[Federal Register Volume 84, Number 192 (Thursday, October 3, 2019)]
[Notices]
[Pages 52902-52905]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-21472]



[[Page 52902]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87142; File No. SR-CboeBZX-2019-072]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; 
Suspension of and Order Instituting Proceedings To Determine Whether To 
Approve or Disapprove a Proposed Rule Change Amending the Fee Schedule 
Assessed on Members To Establish a Monthly Trading Rights Fee

September 27, 2019.

I. Introduction

    On August 1, 2019, Cboe BZX Exchange, Inc. (``BZX'' or the 
``Exchange'') 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 (File Number SR-CboeBZX-2019-072) to amend the BZX 
fee schedule to establish a monthly Trading Rights Fee to be assessed 
on Members. The proposed rule change was immediately effective upon 
filing with the Commission pursuant to Section 19(b)(3)(A) of the 
Act.\3\ The proposed rule change was published for comment in the 
Federal Register on August 21, 2019.\4\ The Commission has received one 
comment letter on the proposal, and one response letter from the 
Exchange.\5\ Under Section 19(b)(3)(C) of the Act,\6\ the Commission is 
hereby: (i) Temporarily suspending the proposed rule change; and (ii) 
instituting proceedings to determine whether to approve or disapprove 
the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ See Securities Exchange Act Release No. 86686 (August 15, 
2019), 84 FR 43633 (``Notice'').
    \5\ See Letters from: Theodore R. Lazo, Managing Director and 
Associate General Counsel, SIFMA, dated September 12, 2019 (``SIFMA 
Letter''); Adrian Griffiths, Assistant General Counsel, Cboe, dated 
September 25, 2019 (``Exchange Response Letter''). Comment letters 
are available on the Commission's website at: https://www.sec.gov/comments/sr-cboebzx-2019-072/srcboebzx2019072.htm.
    \6\ 15 U.S.C. 78s(b)(3)(C).
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II. Description of the Proposed Rule Change

    The Exchange proposes to amend the Membership Fees section of the 
BZX fee schedule to establish a monthly Trading Rights Fee, which would 
be assessed on Members that trade more than a specified volume in U.S. 
equities.\7\ Specifically, the Exchange proposes to charge Members a 
Trading Rights Fee of $500 per month for the ability to trade on the 
Exchange.\8\ A Member would not be charged the monthly Trading Rights 
Fee if it qualifies for one of the following waivers: (1) The Member 
has a monthly ADV \9\ of less than 100,000 shares, (2) at least 90% of 
the Member's orders submitted to the Exchange per month are retail 
orders,\10\ or (3) a new Member is within the first three months of 
their membership.\11\
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    \7\ See Notice, supra note 4, at 43633. The Commission notes 
that the Exchange's affiliates, Cboe BYX Exchange, Inc., Cboe EDGA 
Exchange, Inc., and Cboe EDGX Exchange, Inc., each also filed a 
proposed rule change to amend their fee schedules to establish a 
monthly Trading Rights Fee to be assessed on Members: CboeBYX-2019-
013, CboeEDGA-2019-014, and CboeEDGX-2019-050, respectively.
    \8\ See id.
    \9\ See id. ``ADV'' means average daily volume calculated as the 
number of shares added or removed, combined, per day. ADV is 
calculated on a monthly basis. See id. at n.5.
    \10\ See Notice, supra note 4, at 43633.
    \11\ See id. For any month in which a firm is approved for 
Membership with the Exchange, the monthly Trading Rights Fee would 
be pro-rated in accordance with the date on which Membership is 
approved. See id. at 43634.
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III. Suspension of the Proposed Rule Change

