[Federal Register Volume 86, Number 18 (Friday, January 29, 2021)]
[Notices]
[Pages 7597-7602]
[FR Doc No: 2021-01943]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90987; File No. SR-BOX-2020-16]

Self-Regulatory Organizations; BOX Exchange LLC; Order
Disapproving Proposed Rule Change, as Modified by Amendment No. 1, in
Connection With the Proposed Establishment of the Boston Security Token
Exchange LLC as a Facility of the Exchange

January 25, 2021.

I. Introduction

    On May 12, 2020, 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 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 June 1, 2020.\3\ On July 16, 2020, 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
disapprove the proposed rule change.\5\ On August 3, 2020, the Exchange
filed Amendment No. 1 to the proposed rule change (``Amendment No.
1'').\6\ On August 12, 2020, the Commission published notice of filing
of Amendment No. 1, for notice and comment, and instituted proceedings
to determine whether to approve or disapprove the proposed rule change,
as modified by Amendment No. 1.\7\ On November 24, 2020, pursuant to
Section 19(b)(2) of the Exchange Act,\8\ the Commission designated a
longer period within which to approve the proposed rule change, as
modified by Amendment No. 1, disapprove the proposed rule change, as
modified by Amendment No. 1, or institute proceedings to determine
whether to disapprove the proposed rule change, as modified by
Amendment No. 1.\9\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 88949 (May 26,
2020), 85 FR 33258 (June 1, 2020) (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 89329 (July 16,
2020), 85 FR 44333 (July 22, 2020). The Commission designated August
30, 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\ In Amendment No. 1 the Exchange revised the proposal to: (1)
Modify its description of the market that BSTX would operate,
including what would be traded on that market; (2) clarify that it
is proposing to establish BSTX as a facility of the Exchange, but
that the Exchange would not commence operations of the ``BSTX
Market'' (as defined below) absent trading rules approved by the
Commission that are the subject of a separate filing, and that the
Exchange's regulatory oversight responsibilities with respect to
BSTX would not be triggered unless SR-BOX-2020-16 is approved by the
Commission; (3) update a citation to a proposed rule change filed by
the Exchange to provide flexibility for the Exchange to regulate
multiple facilities; and (4) include a citation to a separate
proposed rule change filed by the Exchange to provide trading rules
for the BSTX Market. Amendment No. 1 was filed as a partial
amendment. See Form 19b-4 for Amendment No. 1 to SR-BOX-2020-16
(``Amendment No. 1 Form 19b-4''). When the Exchange filed Amendment
No. 1 to SR-BOX-2020-16, it also submitted a redline, which the
Exchange states reflects the text of the partial amendment compared
to the original filing, as a comment letter to the filing, and which
the Commission made publicly available at https://www.sec.gov/comments/sr-box-2020-16/srbox202016-7525322-222100.pdf.
    \7\ See Securities Exchange Act Release No. 89537 (August 12,
2020), 85 FR 50850 (August 18, 2020) (Notice of Filing of Amendment
No. 1 and Order Instituting Proceedings).
    \8\ 15 U.S.C. 78s(b)(2).
    \9\ See Securities Exchange Act Release No. 90513 (November 24,
2020), 85 FR 77334 (December 1, 2020). The Commission designated
January 27, 2021, as the date by which the Commission shall approve
or disapprove, or institute proceedings to determine whether to
disapprove, the proposed rule change.
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    The proposed rule change is substantially similar to a proposed
rule change previously filed with the Commission by the Exchange as SR-
BOX-2019-37.\10\ SR-BOX-2019-37 was published for comment in the
Federal Register on January 3, 2020.\11\ The Commission received
comments on the substance of SR-BOX-2019-37.\12\ BOX withdrew proposed
rule change SR-BOX-2019-37 on May 12, 2020.\13\
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    \10\ See Securities Exchange Act Release No. 87868 (December 30,
2019), 85 FR 345 (January 3, 2020) (Notice of Filing of Proposed
Rule Change).
    \11\ See id. See also Securities Exchange Act Release No. 88536
(April 1, 2020), 85 FR 19537 (April 7, 2020) (Order Instituting
Proceedings) (instituting proceedings to determine whether to
disapprove the proposed rule change). The only differences between
SR-BOX-2019-37 and SR-BOX-2020-16 relate to: (1) Reclassifying
ownership interests in BSTX from a single class with voting rights
into two classes--one with voting rights and one without voting
rights, and related changes; (2) providing an updated Second Amended
and Restated LLC Agreement, dated as of December 24, 2019; (3)
removing the list of BSTX LLC Members and their initial capital
contributions; and (4) modifying the Second Amended and Restated LLC
Agreement to reflect that a ``Membership Record'' would be
maintained by the Secretary of BSTX and updated from time to time as
necessary and as provided in the Second Amended and Restated LLC
Agreement, which shall include the name, address, and number of
units of each class of ownership interests held by each BSTX LLC
Member; (5) updating certain upstream ownership information; (6)
updating references to other proposed rule changes of the Exchange;
and (7) the modifications made by Amendment No. 1.
    \12\ Comments on SR-BOX-2019-37 can be found at: https://www.sec.gov/comments/sr-box-2019-37/srbox201937.htm. While the
Commission considered the comments received on SR-BOX-2019-37, they
are not germane to the basis for disapproval and are not discussed
herein.
    \13\ See Securities Exchange Act Release No. 89017 (June 4,
2020), 85 FR 35473 (June 10, 2020) (Notice of Withdrawal of a
Proposed Rule Change).
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    This order disapproves the proposed rule change, as modified by
Amendment No. 1 (``BSTX Governance Proposal''). The Exchange proposes
to establish BSTX as a facility of the Exchange, as that term is
defined in Section 3(a)(2) of the Exchange Act, that would operate a
market for the trading of securities (``BSTX Market'') and be jointly
owned and controlled by BOX Digital Markets LLC (``BOX Digital''), a
Delaware limited liability company and a subsidiary of BOX Holdings
Group LLC (``BOX Holdings,'' which is also the parent company of the
Exchange's existing facility BOX Options Market LLC, ``BOX Options'')
and tZERO Group, Inc. (``tZERO''), a Delaware limited liability company
and a subsidiary of Overstock.com Inc. (``Overstock''). According to
the Exchange, it is proposing the Boston Security Token Exchange LLC,
Second Amended and Restated Limited Liability Company Agreement, dated
as of December 24, 2019 (``BSTX LLC Agreement'') \14\ as the

