order Execution Quality Disclosure
Plan, the Plan to Address Extraordinary Market Volatility, the Plan
Governing the Process of Selecting a Plan Processor, and the applicable
plans for consolidation and dissemination of market data. The Exchange
is already a participant in the NMS plan related to the Consolidated
Audit Trail. Consistent with Section 6(b)(5) of the Exchange Act,\333\
the Exchange believes that joining the same set of NMS plans that all
other national securities exchanges that trade equities must join
fosters cooperation and coordination with other national securities
exchanges and other market participants engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities.
---------------------------------------------------------------------------
\333\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with the provisions of the Exchange Act,\334\ in general and with
Section 6(b)(5) of the Exchange Act,\335\ in particular, in that it is
designed to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, 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;
and it is not designed to permit unfair discrimination between
customers, issuers, brokers, or dealers, or to regulate by virtue of
any authority conferred by this title matters not related to the
purposes of this title or the administration of the Exchange.
---------------------------------------------------------------------------
\334\ 15 U.S.C. 78a et seq.
\335\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Exchange believes that BSTX will benefit individual investors,
other market participants, and the equities market generally. The
Exchange proposes to establish BSTX as a facility of the Exchange that
would trade equities in a similar manner to how equities presently
trade on other exchanges. However, BSTX would also require reporting of
end-of-day security token balances to the Exchange in order to
facilitate the use of blockchain technology as an ancillary
recordkeeping mechanism. The Exchange believes that using blockchain
technology as an ancillary recordkeeping mechanism that operates in
parallel with the traditional trading, recordkeeping, and clearance and
settlement structures that market participants are familiar with is an
important first step toward exploring the potential uses and benefits
of blockchain technology in securities transactions. The entry of an
innovative competitor such as BSTX seeking to implement a measured
introduction of blockchain technology in connection with the trading of
equity securities may promote competition by encouraging other market
participants to find ways of using blockchain technology in connection
with securities transactions. The proposed regulation of BSTX and BSTX
Participants, as well as the execution of security tokens using a
price-time priority model and the clearance and settlement of security
tokens will all operate in a manner substantially similar to existing
equities exchanges. In this way, the Exchange believes that BSTX
provides a robust regulatory structure that protects investors and the
public interest while introducing the use of blockchain technology as
an ancillary recordkeeping mechanism in connection with listed equity
securities.
In order to implement the use of blockchain technology as an
ancillary recordkeeping mechanism, the Exchange proposes two
requirements pursuant to proposed Rule 17020 to: (i) Obtain a wallet
address through BSTX to which end-of-day security token balances may be
recorded to the Ethereum blockchain as an ancillary recordkeeping
mechanism; and (ii) requiring BSTX Participants to report their end-of-
day security token balances to BSTX to facilitate updates to the
Ethereum blockchain as an ancillary recordkeeping mechanism to reflect
changes in ownership as a result of trading security tokens.
The Exchange believes that the proposed address whitelisting and
end-of-day security token balance reporting requirement is consistent
with the Exchange Act, and Section 6(b)(5) \336\ in particular, because
it is designed to foster cooperation and coordination with persons
engaged in regulating, clearing, settling, and processing information
with respect to transactions in security tokens and does not unfairly
discriminate among BSTX Participants, all of whom are subject to the
same wallet address and end-of-day reporting requirement. The
requirement to obtain a wallet address is a one-time, minimal
obligation similar to obtaining an MPID or other market participant
identifier that is applicable to each BSTX Participant. The end-of-day
security token balance reporting obligation would be used to update the
Ethereum blockchain as an ancillary recordkeeping mechanism, which the
Exchange believes would be a first step in demonstrating the potential
use of blockchain technology in connection with securities
transactions. The Exchange does not propose to charge a fee in
connection with either of these requirements. As discussed in greater
detail above,\337\ the Exchange believes that these proposed
requirements are consistent with the Exchange Act as they are necessary
to facilitate the blockchain-based ancillary recordkeeping mechanism
and are consistent with authority that the Commission has already
approved for exchanges regarding furnishment of records by members of
the exchange. The Exchange believes that blockchain technology offers
potential benefits to investors, and while such benefits may not be
immediately evident while the blockchain is used only as ancillary
recordkeeping mechanism, the Exchange believes that a measured and
gradual introduction of blockchain technology is a useful way to
explore these potential benefits that is consistent with the protection
of investors and the public interest.
---------------------------------------------------------------------------
\336\ 15 U.S.C. 78f(b)(5).
\337\ See supra Parts II.G. through J for further discussion
regarding why these proposed requirements are consistent with the
Exchange Act.
