Self-Regulatory Organizations; BOX Exchange LLC; Notice of Filing of Amendment No. 1 and Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change, as Modified by Amendment No. 1, 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, 4040-4045 [2020-01041]
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4040
Federal Register / Vol. 85, No. 15 / Thursday, January 23, 2020 / Notices
does not impose a burden on
competition.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were solicited
or received with respect to 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 up to 90 days (i) as the
Commission may designate 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, as modified by Amendment No.
1, is consistent with the Act. Comments
may be submitted by any of the
following methods:
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Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
NYSECHX–2020–01 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–NYSECHX–2020–01. 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 (https://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
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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–NYSECHX–2020–01 and
should be submitted on or before
February 13, 2020.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.27
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–01032 Filed 1–22–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–88002; File No. SR–BOX–
2019–19]
Self-Regulatory Organizations; BOX
Exchange LLC; Notice of Filing of
Amendment No. 1 and Order Instituting
Proceedings To Determine Whether To
Approve or Disapprove a Proposed
Rule Change, as Modified by
Amendment No. 1, 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
January 16, 2020.
On September 27, 2019, BOX
Exchange LLC (‘‘Exchange’’ or ‘‘BOX’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Exchange
Act’’) 1 and Rule 19b–4 thereunder,2 a
proposed rule change to adopt rules
governing the listing and trading of
equity securities that would be NMS
stocks on the Exchange through a
facility of the Exchange known as the
Boston Security Token Exchange LLC
(‘‘BSTX’’). The proposed rule change
27 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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was published for comment in the
Federal Register on October 18, 2019.3
On November 29, 2019, pursuant to
Section 19(b)(2) of the Exchange Act,4
the Commission designated a longer
period within which to approve the
proposed rule change, disapprove the
proposed rule change, or institute
proceedings to determine whether to
approve or disapprove the proposed
rule change.5 On December 26, 2019,
the Exchange filed Amendment No. 1 to
the proposed rule change, which
amended the proposed rule change as
originally filed.6 The Commission has
received one comment letter on the
proposed rule change.7 The Commission
is publishing this notice and order to
3 See Securities Exchange Act Release No. 87287
(October 11, 2019), 84 FR 56022 (October 18, 2019)
(‘‘Notice’’).
4 15 U.S.C. 78s(b)(2).
5 See Securities Exchange Act Release No. 87641
(November 29, 2019), 84 FR 66701 (December 5,
2019). The Commission designated January 16,
2020, as the date by which the Commission shall
approve or disapprove, or institute proceedings to
determine whether to approve or disapprove, the
proposed rule change.
6 In Amendment No. 1, the Exchange revised the
proposal to: (1) Adopt listing standards that are
similar to those of NYSE American, rather than
quantitative listing standards that are 20% lower
than those of NYSE American as initially proposed;
(2) remove the requirement that, for a period of one
year from the commencement of trading in security
tokens on BSTX, non-BSTX Participants must
obtain a wallet address from the Exchange and
agree to report their end-of-day security token
balances to BSTX; (3) provide for an omnibus wallet
address to which the Exchange would instruct
Wallet Managers to allocate unreported end-of-day
balances for a given type of security token, resulting
either from security tokens held by non-BSTX
Participants who are not subject to the end-of-day
balance reporting requirement or from any missing
end-of-day balance reports among BSTX
Participants; (4) state that a BSTX Participant who
fails to obtain a wallet address prior to acquiring
a position in a security token, fails to report the
end-of-day balances in a timely manner, or
inaccurately reports such balances would be subject
to disciplinary action; (5) add additional listing
requirements for security tokens issued by affiliates
of the Exchange; (6) require at least three market
makers upon initial listing for a security token that
does not utilize a designated market maker
(‘‘DMM’’); (7) state that the Ethereum blockchain
serves as ancillary records that would not create or
convey any ownership of security tokens or
shareholder equity in the issuer; and (8) make
technical and conforming changes. See text
accompanying infra note 12 for the Exchange’s
definition of ‘‘security tokens,’’ infra note 15 for the
definition of ‘‘BSTX Participant,’’ and infra note 18
for the definition of ‘‘Wallet Manager.’’ When the
Exchange filed Amendment No. 1 to BOX–2019–19,
it also submitted the text of the partial amendment
as a comment letter to the filing, which the
Commission made publicly available at https://
www.sec.gov/comments/sr-box-2019-19/
srbox201919-6613675-202939.pdf (‘‘Amendment
No. 1’’).
7 See Letter from Ellen Greene, Managing
Director, SIFMA, to Vanessa Countryman,
Secretary, Commission, dated January 13, 2020,
available at https://www.sec.gov/comments/sr-box2019-19/srbox201919-6640676-203567.pdf
(‘‘SIFMA Letter’’).
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solicit comments on the proposed rule
change, as modified by Amendment No.
1, from interested persons and to
institute proceedings pursuant to
Section 19(b)(2)(B) of the Exchange Act 8
to determine whether to approve or
disapprove the proposed rule change, as
modified by Amendment No. 1.
I. Summary of the Proposal, as
Modified by Amendment No. 1
As described in the Notice and
Amendment No. 1,9 the Exchange
proposes to adopt rules governing the
trading of equity securities through a
facility of the Exchange known as
BSTX.10 BSTX proposes to operate a
fully automated, price-time priority
execution system to trade equity
securities that are NMS stocks and meet
BSTX listing standards.11 These
securities would have ancillary records
of ownership reflecting certain end-ofday security token balances as reported
by market participants that would be
created and maintained using
distributed ledger technology (such
securities to be referred to as ‘‘security
tokens’’).12 According to the Exchange,
official records of security ownership
would be maintained by participants at
The Depository Trust Company
(‘‘DTC’’), and attribution of a security
token on the Ethereum blockchain
would not convey ownership of
shareholder equity in the issuer.13
According to the Exchange, security
tokens would have their ancillary record
of ownership recorded on the Ethereum
blockchain using a protocol standard
determined by BSTX (the ‘‘BSTX
Security Token Protocol’’).14 The
Exchange proposes that each BSTX
Participant 15 would be required to
establish, either directly or through a
carrying firm, a whitelisted wallet
address to which its end-of-day security
token ownership balances may be
recorded.16 The Exchange proposes that
each business day, each BSTX
Participant would be required to report
to BSTX certain end-of-day security
U.S.C. 78s(b)(2)(B).
Notice, supra note 3; Amendment No. 1,
supra note 6.
10 See Notice, supra note 3, 84 FR at 56022.
11 See id.
12 See id.
13 See id. at 56026.
14 See id. at 56025.
15 A ‘‘BSTX Participant’’ would be a participant
that is authorized to trade security tokens on the
Exchange. See proposed BSTX Rule 17000(a)(11).
16 See Notice, supra note 3, 84 FR at 56027.
According to the Exchange, a whitelisted wallet
address would be a permissioned number
associated with a particular market participant to
which security tokens may be sent. The Registry
Smart Contract, which is an ancillary smart contract
within the BSTX Security Token Protocol, contains
a list of whitelisted addresses. See id. at 56026–27.
token ownership balances in a manner
and form acceptable to BSTX.17 The
Exchange would then, in coordination
with a Wallet Manager,18 cause the
Ethereum blockchain to be updated as
an ancillary recordkeeping mechanism
to reflect changes in ownership of
security tokens.19 According to the
Exchange, non-BSTX Participants that
may trade security tokens would not be
subject to the requirement to obtain a
wallet address or to the end-of-day
ownership reporting requirements.20
According to the Exchange, to account
for instances in which a BSTX
Participant fails to report or inaccurately
reports its end-of-day ownership
balance and the position of security
tokens held by non-BSTX Participants
who are not subject to the end-of-day
ownership reporting requirement, the
Exchange would require the Wallet
Mangers to allocate all such unreported
security token balances for a given
security token to a single omnibus
wallet address.21 The Exchange states
that the Ethereum blockchain would
display security token balances that
would reflect end-of-day ownership
balances reported to BSTX pursuant to
proposed BSTX Rule 17020 22 and a
balance allocated to the 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. Thus,
according to the Exchange, the
Ethereum blockchain may not reflect the
precise distribution of a security token
among holders, and may also display
inaccurate information to the extent that
BSTX Participants inaccurately report
their end-of-day ownership balances to
BSTX.23
The Exchange proposes that security
tokens would be only eligible for trading
on another national securities exchange
if that exchange is able to support
trading in security tokens 24 and has in
effect rules providing for the trading of
security tokens on that exchange,
8 15
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9 See
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17 See
id. at 56027.