source of governance and operating authority for BSTX. Among other
things, the BSTX LLC Agreement includes provisions that are designed to
prevent any owner of BSTX from exercising undue influence over the
regulated activities of BSTX. As is the case with BOX Options, the
Exchange would not hold an ownership interest in BSTX, but would
regulate BSTX as a facility of the Exchange pursuant to a separate
agreement between the Exchange and BSTX (``Facility Agreement''). The
Exchange currently regulates one facility, BOX Options, and recently
amended the Exchange's governing documents to provide for the
flexibility to regulate additional facilities.\15\
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    \14\ The proposed BSTX LLC Agreement is attached as Exhibit 5A
to the Form 19b-4 for SR-BOX-2020-16 (available on the Commission's
website at https://www.sec.gov/rules/sro/box/2020/34-88949-ex5a.pdf).
    \15\ See Securities Exchange Act Release Nos. 88236 (February
19, 2020), 85 FR 10765 (February 25, 2020) (Notice of Filing of
Proposed Rule Change); 88934 (May 22, 2020), 85 FR 32085 (May 28,
2020) (Order Granting Approval of a Proposed Rule Change) (SR-BOX-
2020-04) (``BOX-2020-04 Approval'').
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    The Exchange separately filed a proposed rule change containing
proposed trading rules for BSTX that would have established the kinds
of securities that would be listed and traded on BSTX, the manner of
operations of the BSTX Market, and eligibility to participate on the
BSTX Market (``BSTX Trading Rules Proposal'').\16\ The Commission
disapproved the BSTX Trading Rules Proposal on December 18, 2020.\17\
As discussed in further detail below, this Order finds that, given that
the trading rules for the BSTX facility were not approved, and BOX
relied upon those rules in the BSTX Governance Proposal with respect to
how BSTX would operate the BSTX market and the Exchange would provide
regulatory oversight of BSTX, the Commission is unable to assess the
scope of the Exchange's regulatory operations, and therefore cannot
find that the BSTX Governance Proposal is consistent with the Exchange
Act. Specifically, the BSTX Governance Proposal does not provide
sufficient detail about aspects of the proposed operation of the BSTX
Market and regulation of BSTX that were addressed in the BSTX Trading
Rules Proposal, including: (1) The rules that would establish which
securities would be eligible for trading on BSTX, which the Exchange
refers to as ``BSTX Products;'' \18\ (2) the rules that would govern an
Exchange member's eligibility to trade on BSTX as a ``BSTX
Participant'' \19\ and their ongoing obligations; (3) the rules for
trading on the BSTX Market; and (4) how the Exchange proposes to comply
with its regulatory obligations with respect to the BSTX Market. The
Commission cannot, therefore, find that the BSTX Governance Proposal is
consistent with the Exchange Act, and in particular Section 6(b)(1) of
the Exchange Act.\20\
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    \16\ See Securities Exchange Act Release Nos. 88946 (May 26,
2020), 85 FR 33454 (June 1, 2020) (Notice of Filing of Proposed Rule
Change); 89536 (August 12, 2020), 85 FR 51250 (August 19, 2020)
(Notice of Filing of Amendment No. 1 and Order Instituting
Proceedings) (SR-BOX-2020-14).
    \17\ See Securities Exchange Act Release No. 90735 (December 18,
2020), 85 FR 84403 (December 28, 2020) (SR-BOX-2020-14) (Order
Disapproving 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) (``BSTX Trading Rules Disapproval'').
    \18\ See infra note 75 and accompanying text.
    \19\ See infra notes 39 and 52 and accompanying text.
    \20\ 15 U.S.C. 78f(b)(1).
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II. Description of the Proposed Rule Change and Exchange's
Representations

