Self-Regulatory Organizations; BOX Exchange LLC; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change in Connection With the Proposed Commencement of Operations of the Boston Security Token Exchange LLC as a Facility of the Exchange, 19537-19540 [2020-07229]
Download as PDF
<![CDATA[
Federal Register / Vol. 85, No. 67 / Tuesday, April 7, 2020 / Notices
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.36
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–07226 Filed 4–6–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–88536; File No. SR–BOX–
2019–37]
Self-Regulatory Organizations; BOX
Exchange LLC; Order Instituting
Proceedings To Determine Whether To
Approve or Disapprove a Proposed
Rule Change in Connection With the
Proposed Commencement of
Operations of the Boston Security
Token Exchange LLC as a Facility of
the Exchange
April 1, 2020.
On December 18, 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 (‘‘Act’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
change in connection with the proposed
commencement of operations of the
Boston Security Token Exchange LLC
(‘‘BSTX’’) as a facility of the Exchange.
The proposed rule change was
published for comment in the Federal
Register on January 3, 2020.3 On
February 13, 2020, pursuant to Section
19(b)(2) of the 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 disapprove the proposed
rule change.5 The Commission has
received comment letters on the
proposed rule change.6 This order
institutes proceedings pursuant to
Section 19(b)(2)(B) of the Act 7 to
36 17
CFR 200.30–3(a)(57).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 87868
(December 30, 2019), 85 FR 345 (January 3, 2020)
(‘‘Notice’’).
4 15 U.S.C. 78s(b)(2).
5 See Securities Exchange Act Release No. 88206
(February 13, 2020), 85 FR 9824 (February 20,
2020). The Commission designated April 2, 2020,
as the date by which the Commission shall approve
or disapprove, or institute proceedings to determine
whether to disapprove, the proposed rule change.
6 All comments on the proposed rule change are
available on the Commission’s website at https://
www.sec.gov/comments/sr-box-2019-37/
srbox201937.htm.
7 15 U.S.C. 78s(b)(2)(B).
khammond on DSKJM1Z7X2PROD with NOTICES
1 15
VerDate Sep<11>2014
18:22 Apr 06, 2020
Jkt 250001
determine whether to approve or
disapprove the proposed rule change.
I. Summary of the Proposal
As described in the Notice,8 the
Exchange proposes to adopt the
Amended and Restated Limited
Liability Company Agreement of BSTX
(the ‘‘BSTX LLC Agreement’’) for BSTX
as a facility of the Exchange.9 BSTX
proposes to operate a fully automated,
price-time priority execution system to
list and trade NMS stocks that meet
BSTX listing standards and for which
ancillary records of ownership reflecting
certain end-of-day security token
balances as reported by market
participants would be created and
maintained using distributed ledger
technology (such securities to be
referred to as ‘‘security tokens’’).10
According to the Exchange, BSTX is
(1) 50% owned by BOX Digital Markets
LLC (‘‘BOX Digital’’), which is 98%
owned by BOX Holdings Group LLC
(‘‘BOX Holdings’’) and 2% owned by
Lisa Fall; 11 and (2) 50% owned by
tZERO Group, Inc. (‘‘tZERO’’), which is
80.07% owned by Medici Ventures, Inc.
(‘‘Medici’’), a wholly owned subsidiary
of a publicly held corporation,
Overstock.com, Inc. (‘‘Overstock’’), and
19.93% owned by individuals and
companies.12 BOX Holdings is (1)
41.33% owned by MX US 2, Inc., which
is 100% owned by MX US 1, Inc., a
wholly owned subsidiary of Bourse de
8 See
Notice, supra note 3.
id., 85 FR at 345. The proposed Boston
Security Token Exchange LLC, Amended and
Restated Limited Liability Company Agreement,
dated as of January 29, 2019 (‘‘BSTX LLC
Agreement’’) is attached as Exhibit 5A to the Form
19b–4 for SR–BOX–2019–37 (available on the
Commission’s website at https://www.sec.gov/rules/
sro/box/2019/34-87868-ex5a.pdf).
10 See Notice, supra note 3, 85 FR at 345. The
Exchange has separately filed with the Commission
a proposed rule change regarding the listing and
trading rules for the BSTX facility. See Securities
Exchange Act Release No. 88300 (February 28,
2020), 85 FR 13242 (March 6, 2020) (‘‘BSTX
Trading Rules Proposal’’).
The Commission also published an order
instituting proceedings to determine whether to
approve or disapprove the BSTX Trading Rules
Proposal. See Securities Exchange Act Release No.
88002 (January 16, 2020), 85 FR 4040 (January 23,
2020) (SR–BOX–2019–19) (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).
11 Lisa Fall is the Chief Executive Officer of
BSTX, and President of the Exchange. See BSTX
LLC Agreement, supra note 9, Signature Page.
12 See Notice, supra note 3, 85 FR at 346. One
individual holds 7.53% of the outstanding shares of
tZERO, and Newer Ventures LLC, SpeedRoute
Technologies Inc., Dinosaur Financial, and 28
individuals each own less than 3% of the
outstanding shares of tZERO. See id.
9 See
PO 00000
Frm 00116
Fmt 4703
Sfmt 4703
19537
Montreal, Inc., which in turn is a wholly
owned subsidiary of TMX Group
Limited (‘‘TMX’’); (2) 22.01% owned by
IB Exchange Corp.; and (3) 36.66%
owned by seven separate, unaffiliated
owners.13 The Exchange also states that
BSTX is an affiliate of the Exchange and
will be subject to regulatory oversight by
the Exchange,14 and that tZERO and
BSTX are affiliates of Overstock.15
The Exchange states that BOX
Holdings wholly owns BOX Options
Market LLC (‘‘BOX Options’’), which is
a facility of the Exchange 16 and the only
facility that the Exchange currently
operates.17 The Exchange notes that the
BSTX LLC Agreement provisions are
generally the same as provisions of the
BOX Options LLC Agreement or the
BOX Holdings LLC Agreement, with
certain exceptions.18 The Exchange
states that it will enter into a facility
agreement with BSTX (‘‘Facility
Agreement’’) pursuant to which the
Exchange will exercise regulatory
oversight over BSTX.19 Furthermore, the
Exchange has entered into an IP License
and Services Agreement (‘‘LSA’’) with
tZERO,20 under which tZERO will
provide BSTX and the Exchange with a
license to use its intellectual property
that comprises the BSTX trading system
and services related to, among other
things, implementing and maintain the
trading system.21
Currently, BOX Digital and tZERO are
the only holders of the limited liability
company interests of BSTX (‘‘LLC
Members’’).22 The Exchange proposes
that a person would become an
additional or substitute LLC Member of
BSTX only upon that person’s execution
of a counterpart of the BSTX LLC
Agreement to evidence that person’s
written acceptance of the terms and
13 See id. The following entities each hold less
than 17% of the outstanding units of BOX Holdings:
Citadel Securities Principal Investments LLC,
Citigroup Financial Products Inc., UBS Americas
Inc., CSFB Next Fund Inc., LabMorgan Corp.,
Wolverine Trading, LLC, and Aragon Solutions Ltd.