    Pursuant to Section 19(b)(3)(C) of the Act,\12\ at any time within 
60 days of the date of filing of a proposed rule change pursuant to 
Section 19(b)(1) of the Act,\13\ the Commission summarily may 
temporarily suspend the change in the rules of a self-regulatory 
organization (''SRO'') if it appears to the Commission that such action 
is necessary or appropriate in the public interest, for the protection 
of investors, or otherwise in furtherance of the purposes of the Act. 
As discussed below, the Commission believes a temporary suspension of 
the proposed rule change is necessary and appropriate to allow for 
additional analysis of the proposed rule change's consistency with the 
Act and the rules thereunder.
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    \12\ 15 U.S.C. 78s(b)(3)(C).
    \13\ 15 U.S.C. 78s(b)(1).
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    The Exchange asserts that the proposed Trading Rights Fee ``is 
reasonable because it will assist in funding the overall regulation and 
maintenance of the Exchange'' and will contribute to ``ensuring that 
adequate resources are devoted to regulation.'' \14\ The Exchange also 
believes the proposed fee is reasonable because it ``represents a 
modest charge'' applied to firms that ``have chosen to become members 
of the Exchange,'' and such firms consume more regulatory resources and 
``benefit from the Exchange's regulatory efforts by having access to a 
well-regulated market.'' \15\ The Exchange notes that its Regulatory 
Services Agreement (``RSA'') costs, which cover regulatory services in 
connection with market and financial surveillance, examinations, 
investigations, and disciplinary procedure, have increased 12.2%, while 
the Exchange's overall regulatory costs have grown 64%, from 2016 to 
2019.\16\ The Exchange also asserts that the proposed Trading Rights 
Fee is reasonable because the ``cost of this membership fee is 
generally less than the analogous membership fees of other markets'' 
and that a number of national securities exchanges currently charge 
similar Trading Rights fees to assist in funding their regulatory 
efforts.\17\
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    \14\ See Notice, supra note 4, at 43635.
    \15\ See id.
    \16\ See id.
    \17\ See id. The Exchange notes, for example, that the 
Exchange's proposed Trading Rights Fee of $500 a month is 
``substantially lower'' than the monthly $1,250 Trading Rights Fee 
that Nasdaq assesses on its members. Id.
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    The Exchange states that it believes the proposed Trading Rights 
Fee is equitable and not unfairly discriminatory because it will apply 
equally to all Members that do not qualify for a waiver.\18\ The 
Exchange further asserts that the proposed fee is equitable and not 
unfairly discriminatory because it will ``contribute to a portion of 
the costs incurred by the Exchange in providing its Members with an 
efficient and well-regulated market, which benefits all Members.'' \19\
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    \18\ See Notice, supra note 4, at 43636.
    \19\ See id. at 43635-36.
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    In regard to the proposed waivers pursuant to which Members would 
not be charged the Trading Rights Fee, the Exchange states that it 
believes that such waivers are reasonable.\20\ Specifically, the 
Exchange states that the proposed waiver for Members that trade less 
than a monthly ADV of 100,000 shares is reasonable because it would 
allow such smaller Members to continue to trade at a lower cost.\21\ In 
addition, the Exchange states the waiver is reasonable because such 
firms consume fewer regulatory resources.\22\ The Exchange also asserts 
that the proposed ADV threshold of 100,000 is reasonable because the 
median ADV per firm per month on the Exchange is 475,591; therefore, 
the proposed ADV threshold would serve to capture ``smaller volume firm 
outliers as

[[Page 52903]]