    As described in the Notice, as modified by Amendment No. 1,\21\ the
Exchange proposes to establish BSTX as a facility (as defined in
Section 3(a)(2) of the Exchange Act) of the Exchange that will operate
the BSTX Market and adopt the BSTX LLC Agreement for BSTX as a facility
of the Exchange.\22\ Specifically, the Exchange states that with the
BSTX Governance Proposal the Exchange proposes to establish BSTX as a
facility of the Exchange that ``operates a market for the trading of
securities,'' which market it refers to in the proposal as the BSTX
Market.\23\ The Exchange also states that it submitted a separate
filing to establish rules relating to trading on BSTX, and that,
subject to approval of those rules by the Commission, BSTX would
operate the BSTX Market.\24\ The Exchange states that without
Commission approval of the BSTX Trading Rules Proposal, the Exchange
would not permit BSTX to commence operations of the BSTX Market.\25\
Further, the Exchange states that it will not permit BSTX to commence
operations of the BSTX Market, and the Exchange's regulatory oversight
responsibilities with respect to BSTX would not be triggered, unless
the BSTX Governance Proposal is approved by the Commission.\26\
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    \21\ See Notice, supra note 3; Amendment No. 1 Form 19b-4, supra
note 6.
    \22\ See Notice, supra note 3, 85 FR at 33259; Amendment No. 1
Form 19b-4, supra note supra note 6.
    \23\ See Amendment No. 1 Form 19b-4, supra note 6, at 4.
    \24\ See id. (citing BSTX Trading Rules Proposal, supra note
16). The proposed trading rules for BSTX, titled the BSTX Rulebook
(``BSTX Rules''), were attached as Exhibit 5A to the 19b-4 for SR-
BOX-2020-14 (available on the Commission's website at https://www.sec.gov/rules/sro/box/2020/34-89536-ex5a.pdf). Proposed
amendments to the Exchange's existing rules to facilitate trading on
BSTX were attached as Exhibit 5B to the 19b-4 for SR-BOX-2020-14
(available on the Commission's website https://www.sec.gov/rules/sro/box/2020/34-89536-ex5b.pdf).
    \25\ See Amendment No. 1 Form 19b-4, supra note 6, at 4.
    \26\ See id.
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    Pursuant to the proposal, ownership interests in BSTX are
represented by two classes of units (``Units''): Class A Units, which
represent equal units of limited liability interest in BSTX, including
an interest in the ownership and profits and losses of BSTX and the
right to receive distributions from BSTX as set forth in the BSTX LLC
Agreement (``Class A Units''); and Class B Units, which are generally
identical to the Class A Units, except that they do not have the right
to vote on any matter related to BSTX (``Class B Units'').\27\
According to the Exchange, 50% of the voting Class A Units are owned by
BOX Digital, which is 98% owned by BOX Holdings, and the other 50% of
the voting Class A Units are owned by tZERO.\28\ According to the
Exchange, BOX Digital and tZERO each have over a 45% economic interest
in BSTX, and the non-voting Class B Units are held by various employees
and directors of BSTX, each of whom hold less than a 5% economic
interest in BSTX.\29\ Holders of Units are referred to as ``Members''
of BSTX (``BSTX LLC Members'').\30\ The Exchange also states that BSTX
is an affiliate of the Exchange and, if approved as a facility of the
Exchange, will be subject to regulatory oversight by the Exchange.\31\
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    \27\ See Notice, supra note 3, 85 FR at 33259, nn.10-12 and
accompanying text.
    \28\ See id. at 33260. The Exchange also provides additional
information about the upstream ownership of BOX Digital and tZERO.
See id.
    \29\ See id.
    \30\ See Notice, supra note 3, 85 FR at 33259-60. ``Members''
are defined by the Exchange as the duly admitted holders of BSTX
Units and would include any person later admitted to BSTX as an
additional or substitute LLC Member as provided by the BSTX LLC
Agreement. See id.; BSTX LLC Agreement, supra note 14, Section 1.1.
    \31\ See Amendment No. 1 Form 19b-4, supra note 6, at 4. The
Exchange also states that tZERO and BSTX are affiliates of
Overstock. See Notice, supra note 3, 85 FR at 33260.
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    The Exchange states that BOX Holdings wholly owns BOX Options,
which is a facility of the Exchange \32\ and the only facility that the
Exchange currently operates.\33\ According to the Exchange, the BSTX
LLC Agreement provisions are generally the same as