See id.
14 See id. at 345.
15 See id. at 346.
16 See id. at 345.
17 See id. at 345, n.4.
18 See id. at 345, n.8 and accompanying text.
19 See id. at 345. The Exchange will also provide
certain business services to BSTX pursuant to an
administrative services agreement. See id.
20 See id. at 347.
21 See id. at 352. The Facility Agreement,
administrative services agreement, and LSA were
not provided as exhibits to the proposal.
22 See id. at 346; BSTX LLC Agreement, supra
note 9. ‘‘LLC Members’’ are duly admitted holders
of limited liability company interests in BSTX and
would include any person later admitted to BSTX
as an additional or substitute LLC Member as
provided by the BSTX LLC Agreement. See Notice,
supra note 3, 85 FR at 346; BSTX LLC Agreement,
supra note 9, Section 1.1.
E:\FR\FM\07APN1.SGM
07APN1
19538
Federal Register / Vol. 85, No. 67 / Tuesday, April 7, 2020 / Notices
khammond on DSKJM1Z7X2PROD with NOTICES
provisions of the BSTX LLC
Agreement.23 According to the
Exchange, the Commission would be
notified if an LLC Member’s ownership
interest in BSTX, alone or together with
any related person of that LLC Member,
meets or exceeds 5%, 10%, or 15%, and
the BSTX LLC Agreement provides that
any ‘‘Transfer’’ that results in the
acquisition and holding by any person,
alone or together with its related
persons, of an ownership interest that
meets or crosses 20% or any subsequent
5% increment, would be subject to the
rule filing process pursuant to Section
19 of the Act.24
Pursuant to the BSTX LLC Agreement,
a Controlling Person that establishes a
Controlling Interest 25 in an LLC
23 See Notice, supra note 3, 85 FR at 352–53;
BSTX LLC Agreement, supra note 9, Section 7.1(b).
24 See Notice, supra note 3, 85 FR at 353; BSTX
LLC Agreement, supra note 9, Section 7.4(e) and (f).
The term ‘‘Transfer’’ is defined in Section 7.1(a) of
the BSTX LLC Agreement, and excludes ‘‘(i)
transfers among [LLC] Members, (ii) transfers to any
Person directly or indirectly owning, controlling or
holding with power to vote all of the outstanding
voting securities of and equity beneficial interests
in such [LLC] Member, or (iii) any Person that is
a wholly owned Affiliate of such [LLC] Member.’’
See BSTX LLC Agreement, supra note 9, Section
7.1(a); Notice, supra note 3, 85 FR at 352.
25 ‘‘Controlling Person’’ is defined as ‘‘a Person
who, alone or together with any Related Persons of
such Person, holds a Controlling Interest in [an
LLC] Member.’’ ‘‘Controlling Interest’’ is defined as
‘‘the direct or indirect ownership of 25% or more
of the total voting power of all equity securities of
[an LLC] Member . . . by any Person, alone or
together with any Related Persons of such Person.’’
See BSTX LLC Agreement, supra note 9, Section
7.4(g)(v)(A)–(B). ‘‘Related Person’’ is defined as
‘‘with respect to any Person: (A) Any Affiliate of
such Person; (B) any other Person with which such
first Person has any agreement, arrangement or
understanding (whether or not in writing) to act
together for the purpose of acquiring, voting,
holding or disposing of Interests; (C) in the case of
a Person that is a company, corporation or similar
entity, any executive officer (as defined under Rule
3b–7 under the Exchange Act) or director of such
Person and, in the case of a Person that is a
partnership or limited liability company, any
general partner, managing member or manager of
such Person, as applicable; (D) in the case of any
BSTX Participant who is at the same time a brokerdealer, any Person that is associated with the BSTX
Participant (as determined using the definition of
‘person associated with a member’ as defined under
Section 3(a)(21) of the Exchange Act); (E) in the case
of a Person that is a natural person and a BSTX
Participant, any broker or dealer that is also a BSTX
Participant with which such Person is associated;
(F) in the case of a Person that is a natural person,
any relative or spouse of such Person, or any
relative of such spouse who has the same home as
such Person or who is a director or officer of the
Exchange or any of its parents or subsidiaries; (G)
in the case of a Person that is an executive officer
(as defined under Rule 3b–7 under the Exchange
Act) or a director of a company, corporation or
similar entity, such company, corporation or entity,
as applicable; and (H) in the case of a Person that
is a general partner, managing member or manager
of a partnership or limited liability company, such
partnership or limited liability company, as
applicable.’’ See BSTX LLC Agreement, supra note
9, Section 1.1.
VerDate Sep<11>2014
18:22 Apr 06, 2020
Jkt 250001
Member that holds equal to or greater
than a 20% ownership interest in BSTX
will be required to become a party to the
BSTX LLC Agreement, by executing an
instrument of accession, and abide by
its provisions to the same extent as if
they were LLC Members.26 The
Exchange also states that these
amendments to the BSTX LLC
Agreement will be subject to the rule
filing process pursuant to Section 19 of
the Act.27 The Exchange further
proposes that any BSTX Participant that
directly or indirectly with Related
Persons holds more than 20% of BSTX
would have its voting power capped at
20%.28 According to the Exchange, this
limitation is designed to prevent a
market participant from exerting undue
influence on an Exchange facility.29
The Exchange states that the BSTX
LLC Agreement includes provisions that
ensure that the Exchange has full
regulatory control over BSTX and these
provisions are designed to prevent any
owner of BSTX from having undue
influence over regulatory actions.30 The
BSTX LLC Agreement provides that
BSTX’s board of directors (‘‘Board’’) will
consist of six directors, comprised of (1)
two directors appointed by each of BOX
Digital and tZERO (the ‘‘Member
Directors’’); (2) one director appointed
by the unanimous vote of the Member
Directors (the ‘‘Independent Director’’);
and (3) one non-voting director
appointed by the Exchange (‘‘the
‘‘Regulatory Director’’).31 The Exchange
‘‘BSTX Participant’’ is defined as ‘‘a firm or
organization that is registered with the Exchange
pursuant to Exchange Rules for purposes of
participating in Trading on the BSTX Market as an
order flow provider or market maker.’’ See id.
26 See Notice, supra note 3, 85 FR at 346, 353;
BSTX LLC Agreement, supra note 9, Section 7.4(g).
The proposed Form of Instrument of Accession to
Boston Security Token Exchange LLC, Amended
and Restated Limited Liability Company Agreement
is attached as Exhibit 5B to the Form 19b–4 for SR–
BOX–2019–37 (available on the Commission’s
website at https://www.sec.gov/rules/sro/box/2019/
34-87868-ex5b.pdf). The Exchange specifically
notes that Medici, Overstock, BOX Digital, BOX
Holdings, MX US 1, Inc., MX US 2, Inc., Bourse de
Montreal, Inc., and TMX would be required to
execute an instrument of accession substantially in
the form attached as Exhibit 5B. See Notice, supra
note 3, 85 FR at 346.