Exchange proposes to define a ‘‘Wallet
Manager’’ as a party approved by BSTX to operate
software compatible with the BSTX Security Token
Protocol. See proposed Rule 17000(a)(31).
According to the Exchange, the Wallet Manager
would act as a third-party service provider for the
Exchange that would facilitate establishing wallet
addresses and updating the Ethereum blockchain.
See Notice, supra note 3, 84 FR at 56027 n.44.
19 See Notice, supra note 3, 84 FR at 56027–28.
20 See Amendment No. 1, supra note 6, at 5.
21 See id. at 6.
22 Proposed BSTX Rule 17020 sets forth the
proposed end-of-day reporting requirements for
BSTX Participants. See proposed BSTX Rule 17020.
23 See Amendment No. 1, supra note 6, at 6.
24 See Notice, supra note 3, 84 FR at 56029.
18 The
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4041
including rules requiring that exchange
members obtain a wallet address
compatible with the BSTX Security
Token Protocol and adopt some
mechanism to report end-of-day security
token ownership balances to BSTX.25
The Exchange also proposes rules for
participation on BSTX, business
conduct for BSTX Participants, financial
and operational rules for BSTX
Participants, supervision, trading
practices, discipline, trading rules, and
market making.26 In addition, the
Exchange proposes listing standards
that, according to the Exchange, are
similar to the listing standards of NYSE
American.27 The Exchange proposes
that these listing standards would also
specify that all listed security tokens
must comply with the BSTX Security
Token Protocol.28
According to the Exchange, all
transactions in security tokens would
clear and settle in accordance with the
rules, policies, and procedures of
registered clearing agencies.29 The
Exchange states that BSTX anticipates
that DTC would serve as the securities
depository for security tokens and that
confirmed trades in securities tokens on
BSTX would be transmitted to National
Securities Clearing Corporation
(‘‘NSCC’’) for clearing.30
II. Summary of the Comment
To date the Commission has received
one comment letter on the proposal.31
The commenter notes that the proposal
was only recently brought to its
attention because it did not anticipate
that a filing by an options exchange to
create a facility could impact the U.S.
equities markets.32 The commenter
expresses concern that the approval of
the proposal ‘‘could be a significant
change for the equities market.’’ 33 The
25 See
id.
id. at 56030–43. The trading rules that the
Exchange proposes include provisions for primary
distributions of securities to be made through the
Exchange, including using an auction process. See
id. at 56035–36.
27 See Amendment No. 1, supra note 6, at 10–11.
28 See Notice, supra note 3, 84 FR at 56025.
29 See id. at 56023.
30 See id.
31 See SIFMA Letter, supra note 7.
32 Id. at 2.
33 Id. The commenter’s letter also references
another filing by the Exchange, SR–BOX–2019–37,
which also relates to the commencement of
operations of BSTX. Id. at 1 (referencing Securities
Exchange Act Release No. 87868 (December 30,
2019), 85 FR 345 (January 3, 2020) (SR–BOX–2019–
37) (‘‘BSTX Corporate Governance Proposal’’)).
With the BSTX Corporate Governance Proposal,
BSTX proposes the corporate governance
documents for the BSTX facility, and describes the
proposed initial ownership structure for the facility,
which would be 50% owned by BOX Digital
Markets LLC, a subsidiary of BOX Holdings Group
26 See
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commenter requests an extension of the
comment period to consider the
proposal, particularly on the
implications of the characterization of
security tokens as NMS stocks, the use
of blockchain, and the potential impact
on unlisted trading privileges.34
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III. Proceedings To Determine Whether
To Approve or Disapprove SR–BOX–
2019–19 and Grounds for Disapproval
Under Consideration
The Commission is instituting
proceedings pursuant to Section
19(b)(2)(B) of the Exchange Act 35 to
determine whether the proposed rule
change should be approved or
disapproved. Institution of such
proceedings is appropriate at this time
in view of the legal and policy issues
raised by the proposed rule change.
Institution of proceedings does not
indicate that the Commission has
reached any conclusions with respect to
any of the issues involved. Rather, as
described below, the Commission seeks
and encourages interested persons to
provide additional comment on the
proposed rule change to inform the
Commission’s analysis of whether to
approve or disapprove the proposed
rule change.
Pursuant to Section 19(b)(2)(B) of the
Exchange Act,36 the Commission is
providing notice of the grounds for
disapproval under consideration:
• Whether the Exchange has
demonstrated how the proposal is
consistent with Section 6(b)(1) of the
Exchange Act, which requires, among
other things, that a national securities
exchange be so organized and have the
capacity to be able to carry out the
purposes of the Exchange Act and to
comply, and enforce compliance by its
members and persons associated with
its members, with the provisions of the
Exchange Act, the rules and regulations
thereunder, and the rules of the
Exchange; 37
• Whether the Exchange has
demonstrated how the proposal is
consistent with Section 6(b)(5) of the
Exchange Act, which requires, among
other things, that the rules of a national
securities exchange be designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, to foster
LLC—an affiliate of the Exchange, and 50% owned
by tZERO Group, Inc., an indirect subsidiary of
Overstock.com, Inc. See id. The commenter also
requests more time to provide feedback on the
BSTX Corporate Governance Proposal. See SIFMA
Letter, supra note 7, at 2.
34 See SIFMA Letter, supra note 7, at 2.
35 15 U.S.C. 78s(b)(2)(B).
36 Id.
37 15 U.S.C. 78f(b)(1).
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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 to protect investors and the
public interest, and not be designed to
permit unfair discrimination between
customers, issuers, brokers, or
dealers; 38
• Whether the Exchange has
demonstrated how the proposal is
consistent with Section 6(b)(7) of the
Exchange Act, which requires that the
rules of the exchange provide a fair
procedure for the prohibition or
limitation by the exchange of any
person with respect to access to services
offered by the exchange; 39
• Whether the Exchange has
demonstrated how the proposal is
consistent with Section 6(b)(8) of the
Exchange Act, which requires that the
rules of the exchange do not impose any
burden on competition not necessary or
appropriate in furtherance of the
purposes of the Exchange Act; 40
• Whether the Exchange has
demonstrated how the proposal is
consistent with Section 11A of the
Exchange Act, which provides the
Commission’s authority to establish and
maintain a national market system; 41
• Whether the Exchange has
demonstrated how the proposal is
consistent with Section 12 of the
Exchange Act, which provides, among
other things, certain requirements that a
national securities exchange must
comply with to extend unlisted trading
privileges to securities originally listed
on another national securities
exchange; 42 and
• Whether the Exchange has
demonstrated how the proposal is
consistent with Section 17A of the
Exchange Act, which provides, among
other things, the Commission’s
authority to establish linked or
coordinated facilities for the clearance
and settlement of transactions in
securities.43
Under the Commission’s Rules of
Practice, the ‘‘burden to demonstrate
that a proposed rule change is
consistent with the Exchange Act and
the rules and regulations issued
thereunder . . . is on the [SRO] that
proposed the rule change.’’ 44 The
38 15
U.S.C. 78f(b)(5).