provisions of the BOX Options LLC Agreement or the BOX Holdings LLC
Agreement.\34\ The Exchange states that it will enter into a Facility
Agreement with BSTX pursuant to which the Exchange will exercise
regulatory oversight over BSTX.\35\ Furthermore, the Exchange has
entered into an IP License and Services Agreement (``LSA'') with
tZERO,\36\ 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.\37\
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    \32\ See Notice, supra note 3, 85 FR at 33259.
    \33\ See Amendment No. 1 Form 19b-4, supra note 6, at 5.
    \34\ See Notice, supra note 3, 85 FR at 33259, n.8 and
accompanying text.
    \35\ See id. at 33259. The Exchange will also provide certain
business services to BSTX pursuant to an administrative services
agreement. See id.
    \36\ See id. at 33261.
    \37\ See id. at 33266. The Facility Agreement, administrative
services agreement, and LSA were not provided as exhibits to the
proposal.
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    Pursuant to the BSTX LLC Agreement, a person that establishes an
indirect ownership interest in BSTX that meets certain thresholds would
be required to become a party to the BSTX LLC Agreement, by executing
an amendment to the BSTX LLC Agreement, and abide by its provisions to
the same extent as if they were a BSTX LLC Member.\38\ The Exchange
further proposes that any BSTX Participant \39\ that directly or
indirectly together with its Related Persons holds more than 20% of
BSTX would have its voting power capped at 20%.\40\
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    \38\ See Notice, supra note 3, 85 FR at 33260, 33267; BSTX LLC
Agreement, supra note 14, Section 7.4(g). The Exchange specifically
identifies certain upstream owners that would be required to execute
such an amendment. See Notice, supra note 3, 85 FR at 33260.
    \39\ BSTX LLC Agreement defines ``BSTX Participant'' 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 BSTX LLC
Agreement, supra note 14, Section 1.1.
    \40\ See Notice, supra note 3, 85 FR at 33260; BSTX LLC
Agreement, supra note 14, Section 7.4(h). According to the Exchange,
this limitation is designed to prevent a market participant from
exerting undue influence on an Exchange facility, and in particular
is designed to minimize the ability of a BSTX Participant to
improperly interfere with or restrict the ability of the Exchange to
effectively carry out its regulatory oversight responsibilities
under the Exchange Act. See Notice, supra note 3, 85 FR at 33260.
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    The Exchange states that the BSTX LLC Agreement includes provisions
designed to prevent any owner of BSTX from having undue influence over
regulatory actions and ensure that the Exchange has full regulatory
control over BSTX and these provisions.\41\ These provisions, which
according to the Exchange are the same provisions that are contained in
the BOX Options LLC Agreement, include provisions that would require
each of the BSTX LLC Members and the directors, officers, employees and
agents of BSTX to give due regard to the preservation of the
independence of the self-regulatory function of the Exchange and
cooperate with the Exchange pursuant to its regulatory authority and
with the Commission.\42\ The Exchange also states that the Exchange's
powers and authority under the Facility Agreement ensure that the
Exchange has full regulatory control over BSTX, which is designed to
prevent any owner of BSTX from exercising undue influence over the
regulated activities of BSTX.\43\
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    \41\ See e.g., Notice, supra note 3, 85 FR at 33261-62, 33268.
Section 3.2(a)(i) of the proposed BSTX LLC Agreement, for example,
which according to the Exchange is identical in substance to a
provision in the BOX Options LLC Agreement, provides that the
Exchange has authority to act as the ``SRO for BSTX Market,'' will
``provide the regulatory framework for the BSTX Market'' and will
have ``regulatory responsibility for the activities of the BSTX
Market.'' See Notice, supra note 3, 85 FR at 33262; BSTX LLC
Agreement, supra note 14, Section 3.2(a)(i). It also provides that
the Exchange will ``provide regulatory services to BSTX pursuant to
the Facility Agreement,'' and that nothing in the LLC Agreement
``shall be construed to prevent the Exchange from allowing BSTX to
perform activities that support the regulatory framework for the
BSTX Market, subject to oversight by the Exchange.'' See Notice,
supra note 3, 85 FR at 33262; BSTX LLC Agreement, supra note 14,
Section 3.2(a)(i).
    \42\ See Notice, supra note 3, 85 FR at 33261-62; BSTX LLC
Agreement, supra note 14, Sections 4.12(a), (c). The BSTX LLC
Agreement also 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 (see Notice,
supra note 3, 85 FR at 33268-69; BSTX LLC Agreement, supra note 14,
Article 15); and provisions, which the Exchange states are
substantially similar to those of the BOX Options LLC Agreement,
related to regulatory jurisdiction over BSTX LLC Members; the
maintenance of books and records; and the independence of the self-
regulatory function of the Exchange and compliance with federal
securities laws. See Notice, supra note 3, 85 FR at 33269; BSTX LLC
Agreement, supra note 14, Sections 4.12, 11.1, 18.6(a), and 18.6(c).
    \43\ See Notice, supra note 3, 85 FR at 33259.
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    The BSTX LLC Agreement 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.\44\ If the Exchange determines that
planned or proposed changes could cause a ``Regulatory Deficiency,''
\45\ the Exchange may direct BSTX, subject to Board approval, to modify
the proposal as necessary.\46\ Further, in the BSTX Governance Proposal
the Exchange proposes how regulatory funds may be allocated and
provisions regarding capital contributions and distributions.\47\ The
Exchange also states that it submitted a separate filing to introduce
structural changes to the Exchange to accommodate regulation of BSTX as
well as BOX Options, which was approved by the Commission.\48\
According to the Exchange, BSTX Participants will have the same
representation, rights, and responsibilities as BOX Options
Participants.\49\
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    \44\ See Notice, supra note 3, 85 FR at 33264; BSTX LLC
Agreement, supra note 14, Section 3.2(a)(ii).
    \45\ The BSTX LLC Agreement defines ``Regulatory Deficiency'' as
the operation of BSTX (in connection with matters that are not Non-
Market Matters) or the BSTX Market (including, but not limited to,
the BSTX System) in a manner that is not consistent with the
Exchange rules and/or the Commission rules governing the BSTX Market
or BSTX Participants, or that otherwise impedes the Exchange's
ability to regulate the BSTX Market or BSTX Participants or to
fulfill its obligations under the Exchange Act as an SRO. See BSTX
LLC Agreement, supra note 14, Section 1.1. ``Non-Market Matters''
means changes related solely to one or more of the following:
Marketing, administrative matters, personal matters, social or team-
building events, meetings of the BSTX LLC Members, communication
with the BSTX LLC Members, finance, location and timing of the Board
meetings, market research, real property, equipment, furnishings,
personal property, intellectual property, insurance, contracts
unrelated to the operation of the BSTX Market and de minimis items.
See BSTX LLC Agreement, supra note 14, Section 3.2(a)(ii). See also
infra note 51 (defining ``BSTX System'').
    \46\ See Notice, supra note 3, 85 FR at 33264; BSTX LLC
Agreement, supra note 14, Section 3.2(a)(iii).
    \47\ See, e.g., Notice, supra note 3, 85 FR at 33264-66; BSTX
LLC Agreement, supra note 14, Sections 6.1, 6.2, and 8.1, and 8.2.
    \48\ See Amendment No. 1 Form 19b-4, supra note 6, at 5 (citing
the BOX-2020-04 Approval, see supra note 15).
    \49\ See Notice, supra note 3, 85 FR at 33259.
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    Additionally, as described above, the Exchange proposes that
without Commission approval of the BSTX Trading Rules Proposal, it
would not permit BSTX to commence operations of the BSTX Market.\50\
Pursuant to the BSTX Trading Rules Proposal, the Exchange proposed to
operate a fully automated, price/time priority execution system for the
listing and trading of securities (``BSTX Securities'').\51\ BSTX
Securities would