compared to the overall ADV across all firms.'' \23\
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    \20\ See id. at 43635. The Exchange also asserts that the 
waivers are equitable and not unfairly discriminatory in the Notice. 
See id. at 43636.
    \21\ See id. at 43625.
    \22\ See id. at 43635-36.
    \23\ See id. at 43636.
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    The Exchange also states that the second waiver for Members that 
submit 90% or more of their orders per month as retail orders is 
reasonable because it would ensure that ``retail broker members can 
continue to submit orders for individual investors at a lower cost, 
thereby continuing to encourage retail investor participation on the 
Exchange.'' \24\ The Exchange also argues that increased liquidity in 
retail order flow could benefit all market participants by 
incentivizing other Members to send order flow to the Exchange and 
increasing overall liquidity, as well by positively impacting market 
quality by reflecting long-term investment intentions of retail 
participation.\25\ The Exchange also asserts that the retail order 
volume threshold is reasonable because it would serve to capture 
broker-dealers that are primarily in the business of handling orders on 
behalf of retail investors, rather than larger broker-dealers that may 
route some retail orders on behalf of other broker-dealers, but for the 
most part are engaging in a significant amount of activity not related 
to servicing retail investors.\26\
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    \24\ See id.
    \25\ See id.
    \26\ See id.
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    Finally the Exchange states that it believes that not charging a 
Trading Rights Fee for new Members is reasonable because it would 
incentivize firms to become Members of the Exchange and bring 
additional liquidity to the market to the benefit of all market 
participants.\27\ The Exchange asserts that the proposed waiver for new 
Members is also reasonable because ``it will allow new firms the 
flexibility in resources needed to initially adjust to the Exchange's 
market-model and functionality.'' \28\
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    \27\ See id. at 43635.
    \28\ See id.
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    Regarding competition, the Exchange states that it believes the 
proposed rule change does not impose any burden on either intramarket 
or intermarket competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.\29\ The Exchange notes that, 
with regard to intramarket competition, the proposed rule change would 
apply equally to all Members that reach an ADV of 100,000 shares traded 
or greater, those in which less than 90% of their order volume is 
retail order volume per month, and those that are not within their 
first three months of new Membership on the Exchange.\30\ In regard to 
intermarket competition, the Exchange states that it operates in a 
highly competitive market, and that this includes competition for 
exchange memberships.\31\ The Exchange explains that Members have 
numerous venues on which they can participate, including other equities 
exchanges and off-exchange venues such as alternative trading 
systems.\32\ The Exchange asserts that while trade-through and best 
execution obligations may require a firm to access the Exchange, no 
firm is compelled to be a Member of the Exchange in order to 
participate on the Exchange, and accordingly firms may freely choose to 
participate on the Exchange without holding a Membership.\33\ The 
Exchange believes that if the proposed fee is unattractive to members, 
the Exchange is likely to lose membership and market share as a 
result.\34\
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    \29\ See id. at 43636.
    \30\ See id. at 43636.
    \31\ See id. at 43636-37.
    \32\ See id. at 43637. The Exchange states that it represents a 
small percentage of the overall market, and based on publicly 
available information, no single equities exchange has more than 20% 
market share, and no exchange group has more than 22% market share. 
See id. The Exchange references the Cboe Global Markets U.S. 
Equities Market Volume Summary (July 31, 2019), available at https://markets.cboe.com/us/equities/market_share. See id. at n.15.
    \33\ See id. at 43637.
    \34\ See id.
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    As noted above, the Commission received one comment letter on the 
proposed rule change.\35\ SIFMA notes that the Exchange previously 
filed a proposed rule change to institute a trading rights fee, and the 
Commission suspended that filing.\36\ SIFMA argues that, like the prior 
proposal, the Exchange did not provide sufficient information in the 
filing to support a finding that the proposal is consistent with the 
Act.\37\ Specifically, SIFMA asserts that the Exchange should provide 
quantitative data showing its anticipated revenues, costs and 
profitability, as well as describe its methodology for estimating the 
baseline and expected costs and revenues.\38\ Further, SIFMA argues 
that the Exchange should provide specific detail regarding the amount 
of its regulatory costs rather than information about broad percentage 
increases in such costs.\39\ In addition, SIFMA believes the Exchange 
should provide specific detail about the amount of revenue it would 
expect to receive from the Trading Rights Fee, as well as the amount of 
revenue it receives from other sources that are intended to fund 
regulation, such as registration and licensing fees.\40\
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    \35\ See supra note 5.
    \36\ See SIFMA Letter, supra note 5, at 1.
    \37\ See id.
    \38\ See id. at 2.
    \39\ See id.
    \40\ See id.
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    SIFMA also asserts the Exchange's Trading Rights Fee would not be 
constrained by competition because broker-dealers must pay this fee 
prior to being able to satisfy their regulatory obligations and 
deciding where to route orders.\41\ SIFMA notes that trade-through 
requirements under Regulation NMS, as well as broker-dealers' best 
execution obligations, effectively require direct or indirect access 
and connection to all registered exchanges, and each exchange remains 
the exclusive purveyor of those services.\42\
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    \41\ See id.
    \42\ See id.
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    In response, the Exchange reiterated several of the arguments for 
the proposed rule change that were provided in the Notice. In addition, 
the Exchange states that contrary to SIFMA's assertions, the instant 
filing contains significantly more information and analysis in regard 
to the proposed fee, including information related to increases in 
regulatory costs.\43\ The Exchange indicates that the proposed fee 
would defray only a portion of these increasing costs.\44\ The Exchange 
also asserts that in regard to competition, broker-dealers are not 
compelled to become members of any particular exchange, and a number of 
broker-dealers are able to meet their business and compliance needs by 
trading via other arrangements.\45\
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    \43\ See Exchange Response Letter, supra note 5, at 2.
    \44\ See id.
    \45\ See id.
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    The Exchange originally filed a proposal to implement a Trading 
Rights Fee on May 2, 2019.\46\ That proposal, CboeBZX-2019-041, was 
published for comment in the Federal Register on May 16, 2019.\47\ On 
June 28, 2019, pursuant to Section 19(b)(3)(C) of the Act, the 
Commission: (i) Temporarily suspended the proposed rule change; and 
(ii) instituted proceedings to determine whether to approve or 
disapprove the proposed rule change.\48\ The instant filing proposes an 
identical Trading Rights Fee and raises similar concerns as to whether 
it is consistent with the Act.\49\
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    \46\ See Securities Exchange Act Release No. 85840 (May 10, 
2019), 84 FR 22190.
    \47\ See id.
    \48\ See Securities Exchange Act Release No. 86233 (June 28, 
2019), 84 FR 32230 (July 5, 2019).
    \49\ See id.
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    When exchanges file their proposed rule changes with the 
Commission,