U.S.C. 78f(b)(7).
40 15 U.S.C. 78f(b)(8).
41 15 U.S.C. 78k–1.
42 15 U.S.C. 78l.
43 15 U.S.C. 78q–1.
44 17 CFR 201.700(b)(3).
39 15
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description of a proposed rule change,
its purpose and operation, its effect, and
a legal analysis of its consistency with
applicable requirements must all be
sufficiently detailed and specific to
support an affirmative Commission
finding,45 and any failure of an SRO to
provide this information may result in
the Commission not having a sufficient
basis to make an affirmative finding that
a proposed rule change is consistent
with the Exchange Act and the
applicable rules and regulations.46
The Commission is instituting
proceedings to allow for additional
consideration and comment on the
issues raised herein, including as to
whether the proposal is consistent with
the Exchange Act.
IV. Procedure: Request for Written
Comments
The Commission requests that
interested persons provide written
submissions of their views, data, and
arguments with respect to the issues
identified above, as well as any other
concerns they may have with the
proposal. In particular, the Commission
invites the written views of interested
persons concerning whether the
proposal, as modified by Amendment
No. 1, is consistent with Sections
6(b)(1),47 6(b)(5),48 6(b)(7),49 6(b)(8),50
11A,51 12,52 and 17A 53 of the Exchange
Act or any other provision of the
Securities Act of 1933 (‘‘Securities Act’’)
or the Exchange Act, or the rules and
regulations thereunder. Although there
do not appear to be any issues relevant
to approval or disapproval that would
be facilitated by an oral presentation of
views, data, and arguments, the
Commission will consider, pursuant to
Rule 19b–4 under the Exchange Act,54
any request for an opportunity to make
an oral presentation.55
Interested persons are invited to
submit written data, views, and
arguments regarding whether the
45 See
id.
id.
47 15 U.S.C. 78f(b)(1).
48 15 U.S.C. 78f(b)(5).
49 15 U.S.C. 78f(b)(7).
50 15 U.S.C. 78f(b)(8).
51 15 U.S.C. 78k–1.
52 15 U.S.C. 78l.
53 15 U.S.C. 78q–1.
54 17 CFR 240.19b–4.
55 Section 19(b)(2) of the Exchange Act, as
amended by the Securities Act Amendments of
1975, Public Law 94–29 (June 4, 1975), grants the
Commission flexibility to determine what type of
proceeding—either oral or notice and opportunity
for written comments—is appropriate for
consideration of a particular proposal by a selfregulatory organization. See Securities Act
Amendments of 1975, Senate Comm. on Banking,
Housing & Urban Affairs, S. Rep. No. 75, 94th
Cong., 1st Sess. 30 (1975).
46 See
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proposal should be approved or
disapproved by February 13, 2020. Any
person who wishes to file a rebuttal to
any other person’s submission must file
that rebuttal by February 27, 2020.
The Commission asks that
commenters address the sufficiency of
the Exchange’s statements in support of
the proposal, which are set forth in the
Notice and Amendment No. 1,56 in
addition to any other comments they
may wish to submit about the proposed
rule change. In particular, the
Commission seeks comment on the
following questions and asks
commenters to submit data where
appropriate to support their views:
• What are commenters’ views on the
use of distributed ledger technology to
create and maintain unofficial ancillary
records of ownership reflecting certain
end-of-day security token ownership
balances as reported by market
participants, and the use of the
Ethereum blockchain in particular?
What are commenters’ views on
whether the use of the Ethereum
blockchain for an ancillary record of
ownership is consistent with referring to
the security as a ‘‘token’’? What are
commenters’ views on advantages and
disadvantages of having an unofficial
ancillary record of a security’s
ownership on the Ethereum blockchain,
in addition to an official record of such
security’s ownership through DTC,
including costs and benefit to investors
or the integrity of the securities
markets?
• What are commenters’ views on
potential discrepancies that may exist
between the official records of
ownership and the unofficial ancillary
records maintained on the Ethereum
blockchain, how erroneous entries of
transactions on the Ethereum
blockchain would be identified and
addressed, and how the unofficial
ancillary record would be updated after
events such as dividends and stock
splits? Do commenters believe that
potential discrepancies between the
official records of ownership and the
unofficial ancillary records maintained
on the Ethereum blockchain could pose
risks to investors, other market
participants, the securities market, or
the national clearance and settlement
system? Please explain why or why not.
• What are commenters’ views on
whether the ancillary recordkeeping
mechanism is inconsistent with Section
17A(a)(2)(A)(ii) of the Exchange Act,57
which directs the Commission to
facilitate the establishment of linked or
coordinated facilities for clearance and
settlement of securities transactions, or
any other provision of the Exchange
Act, or the rules and regulations
thereunder?
• The Exchange states that
‘‘[p]ursuant to Rule 12f–5 under the
Exchange Act,58 an exchange may not
extend unlisted trading privileges to any
security unless the national securities
exchange has in effect rules providing
for transactions in the class or type of
security to which the exchange extends
unlisted trading privileges’’ 59 and that
to be able to extend unlisted trading
privileges to BSTX-listed security
tokens, another national security
exchanges would need rules that would
‘‘(i) requir[e] that exchange members
obtain a wallet address compatible with
the BSTX Security Token Protocol in
order to attribute security token
balances with that exchange member;
and (ii) adopt[] some mechanism to
report end-of-day security token
[ownership] balances to BSTX in order
to facilitate updates of ownership to the
Ethereum blockchain as an ancillary
recordkeeping mechanism.’’ 60 What are
commenters’ views on how a national
securities exchange seeking to extend
unlisted trading privileges to a BSTXlisted security token might fulfill these
requirements and whether doing so
would impose a burden on competition
that is not necessary or appropriate in
furtherance of the purposes of the
Exchange Act? Do commenters agree
with the Exchange’s assertion that the
burden on another exchange of adopting
additional rules to extend unlisted
trading privileges to trade BSTX-listed
security tokens is no different than the
burden on an exchange that only trades
equities having to first adopt rules to
govern options trading prior to offering
trading in options? 61 Why or why not?
• Do commenters believe that the
proposal, including the proposed
requirement that the BSTX Participants
report their end-of-day ownership
balances to BSTX to be recorded to the
Ethereum blockchain, is designed to
remove impediments to and perfect the
mechanism of a free and open market
and a national market system for NMS
stock? 62 Why or why not? Do
commenters believe that the proposal is
in the public interest and appropriate
for the protection of investors and is
designed to maintain fair and orderly
markets to assure, among other things,
fair competition among brokers and
58 17
CFR 240.12f–5 (citation in original).
supra note 3, 84 FR at 56029.
59 Notice,
56 See Notice, supra note 3; Amendment No. 1,
supra note 6.
57 15 U.S.C. 78q–1(a)(2)(A)(ii).
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dealers, among exchange markets, and
between exchange markets and markets
other than exchange markets; and the
practicability of brokers executing
investors’ orders in the best market? 63
Why or why not?
• Do commenters agree with the
Exchange’s assertion that requiring
BSTX Participants to report their end-ofday ownership balances to the
Exchange, while non-BSTX Participants
would not be subject to the same
requirement, would ‘‘impose only a
minimal burden on BSTX
Participants’’? 64 Why or why not? Do
commenters believe that the
requirements imposed by the end-of-day
ownership reporting requirements
would result in a burden or impact on
competition between BSTX Participants
and non-BSTX Participants or
otherwise, that would be necessary or
appropriate in furtherance of the
Exchange Act? Why or why not?
• What are commenters’ views on the
Exchange’s proposal to disseminate endof-day ownership information, potential
inaccuracies in that information, how
and when that information would be
disseminated, and how market
participants would have access to view
this information on the Ethereum
blockchain? What are commenters’
views on any advantages or
disadvantages with the Exchange’s
proposal to disseminate end-of-day
ownership information?