Pursuant to Section 7.4(g)(iii) of the BSTX LLC
Agreement, ‘‘a Person shall not be required to
execute an amendment to [the BSTX LLC
Agreement] . . . if such Person does not, directly
or indirectly, hold any interest in [an LLC]
Member.’’ BSTX LLC Agreement, supra note 9,
Section 7.4(g)(iii).
27 See Notice, supra note 3, 85 FR at 353; BSTX
LLC Agreement, supra note 9, Section 7.4(g)(iv).
28 See Notice, supra note 3, 85 FR at 346, 353;
BSTX LLC Agreement, supra note 9, Section 7.4(h).
29 See Notice, supra note 3, 85 FR at 346.
30 See id. at 348.
31 See id.; BSTX LLC Agreement, supra note 9,
Section 4.1(a). The Exchange states that the
Regulatory Director must be a member of senior
PO 00000
Frm 00117
Fmt 4703
Sfmt 4703
states that BSTX will have an
Independent Director to avoid either
BOX Digital or tZERO from controlling
or creating deadlock on the Board.32 The
Exchange also states that BSTX’s Board
structure differs from that of BOX
Options because BOX Options, as a
wholly-owned subsidiary of BOX
Holdings, has the same directors as BOX
Holdings, and BOX Holdings, unlike
BSTX, has no owners with 50% or
greater ownership.33
Generally, actions by the Board will
be considered effective only if approved
by at least a majority of the votes
entitled to vote on that action.34 The
Board must approve, by an affirmative
vote of the Member Directors, any
‘‘major action,’’ which will include,
among other things, changes to
operating the BSTX Market using any
software system other than the BSTX
trading system, except as otherwise
provided in the LSA or to the extent
otherwise required by the Exchange to
fulfill its regulatory functions or
responsibilities or to oversee the BSTX
Market as determined by the board of
the Exchange.35 The BSTX LLC
Agreement also provides that the
Exchange shall receive notice of
planned or proposed changes to BSTX,
with the exception of certain changes
not related to the operation of the
market, or to the BSTX Market, and that
such changes will require affirmative
approval by the Exchange before
implementation.36 If the Exchange
determines that planned or proposed
changes could cause a regulatory
deficiency, the Exchange may direct
BSTX, subject to Board approval, to
modify the proposal as necessary.37
The Exchange also proposes how
regulatory funds may be allocated. The
Exchange states that, pursuant to the
Facility Agreement, the Exchange will
have the right to receive all fees, fines,
and disgorgements imposed upon BSTX
Participants with respect to BSTX’s
trading system (‘‘Regulatory Funds’’)
and all other market data fees, tape, and
other revenue (‘‘Non-regulatory
management of the regulation staff of the Exchange.
See Notice, supra note 3, 85 FR at 348. See also
BSTX LLC Agreement, supra note 9, Section 1.1.
32 See Notice, supra note 3, 85 FR at 348.
33 See id.
34 See id.; BSTX LLC Agreement, supra note 9,
Section 4.3.
35 See Notice, supra note 3, 85 FR at 348–49;
BSTX LLC Agreement, supra note 9, Section 4.4(a).
‘‘BSTX Market’’ is defined as the market operated
by the Exchange pursuant to Section 3.1 of the
BSTX LLC Agreement. See BSTX LLC Agreement,
supra note 9, Section 1.1.
36 See Notice, supra note 3, 85 FR at 350; BSTX
LLC Agreement, supra note 9, Section 3.2(a)(ii).
37 See Notice, supra note 3, 85 FR at 350; BSTX
LLC Agreement, supra note 9, Section 3.2(a)(iii).
E:\FR\FM\07APN1.SGM
07APN1
Federal Register / Vol. 85, No. 67 / Tuesday, April 7, 2020 / Notices
khammond on DSKJM1Z7X2PROD with NOTICES
Funds’’), and all Regulatory Funds and
Non-regulatory Funds collected in
respect to BSTX may be used by the
Exchange, at its sole discretion, for
regulatory purposes.38 Furthermore, all
Regulatory Funds collected by the
Exchange will be retained by the
Exchange and not transferred to BSTX;
however, Non-regulatory Funds
collected may be transferred to BSTX
after the Exchange has made adequate
provisions for all regulatory purposes.39
The proposal includes provisions
regarding capital contributions and
distributions. The BSTX LLC Agreement
provides for an initial capital
contribution from both BOX Digital and
tZERO, with tZERO providing an initial
cash contribution of $10 million and
BOX Digital providing the ‘‘[r]ight to
seek approval to become a facility of
SRO’’ and ‘‘[r]egulatory expertise.’’ 40
The BSTX LLC Agreement also includes
provisions regarding determinations of
capital needs by the Board, including,
among others, the requirement that at
least one Member Director appointed by
each LLC Member affirmatively vote to
raise capital; 41 potential cash
distributions; 42 and allocation of
profits, losses, and credits for each fiscal
year to LLC Members at least once
annually on a pro rata basis.43
The proposal also includes provisions
regarding the regulation of BSTX and
regulatory jurisdiction over LLC
Members of BSTX.44 Specifically, the
BSTX LLC Agreement provides that the
Exchange has the authority to act as the
self-regulatory organization (‘‘SRO’’) for
BSTX, will provide the regulatory
framework for the BSTX Market, and
will have regulatory responsibility for
38 See Notice, supra note 3, 85 FR at 350–51. If
BSTX incurs costs and expenses for regulatory
purposes, the Exchange may reimburse BSTX using
Regulatory Funds. See id. at 351. In the event that
the Exchange does not hold sufficient funds to meet
all regulatory purposes, BSTX will reimburse the
Exchange for any such additional costs and
expenses. See id. The BSTX LLC Agreement does
not include provisions regarding Regulatory Funds.
39 See id.
40 See id.; BSTX LLC Agreement, supra note 9,
Section 6.1 & Schedule A. tZERO will also provide
‘‘consideration provided pursuant to the LSA.’’
BSTX LLC Agreement, supra note 9, Schedule A.
41 See Notice, supra note 3, 85 FR at 351; BSTX
LLC Agreement, supra note 9, Section 6.2. The
Exchange states that the requirement concerning the
affirmative vote of one Member Director appointed
by each LLC Member is not present in the BOX
Options LLC Agreement, but that the Exchange
believes that this provision promotes commercial
fairness and is necessary due to the differing
ownership structure of BSTX. See Notice, supra
note 3, 85 FR at 351.
42 See BSTX LLC Agreement, supra note 9,
Section 8.1.