be NMS stock, and members approved for trading on BSTX (i.e., BSTX
Participants),\52\ and issuers of BSTX Securities, would be required to
comply with a protocol to enable BSTX to record and publicly
disseminate digital representations of end-of-day ownership balances to
the Ethereum blockchain.\53\ Specifically, in the BSTX Trading Rules
Proposal, which the Commission disapproved,\54\ the Exchange proposed:
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    \50\ See supra note 25 and accompanying text.
    \51\ See BSTX Trading Rules Proposal, supra note 16, 85 FR
51251. The BSTX Rules would have defined the ``Securities'' that
would be traded on BSTX as a facility of the Exchange as ``NMS
stock, as defined in Rule 600(b)(47) of the Exchange Act, trading on
the BSTX System and for which ancillary Ethereum blockchain records
are maintained under [the BSTX Rules]''; and the BSTX System as the
``the automated trading system used by BSTX for the trading of
Securities.'' See BSTX Rules, supra note 24, Rules 17000(a)(30) and
(14), respectively. Exchange Act Rule 600(b)(47) defines ``NMS
security'' as ``any security or class of securities for which
transaction reports are collected, processed, and made available
pursuant to an effective transaction reporting plan, or an effective
national market system plan for reporting transactions in listed
options.'' 17 CFR 242.600(b)(47). Exchange Act Rule 600(b)(48) then
defines ``NMS stock'' as ``any NMS security other than an option.''
17 CFR 242.600(b)(48). The BSTX LLC Agreement defines ``System'' as
``the technology, know-how, software, equipment, communication lines
or services, services and other deliverables or materials of any
kind as may be necessary or desirable for the operation of the BSTX
Market.'' See BSTX LLC Agreement, supra note 14, Section 1.1.
    \52\ The BSTX LLC Agreement defines ``BSTX Participant'' 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.'' See BSTX LLC Agreement, supra note 14, Section 1.1.
The proposed trading rules would have defined ``BSTX Participant''
as ``a Participant or Options Participant (as defined in [Exchange]
Rule 100 Series) that is authorized to trade Securities on the
Exchange.'' See BSTX Rules, supra note 24, Rule 17000(a)(11).
    \53\ See BSTX Trading Rules Proposal, supra note 16, 85 FR at
51256, 51258-62.
    \54\ See BSTX Trading Rules Disapproval, supra note 17.
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     Rules for which securities could be listed and traded on
the BSTX Market,\55\ including:
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    \55\ See BSTX Rules, supra note 24, Rule 26000 Series and 27000
Series; BSTX Trading Rules Proposal, supra note 16, 85 FR at 51277-
81.
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     rules governing listing on BSTX, such as initial listing
standards; \56\
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    \56\ See BSTX Rules, supra note 24, Rule 26000 Series; BSTX
Trading Rules Proposal, supra note 16, 85 FR at 51277-80.
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     rules governing suspension and delisting; \57\ and
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    \57\ See BSTX Rules, supra note 24, Rule 27000 Series; BSTX
Trading Rules Proposal, supra note 16, 85 FR at 51280.
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     forms to be used by issuers applying to list on BSTX; \58\
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    \58\ See BSTX Trading Rules Proposal, supra note 16, 85 FR at
51283-85. The proposed forms for issuers to list on BSTX were
attached as Exhibits 3G through 3M to the 19b-4 for SR-BOX-2020-14
(available on the Commission's website at https://www.sec.gov/rules/sro/box.htm#SR-BOX-2020-14).
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     rules governing the process for and eligibility to become
a BSTX Participant, as well as ongoing obligations, including:
     Rules defining BSTX Participant; \59\
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    \59\ See supra note 52.
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     rules setting forth requirements to participation on BSTX;
\60\
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    \60\ See BSTX Rules, supra note 24, Rule 18000 Series; BSTX
Trading Rules Proposal, supra note 16, 85 FR at 51264-65.
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     agreements and forms required to become a BSTX
Participant; \61\ and
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    \61\ See BSTX Trading Rules Proposal, supra note 16, 85 FR at
51283. The proposed forms for issuers to list on BSTX were attached
as Exhibits 3A through 3F to the 19b-4 for SR-BOX-2020-14 (available
on the Commission's website at https://www.sec.gov/rules/sro/box.htm#SR-BOX-2020-14).
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     rules governing business conduct, trading practice,
financial responsibility for BSTX Participants; \62\
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    \62\ See BSTX Rules, supra note 24, Rule 19000 Series, 20000
Series, and 23000 Series; BSTX Trading Rules Proposal, supra note
16, 85 FR at 51265-68.
---------------------------------------------------------------------------

     rules for trading on the BSTX Market and access to the
BSTX System; \63\
---------------------------------------------------------------------------