• What are commenters’ views on the
use of an omnibus account to reflect
discrepancies between the sum of endof-day balances reported by BSTX
Participants and the number of security
tokens known by the Exchange to be
issued and outstanding? Do commenters
have concerns about how and when the
balances attributed to the omnibus
wallet address would be calculated and
by whom? What are commenters’ views
on how the number of securities for a
given security token attributed to the
omnibus wallet address may change
over time and the potential for the total
number of securities for a security token
attributed to the omnibus wallet address
to exceed the number of disseminated
whitelisted address for that security
token? What are commenters’ views on
whether they would have access to the
information necessary to differentiate
the balances attributed to the omnibus
wallet address from the balances
attributed to whitelisted addresses in
the information disseminated on the
Ethereum blockchain and, if not, the
potential for confusion by investors or
other market participants?
60 Id.
61 See
62 See
PO 00000
id. at 56055.
15 U.S.C. 78f(b)(5).
Frm 00153
Fmt 4703
63 See
15 U.S.C. 78k–1(a)(1)(C)(ii), (iv).
No. 1, supra note 6, at 15.
64 Amendment
Sfmt 4703
4043
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4044
Federal Register / Vol. 85, No. 15 / Thursday, January 23, 2020 / Notices
• What are commenters’ views on the
proposed requirement that end-of-day
security token balances must be
reported to BSTX each business day
when the securities depository is also
open for business, after such time as the
securities depository has completed its
end-of-day settlement process? Do
commenters agree with ‘‘BSTX’s belie[f]
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’’? 65 Why or why
not? What are commenters’ view on
how the Exchange will enforce
compliance with the end-of-day
ownership reporting requirement on
BSTX Participants?
• What are commenters’ views on the
Exchange’s proposal to require each
BSTX Participant to, either directly or
through its carrying firm, establish a
whitelisted wallet address to which its
end-of-day security token ownership
balances may be recorded by contacting
BSTX or a Wallet Manager? 66 What are
commenters’ views on the function and
activities of the Exchange Wallet
Manager and how the Wallet Manager
will assist a BSTX Participant with
establishing a wallet address? What are
commenters’ views on the standard the
Exchange will use to select a Wallet
Manager, the standard that the Wallet
Manager will use to approve or deny
applications to establish a wallet
address, Exchange’s oversight of the
Wallet Manager’s activities, including
the Wallet Manager’s approval or denial
of applications to establish a wallet
address, and the Exchange’s rules and
procedures to ensure that a Wallet
Manager does not act in an unfair or
discriminatory manner in performing its
function?
• What are commenters’ views on
whether it would be feasible for third
parties not affiliated with BSTX to serve
as a Wallet Manager? What are
commenters’ views on the Exchange’s
representation that the BSTX Security
Token Protocol is based on open source
code, that the Exchange would not
require the use of a particular version of
Wallet Manager software, and that
anyone would be eligible to serve or
operate as a Wallet Manager provided
they are capable of facilitating effective
updates to the Ethereum blockchain to
reflect changes in security token
ownership? 67 What are commenters’
views on competition to be a Wallet
Manager and any potential for conflicts
of interest that may arise between or
among national securities exchange and
Wallet Managers for trading BSTX-listed
security tokens?
• While the Exchange proposes that
the Exchange and Wallet Manager will
not charge a fee for obtaining a wallet
address, what are commenters’ views on
the costs that may be incurred because
of the end-of-day security token balance
reporting process to investors, issuers,
broker-dealers, including BSTX
Participants and non-BSTX Participants,
Wallet Managers, and trading centers,
such as national securities exchanges
and alternative trading systems? 68
• Do commenters agree with the
Exchange’s assertion that ‘‘[o]wnership
of security tokens would be able to be
transferred without regard to the
blockchain-based ancillary
recordkeeping functionality’’? 69 Why or
why not? What are commenters’ views
on whether or not having a security
token attributed to a wallet address
could mean that the holder of the wallet
address has a shareholder equity
interest in the issuer? What are
commenters’ views on how disputes
over ownership of security token would
be enforced by the Exchange or any
other party?
• The proposed trading rules include
provisions providing for primary
distributions of securities be made
through the Exchange, including using
an auction process.70 Do commenters
agree with the Exchange’s assertion that
the proposed method of opening trading
in securities, including with respect to
initial security token offerings,
‘‘provides a simple and clear method for
opening transactions that is consistent
with the protection of investors and the
id. at 56055.
id. at 56046 n.286.
69 Id. at 56023.
70 See id. at 56035–36.
jbell on DSKJLSW7X2PROD with NOTICES
supra note 3, 84 FR at 56028.
66 See id. at 56027.
VerDate Sep<11>2014
17:13 Jan 22, 2020
Jkt 250001
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
BOX–2019–19 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.
67 See
68 See
65 Notice,
public interest’’? 71 Why are why not?
Do commenters understand from the
Exchange’s proposal how primary
offerings of security tokens could be
made through the Exchange in
compliance with the Securities Act,
including the registration and
prospective delivery provisions, and the
related rules thereunder? If not, what
information would be helpful? Do
commenters understand from the
Exchange’s proposal how broker-dealers
using the Exchange to engage in primary
offerings of securities would be able to
comply with their obligations under the
Securities Act and the Exchange Act,
and the respective rules thereunder? If
so, please describe how a broker-dealer
could comply.
• The Exchange states that ‘‘NSCC
already has authority under its rules,
policies and procedures to clear certain
trades on a T+1 or T+0 basis.’’ 72 What
are commenters’ views on the NSCC
process for clearing security tokens? Do
commenters believe that the Exchange
has adequately explained why BSTX
Participants may agree to shorter or
longer settlement cycles than T+1,73 and
the potential effects of such shorter or
longer settlement cycles?
• What are commenters’ views on the
rules the Exchange is proposing for
short sales of security tokens? Do
commenters believe that the proposed
short selling rules are appropriately
designed for the ancillary recordkeeping
on the Ethereum blockchain and the
T+1 reporting? Why or why not?
Comments may be submitted by any
of the following methods:
PO 00000
Frm 00154
Fmt 4703
71 Id.
at 56037.
at 56025.
73 See id. at 56024–25, 56039.
72 Id.
Sfmt 4703
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4045
Federal Register / Vol. 85, No. 15 / Thursday, January 23, 2020 / Notices
All submissions should refer to File
Number SR–BOX–2019–19. 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 (https://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–2019–19 and should
be submitted by February 13, 2020.
Rebuttal comments should be submitted
by February 27, 2020.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.74
J. Matthew DeLesDernier,
Assistant Secretary.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
[FR Doc. 2020–01041 Filed 1–22–20; 8:45 am]
In its filing with the Commission, the
Exchange 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
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–87998; File No. SR–ISE–
2020–01]
Self-Regulatory Organizations; Nasdaq
ISE, LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Amend the
Exchange’s Pricing Schedule at
Options 7
January 16, 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 January 2,
2020, Nasdaq ISE, LLC (‘‘ISE’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission (‘‘SEC’’ or
‘‘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.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend the
Exchange’s Pricing Schedule at Options
7, as described further below.
The text of the proposed rule change
is available on the Exchange’s website at
https://ise.cchwallstreet.com/, at the
principal office of the Exchange, and at
the Commission’s Public Reference
Room.
Priority customer complex tier
Tier
Tier
Tier
Tier
Tier
1
2
3
4
5
................................................
................................................
................................................
................................................
................................................
jbell on DSKJLSW7X2PROD with NOTICES
The purpose of the proposed rule
change is to amend the Exchange’s
Pricing Schedule at Options 7. Each
change is described below.