43 See id., Section 9.1.
44 See Notice, supra note 3, 85 FR at 354–55.
VerDate Sep<11>2014
18:22 Apr 06, 2020
Jkt 250001
the activities of the BSTX Market.45
Additionally, the BSTX LLC Agreement
includes provisions, which the
Exchange states are substantively
similar to provisions in the BOX
Options LLC Agreement, that address
the handling of confidential
information, both pertaining to
regulatory matters and otherwise.46 The
BSTX LLC Agreement also contains
provisions, which the Exchange states
are substantially similar to those of the
BOX Options LLC Agreement, related to
regulatory jurisdiction over LLC
Members; 47 the maintenance of books
and records; 48 and the independence of
the self-regulatory function of the
Exchange and compliance with federal
securities laws.49
The Exchange also states that it is
submitting a separate filing to introduce
structural changes to the Exchange to
accommodate regulation of BSTX as
well as BOX Options.50 According to the
Exchange, BSTX Participants will have
the same representation, rights, and
responsibilities as BOX Options
Participants.51
II. Summary of the Comment Letters
Received
To date the Commission has received
two comment letters on the proposal.52
One 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.
45 See id. at 354; BSTX LLC Agreement, supra
note 9, Section 3.2. The Exchange states that
Section 3.2 of the BSTX LLC Agreement ensures
that the Exchange has full regulatory control over
BSTX and is designed to prevent any owner of
BSTX from exercising undue influence over the
regulated activities of BSTX. See Notice, supra note
3, 85 FR at 354.
46 See Notice, supra note 3, 85 FR at 354–55;
BSTX LLC Agreement, supra note 9, Article 15. The
BSTX LLC Agreement contains additional language
to make it clear that the Commission can access and
examine confidential information pursuant to
federal securities laws and rules. See Notice, supra
note 3, 85 FR at 354–55; BSTX LLC Agreement,
supra note 9, Section 15.5.
47 See Notice, supra note 3, 85 FR at 355; BSTX
LLC Agreement, supra note 9, Sections 11.1,
18.6(a), 18.6(c).
48 See Notice, supra note 3, 85 FR at 355; BSTX
LLC Agreement, supra note 9, Section 11.1.
49 See Notice, supra note 3, 85 FR at 348, 350;
BSTX LLC Agreement, supra note 9, Section 4.12.
50 See Notice, supra note 3, 85 FR at 345.
51 See id. See also Securities Exchange Act
Release No. 88236 (February 19, 2020), 85 FR 10768
(February 25, 2020) (SR–BOX–2020–04) (‘‘Exchange
Governance Amendment Proposal’’). The
Commission notes that the Exchange Governance
Amendment Proposal proposes to amend the
Exchange’s LLC Agreement and Bylaws to provide
flexibility for the Exchange to regulate multiple
facilities.
52 See supra note 6.
PO 00000
Frm 00118
Fmt 4703
Sfmt 4703
19539
equities markets.53 This commenter
expresses concern that the approval of
the proposal ‘‘could be a significant
change for the equities market.’’ 54 This
commenter requests an extension of the
comment period to consider the
proposal.55 Another commenter notes
that the tZERO token is affiliated with
certain owners of the Exchange,
Overstock, and other entities related to
the Exchange.56 This commenter also
notes that the price of the tZERO token
is down by over 85% since issuance less
than two years ago.57 This commenter
believes that the Commission should
disclose and study further details on the
relationships between the
aforementioned entities.58
III. Proceedings To Determine Whether
To Approve or Disapprove SR–BOX–
2019–37 and Grounds for Disapproval
Under Consideration
The Commission is instituting
proceedings pursuant to Section
19(b)(2)(B) of the Act 59 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
Act,60 the Commission is providing
53 See Letter from Ellen Greene, Managing
Director, SIFMA, to Vanessa Countryman,
Secretary, Commission, dated January 13, 2020
(‘‘SIFMA Letter’’), at 2. See also Letter from David
A. Schrader, Partner, Paykin Krieg & Adams, LLP,
to Vanessa Countryman, Secretary, Commission,
dated February 25, 2020 (‘‘PKA Law Letter’’), at 2
(stating that the proposal has had little
dissemination among market participants,
particularly the exchanges and designated market
makers).
54 See SIFMA Letter, supra note 53, at 2. This
commenter’s letter also references the BSTX
Trading Rules Proposal. See id. at 1. See also PKA
Law Letter, supra note 53, at 2 (stating that the
proposal contains potentially significant changes to
the operation and structure of the global equity
trading markets).
55 See SIFMA Letter, supra note 53, at 2. This
commenter also requests more time to provide
feedback on the BSTX Trading Rules Proposal. See
id. at 2.
56 See PKA Law Letter, supra note 53, at 2.
57 See id.
58 See id.
59 15 U.S.C. 78s(b)(2)(B).
60 Id.
E:\FR\FM\07APN1.SGM
07APN1
khammond on DSKJM1Z7X2PROD with NOTICES
19540
Federal Register / Vol. 85, No. 67 / Tuesday, April 7, 2020 / Notices
notice of the grounds for disapproval
under consideration. The Commission is
instituting proceedings to allow for
additional analysis of the proposed rule
change’s consistency with Section
6(b)(1) of the Act, which requires that a
national securities exchange be so
organized and have the capacity to be
able to carry out the purposes of the Act
and to comply, and enforce compliance
by its members and persons associated
with its members, with the provisions of
the Act, the rules and regulations
thereunder, and the rules of the
exchange.61 In addition, the
Commission is instituting proceedings
to allow for additional analysis of the
proposed rule change’s consistency with
Section 6(b)(3) of the Act, which
requires that the rules of a national
securities exchange assure a fair
representation of its members in the
selection of its directors and
administration of its affairs and provide
that one or more directors shall be
representative of issuers and investors
and not be associated with a member of
the exchange, broker, or dealer; 62 and
Section 6(b)(5) of the 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.63
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.’’ 64 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,65 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
61 15
U.S.C. 78f(b)(1).
U.S.C. 78f(b)(3).
63 15 U.S.C. 78f(b)(5).
64 17 CFR 201.700(b)(3).
65 See id.
62 15
VerDate Sep<11>2014
18:22 Apr 06, 2020
Jkt 250001
a proposed rule change is consistent
with the Act and the applicable rules
and regulations.66
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 Act.
Electronic Comments
IV. Procedure: Request for Written
Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
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 is consistent with Sections
6(b)(1),67 6(b)(3),68 and 6(b)(5) 69 of the
Act or any other provision of the 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 Act,70 any request for an
opportunity to make an oral
presentation.71
Interested persons are invited to
submit written data, views, and
arguments regarding whether the
proposal should be approved or
disapproved by April 28, 2020. Any
person who wishes to file a rebuttal to
any other person’s submission must file
that rebuttal by May 12, 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,72 in addition to any other
comments they may wish to submit
about the proposed rule change.
Comments may be submitted by any
of the following methods:
66 See
id.
U.S.C. 78f(b)(1).
68 15 U.S.C. 78f(b)(3).
