[Federal Register Volume 85, Number 45 (Friday, March 6, 2020)]
[Notices]
[Pages 13242-13280]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-04470]



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Vol. 85

Friday,

No. 45

March 6, 2020

Part II





Securities and Exchange Commission





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Self-Regulatory Organizations; BOX Exchange LLC; Notice of Filing of 
Amendment No. 2 to Proposed Rule Change To Adopt Rules Governing the 
Trading of Equity Securities on the Exchange Through a Facility of the 
Exchange Known as the Boston Security Token Exchange LLC; Notice

  Federal Register / Vol. 85, No. 45 / Friday, March 6, 2020 / 
Notices  

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88300; File No. SR-BOX-2019-19]


Self-Regulatory Organizations; BOX Exchange LLC; Notice of Filing 
of Amendment No. 2 to Proposed Rule Change To Adopt Rules Governing the 
Trading of Equity Securities on the Exchange Through a Facility of the 
Exchange Known as the Boston Security Token Exchange LLC

February 28, 2020.
    On September 27, 2019, BOX Exchange LLC (``Exchange'' or ``BOX'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
adopt rules governing the listing and trading of equity securities that 
would be NMS stocks on the Exchange through a facility of the Exchange 
known as the Boston Security Token Exchange LLC (``BSTX''). The 
proposed rule change was published for comment in the Federal Register 
on October 18, 2019.\3\ On November 29, 2019, pursuant to Section 
19(b)(2) of the Act,\4\ the Commission designated a longer period 
within which to approve the proposed rule change, disapprove the 
proposed rule change, or institute proceedings to determine whether to 
approve or disapprove the proposed rule change.\5\ On December 26, 
2019, the Exchange filed Amendment No. 1 to the proposed rule change, 
which amended the proposed rule change as originally filed.\6\
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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. 87287 (October 11, 
2019), 84 FR 56022 (October 18, 2019).
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 87641 (November 29, 
2019), 84 FR 66701 (December 5, 2019). The Commission designated 
January 16, 2020, as the date by which the Commission shall approve 
or disapprove, or institute proceedings to determine whether to 
approve or disapprove, the proposed rule change.
    \6\ When the Exchange filed Amendment No. 1 to BOX-2019-19, it 
also submitted the text of the partial amendment as a comment letter 
to the filing, which the Commission made publicly available at 
https://www.sec.gov/comments/sr-box-2019-19/srbox201919-6613675-202939.pdf (``Amendment No. 1'').
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    On January 16, 2020, the Commission published the proposed rule 
change, as modified by Amendment No. 1, for notice and comment and 
instituted proceedings under Section 19(b)(2)(B) of the Act \7\ to 
determine whether to approve or disapprove the proposed rule change, as 
modified by Amendment No. 1.\8\ On February 19, 2020, the Exchange 
filed Amendment No. 2 to the proposed rule change, which replaced and 
superseded the proposed rule change as originally filed.\9\ The 
Commission has received four comment letters on the proposed rule 
change.\10\ The Commission is publishing this notice to solicit 
comments from interested persons on the proposed rule change, as 
modified by Amendment No. 2, and as described in Items I and II below, 
which Items have been prepared by the Exchange.
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    \7\ 15 U.S.C. 78s(b)(2)(B).
    \8\ See Securities Exchange Act Release No. 88002 (January 16, 
2020), 85 FR 4040 (January 23, 2020) (``Order Instituting 
Proceedings'').
    \9\ Amendment No. 2 is available at: https://lynxstorageaccount.blob.core.windows.net/boxvr/SE_resources/SR-BOX-2019-19_Amendment_2.pdf.
    \10\ See Letter from Ellen Greene, Managing Director, SIFMA, to 