Priority Customer Complex Legging
Rebate
Currently, the Exchange provides
rebates to Priority Customer 3 complex
orders that trade with non-Priority
Customer complex orders in the
complex order book or trade with quotes
and orders on the regular order book.
This program is designed to encourage
Members to bring complex volume to
the Exchange, including incentivizing
Members to bring Priority Customer
complex orders specifically to earn the
associated rebates. Rebates are tiered
based on a percentage of total industry
volume.4 There are currently nine
Priority Customer Complex Tiers as
follows: 5
Rebate for
select
symbols 6
0.000–0.200 ...............................................................................................
Above 0.200–0.400 ...................................................................................
Above 0.400–0.600 ...................................................................................
Above 0.600–0.750 ...................................................................................
Above 0.750–1.000 ...................................................................................
CFR 200.30–3(a)(57).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 A ‘‘Priority Customer’’ is a person or entity that
is not a broker/dealer in securities, and does not
place more than 390 orders in listed options per day
on average during a calendar month for its own
beneficial account(s), as defined in Nasdaq ISE
Options 1, Section 1(a)(36).
4 The Priority Customer Complex Tiers are based
on total Affiliated Member or Affiliated Entity
complex order volume (excluding Crossing Orders
1 15
17:13 Jan 22, 2020
1. Purpose
Complex order volume percentage
74 17
VerDate Sep<11>2014
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
Jkt 250001
and Responses to Crossing Orders) calculated as a
percentage of total national volume cleared at The
Options Clearing Corporation in the Customer range
in equity and ETF options for that month
(hereinafter, ‘‘Complex Order Volume Percentage’’).
All complex order volume executed on the
Exchange, including volume executed by Affiliated
Members, is included in the volume calculation,
except for volume executed as Crossing Orders and
Responses to Crossing Orders. Affiliated Entities
may also aggregate their complex order volume for
purposes of calculating Priority Customer rebates.
The Appointed OFP would receive the rebate
PO 00000
Frm 00155
Fmt 4703
Sfmt 4703
($0.25)
(0.30)
(0.35)
(0.40)
(0.45)
Rebate for
non-select
symbols 7
($0.40)
(0.55)
(0.70)
(0.75)
(0.80)
associated with the qualifying volume tier based on
aggregated volume.
5 The rebate for the highest tier volume achieved
is applied retroactively to all eligible Priority
Customer complex volume once the threshold has
been reached. Members will not receive rebates for
net zero complex orders. For purposes of
determining which complex orders qualify as ‘‘net
zero’’ the Exchange will count all complex orders
that leg into the regular order book and are executed
at a net price per contract that is within a range of
$0.01 credit and $0.01 debit.
E:\FR\FM\23JAN1.SGM
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]]>Agencies
[Federal Register Volume 85, Number 15 (Thursday, January 23, 2020)]
[Notices]
[Pages 4040-4045]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-01041]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-88002; File No. SR-BOX-2019-19]
Self-Regulatory Organizations; BOX Exchange LLC; Notice of Filing
of Amendment No. 1 and Order Instituting Proceedings To Determine
Whether To Approve or Disapprove a Proposed Rule Change, as Modified by
Amendment No. 1, 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
January 16, 2020.
On September 27, 2019, BOX Exchange LLC (``Exchange'' or ``BOX'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule
change to adopt rules governing the listing and trading of equity
securities that would be NMS stocks on the Exchange through a facility
of the Exchange known as the Boston Security Token Exchange LLC
(``BSTX''). The proposed rule change was published for comment in the
Federal Register on October 18, 2019.\3\ On November 29, 2019, pursuant
to Section 19(b)(2) of the Exchange Act,\4\ the Commission designated a
longer period within which to approve the proposed rule change,
disapprove the proposed rule change, or institute proceedings to
determine whether to approve or disapprove the proposed rule change.\5\
On December 26, 2019, the Exchange filed Amendment No. 1 to the
proposed rule change, which amended the proposed rule change as
originally filed.\6\ The Commission has received one comment letter on
the proposed rule change.\7\ The Commission is publishing this notice
and order to
[[Page 4041]]
solicit comments on the proposed rule change, as modified by Amendment
No. 1, from interested persons and to institute proceedings pursuant to
Section 19(b)(2)(B) of the Exchange Act \8\ to determine whether to
approve or disapprove the proposed rule change, as modified by
Amendment No. 1.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 87287 (October 11,
2019), 84 FR 56022 (October 18, 2019) (``Notice'').
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 87641 (November 29,
2019), 84 FR 66701 (December 5, 2019). The Commission designated
January 16, 2020, as the date by which the Commission shall approve
or disapprove, or institute proceedings to determine whether to
approve or disapprove, the proposed rule change.
\6\ In Amendment No. 1, the Exchange revised the proposal to:
(1) Adopt listing standards that are similar to those of NYSE
American, rather than quantitative listing standards that are 20%
lower than those of NYSE American as initially proposed; (2) remove
the requirement that, for a period of one year from the commencement
of trading in security tokens on BSTX, non-BSTX Participants must
obtain a wallet address from the Exchange and agree to report their
end-of-day security token balances to BSTX; (3) provide for an
omnibus wallet address to which the Exchange would instruct Wallet
Managers to allocate unreported end-of-day balances for a given type
of security token, resulting either from security tokens held by
non-BSTX Participants who are not subject to the end-of-day balance
reporting requirement or from any missing end-of-day balance reports
among BSTX Participants; (4) state that a BSTX Participant who fails
to obtain a wallet address prior to acquiring a position in a
security token, fails to report the end-of-day balances in a timely
manner, or inaccurately reports such balances would be subject to
disciplinary action; (5) add additional listing requirements for
security tokens issued by affiliates of the Exchange; (6) require at
least three market makers upon initial listing for a security token
that does not utilize a designated market maker (``DMM''); (7) state
that the Ethereum blockchain serves as ancillary records that would
not create or convey any ownership of security tokens or shareholder
equity in the issuer; and (8) make technical and conforming changes.
See text accompanying infra note 12 for the Exchange's definition of
``security tokens,'' infra note 15 for the definition of ``BSTX
Participant,'' and infra note 18 for the definition of ``Wallet
Manager.'' When the Exchange filed Amendment No. 1 to BOX-2019-19,
it also submitted the text of the partial amendment as a comment
letter to the filing, which the Commission made publicly available
at https://www.sec.gov/comments/sr-box-2019-19/srbox201919-6613675-202939.pdf (``Amendment No. 1'').
\7\ See Letter from Ellen Greene, Managing Director, SIFMA, to
Vanessa Countryman, Secretary, Commission, dated January 13, 2020,
available at https://www.sec.gov/comments/sr-box-2019-19/srbox201919-6640676-203567.pdf (``SIFMA Letter'').
\8\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------
I. Summary of the Proposal, as Modified by Amendment No. 1
As described in the Notice and Amendment No. 1,\9\ the Exchange
proposes to adopt rules governing the trading of equity securities
through a facility of the Exchange known as BSTX.\10\ BSTX proposes to
operate a fully automated, price-time priority execution system to
trade equity securities that are NMS stocks and meet BSTX listing
standards.\11\ These securities would have ancillary records of
ownership reflecting certain end-of-day security token balances as
reported by market participants that would be created and maintained
using distributed ledger technology (such securities to be referred to
as ``security tokens'').\12\ According to the Exchange, official
records of security ownership would be maintained by participants at
The Depository Trust Company (``DTC''), and attribution of a security
token on the Ethereum blockchain would not convey ownership of
shareholder equity in the issuer.\13\
---------------------------------------------------------------------------
\9\ See Notice, supra note 3; Amendment No. 1, supra note 6.
\10\ See Notice, supra note 3, 84 FR at 56022.
\11\ See id.
\12\ See id.
\13\ See id. at 56026.