69 15 U.S.C. 78f(b)(5).
70 17 CFR 240.19b–4.
71 Section 19(b)(2) of the 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).
72 See Notice, supra note 3.
67 15
PO 00000
Frm 00119
Fmt 4703
Sfmt 4703
• 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–2019–37 on the subject line.
Paper Comments
All submissions should refer to File
Number SR–BOX–2019–37. 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–2019–37 and should
be submitted by April 28, 2020. Rebuttal
comments should be submitted by May
12, 2020.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.73
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–07229 Filed 4–6–20; 8:45 am]
BILLING CODE 8011–01–P
73 17
E:\FR\FM\07APN1.SGM
CFR 200.30–3(a)(57).
07APN1
]]>Agencies
[Federal Register Volume 85, Number 67 (Tuesday, April 7, 2020)]
[Notices]
[Pages 19537-19540]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-07229]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-88536; File No. SR-BOX-2019-37]
Self-Regulatory Organizations; BOX Exchange LLC; Order
Instituting Proceedings To Determine Whether To Approve or Disapprove a
Proposed Rule Change in Connection With the Proposed Commencement of
Operations of the Boston Security Token Exchange LLC as a Facility of
the Exchange
April 1, 2020.
On December 18, 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
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change in
connection with the proposed commencement of operations of the Boston
Security Token Exchange LLC (``BSTX'') as a facility of the Exchange.
The proposed rule change was published for comment in the Federal
Register on January 3, 2020.\3\ On February 13, 2020, pursuant to
Section 19(b)(2) of the 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
disapprove the proposed rule change.\5\ The Commission has received
comment letters on the proposed rule change.\6\ This order institutes
proceedings pursuant to Section 19(b)(2)(B) of the Act \7\ to determine
whether to approve or disapprove the proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 87868 (December 30,
2019), 85 FR 345 (January 3, 2020) (``Notice'').
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 88206 (February 13,
2020), 85 FR 9824 (February 20, 2020). The Commission designated
April 2, 2020, as the date by which the Commission shall approve or
disapprove, or institute proceedings to determine whether to
disapprove, the proposed rule change.
\6\ All comments on the proposed rule change are available on
the Commission's website at https://www.sec.gov/comments/sr-box-2019-37/srbox201937.htm.
\7\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------
I. Summary of the Proposal
As described in the Notice,\8\ the Exchange proposes to adopt the
Amended and Restated Limited Liability Company Agreement of BSTX (the
``BSTX LLC Agreement'') for BSTX as a facility of the Exchange.\9\ BSTX
proposes to operate a fully automated, price-time priority execution
system to list and trade NMS stocks that meet BSTX listing standards
and for which ancillary records of ownership reflecting certain end-of-
day security token balances as reported by market participants would be
created and maintained using distributed ledger technology (such
securities to be referred to as ``security tokens'').\10\
---------------------------------------------------------------------------
\8\ See Notice, supra note 3.
\9\ See id., 85 FR at 345. The proposed Boston Security Token
Exchange LLC, Amended and Restated Limited Liability Company
Agreement, dated as of January 29, 2019 (``BSTX LLC Agreement'') is
attached as Exhibit 5A to the Form 19b-4 for SR-BOX-2019-37
(available on the Commission's website at https://www.sec.gov/rules/sro/box/2019/34-87868-ex5a.pdf).
\10\ See Notice, supra note 3, 85 FR at 345. The Exchange has
separately filed with the Commission a proposed rule change
regarding the listing and trading rules for the BSTX facility. See
Securities Exchange Act Release No. 88300 (February 28, 2020), 85 FR
13242 (March 6, 2020) (``BSTX Trading Rules Proposal'').
The Commission also published an order instituting proceedings
to determine whether to approve or disapprove the BSTX Trading Rules
Proposal. See Securities Exchange Act Release No. 88002 (January 16,
2020), 85 FR 4040 (January 23, 2020) (SR-BOX-2019-19) (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).
---------------------------------------------------------------------------
According to the Exchange, BSTX is (1) 50% owned by BOX Digital
Markets LLC (``BOX Digital''), which is 98% owned by BOX Holdings Group
LLC (``BOX Holdings'') and 2% owned by Lisa Fall; \11\ and (2) 50%
owned by tZERO Group, Inc. (``tZERO''), which is 80.07% owned by Medici
Ventures, Inc. (``Medici''), a wholly owned subsidiary of a publicly
held corporation, Overstock.com, Inc. (``Overstock''), and 19.93% owned
by individuals and companies.\12\ BOX Holdings is (1) 41.33% owned by
MX US 2, Inc., which is 100% owned by MX US 1, Inc., a wholly owned
subsidiary of Bourse de Montreal, Inc., which in turn is a wholly owned
subsidiary of TMX Group Limited (``TMX''); (2) 22.01% owned by IB
Exchange Corp.; and (3) 36.66% owned by seven separate, unaffiliated
owners.\13\ The Exchange also states that BSTX is an affiliate of the
Exchange and will be subject to regulatory oversight by the
Exchange,\14\ and that tZERO and BSTX are affiliates of Overstock.\15\
---------------------------------------------------------------------------
\11\ Lisa Fall is the Chief Executive Officer of BSTX, and
President of the Exchange. See BSTX LLC Agreement, supra note 9,
Signature Page.
\12\ See Notice, supra note 3, 85 FR at 346. One individual
holds 7.53% of the outstanding shares of tZERO, and Newer Ventures
LLC, SpeedRoute Technologies Inc., Dinosaur Financial, and 28
individuals each own less than 3% of the outstanding shares of
tZERO. See id.
\13\ See id. The following entities each hold less than 17% of
the outstanding units of BOX Holdings: Citadel Securities Principal
Investments LLC, Citigroup Financial Products Inc., UBS Americas
Inc., CSFB Next Fund Inc., LabMorgan Corp., Wolverine Trading, LLC,
and Aragon Solutions Ltd. See id.
\14\ See id. at 345.
\15\ See id. at 346.
---------------------------------------------------------------------------
The Exchange states that BOX Holdings wholly owns BOX Options
Market LLC (``BOX Options''), which is a facility of the Exchange \16\
and the only facility that the Exchange currently operates.\17\ The
Exchange notes that the BSTX LLC Agreement provisions are generally the
same as provisions of the BOX Options LLC Agreement or the BOX Holdings
LLC Agreement, with certain exceptions.\18\ The Exchange states that it
will enter into a facility agreement with BSTX (``Facility Agreement'')
pursuant to which the Exchange will exercise regulatory oversight over
BSTX.\19\ Furthermore, the Exchange has entered into an IP License and
Services Agreement (``LSA'') with tZERO,\20\ under which tZERO will
provide BSTX and the Exchange with a license to use its intellectual
property that comprises the BSTX trading system and services related
to, among other things, implementing and maintain the trading
system.\21\
---------------------------------------------------------------------------
\16\ See id. at 345.
\17\ See id. at 345, n.4.