    \63\ See BSTX Rules, supra note 24, Rule 25000 Series; BSTX
Trading Rules Proposal, supra note 16, 85 FR at 51268-75.
---------------------------------------------------------------------------

     rules for BSTX Participants and the Exchange requiring
reporting of end-of-day balance information of BSTX Participants in
BSTX Securities to the Exchange for recording to the Ethereum
blockchain; \64\ and
---------------------------------------------------------------------------

    \64\ See BSTX Rules, supra note 24, Rule 17020; BSTX Trading
Rules Proposal, supra note 16, 85 FR at 51258-62.
---------------------------------------------------------------------------

     rules for how the Exchange would satisfy its regulatory
obligations (including by extending its existing Regulatory Services
Agreement (``RSA'') with the Financial Industry Regulatory Authority
(``FINRA'') to cover BSTX Participants).\65\
---------------------------------------------------------------------------

    \65\ See BSTX Rules, supra note 24, Rule 22040; BSTX Trading
Rules Proposal, supra note 16, 85 FR at 51267, 51286-87.
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III. Discussion and Commission Finding

A. Applicable Standard of Review

    Under Section 19(b)(2)(C) of the Exchange Act, the Commission must
approve the proposed rule change of a self-regulatory organization
(``SRO'') if the Commission finds that the proposed rule change is
consistent with the requirements of the Exchange Act and the applicable
rules and regulations thereunder; if it does not make such a finding,
the Commission must disapprove the proposed rule change.\66\
Additionally, under Rule 700(b)(3) of 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 self-regulatory organization that proposed
the rule change.'' \67\ The description of a proposed rule change, its
purpose and operation, its effect, and a legal analysis of its
consistency with applicable requirements must be sufficiently detailed
and specific to support an affirmative Commission finding.\68\ 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 issued thereunder that are applicable
to the SRO.\69\ Moreover, ``unquestioning reliance'' on an SRO's
representations in a proposed rule change is not sufficient to justify
Commission approval of a proposed rule change.\70\
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    \66\ See 15 U.S.C. 78s(b)(2)(C)(i).
    \67\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3).
    \68\ See id.
    \69\ See id.
    \70\ Susquehanna Int'l Group, LLP v. Securities and Exchange
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017).
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    As discussed throughout, the rules for operation of the BSTX Market
proposed in the BSTX Trading Rules Proposal undergird the operation and
governance of BSTX as a facility of the Exchange. Those listing and
trading rules, which are cited and relied upon by the Exchange in the
BSTX Governance Proposal, were disapproved by the Commission and, as a
result, the BSTX Governance Proposal, standing alone, does not reflect
the proposed operations of the BSTX facility. Given that the rules for
the BSTX facility were not approved, and BOX relied on those rules in
the BSTX Governance Proposal with respect to how BSTX would operate the
BSTX market and the Exchange would provide regulatory oversight of
BSTX, the Commission is unable to assess the scope of the Exchange's
regulatory operations, and therefore cannot find that the BSTX
Governance Proposal is consistent with the Exchange Act, and in
particular Section 6(b)(1). For these reasons, the Commission is unable
to find that the Exchange has met its burden to show that the proposed
rule change is consistent with the Exchange Act and the applicable
rules and regulations thereunder, and in particular Exchange Act
Section 6(b)(1), and is therefore unable to find that the proposal is
consistent with the Exchange Act.\71\
---------------------------------------------------------------------------

    \71\ Other than as discussed below, this Order makes no findings
with respect to whether other aspects of the proposed rule change
are consistent with the Exchange Act.
---------------------------------------------------------------------------

B. Whether the Record Supports a Finding That the Proposal is
Consistent With Section 6(b)(1) of the Exchange Act

    With the BSTX Governance Proposal, the Exchange proposes to
establish BSTX as a facility of the Exchange and proposes the BSTX LLC
Agreement as the source of operating and governance authority for BSTX.
The Exchange rules that would have governed operation of the BSTX
Market, and established many

of the Exchange's obligations as an SRO with respect to BSTX as a
facility of the Exchange, were the subject of a separate proposed rule
change--the BSTX Trading Rules Proposal--that the Commission
disapproved.\72\ In the BSTX Governance Proposal, the Exchange cites
the BSTX Trading Rules Proposal and states that it would not commence
operations of the BSTX Market until the BSTX Trading Rules Proposal is
approved by the Commission.\73\ Many aspects of the BSTX Governance
Proposal and many provisions of the BSTX LLC Agreement, however, are
substantively relevant only in the context of the existence and
operation of the BSTX Market, and in the absence of the BSTX Trading
Rules Proposal, the Commission is unable to assess these provisions and
determine that the Exchange would be organized and have the capacity to
carry out the purposes of the Exchange Act, consistent with Section
6(b)(1) of the Exchange Act.
---------------------------------------------------------------------------