---------------------------------------------------------------------------
According to the Exchange, security tokens would have their
ancillary record of ownership recorded on the Ethereum blockchain using
a protocol standard determined by BSTX (the ``BSTX Security Token
Protocol'').\14\ The Exchange proposes that each BSTX Participant \15\
would be required to establish, either directly or through a carrying
firm, a whitelisted wallet address to which its end-of-day security
token ownership balances may be recorded.\16\ The Exchange proposes
that each business day, each BSTX Participant would be required to
report to BSTX certain end-of-day security token ownership balances in
a manner and form acceptable to BSTX.\17\ The Exchange would then, in
coordination with a Wallet Manager,\18\ cause the Ethereum blockchain
to be updated as an ancillary recordkeeping mechanism to reflect
changes in ownership of security tokens.\19\ According to the Exchange,
non-BSTX Participants that may trade security tokens would not be
subject to the requirement to obtain a wallet address or to the end-of-
day ownership reporting requirements.\20\
---------------------------------------------------------------------------
\14\ See id. at 56025.
\15\ A ``BSTX Participant'' would be a participant that is
authorized to trade security tokens on the Exchange. See proposed
BSTX Rule 17000(a)(11).
\16\ See Notice, supra note 3, 84 FR at 56027. According to the
Exchange, a whitelisted wallet address would be a permissioned
number associated with a particular market participant to which
security tokens may be sent. The Registry Smart Contract, which is
an ancillary smart contract within the BSTX Security Token Protocol,
contains a list of whitelisted addresses. See id. at 56026-27.
\17\ See id. at 56027.
\18\ The Exchange proposes to define a ``Wallet Manager'' as a
party approved by BSTX to operate software compatible with the BSTX
Security Token Protocol. See proposed Rule 17000(a)(31). According
to the Exchange, the Wallet Manager would act as a third-party
service provider for the Exchange that would facilitate establishing
wallet addresses and updating the Ethereum blockchain. See Notice,
supra note 3, 84 FR at 56027 n.44.
\19\ See Notice, supra note 3, 84 FR at 56027-28.
\20\ See Amendment No. 1, supra note 6, at 5.
---------------------------------------------------------------------------
According to the Exchange, to account for instances in which a BSTX
Participant fails to report or inaccurately reports its end-of-day
ownership balance and the position of security tokens held by non-BSTX
Participants who are not subject to the end-of-day ownership reporting
requirement, the Exchange would require the Wallet Mangers to allocate
all such unreported security token balances for a given security token
to a single omnibus wallet address.\21\ The Exchange states that the
Ethereum blockchain would display security token balances that would
reflect end-of-day ownership balances reported to BSTX pursuant to
proposed BSTX Rule 17020 \22\ and a balance allocated to the 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. Thus, according to the
Exchange, the Ethereum blockchain may not reflect the precise
distribution of a security token among holders, and may also display
inaccurate information to the extent that BSTX Participants
inaccurately report their end-of-day ownership balances to BSTX.\23\
---------------------------------------------------------------------------
\21\ See id. at 6.
\22\ Proposed BSTX Rule 17020 sets forth the proposed end-of-day
reporting requirements for BSTX Participants. See proposed BSTX Rule
17020.
\23\ See Amendment No. 1, supra note 6, at 6.
---------------------------------------------------------------------------
The Exchange proposes that security tokens would be only eligible
for trading on another national securities exchange if that exchange is
able to support trading in security tokens \24\ and has in effect rules
providing for the trading of security tokens on that exchange,
including rules requiring that exchange members obtain a wallet address
compatible with the BSTX Security Token Protocol and adopt some
mechanism to report end-of-day security token ownership balances to
BSTX.\25\
---------------------------------------------------------------------------
\24\ See Notice, supra note 3, 84 FR at 56029.
\25\ See id.
---------------------------------------------------------------------------
The Exchange also proposes rules for participation on BSTX,
business conduct for BSTX Participants, financial and operational rules
for BSTX Participants, supervision, trading practices, discipline,
trading rules, and market making.\26\ In addition, the Exchange
proposes listing standards that, according to the Exchange, are similar
to the listing standards of NYSE American.\27\ The Exchange proposes
that these listing standards would also specify that all listed
security tokens must comply with the BSTX Security Token Protocol.\28\
---------------------------------------------------------------------------
\26\ See id. at 56030-43. The trading rules that the Exchange
proposes include provisions for primary distributions of securities
to be made through the Exchange, including using an auction process.
See id. at 56035-36.
\27\ See Amendment No. 1, supra note 6, at 10-11.
\28\ See Notice, supra note 3, 84 FR at 56025.
---------------------------------------------------------------------------
According to the Exchange, all transactions in security tokens
would clear and settle in accordance with the rules, policies, and
procedures of registered clearing agencies.\29\ The Exchange states
that BSTX anticipates that DTC would serve as the securities depository
for security tokens and that confirmed trades in securities tokens on
BSTX would be transmitted to National Securities Clearing Corporation
(``NSCC'') for clearing.\30\
---------------------------------------------------------------------------
\29\ See id. at 56023.
\30\ See id.
---------------------------------------------------------------------------
II. Summary of the Comment
To date the Commission has received one comment letter on the
proposal.\31\ The commenter notes that the proposal was only recently
brought to its attention because it did not anticipate that a filing by
an options exchange to create a facility could impact the U.S. equities
markets.\32\ The commenter expresses concern that the approval of the
proposal ``could be a significant change for the equities market.''
\33\ The
[[Page 4042]]
commenter requests an extension of the comment period to consider the
proposal, particularly on the implications of the characterization of
security tokens as NMS stocks, the use of blockchain, and the potential
impact on unlisted trading privileges.\34\
---------------------------------------------------------------------------
\31\ See SIFMA Letter, supra note 7.
\32\ Id. at 2.
\33\ Id. The commenter's letter also references another filing
by the Exchange, SR-BOX-2019-37, which also relates to the
commencement of operations of BSTX. Id. at 1 (referencing Securities
Exchange Act Release No. 87868 (December 30, 2019), 85 FR 345
(January 3, 2020) (SR-BOX-2019-37) (``BSTX Corporate Governance
Proposal'')). With the BSTX Corporate Governance Proposal, BSTX
proposes the corporate governance documents for the BSTX facility,
and describes the proposed initial ownership structure for the
facility, which would be 50% owned by BOX Digital Markets LLC, a
subsidiary of BOX Holdings Group LLC--an affiliate of the Exchange,
and 50% owned by tZERO Group, Inc., an indirect subsidiary of
Overstock.com, Inc. See id. The commenter also requests more time to
provide feedback on the BSTX Corporate Governance Proposal. See
SIFMA Letter, supra note 7, at 2.
\34\ See SIFMA Letter, supra note 7, at 2.
---------------------------------------------------------------------------
III. Proceedings To Determine Whether To Approve or Disapprove SR-BOX-
2019-19 and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Exchange Act \35\ to determine whether the proposed
rule change should be approved or disapproved. Institution of such
proceedings is appropriate at this time in view of the legal and policy
issues raised by the proposed rule change. Institution of proceedings
does not indicate that the Commission has reached any conclusions with
respect to any of the issues involved. Rather, as described below, the
Commission seeks and encourages interested persons to provide
additional comment on the proposed rule change to inform the
Commission's analysis of whether to approve or disapprove the proposed
rule change.
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\35\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Exchange Act,\36\ the
Commission is providing notice of the grounds for disapproval under
consideration:
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\36\ Id.
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Whether the Exchange has demonstrated how the proposal is
consistent with Section 6(b)(1) of the Exchange Act, which requires,
among other things, that a national securities exchange be so organized
and have the capacity to be able to carry out the purposes of the
Exchange Act and to comply, and enforce compliance by its members and
persons associated with its members, with the provisions of the
Exchange Act, the rules and regulations thereunder, and the rules of
the Exchange; \37\
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\37\ 15 U.S.C. 78f(b)(1).