\18\ See id. at 345, n.8 and accompanying text.
\19\ See id. at 345. The Exchange will also provide certain
business services to BSTX pursuant to an administrative services
agreement. See id.
\20\ See id. at 347.
\21\ See id. at 352. The Facility Agreement, administrative
services agreement, and LSA were not provided as exhibits to the
proposal.
---------------------------------------------------------------------------
Currently, BOX Digital and tZERO are the only holders of the
limited liability company interests of BSTX (``LLC Members'').\22\ The
Exchange proposes that a person would become an additional or
substitute LLC Member of BSTX only upon that person's execution of a
counterpart of the BSTX LLC Agreement to evidence that person's written
acceptance of the terms and
[[Page 19538]]
provisions of the BSTX LLC Agreement.\23\ According to the Exchange,
the Commission would be notified if an LLC Member's ownership interest
in BSTX, alone or together with any related person of that LLC Member,
meets or exceeds 5%, 10%, or 15%, and the BSTX LLC Agreement provides
that any ``Transfer'' that results in the acquisition and holding by
any person, alone or together with its related persons, of an ownership
interest that meets or crosses 20% or any subsequent 5% increment,
would be subject to the rule filing process pursuant to Section 19 of
the Act.\24\
---------------------------------------------------------------------------
\22\ See id. at 346; BSTX LLC Agreement, supra note 9. ``LLC
Members'' are duly admitted holders of limited liability company
interests in BSTX and would include any person later admitted to
BSTX as an additional or substitute LLC Member as provided by the
BSTX LLC Agreement. See Notice, supra note 3, 85 FR at 346; BSTX LLC
Agreement, supra note 9, Section 1.1.
\23\ See Notice, supra note 3, 85 FR at 352-53; BSTX LLC
Agreement, supra note 9, Section 7.1(b).
\24\ See Notice, supra note 3, 85 FR at 353; BSTX LLC Agreement,
supra note 9, Section 7.4(e) and (f). The term ``Transfer'' is
defined in Section 7.1(a) of the BSTX LLC Agreement, and excludes
``(i) transfers among [LLC] Members, (ii) transfers to any Person
directly or indirectly owning, controlling or holding with power to
vote all of the outstanding voting securities of and equity
beneficial interests in such [LLC] Member, or (iii) any Person that
is a wholly owned Affiliate of such [LLC] Member.'' See BSTX LLC
Agreement, supra note 9, Section 7.1(a); Notice, supra note 3, 85 FR
at 352.
---------------------------------------------------------------------------
Pursuant to the BSTX LLC Agreement, a Controlling Person that
establishes a Controlling Interest \25\ in an LLC Member that holds
equal to or greater than a 20% ownership interest in BSTX will be
required to become a party to the BSTX LLC Agreement, by executing an
instrument of accession, and abide by its provisions to the same extent
as if they were LLC Members.\26\ The Exchange also states that these
amendments to the BSTX LLC Agreement will be subject to the rule filing
process pursuant to Section 19 of the Act.\27\ The Exchange further
proposes that any BSTX Participant that directly or indirectly with
Related Persons holds more than 20% of BSTX would have its voting power
capped at 20%.\28\ According to the Exchange, this limitation is
designed to prevent a market participant from exerting undue influence
on an Exchange facility.\29\
---------------------------------------------------------------------------
\25\ ``Controlling Person'' is defined as ``a Person who, alone
or together with any Related Persons of such Person, holds a
Controlling Interest in [an LLC] Member.'' ``Controlling Interest''
is defined as ``the direct or indirect ownership of 25% or more of
the total voting power of all equity securities of [an LLC] Member .
. . by any Person, alone or together with any Related Persons of
such Person.'' See BSTX LLC Agreement, supra note 9, Section
7.4(g)(v)(A)-(B). ``Related Person'' is defined as ``with respect to
any Person: (A) Any Affiliate of such Person; (B) any other Person
with which such first Person has any agreement, arrangement or
understanding (whether or not in writing) to act together for the
purpose of acquiring, voting, holding or disposing of Interests; (C)
in the case of a Person that is a company, corporation or similar
entity, any executive officer (as defined under Rule 3b-7 under the
Exchange Act) or director of such Person and, in the case of a
Person that is a partnership or limited liability company, any
general partner, managing member or manager of such Person, as
applicable; (D) in the case of any BSTX Participant who is at the
same time a broker-dealer, any Person that is associated with the
BSTX Participant (as determined using the definition of `person
associated with a member' as defined under Section 3(a)(21) of the
Exchange Act); (E) in the case of a Person that is a natural person
and a BSTX Participant, any broker or dealer that is also a BSTX
Participant with which such Person is associated; (F) in the case of
a Person that is a natural person, any relative or spouse of such
Person, or any relative of such spouse who has the same home as such
Person or who is a director or officer of the Exchange or any of its
parents or subsidiaries; (G) in the case of a Person that is an
executive officer (as defined under Rule 3b-7 under the Exchange
Act) or a director of a company, corporation or similar entity, such
company, corporation or entity, as applicable; and (H) in the case
of a Person that is a general partner, managing member or manager of
a partnership or limited liability company, such partnership or
limited liability company, as applicable.'' See BSTX LLC Agreement,
supra note 9, Section 1.1.
``BSTX Participant'' is defined as ``a firm or organization that
is registered with the Exchange pursuant to Exchange Rules for
purposes of participating in Trading on the BSTX Market as an order
flow provider or market maker.'' See id.
\26\ See Notice, supra note 3, 85 FR at 346, 353; BSTX LLC
Agreement, supra note 9, Section 7.4(g). The proposed Form of
Instrument of Accession to Boston Security Token Exchange LLC,
Amended and Restated Limited Liability Company Agreement is attached
as Exhibit 5B to the Form 19b-4 for SR-BOX-2019-37 (available on the
Commission's website at https://www.sec.gov/rules/sro/box/2019/34-87868-ex5b.pdf). The Exchange specifically notes that Medici,
Overstock, BOX Digital, BOX Holdings, MX US 1, Inc., MX US 2, Inc.,
Bourse de Montreal, Inc., and TMX would be required to execute an
instrument of accession substantially in the form attached as
Exhibit 5B. See Notice, supra note 3, 85 FR at 346.
Pursuant to Section 7.4(g)(iii) of the BSTX LLC Agreement, ``a
Person shall not be required to execute an amendment to [the BSTX
LLC Agreement] . . . if such Person does not, directly or
indirectly, hold any interest in [an LLC] Member.'' BSTX LLC
Agreement, supra note 9, Section 7.4(g)(iii).
\27\ See Notice, supra note 3, 85 FR at 353; BSTX LLC Agreement,
supra note 9, Section 7.4(g)(iv).
\28\ See Notice, supra note 3, 85 FR at 346, 353; BSTX LLC
Agreement, supra note 9, Section 7.4(h).
\29\ See Notice, supra note 3, 85 FR at 346.