---------------------------------------------------------------------------
The Exchange also believes that the proposed rule change is
consistent with Section 11A of Exchange Act which sets forth the
Commission's authority to establish and maintain a national
[[Page 33490]]
market system.\338\ In setting forth the Commission's authority to
establish a national market system, Congress expressly contemplated
that the national market system ``may include use of subsystems for
particular types of securities with unique trading characteristics.''
\339\ The Exchange has proposed here a type of security (i.e., security
tokens) that trade, clear, and settle entirely within the scope and
using the same processes as the existing national market system, but
that pursuant to the proposed BSTX Rules would have the unique
characteristic of an end-of-day security token balance reporting
process as an ancillary recordkeeping function using the ``subsystem''
of blockchain technology.\340\ The clear intent of Congress was to
provide for a national market system that could include such
``securities with unique trading characteristics.'' For these reasons
the Exchange believes that the proposed rule change is consistent with
Section 11A of the Exchange Act.
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\338\ 15 U.S.C. 78k-1.
\339\ 15 U.S.C. 78k-1(a)(2).
\340\ The Exchange notes that to the extent the Commission
believes that the ancillary recordkeeping process regarding security
tokens under the proposed BSTX Rules is not a ``unique trading
characteristic'' of security tokens for purposes of Section 11A of
the Exchange Act insofar as it does not directly relate to
``trading'' of security tokens, then there would not be any concern
with respect to security tokens regarding consistency with Section
11A. In other words, either the ancillary recordkeeping process is a
unique trading characteristic of security tokens as explicitly
contemplated by Congress as part of the national market system or it
is not a unique trading characteristic of security tokens because
they will trade, clear, and settle the same as all other NMS stock.
In the latter case, security tokens would be consistent with Section
11A just like all other NMS stock.
---------------------------------------------------------------------------
Finally, the Exchange believes that the proposal is consistent with
Section 6(b)(5) of the Exchange Act because the BSTX Rules would not be
designed to regulate by virtue of any authority conferred by the
Exchange Act matters that are not related to the purposes of the
Exchange Act or the administration of the Exchange. Congress adopted
Section 2 of the Exchange Act to set forth the reasons for the
necessity of the Exchange Act, which expressly include that
``transactions in securities as commonly conducted upon securities
exchanges and over-the-counter markets are effected with a national
public interest which makes it necessary to provide for regulation and
control of such transactions and of practices and matters related
thereto, including . . . to require appropriate reports[.]'' \341\
[emphasis added.] The Exchange Act and rules of self-regulatory
organizations, including national securities exchanges and national
securities associations, include reporting requirements that regulate
and control matters and practices related to securities transactions
conducted on securities exchanges and in the over-the-counter markets.
For example, all of the U.S. options exchanges and FINRA maintain rules
approved by the Commission that require their member broker-dealers to
prepare and submit daily large options position reports to a third-
party administrator that maintains a large options position reporting
system.\342\ These large option positions reports are not reports
regarding the trading or clearance and settlement of securities
transactions themselves but, instead, are reports that are related to
end-of-day positions of the members of the options exchange and/or
FINRA in a particular class of standardized or over-the-counter
securities option. As described above, the proposed BSTX Rules
regarding the ancillary recordkeeping process would similarly require
BSTX Participants to provide reports regarding their end-of-day
positions in security tokens. Also as described above, the Exchange
believes that the requirements regarding the ancillary recordkeeping
process will promote the use of the functionality of smart contracts
and their ability to allocate and re-allocate security token balances
across multiple addresses in connection with end-of-day security token
position balance information of BSTX Participants such that the
requirements will allow market participants to observe and increase
their familiarity with the capabilities and potential benefits of
blockchain technology in a context that parallels current equity market
infrastructure and thereby advances and protects the public's interest
in the use and development of new data processing techniques that may
create opportunities for more efficient, effective and safe securities
markets.\343\
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\341\ 15 U.S.C. 78(b).
\342\ See e.g., FINRA Rule 2360(b)(5) and Cboe Rule 8.43.
\343\ Report of the Senate Committee on Banking, Housing & Urban
Affairs, S. Rep. No. 94-75, at 8 (1975) (expressing Congress'
finding that new data processing and communications systems create
the opportunity for more efficient and effective markets).
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
result in any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Exchange Act. The
Exchange operates in an intensely competitive global marketplace for
transaction services. Relying on its array of services and benefits,
the Exchange competes for the privilege of providing market services to
broker-dealers. The Exchange's ability to compete in this environment
is based in large part on the quality of its trading systems, the
overall quality of its market and its attractiveness to the largest
number of investors, as measured by speed, likelihood and costs of
executions, as well as spreads, fairness, and transparency.
The Exchange believes that the primary areas where the proposed
rule change has the potential to result in a burden on competition are
with regard to the terms on which: (1) Issuers may list their
securities for trading, (2) market participants that may access the
Exchange and use its facilities, (3) security token transactions may be
cleared and settled, (4) security token transactions occurring OTC, and
(5) security token transactions occurring on other exchanges that might
extend unlisted trading privileges to security tokens.