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Whether the Exchange has demonstrated how the proposal is
consistent with Section 6(b)(5) of the Exchange Act, which requires,
among other things, that the rules of a national securities exchange be
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
to protect investors and the public interest, and not be designed to
permit unfair discrimination between customers, issuers, brokers, or
dealers; \38\
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\38\ 15 U.S.C. 78f(b)(5).
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Whether the Exchange has demonstrated how the proposal is
consistent with Section 6(b)(7) of the Exchange Act, which requires
that the rules of the exchange provide a fair procedure for the
prohibition or limitation by the exchange of any person with respect to
access to services offered by the exchange; \39\
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\39\ 15 U.S.C. 78f(b)(7).
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Whether the Exchange has demonstrated how the proposal is
consistent with Section 6(b)(8) of the Exchange Act, which requires
that the rules of the exchange do not impose any burden on competition
not necessary or appropriate in furtherance of the purposes of the
Exchange Act; \40\
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\40\ 15 U.S.C. 78f(b)(8).
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Whether the Exchange has demonstrated how the proposal is
consistent with Section 11A of the Exchange Act, which provides the
Commission's authority to establish and maintain a national market
system; \41\
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\41\ 15 U.S.C. 78k-1.
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Whether the Exchange has demonstrated how the proposal is
consistent with Section 12 of the Exchange Act, which provides, among
other things, certain requirements that a national securities exchange
must comply with to extend unlisted trading privileges to securities
originally listed on another national securities exchange; \42\ and
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\42\ 15 U.S.C. 78l.
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Whether the Exchange has demonstrated how the proposal is
consistent with Section 17A of the Exchange Act, which provides, among
other things, the Commission's authority to establish linked or
coordinated facilities for the clearance and settlement of transactions
in securities.\43\
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\43\ 15 U.S.C. 78q-1.
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Under the Commission's Rules of Practice, the ``burden to
demonstrate that a proposed rule change is consistent with the Exchange
Act and the rules and regulations issued thereunder . . . is on the
[SRO] that proposed the rule change.'' \44\ The description of a
proposed rule change, its purpose and operation, its effect, and a
legal analysis of its consistency with applicable requirements must all
be sufficiently detailed and specific to support an affirmative
Commission finding,\45\ and any failure of an SRO to provide this
information may result in the Commission not having a sufficient basis
to make an affirmative finding that a proposed rule change is
consistent with the Exchange Act and the applicable rules and
regulations.\46\
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\44\ 17 CFR 201.700(b)(3).
\45\ See id.
\46\ See id.
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The Commission is instituting proceedings to allow for additional
consideration and comment on the issues raised herein, including as to
whether the proposal is consistent with the Exchange Act.
IV. Procedure: Request for Written Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
issues identified above, as well as any other concerns they may have
with the proposal. In particular, the Commission invites the written
views of interested persons concerning whether the proposal, as
modified by Amendment No. 1, is consistent with Sections 6(b)(1),\47\
6(b)(5),\48\ 6(b)(7),\49\ 6(b)(8),\50\ 11A,\51\ 12,\52\ and 17A \53\ of
the Exchange Act or any other provision of the Securities Act of 1933
(``Securities Act'') or the Exchange Act, or the rules and regulations
thereunder. Although there do not appear to be any issues relevant to
approval or disapproval that would be facilitated by an oral
presentation of views, data, and arguments, the Commission will
consider, pursuant to Rule 19b-4 under the Exchange Act,\54\ any
request for an opportunity to make an oral presentation.\55\
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\47\ 15 U.S.C. 78f(b)(1).
\48\ 15 U.S.C. 78f(b)(5).
\49\ 15 U.S.C. 78f(b)(7).
\50\ 15 U.S.C. 78f(b)(8).
\51\ 15 U.S.C. 78k-1.
\52\ 15 U.S.C. 78l.
\53\ 15 U.S.C. 78q-1.
\54\ 17 CFR 240.19b-4.
\55\ Section 19(b)(2) of the Exchange Act, as amended by the
Securities Act Amendments of 1975, Public Law 94-29 (June 4, 1975),
grants the Commission flexibility to determine what type of
proceeding--either oral or notice and opportunity for written
comments--is appropriate for consideration of a particular proposal
by a self-regulatory organization. See Securities Act Amendments of
1975, Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No.
75, 94th Cong., 1st Sess. 30 (1975).
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Interested persons are invited to submit written data, views, and
arguments regarding whether the
[[Page 4043]]
proposal should be approved or disapproved by February 13, 2020. Any
person who wishes to file a rebuttal to any other person's submission
must file that rebuttal by February 27, 2020.
The Commission asks that commenters address the sufficiency of the
Exchange's statements in support of the proposal, which are set forth
in the Notice and Amendment No. 1,\56\ in addition to any other
comments they may wish to submit about the proposed rule change. In
particular, the Commission seeks comment on the following questions and
asks commenters to submit data where appropriate to support their
views:
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\56\ See Notice, supra note 3; Amendment No. 1, supra note 6.
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What are commenters' views on the use of distributed
ledger technology to create and maintain unofficial ancillary records
of ownership reflecting certain end-of-day security token ownership
balances as reported by market participants, and the use of the
Ethereum blockchain in particular? What are commenters' views on
whether the use of the Ethereum blockchain for an ancillary record of
ownership is consistent with referring to the security as a ``token''?
What are commenters' views on advantages and disadvantages of having an
unofficial ancillary record of a security's ownership on the Ethereum
blockchain, in addition to an official record of such security's
ownership through DTC, including costs and benefit to investors or the
integrity of the securities markets?
What are commenters' views on potential discrepancies that
may exist between the official records of ownership and the unofficial
ancillary records maintained on the Ethereum blockchain, how erroneous
entries of transactions on the Ethereum blockchain would be identified
and addressed, and how the unofficial ancillary record would be updated
after events such as dividends and stock splits? Do commenters believe
that potential discrepancies between the official records of ownership
and the unofficial ancillary records maintained on the Ethereum
blockchain could pose risks to investors, other market participants,
the securities market, or the national clearance and settlement system?
Please explain why or why not.
What are commenters' views on whether the ancillary
recordkeeping mechanism is inconsistent with Section 17A(a)(2)(A)(ii)
of the Exchange Act,\57\ which directs the Commission to facilitate the
establishment of linked or coordinated facilities for clearance and
settlement of securities transactions, or any other provision of the
Exchange Act, or the rules and regulations thereunder?
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\57\ 15 U.S.C. 78q-1(a)(2)(A)(ii).
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The Exchange states that ``[p]ursuant to Rule 12f-5 under
the Exchange Act,\58\ an exchange may not extend unlisted trading
privileges to any security unless the national securities exchange has
in effect rules providing for transactions in the class or type of
security to which the exchange extends unlisted trading privileges''
\59\ and that to be able to extend unlisted trading privileges to BSTX-
listed security tokens, another national security exchanges would need
rules that would ``(i) requir[e] that exchange members obtain a wallet
address compatible with the BSTX Security Token Protocol in order to
attribute security token balances with that exchange member; and (ii)
adopt[] some mechanism to report end-of-day security token [ownership]
balances to BSTX in order to facilitate updates of ownership to the
Ethereum blockchain as an ancillary recordkeeping mechanism.'' \60\
What are commenters' views on how a national securities exchange
seeking to extend unlisted trading privileges to a BSTX-listed security
token might fulfill these requirements and whether doing so would
impose a burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Exchange Act? Do commenters agree
with the Exchange's assertion that the burden on another exchange of
adopting additional rules to extend unlisted trading privileges to
trade BSTX-listed security tokens is no different than the burden on an
exchange that only trades equities having to first adopt rules to
govern options trading prior to offering trading in options? \61\ Why
or why not?