---------------------------------------------------------------------------
The Exchange states that the BSTX LLC Agreement includes provisions
that ensure that the Exchange has full regulatory control over BSTX and
these provisions are designed to prevent any owner of BSTX from having
undue influence over regulatory actions.\30\ The BSTX LLC Agreement
provides that BSTX's board of directors (``Board'') will consist of six
directors, comprised of (1) two directors appointed by each of BOX
Digital and tZERO (the ``Member Directors''); (2) one director
appointed by the unanimous vote of the Member Directors (the
``Independent Director''); and (3) one non-voting director appointed by
the Exchange (``the ``Regulatory Director'').\31\ The Exchange states
that BSTX will have an Independent Director to avoid either BOX Digital
or tZERO from controlling or creating deadlock on the Board.\32\ The
Exchange also states that BSTX's Board structure differs from that of
BOX Options because BOX Options, as a wholly-owned subsidiary of BOX
Holdings, has the same directors as BOX Holdings, and BOX Holdings,
unlike BSTX, has no owners with 50% or greater ownership.\33\
---------------------------------------------------------------------------
\30\ See id. at 348.
\31\ See id.; BSTX LLC Agreement, supra note 9, Section 4.1(a).
The Exchange states that the Regulatory Director must be a member of
senior management of the regulation staff of the Exchange. See
Notice, supra note 3, 85 FR at 348. See also BSTX LLC Agreement,
supra note 9, Section 1.1.
\32\ See Notice, supra note 3, 85 FR at 348.
\33\ See id.
---------------------------------------------------------------------------
Generally, actions by the Board will be considered effective only
if approved by at least a majority of the votes entitled to vote on
that action.\34\ The Board must approve, by an affirmative vote of the
Member Directors, any ``major action,'' which will include, among other
things, changes to operating the BSTX Market using any software system
other than the BSTX trading system, except as otherwise provided in the
LSA or to the extent otherwise required by the Exchange to fulfill its
regulatory functions or responsibilities or to oversee the BSTX Market
as determined by the board of the Exchange.\35\ The BSTX LLC Agreement
also provides that the Exchange shall receive notice of planned or
proposed changes to BSTX, with the exception of certain changes not
related to the operation of the market, or to the BSTX Market, and that
such changes will require affirmative approval by the Exchange before
implementation.\36\ If the Exchange determines that planned or proposed
changes could cause a regulatory deficiency, the Exchange may direct
BSTX, subject to Board approval, to modify the proposal as
necessary.\37\
---------------------------------------------------------------------------
\34\ See id.; BSTX LLC Agreement, supra note 9, Section 4.3.
\35\ See Notice, supra note 3, 85 FR at 348-49; BSTX LLC
Agreement, supra note 9, Section 4.4(a). ``BSTX Market'' is defined
as the market operated by the Exchange pursuant to Section 3.1 of
the BSTX LLC Agreement. See BSTX LLC Agreement, supra note 9,
Section 1.1.
\36\ See Notice, supra note 3, 85 FR at 350; BSTX LLC Agreement,
supra note 9, Section 3.2(a)(ii).
\37\ See Notice, supra note 3, 85 FR at 350; BSTX LLC Agreement,
supra note 9, Section 3.2(a)(iii).
---------------------------------------------------------------------------
The Exchange also proposes how regulatory funds may be allocated.
The Exchange states that, pursuant to the Facility Agreement, the
Exchange will have the right to receive all fees, fines, and
disgorgements imposed upon BSTX Participants with respect to BSTX's
trading system (``Regulatory Funds'') and all other market data fees,
tape, and other revenue (``Non-regulatory
[[Page 19539]]
Funds''), and all Regulatory Funds and Non-regulatory Funds collected
in respect to BSTX may be used by the Exchange, at its sole discretion,
for regulatory purposes.\38\ Furthermore, all Regulatory Funds
collected by the Exchange will be retained by the Exchange and not
transferred to BSTX; however, Non-regulatory Funds collected may be
transferred to BSTX after the Exchange has made adequate provisions for
all regulatory purposes.\39\
---------------------------------------------------------------------------
\38\ See Notice, supra note 3, 85 FR at 350-51. If BSTX incurs
costs and expenses for regulatory purposes, the Exchange may
reimburse BSTX using Regulatory Funds. See id. at 351. In the event
that the Exchange does not hold sufficient funds to meet all
regulatory purposes, BSTX will reimburse the Exchange for any such
additional costs and expenses. See id. The BSTX LLC Agreement does
not include provisions regarding Regulatory Funds.
\39\ See id.
---------------------------------------------------------------------------
The proposal includes provisions regarding capital contributions
and distributions. The BSTX LLC Agreement provides for an initial
capital contribution from both BOX Digital and tZERO, with tZERO
providing an initial cash contribution of $10 million and BOX Digital
providing the ``[r]ight to seek approval to become a facility of SRO''
and ``[r]egulatory expertise.'' \40\ The BSTX LLC Agreement also
includes provisions regarding determinations of capital needs by the
Board, including, among others, the requirement that at least one
Member Director appointed by each LLC Member affirmatively vote to
raise capital; \41\ potential cash distributions; \42\ and allocation
of profits, losses, and credits for each fiscal year to LLC Members at
least once annually on a pro rata basis.\43\
---------------------------------------------------------------------------
\40\ See id.; BSTX LLC Agreement, supra note 9, Section 6.1 &
Schedule A. tZERO will also provide ``consideration provided
pursuant to the LSA.'' BSTX LLC Agreement, supra note 9, Schedule A.
\41\ See Notice, supra note 3, 85 FR at 351; BSTX LLC Agreement,
supra note 9, Section 6.2. The Exchange states that the requirement
concerning the affirmative vote of one Member Director appointed by
each LLC Member is not present in the BOX Options LLC Agreement, but
that the Exchange believes that this provision promotes commercial
fairness and is necessary due to the differing ownership structure
of BSTX. See Notice, supra note 3, 85 FR at 351.
\42\ See BSTX LLC Agreement, supra note 9, Section 8.1.
\43\ See id., Section 9.1.
---------------------------------------------------------------------------
The proposal also includes provisions regarding the regulation of
BSTX and regulatory jurisdiction over LLC Members of BSTX.\44\
Specifically, the BSTX LLC Agreement provides that the Exchange has the
authority to act as the self-regulatory organization (``SRO'') for
BSTX, will provide the regulatory framework for the BSTX Market, and
will have regulatory responsibility for the activities of the BSTX
Market.\45\ Additionally, the BSTX LLC Agreement includes provisions,
which the Exchange states are substantively similar to provisions in
the BOX Options LLC Agreement, that address the handling of
confidential information, both pertaining to regulatory matters and
otherwise.\46\ The BSTX LLC Agreement also contains provisions, which
the Exchange states are substantially similar to those of the BOX
Options LLC Agreement, related to regulatory jurisdiction over LLC
Members; \47\ the maintenance of books and records; \48\ and the
independence of the self-regulatory function of the Exchange and
compliance with federal securities laws.\49\
---------------------------------------------------------------------------
\44\ See Notice, supra note 3, 85 FR at 354-55.