    \72\ See supra note 17 and accompanying text.
    \73\ See supra notes 24-25 and accompanying text.
---------------------------------------------------------------------------

    For example, in the BSTX LLC Agreement the Exchange defines the
BSTX Market as ``the market operated by BSTX pursuant to Section 3.1
[of the BSTX LLC Agreement],'' \74\ and Section 3.1 of the BSTX LLC
Agreement states that the purpose of BSTX is to ``develop the System,
to own and operate the BSTX Market for the Trading of BSTX
Products,\75\ and to engage in all related activities arising therefrom
or relating thereto or necessary, desirable, advisable, convenient, or
appropriate in connection therewith as the [BSTX] LLC Members may
determine.'' \76\ And while the BSTX LLC Agreement generally defines
the terms System,\77\ BSTX Market,\78\ Trading,\79\ and BSTX
Products,\80\ the BSTX Governance Proposal and the BSTX LLC Agreement
do not describe the proposed operation of the BSTX Market, how trading
would occur on the BSTX Market, or the products proposed to be traded
on the BSTX Market. Instead, the proposed rules for, and the
description of, these aspects of the proposed facility were the subject
of the BSTX Trading Rules Proposal.\81\
---------------------------------------------------------------------------

    \74\ See BSTX LLC Agreement, supra note 14, Section 1.1.
    \75\ The BSTX LLC Agreement defines ``BSTX Products'' as
``security tokens (emphasis added) authorized for trading on the
BSTX Market.'' See id. at Section 1.1.
    \76\ See BSTX LLC Agreement, supra note 14, Section 3.
    \77\ See supra note 51 and accompanying text.
    \78\ See supra note 74 and accompanying text.
    \79\ The proposed BSTX LLC Agreement defines ``Trading'' as
``availability of the System to authorized users for entering,
modifying and canceling orders in BSTX Products.'' See BSTX LLC
Agreement, supra note 14, Section 1.1.
    \80\ See supra note 75 and accompanying text.
    \81\ See supra notes 55-65 and accompanying text.
---------------------------------------------------------------------------

    In particular, the securities that are proposed to be traded on
BSTX are described in the BSTX Governance Proposal only as
``securities,'' but are defined in the BSTX LLC Agreement as ``BSTX
Products,'' which are ``security tokens'' authorized for trading on the
BSTX Market. And the Exchange does not further explain BSTX Products.
The BSTX Trading Rules Proposal, however, proposed rules governing what
securities could be listed and traded on BSTX,\82\ and explained how
securities listed and traded on BSTX would be represented on the
Ethereum blockchain as ``tokenized assets,'' a characteristic which
would distinguish them from other NMS stocks.\83\ In the absence of the
BSTX Trading Rules Proposal, the BSTX Governance Proposal does not
sufficiently explain what kinds of securities would be listed and
traded on BSTX, including what the Exchange intends by the term
``security tokens.'' Furthermore, the Exchange states in the BSTX
Governance Proposal that BSTX will be a ``facility of the Exchange that
operates a market for the trading of securities'' \84\ and the BSTX LLC
Agreement defines the products to be traded on the facility as
``authorized for Trading on the BSTX Market.'' \85\ As noted above, the
Commission disapproved the rules that would have established this
authority.
---------------------------------------------------------------------------

    \82\ See supra note 55 and accompanying text.
    \83\ See e.g., BSTX Trading Rules Proposal, supra note 16, 85 FR
at 51257; BSTX Rules, supra note 24, proposed BSTX Rule 17020(d).
    \84\ See supra note 23 and accompanying text.
    \85\ See supra note 75.
---------------------------------------------------------------------------

    Similarly, the BSTX Governance Proposal does not sufficiently
explain who would be a member of the Exchange that is eligible to trade
on BSTX and qualify as a BSTX Participant. The BSTX LLC Agreement
defines BSTX Participant 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,'' \86\ and ``Exchange
Rules'' as ``the rules of the Exchange that constitute the `rules of an
exchange' within the meaning of Section 3 of the Exchange Act, and that
pertain to the BSTX Market.'' \87\ However, the BSTX Governance
Proposal does not provide the rules for and eligibility to become a
BSTX Participant, as well as ongoing obligations. Those were proposed
in the BSTX Trading Rules Proposal.\88\ The BSTX Governance Proposal
does not sufficiently establish what the ``Exchange Rules'' referred to
in that proposal are, the extent of their application, and what they
would require of BSTX members.
---------------------------------------------------------------------------

    \86\ See BSTX LLC Agreement, supra note 14, Section 1.1.
    \87\ See id.
    \88\ See supra notes 59-62 and accompanying text.
---------------------------------------------------------------------------

    In addition, the BSTX LLC Agreement states that the Exchange will
have regulatory responsibility for the activities of the BSTX Market.
But the Exchange also states that it will only commence operations of
the BSTX Market if the BSTX Trading Rules Proposal is approved.
Additionally, as described above, the BSTX Governance Proposal does not
provide information about the proposed operations of BSTX as a
facility. As a result, it is not clear what the activities of the BSTX
Market would be, over which the Exchange would exercise regulatory
responsibility. For example, Section 3.2 of the BSTX LLC Agreement
provides that the Exchange will (a) act as the Commission approved SRO
for the BSTX Market, (b) have regulatory responsibility for the
activities of the BSTX Market, and (c) provide regulatory services to
BSTX pursuant to the Facility Agreement.\89\ The BSTX LLC Agreement
also states that the Exchange will become a party to the BSTX LLC
Agreement and the Commission and the Exchange shall have ``appropriate
regulatory oversight responsibilities with respect to BSTX'' upon the
Commission's approval of the Exchange's proposal to operate the BSTX
Market as a facility of the Exchange.\90\ Because the BSTX Governance
Proposal does not explain how the BSTX Market would operate, the
Commission is unable to assess what the Exchange's regulatory
responsibilities would be and thus whether the Exchange would be
organized and have the capacity to carry out the purposes of the
Exchange Act with respect to BSTX as a facility of the Exchange.
---------------------------------------------------------------------------