[[Page 52904]]

including fee filings like the Exchange's present proposal, they are 
required to provide a statement supporting the proposal's basis under 
the Act and the rules and regulations thereunder applicable to the 
exchange.\50\ The instructions to Form 19b-4, on which exchanges file 
their proposed rule changes, specify that such statement ``should be 
sufficiently detailed and specific to support a finding that the 
proposed rule change is consistent with [those] requirements.'' \51\
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    \50\ See 17 CFR 240.19b-4 (Item 3 entitled ``Self-Regulatory 
Organization's Statement of the Purpose of, and Statutory Basis for, 
the Proposed Rule Change'').
    \51\ See id.
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    Among other things, exchange proposed rule changes are subject to 
Section 6 of the Act, including Sections 6(b)(4), (5), and (8), which 
requires the rules of an exchange to: (1) Provide for the equitable 
allocation of reasonable fees among members, issuers, and other persons 
using the exchange's facilities; \52\ (2) perfect the mechanism of a 
free and open market and a national market system, protect investors 
and the public interest, and not be designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers; \53\ 
and (3) not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act.\54\
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    \52\ 15 U.S.C. 78f(b)(4).
    \53\ 15 U.S.C. 78f(b)(5).
    \54\ 15 U.S.C. 78f(b)(8).
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    In temporarily suspending the Exchange's fee change, the Commission 
intends to further consider whether assessing the proposed monthly 
Trading Rights Fee on certain Members is consistent with the statutory 
requirements applicable to a national securities exchange under the 
Act. In particular, the Commission will consider whether the proposed 
rule change satisfies the standards under the Act and the rules 
thereunder requiring, among other things, that an exchange's rules 
provide for the equitable allocation of reasonable fees among members, 
issuers, and other persons using its facilities; not permit unfair 
discrimination between customers, issuers, brokers or dealers; and do 
not impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act.\55\
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    \55\ See 15 U.S.C. 78f(b)(4), (5), and (8), respectively.
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    Therefore, the Commission finds that it is appropriate in the 
public interest, for the protection of investors, and otherwise in 
furtherance of the purposes of the Act, to temporarily suspend the 
proposed rule changes.\56\
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    \56\ For purposes of temporarily suspending the proposed rule 
change, the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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IV. Proceedings To Determine Whether To Approve or Disapprove the 
Proposed Rule Change