\45\ See id. at 354; BSTX LLC Agreement, supra note 9, Section
3.2. The Exchange states that Section 3.2 of the BSTX LLC Agreement
ensures that the Exchange has full regulatory control over BSTX and
is designed to prevent any owner of BSTX from exercising undue
influence over the regulated activities of BSTX. See Notice, supra
note 3, 85 FR at 354.
\46\ See Notice, supra note 3, 85 FR at 354-55; BSTX LLC
Agreement, supra note 9, Article 15. The BSTX LLC Agreement contains
additional language to make it clear that the Commission can access
and examine confidential information pursuant to federal securities
laws and rules. See Notice, supra note 3, 85 FR at 354-55; BSTX LLC
Agreement, supra note 9, Section 15.5.
\47\ See Notice, supra note 3, 85 FR at 355; BSTX LLC Agreement,
supra note 9, Sections 11.1, 18.6(a), 18.6(c).
\48\ See Notice, supra note 3, 85 FR at 355; BSTX LLC Agreement,
supra note 9, Section 11.1.
\49\ See Notice, supra note 3, 85 FR at 348, 350; BSTX LLC
Agreement, supra note 9, Section 4.12.
---------------------------------------------------------------------------
The Exchange also states that it is submitting a separate filing to
introduce structural changes to the Exchange to accommodate regulation
of BSTX as well as BOX Options.\50\ According to the Exchange, BSTX
Participants will have the same representation, rights, and
responsibilities as BOX Options Participants.\51\
---------------------------------------------------------------------------
\50\ See Notice, supra note 3, 85 FR at 345.
\51\ See id. See also Securities Exchange Act Release No. 88236
(February 19, 2020), 85 FR 10768 (February 25, 2020) (SR-BOX-2020-
04) (``Exchange Governance Amendment Proposal''). The Commission
notes that the Exchange Governance Amendment Proposal proposes to
amend the Exchange's LLC Agreement and Bylaws to provide flexibility
for the Exchange to regulate multiple facilities.
---------------------------------------------------------------------------
II. Summary of the Comment Letters Received
To date the Commission has received two comment letters on the
proposal.\52\ One 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.\53\ This commenter expresses concern that the approval of the
proposal ``could be a significant change for the equities market.''
\54\ This commenter requests an extension of the comment period to
consider the proposal.\55\ Another commenter notes that the tZERO token
is affiliated with certain owners of the Exchange, Overstock, and other
entities related to the Exchange.\56\ This commenter also notes that
the price of the tZERO token is down by over 85% since issuance less
than two years ago.\57\ This commenter believes that the Commission
should disclose and study further details on the relationships between
the aforementioned entities.\58\
---------------------------------------------------------------------------
\52\ See supra note 6.
\53\ See Letter from Ellen Greene, Managing Director, SIFMA, to
Vanessa Countryman, Secretary, Commission, dated January 13, 2020
(``SIFMA Letter''), at 2. See also Letter from David A. Schrader,
Partner, Paykin Krieg & Adams, LLP, to Vanessa Countryman,
Secretary, Commission, dated February 25, 2020 (``PKA Law Letter''),
at 2 (stating that the proposal has had little dissemination among
market participants, particularly the exchanges and designated
market makers).
\54\ See SIFMA Letter, supra note 53, at 2. This commenter's
letter also references the BSTX Trading Rules Proposal. See id. at
1. See also PKA Law Letter, supra note 53, at 2 (stating that the
proposal contains potentially significant changes to the operation
and structure of the global equity trading markets).
\55\ See SIFMA Letter, supra note 53, at 2. This commenter also
requests more time to provide feedback on the BSTX Trading Rules
Proposal. See id. at 2.
\56\ See PKA Law Letter, supra note 53, at 2.
\57\ See id.
\58\ See id.
---------------------------------------------------------------------------
III. Proceedings To Determine Whether To Approve or Disapprove SR-BOX-
2019-37 and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \59\ 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.
---------------------------------------------------------------------------
\59\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------
Pursuant to Section 19(b)(2)(B) of the Act,\60\ the Commission is
providing
[[Page 19540]]
notice of the grounds for disapproval under consideration. The
Commission is instituting proceedings to allow for additional analysis
of the proposed rule change's consistency with Section 6(b)(1) of the
Act, which requires that a national securities exchange be so organized
and have the capacity to be able to carry out the purposes of the Act
and to comply, and enforce compliance by its members and persons
associated with its members, with the provisions of the Act, the rules
and regulations thereunder, and the rules of the exchange.\61\ In
addition, the Commission is instituting proceedings to allow for
additional analysis of the proposed rule change's consistency with
Section 6(b)(3) of the Act, which requires that the rules of a national
securities exchange assure a fair representation of its members in the
selection of its directors and administration of its affairs and
provide that one or more directors shall be representative of issuers
and investors and not be associated with a member of the exchange,
broker, or dealer; \62\ and Section 6(b)(5) of the 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.\63\
---------------------------------------------------------------------------
\60\ Id.
\61\ 15 U.S.C. 78f(b)(1).
\62\ 15 U.S.C. 78f(b)(3).
\63\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
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.'' \64\ 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,\65\ 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 Act and the applicable rules and regulations.\66\
---------------------------------------------------------------------------
\64\ 17 CFR 201.700(b)(3).
\65\ See id.
\66\ See id.
---------------------------------------------------------------------------
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 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 is
consistent with Sections 6(b)(1),\67\ 6(b)(3),\68\ and 6(b)(5) \69\ of
the Act or any other provision of the 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 Act,\70\ any request for an
opportunity to make an oral presentation.\71\
---------------------------------------------------------------------------
\67\ 15 U.S.C. 78f(b)(1).
\68\ 15 U.S.C. 78f(b)(3).
\69\ 15 U.S.C. 78f(b)(5).
\70\ 17 CFR 240.19b-4.
\71\ Section 19(b)(2) of the 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).
---------------------------------------------------------------------------
Interested persons are invited to submit written data, views, and
arguments regarding whether the proposal should be approved or
disapproved by April 28, 2020. Any person who wishes to file a rebuttal
to any other person's submission must file that rebuttal by May 12,
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,\72\ in addition to any other comments they may
wish to submit about the proposed rule change.
---------------------------------------------------------------------------
\72\ See Notice, supra note 3.
---------------------------------------------------------------------------
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-2019-37 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-2019-37. 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-2019-37 and should be submitted by
April 28, 2020. Rebuttal comments should be submitted by May 12, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\73\
---------------------------------------------------------------------------
\73\ 17 CFR 200.30-3(a)(57).
---------------------------------------------------------------------------
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-07229 Filed 4-6-20; 8:45 am]
BILLING CODE 8011-01-P