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\58\ 17 CFR 240.12f-5 (citation in original).
\59\ Notice, supra note 3, 84 FR at 56029.
\60\ Id.
\61\ See id. at 56055.
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Do commenters believe that the proposal, including the
proposed requirement that the BSTX Participants report their end-of-day
ownership balances to BSTX to be recorded to the Ethereum blockchain,
is designed to remove impediments to and perfect the mechanism of a
free and open market and a national market system for NMS stock? \62\
Why or why not? Do commenters believe that the proposal is in the
public interest and appropriate for the protection of investors and is
designed to maintain fair and orderly markets to assure, among other
things, fair competition among brokers and dealers, among exchange
markets, and between exchange markets and markets other than exchange
markets; and the practicability of brokers executing investors' orders
in the best market? \63\ Why or why not?
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\62\ See 15 U.S.C. 78f(b)(5).
\63\ See 15 U.S.C. 78k-1(a)(1)(C)(ii), (iv).
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Do commenters agree with the Exchange's assertion that
requiring BSTX Participants to report their end-of-day ownership
balances to the Exchange, while non-BSTX Participants would not be
subject to the same requirement, would ``impose only a minimal burden
on BSTX Participants''? \64\ Why or why not? Do commenters believe that
the requirements imposed by the end-of-day ownership reporting
requirements would result in a burden or impact on competition between
BSTX Participants and non-BSTX Participants or otherwise, that would be
necessary or appropriate in furtherance of the Exchange Act? Why or why
not?
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\64\ Amendment No. 1, supra note 6, at 15.
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What are commenters' views on the Exchange's proposal to
disseminate end-of-day ownership information, potential inaccuracies in
that information, how and when that information would be disseminated,
and how market participants would have access to view this information
on the Ethereum blockchain? What are commenters' views on any
advantages or disadvantages with the Exchange's proposal to disseminate
end-of-day ownership information?
What are commenters' views on the use of an omnibus
account to reflect discrepancies between the sum of end-of-day balances
reported by BSTX Participants and the number of security tokens known
by the Exchange to be issued and outstanding? Do commenters have
concerns about how and when the balances attributed to the omnibus
wallet address would be calculated and by whom? What are commenters'
views on how the number of securities for a given security token
attributed to the omnibus wallet address may change over time and the
potential for the total number of securities for a security token
attributed to the omnibus wallet address to exceed the number of
disseminated whitelisted address for that security token? What are
commenters' views on whether they would have access to the information
necessary to differentiate the balances attributed to the omnibus
wallet address from the balances attributed to whitelisted addresses in
the information disseminated on the Ethereum blockchain and, if not,
the potential for confusion by investors or other market participants?
[[Page 4044]]
What are commenters' views on the proposed requirement
that end-of-day security token balances must be reported to BSTX each
business day when the securities depository is also open for business,
after such time as the securities depository has completed its end-of-
day settlement process? Do commenters agree with ``BSTX's belie[f] 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''?
\65\ Why or why not? What are commenters' view on how the Exchange will
enforce compliance with the end-of-day ownership reporting requirement
on BSTX Participants?
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\65\ Notice, supra note 3, 84 FR at 56028.
---------------------------------------------------------------------------
What are commenters' views on the Exchange's proposal to
require each BSTX Participant to, either directly or through its
carrying firm, establish a whitelisted wallet address to which its end-
of-day security token ownership balances may be recorded by contacting
BSTX or a Wallet Manager? \66\ What are commenters' views on the
function and activities of the Exchange Wallet Manager and how the
Wallet Manager will assist a BSTX Participant with establishing a
wallet address? What are commenters' views on the standard the Exchange
will use to select a Wallet Manager, the standard that the Wallet
Manager will use to approve or deny applications to establish a wallet
address, Exchange's oversight of the Wallet Manager's activities,
including the Wallet Manager's approval or denial of applications to
establish a wallet address, and the Exchange's rules and procedures to
ensure that a Wallet Manager does not act in an unfair or
discriminatory manner in performing its function?
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\66\ See id. at 56027.
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What are commenters' views on whether it would be feasible
for third parties not affiliated with BSTX to serve as a Wallet
Manager? What are commenters' views on the Exchange's representation
that the BSTX Security Token Protocol is based on open source code,
that the Exchange would not require the use of a particular version of
Wallet Manager software, and that anyone would be eligible to serve or
operate as a Wallet Manager provided they are capable of facilitating
effective updates to the Ethereum blockchain to reflect changes in
security token ownership? \67\ What are commenters' views on
competition to be a Wallet Manager and any potential for conflicts of
interest that may arise between or among national securities exchange
and Wallet Managers for trading BSTX-listed security tokens?
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\67\ See id. at 56055.
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While the Exchange proposes that the Exchange and Wallet
Manager will not charge a fee for obtaining a wallet address, what are
commenters' views on the costs that may be incurred because of the end-
of-day security token balance reporting process to investors, issuers,
broker-dealers, including BSTX Participants and non-BSTX Participants,
Wallet Managers, and trading centers, such as national securities
exchanges and alternative trading systems? \68\
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\68\ See id. at 56046 n.286.
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Do commenters agree with the Exchange's assertion that
``[o]wnership of security tokens would be able to be transferred
without regard to the blockchain-based ancillary recordkeeping
functionality''? \69\ Why or why not? What are commenters' views on
whether or not having a security token attributed to a wallet address
could mean that the holder of the wallet address has a shareholder
equity interest in the issuer? What are commenters' views on how
disputes over ownership of security token would be enforced by the
Exchange or any other party?
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\69\ Id. at 56023.
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The proposed trading rules include provisions providing
for primary distributions of securities be made through the Exchange,
including using an auction process.\70\ Do commenters agree with the
Exchange's assertion that the proposed method of opening trading in
securities, including with respect to initial security token offerings,
``provides a simple and clear method for opening transactions that is
consistent with the protection of investors and the public interest''?
\71\ Why are why not? Do commenters understand from the Exchange's
proposal how primary offerings of security tokens could be made through
the Exchange in compliance with the Securities Act, including the
registration and prospective delivery provisions, and the related rules
thereunder? If not, what information would be helpful? Do commenters
understand from the Exchange's proposal how broker-dealers using the
Exchange to engage in primary offerings of securities would be able to
comply with their obligations under the Securities Act and the Exchange
Act, and the respective rules thereunder? If so, please describe how a
broker-dealer could comply.
---------------------------------------------------------------------------
\70\ See id. at 56035-36.
\71\ Id. at 56037.
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The Exchange states that ``NSCC already has authority
under its rules, policies and procedures to clear certain trades on a
T+1 or T+0 basis.'' \72\ What are commenters' views on the NSCC process
for clearing security tokens? Do commenters believe that the Exchange
has adequately explained why BSTX Participants may agree to shorter or
longer settlement cycles than T+1,\73\ and the potential effects of
such shorter or longer settlement cycles?
---------------------------------------------------------------------------
\72\ Id. at 56025.
\73\ See id. at 56024-25, 56039.
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What are commenters' views on the rules the Exchange is
proposing for short sales of security tokens? Do commenters believe
that the proposed short selling rules are appropriately designed for
the ancillary recordkeeping on the Ethereum blockchain and the T+1
reporting? Why or why not?
Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-BOX-2019-19 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.
[[Page 4045]]
All submissions should refer to File Number SR-BOX-2019-19. 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 (https://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-2019-19 and should be submitted by
February 13, 2020. Rebuttal comments should be submitted by February
27, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\74\
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\74\ 17 CFR 200.30-3(a)(57).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-01041 Filed 1-22-20; 8:45 am]
BILLING CODE 8011-01-P