    The Commission is instituting proceedings pursuant to Sections 
19(b)(3)(C) \57\ and 19(b)(2)(B) of the Act \58\ to determine whether 
the proposed rule change should be approved or disapproved. Institution 
of proceedings does not indicate that the Commission has reached any 
conclusions with respect to any of the issues involved. Rather, 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 disapprove the proposed rule 
change.
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    \57\ 15 U.S.C. 78s(b)(3)(C). Once the Commission temporarily 
suspends a proposed rule change, Section 19(b)(3)(C) of the Act 
requires that the Commission institute proceedings under Section 
19(b)(2)(B) to determine whether a proposed rule change should be 
approved or disapproved.
    \58\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\59\ the Commission is 
providing notice of the grounds for possible disapproval under 
consideration:
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    \59\ 15 U.S.C. 78s(b)(2)(B).
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     Section 6(b)(4) of the Act, which requires that the rules 
of a national securities exchange ``provide for the equitable 
allocation of reasonable dues, fees, and other charges among its 
members and issuers and other persons using its facilities,'' \60\
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    \60\ 15 U.S.C. 78f(b)(4).
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     Section 6(b)(5) of the Act, which requires, among other 
things, that the rules of a national securities exchange be ``designed 
to perfect the operation of a free and open market and a national 
market system'' and ``protect investors and the public interest,'' and 
not be ``designed to permit unfair discrimination between customers, 
issuers, brokers, or dealers,'' \61\ and
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    \61\ 15 U.S.C. 78f(b)(5).
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     Section 6(b)(8) of the Act, which requires that the rules 
of a national securities exchange ``not impose any burden on 
competition not necessary or appropriate in furtherance of the purposes 
of [the Act].'' \62\
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    \62\ 15 U.S.C. 78f(b)(8).
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    As noted above, the proposal imposes a new monthly Trading Rights 
Fee on certain Members. The Commission notes that the Exchange's 
statements in support of the proposed rule change are general in nature 
and lack detail and specificity. For example, while the Exchange 
asserts that the proposed fee will fund overall regulation and 
maintenance of the Exchange and provides broad figures illustrating the 
percentage by which RSA and regulatory costs have increased from 2016 
to 2019, the Exchange has not described how the proposed fee would 
address these regulatory increases.\63\ Further, the rationale provided 
does not address how the proposed fee is an equitable allocation of 
fees beyond noting that it applies to all Members who do not qualify 
for a waiver, and broadly asserting that the proposed fee should 
benefit ``all Members'' by contributing to the provision of ``an 
efficient and well-regulated market'' for Members.\64\
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    \63\ See Notice, supra note 4, at 43635.
    \64\ See id. at 43636.
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    As discussed above, one commenter asserts, among other concerns, 
that the Exchange's cost-based discussion is not sufficiently detailed 
to support its claims that the proposed Trading Rights Fee is 
consistent with the requirements of the Act, and that the Exchange has 
not offered sufficient detail to establish that the proposed fee would 
be constrained by significant competitive forces.\65\ The commenter 
indicates that, among other things, additional information addressing 
both revenues and costs is lacking in the Exchange's proposal.
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    \65\ See SIFMA Letter, supra note 5, at 1-2
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    Under the Commission's Rules of Practice, the ``burden to 
demonstrate that a proposed rule change is consistent with the [Act] 
and the rules and regulations issued thereunder . . . is on the [SRO] 
that proposed the rule change.'' \66\ 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,\67\ 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.\68\
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    \66\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
    \67\ See id.
    \68\ See id.
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    The Commission is instituting proceedings to allow for additional 
consideration and comment on the issues raised herein, including as to 
whether the proposed fees are consistent with the Act, and

[[Page 52905]]

specifically, with its requirements that exchange fees be reasonable 
and equitably allocated; be designed to perfect the mechanism of a free 
and open market and the national market system, protect investors and 
the public interest, and not be unfairly discriminatory; or not impose 
an unnecessary or inappropriate burden on competition.\69\
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    \69\ See 15 U.S.C. 78f(b)(4), (5), and (8).
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V. Commission's Solicitation of Comments

    The Commission requests written views, data, and arguments with 
respect to the concerns identified above as well as any other relevant 
concerns. Such comments should be submitted by October 24, 2019. 
Rebuttal comments should be submitted by November 7, 2019. Although 
there do not appear to be any issues relevant to approval or 
disapproval which would be facilitated by an oral presentation of 
views, data, and arguments, the Commission will consider, pursuant to 
Rule 19b-4, any request for an opportunity to make an oral 
presentation.\70\
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    \70\ 15 U.S.C. 78s(b)(2). Section 19(b)(2) of the Act 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 an SRO. See Securities 
Acts Amendments of 1975, Report of the Senate Committee on Banking, 
Housing and Urban Affairs to Accompany S. 249, S. Rep. No. 75, 94th 
Cong., 1st Sess. 30 (1975).
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    The Commission asks that commenters address the sufficiency and 
merit of the Exchange's statements in support of the proposal, in 
addition to any other comments they may wish to submit about the 
proposed rule change.
    Interested persons are invited to submit written data, views, and 
arguments concerning the proposed rule change, including whether the 
proposed rule change is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-CboeBZX-2019-072 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-CboeBZX-2019-072. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-CboeBZX-2019-072 and should be submitted 
on or before October 24, 2019. Rebuttal comments should be submitted by 
November 7, 2019.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(3)(C) of the 
Act,\71\ that File Number SR-CboeBZX-2019-072 be and hereby is, 
temporarily suspended. In addition, the Commission is instituting 
proceedings to determine whether the proposed rule change should be 
approved or disapproved.
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    \71\ 15 U.S.C. 78s(b)(3)(C).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\72\
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    \72\ 17 CFR 200.30-3(a)(57) and (58).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-21472 Filed 10-2-19; 8:45 am]
BILLING CODE 8011-01-P