Vanessa Countryman, Secretary, Commission, dated January 13, 2020; 
Letter from Dave G., dated January 17, 2020; Letter from Holly H. 
Smith, Partner, Eversheds Sutherland (US) LLP, to J. Matthew 
DeLesDernier, Assistant Secretary, Commission, dated February 12, 
2020; and Letter from David A. Schrader, Partner, Paykin Krieg & 
Adams, LLP, to Vanessa Countryman, Secretary, Commission, dated 
February 25, 2020. All comments on the proposed rule change are 
available at: https://www.sec.gov/comments/sr-box-2019-19/srbox201919.htm.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Pursuant to the provisions of Section 19(b)(1) of the Securities 
Exchange Act of 1934 as amended (``Exchange Act''),\11\ BOX Exchange 
LLC (``BOX'' or the ``Exchange'') is filing with the Securities and 
Exchange Commission (``SEC'' or ``Commission'') a proposed rule change 
to adopt rules to govern the trading of equity securities on the 
Exchange through a facility of the Exchange known as Boston Security 
Token Exchange LLC (``BSTX''). As described more fully below, BSTX 
would operate a fully automated, price/time priority execution system 
for the trading of ``security tokens,'' which would be equity 
securities that meet BSTX listing standards and for which ancillary 
records of ownership would be able to be created and maintained using 
distributed ledger (or ``blockchain'') technology. The proposed 
additions to the Exchange's Rules setting forth new Rule Series 17000-
28000 are included as Exhibit 5A. All text set forth in Exhibit 5A 
would be added to the Exchange's rules and therefore underlining of the 
text is omitted to improve readability. Forms proposed to be used in 
connection with the proposed rule change, such as the application to 
become a BSTX Participant, are included as Exhibits 3A through 3N.
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    \11\ 15 U.S.C. 78s(b)(1).
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    In addition, the Exchange proposes to make certain amendments to 
several existing BOX Rules to facilitate trading on BSTX. The proposed 
changes to the existing BOX Rules would not change the core purpose of 
the subject Rules or the functionality of other BOX trading systems and 
facilities. Specifically, the Exchange is seeking to amend BOX Rules 
100, 2020, 2060, 3180, 7130, 7150, 7230, 7245, IM-8050-3, 11010, 11030, 
12030, and 12140. These proposed changes are set forth in Exhibit 5B. 
Material proposed to be added to the Rule as currently in effect is 
underlined and material proposed to be deleted is bracketed.
    All capitalized terms not defined herein have the same meaning as 
set forth in the Exchange's Rules.\12\
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    \12\ The Exchange's Rules can be found on the Exchange's public 
website: https://boxoptions.com/regulatory/rulebook-filings/.
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    This Amendment No. 2 to SR-BOX-2019-019 amends and supersedes the 
original filing, as modified by Amendment No. 1, in its entirety.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of, and basis for, the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of these statements may be examined at 
the places specified in Item IV below. The self-regulatory organization 
has prepared summaries, set forth in Sections A, B, and C below, of the 
most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange is proposing to adopt a series of rules to govern the 
trading of equity securities through a facility of the Exchange known 
as BSTX and make certain amendments to the existing BOX rules to 
facilitate trading on BSTX. As described more fully below, BSTX would 
operate a fully automated, price/time priority execution system (``BSTX 
System'') for the trading of securities that will be considered 
``security tokens'' under the proposed rules. The ``security tokens'' 
under the proposed rules would be equity securities that meet BSTX 
listing standards, and that trade on the BSTX System, and for