    \89\ See BSTX LLC Agreement, supra note 14, Section 3.2(a)(i);
supra note 41.
    \90\ See BSTX LLC Agreement, supra note 14, Section 18.8.
---------------------------------------------------------------------------

    Furthermore, the BSTX Trading Rules Proposal included discussion
about how the Exchange planned to comply with its regulatory
obligations with respect to the BSTX Market that is not included in the
BSTX Governance Proposal. For example, the BSTX Governance Proposal
does not explain whether the Exchange would enter into any agreements
with other parties to provide regulatory services. However, the BSTX
Trading Rules Proposal explained that

in connection with the operation of BSTX, the Exchange planned to
leverage many of the structures it previously established to operate a
national securities exchange in compliance with Section 6 of the
Exchange Act. The Exchange stated, among other things, its intent to
extend its RSA with FINRA to cover BSTX Participants and trading on the
BSTX System; that the RSA would govern many aspects of the regulation
and discipline of BSTX Participants; and that the Exchange would
perform Security listing regulation, authorize BSTX Participants to
trade on the BSTX System, and conduct surveillance of Security trading
on the BSTX System.\91\ The BSTX Trading Rules Proposal was
disapproved, and this information, which is supportive of how the
Exchange would be organized and have the capacity to carry out the
purposes of the Exchange Act, is not part of the BSTX Governance
Proposal. Because the BSTX Governance Proposal, standing alone, does
not reflect these aspects of the operation of the BSTX facility or how
the Exchange would provide regulatory oversight of BSTX, the Commission
is unable to assess whether the BSTX Governance Proposal is consistent
with Section 6(b)(1) of the Exchange Act.
---------------------------------------------------------------------------

    \91\ See BSTX Trading Rules Proposal, supra note 16, 85 FR at
51286. See also supra note 65 and accompanying text. The Exchange
also proposed that it would perform automated surveillance of
trading on BSTX for the purpose of maintaining a fair and orderly
market at all times and monitor BSTX to identify unusual trading
patterns and determine whether particular trading activity requires
further regulatory investigation by FINRA. See BSTX Trading Rules
Proposal, supra note 16, 85 FR at 51286-87.
---------------------------------------------------------------------------

    In other regards, the BSTX LLC Agreement also refers to the
Exchange's regulatory authority with respect to BSTX.\92\ For example,
the BSTX LLC Agreement gives the Exchange the authority and discretion
to take actions to limit or prevent a ``Regulatory Deficiency,'' which
the BSTX LLC Agreement defines as the operation of BSTX or the BSTX
Market in a manner that is not consistent with Exchange Rules or the
Exchange Act, or rules and regulations thereunder, governing the BSTX
Market or BSTX Participants, or that otherwise impedes the Exchange's
ability to regulate the BSTX Market or BSTX Participants or to fulfill
its obligations under the Exchange Act as an SRO.\93\ The Exchange
states that such provisions ensure the Exchange maintains full
regulatory control and authority over BSTX while it operates as a
facility of the Exchange and help guarantee the Exchange's ability to
fulfill its regulatory responsibilities and operate in a manner
consistent with the Exchange Act, and in particular with Section
6(b)(1).\94\ However, the BSTX Governance Proposal does not provide
sufficient detail about how the BSTX Market would operate, and the
Commission concludes that the information in the BSTX Governance
Proposal on its own cannot support a finding that the Exchange will be
organized and have the capacity to comply with the purposes of the
Exchange Act, consistent with Section 6(b)(1) of the Exchange Act.
---------------------------------------------------------------------------

    \92\ See, e.g., supra notes 41 and 43 and accompanying text.
    \93\ See BSTX LLC Agreement, supra note 14, Section 1.1. See
also supra notes 45-46 and accompanying text.
    \94\ See Notice, supra note 3, 85 FR at 33264.
---------------------------------------------------------------------------

IV. Conclusion

    For the reasons set forth above, the Commission does not find,
pursuant to Section 19(b)(2) of the Exchange Act, that the proposed
rule change, as modified by Amendment No. 1, is consistent with the
requirements of the Exchange Act and the rules and regulations
thereunder applicable to a national securities exchange, and, in
particular, with Section 6(b)(1) of the Exchange Act.\95\
---------------------------------------------------------------------------

    \95\ 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act,\96\ that the proposed rule change (SR-BOX-2020-16), as
modified by Amendment No. 1, be, and hereby is, disapproved.
---------------------------------------------------------------------------

    \96\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\97\
---------------------------------------------------------------------------

    \97\ 17 CFR 200.30-3(a)(57).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-01943 Filed 1-28-21; 8:45 am]
BILLING CODE 8011-01-P