Regarding considerations (1) and (2), and as described in detail in
Item 3 above, the BSTX Rules are drawn substantially from the existing
rules of other exchanges that the Commission has already found to be
consistent with the Exchange Act, including regarding whether they
impose any burden on competition that is not necessary or appropriate
in furtherance of its purposes. For example, the BSTX Listing Rules in
the 26000 and 27000 Series that affect issuers and their ability to
list security tokens for trading are based substantially on the current
rules of NYSE American. The Exchange has proposed that issuers would be
required to create and maintain a security token compliant with the
BSTX Protocol. The Exchange recognizes that these requirements are
additional to those of other exchanges. However, the Exchange does not
believe this poses a burden on competition because issuers are free to
choose to list on other exchanges without such requirements. The
Exchange believes that these requirements may attract issuers that are
interested in exploring the potentials of blockchain technology.
Additionally, the BSTX Rules regarding membership and access to and use
of the facilities of BSTX are also substantially based on existing
exchange rules. Specifically, the relevant BSTX Rules are as follows:
participation on BSTX (Rule 18000 Series); business conduct for BSTX
participants (Rule 19000 Series); financial and operational rules for
BSTX participants (Rule 20000 Series);
[[Page 33491]]
supervision (Rule 21000 Series); miscellaneous provisions (Rule 22000
Series); trading practices (Rule 23000 Series); discipline and summary
suspension (Rule 24000 Series); trading (Rule 25000 Series); market
making (Rule 25200 Series); and dues, fees, assessments, and other
charges (Rule 28000 Series). As described in detail in Item 3, these
rules are substantially based on analogous rules of the following
exchanges, as applicable: BOX; Investors Exchange LLC; Cboe BZX
Exchange, Inc.; The Nasdaq Stock Market LLC; and NYSE American LLC. The
address whitelisting and end-of-day security token balance reporting
requirements to facilitate the use of the Ethereum blockchain as an
ancillary recordkeeping mechanism in proposed Rule 17020 would apply
equally to all BSTX Participants and therefore would not impose any
different burden on one BSTX Participant compared to another. The
Exchange believes that these requirements would impose only a minimal
burden on BSTX Participants that is unlikely to materially impact the
competitive balance among investors and traders of security tokens.
Regarding consideration (3) above and the manner in which security
token transactions may be cleared and settled, the Exchange proposes to
clear and settle security tokens in accordance with the rules, policies
and procedures of a registered clearing agency, similar to how the
Exchange believes other exchange-listed equity securities are cleared
and settled today. Therefore, BSTX's rules do not impose any burden on
competition regarding the manner in which trades may be cleared or
settled because market participants would be able to clear and settle
security token transactions insubstantially the same manner as they
already clear and settle transactions in other types of NMS stock.
With respect to consideration (4) above, as previously noted,
market participants would not be limited in their ability to trade
security tokens OTC because security tokens could be traded OTC and
would be cleared and settled in the same manner as other NMS stocks
through the facilities of a registered clearing agency. Thus, the
Exchange does not believe that its proposal will place any new burden
on competition with respect to OTC trading, given that trading,
clearance and settlement will take place in the same manner as for
other NMS stocks. The Exchange acknowledges that BSTX Participants
would be subject to additional requirements (i.e., acquiring a wallet
address and end-of-day security token balance reporting pursuant to
proposed Rule 17020) that are not required of non-BSTX Participants
trading security tokens. The Exchange believes that these additional
requirements impose only a minimal burden on BSTX Participants and
should not have any material or undue burden or impact on competition
between BSTX Participants and non-BSTX Participants. Acquiring a wallet
address is a one-time burden that can be readily addressed by
contacting the Exchange, and the end-of-day security token balance
reporting requests only that the BSTX Participant, either directly or
through its carrying firm, report information that it (or its carrying
firm) already has available to it from DTC on a daily basis regarding
the balance of security tokens held.
Finally, with respect to consideration (5) noted above regarding
other exchanges extending unlisted trading privileges to security
tokens, the Exchange does not believe that the proposed Rules would
impose a burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Exchange Act. Security tokens would
trade, clear, and settle in the same manner as other NMS stock.
Accordingly, other exchanges would be able to extend unlisted trading
privileges to security tokens in accordance with Commission rules.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received from Members, Participants, or Others
The Exchange has neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be 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-BOX-2020-14 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-BOX-2020-14. 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 website (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 available for website 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. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-BOX-2020-14 and should be submitted on
or before June 22, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\344\
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\344\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-11651 Filed 5-29-20; 8:45 am]
BILLING CODE 8011-01-P