[[Page 13243]]

which ancillary records of ownership would be able to be created and 
maintained using distributed ledger technology. These ancillary records 
of ownership that would be maintained using distributed ledger 
technology would not be official records of security token ownership. 
Instead, as described further herein, such records would be ancillary 
records that would reflect certain end-of-day security token position 
balance information as reported by market participants. All BOX 
Participants would be eligible to participate in BSTX provided that 
they become a BSTX Participant pursuant to the proposed rules. Under 
the proposed rules, BSTX would serve as the listing market for eligible 
companies that wish to issue their registered securities as security 
tokens. Security tokens would trade as NMS stock.\13\ The Exchange is 
not proposing rules that would support its extension of unlisted 
trading privileges to other NMS stock, and accordingly the Exchange 
does not intend to extend any such unlisted trading privileges in 
connection with this proposal. The Exchange would therefore only trade 
security tokens listed on BSTX unless and until it proposes and 
receives Commission approval for rules that would support trading in 
other types of securities, including through any extension of unlisted 
trading privileges to other NMS stock. A guide to the structure of the 
proposed rule change is described immediately below.
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    \13\ 17 CFR 242.600(b)(48).
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    The Exchange is filing this amendment to SR-BOX-2019-019, which was 
published for comment by the Commission on October 11, 2019,\14\ in 
order to: Provide additional clarification and justification in support 
of the proposed rule change, delete and revise certain language in the 
Original Proposal, and respond to questions raised by the Commission 
\15\ and comment letters received regarding the proposal. This 
amendment supersedes and replaces the Original Proposal in its 
entirety.
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    \14\ See Securities Exchange Act Release No. 87287 (October 11, 
2019), 84 FR 56022 (October 18, 2019) (``Original Proposal'').
    \15\ See Securities Exchange Act Release No. 88002 (January 16, 
2020), 85 FR 4040 (January 23, 2020) (``Order'').
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I. Guide to the Scope of the Proposed Rule Change
    The proposal for trading of securities that will be ``security 
tokens'' (under the BSTX Rules, as defined below) through BSTX 
generally involves changes to existing BOX Rules and new BOX Rules 
pertaining specifically to BSTX (``BSTX Rules''). In addition, BSTX 
corporate governance documents as well as certain discrete changes to 
existing BOX corporate governance documents are necessary, which the 
Exchange has submitted to the Commission through separate proposed rule 
changes. To support the trading of security tokens through BSTX, 
certain conforming changes are proposed to existing BOX Rules and 
entirely new BSTX Rules are also proposed as Rule Series 17000 through 
28000.\16\ Each of those new Rule Series and the provisions thereunder 
are described in greater detail below. Where the BSTX Rules are based 
on existing rules of another national securities exchange, the source 
rule from the relevant exchange is noted along with a discussion of 
notable differences between the source rule and the proposed BSTX Rule. 
The proposed BSTX Rules are addressed in Part III below and they 
generally cover the following areas:
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    \16\ The proposed changes to BOX Rules and the proposed BSTX 
Rules are attached as Exhibit 5A.
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     Section 17000--General Provisions of BSTX;
     Section 18000--Participation on BSTX;
     Section 19000--Business Conduct for BSTX Participants;
     Section 20000--Financial and Operational Rules for BSTX 
Participants;
     Section 21000--Supervision;
     Section 22000--Miscellaneous Provisions;
     Section 23000--Trading Practice Rules;
     Section 24000--Discipline and Summary Suspension;
     Section 25000--Trading Rules;
     Section 25200--Market Making on BSTX;
     Section 26000--BSTX Listing Rules;
     Section 27000--Suspension and Delisting;
     Section 27100--Guide to Filing Requirements;
     Section 27200--Procedures for Review of Exchange Listing 
Determinations; and
     Section 28000--Dues, Fees, Assessments and Other Charges.
II. Overview of BSTX and Considerations Related to the Listing, Trading 
and Clearance and Settlement of Security Tokens
A. The Joint Venture and Ownership of BSTX
    On June 19, 2018, t0.com Inc. (``tZERO'') and BOX Digital Markets 
LLC (``BOX Digital'') announced a joint venture to facilitate the 
trading of security tokens on the Exchange.\17\ As part of the joint 
venture, BOX Digital, which is a subsidiary of BOX Holdings Group LLC, 
and tZERO each own 50% of BSTX LLC. Pursuant to the BSTX LLC Agreement, 
BOX Digital and tZERO will perform certain specified functions with 
respect to the operation of BSTX. As noted, these details, as well as 
the proposed governance structure of the joint venture and accompanying 
changes to the Exchange's current governance documents and bylaws, are 
the subject of separate proposed rule changes that the Exchange has 
submitted to the Commission.\18\
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    \17\ See tZERO and BOX Digital Markets Sign Deal to Create Joint 
Venture, Business Wire (June 19, 2018), available at https://www.businesswire.com/news/home/20180619005897/en/tZERO-BOX-Digital-Markets-Sign-Deal-Create.
    \18\ See e.g., Exchange Act Release No. 87868 (December 30, 
2019), 85 FR 345, 70748 (January 3, 2020).
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B. BSTX Is a Facility of BOX That Would Support Trading in the New 
Asset Class of Security Tokens
    BSTX would operate as a facility \19\ of BOX, which is a national 
securities exchange registered with the SEC. As a facility of BOX, 
BSTX's operations would be subject to applicable requirements in 
Sections 6 and 19 of the Exchange Act, among other applicable rules and 
regulations.\20\ Currently, BOX functions as an exchange only for 
standardized options. While BSTX may eventually support a wider variety 
of securities, subject to Commission approval, at the time that BSTX 
commences operations it would only support trading in security tokens 
that are equity securities. Accordingly, this represents a new asset 
class for BOX, and this proposal sets forth the changes and additions 
to the Exchange's rules to support the trading of equity securities as 
security tokens on BSTX.
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    \19\ 15 U.S.C. 78c(a)(2). Section 3(a)(2) of the Exchange Act, 
provides that ``the term `facility' when used with respect to an 
exchange includes its premises, tangible or intangible property 
whether on the premises or not, any right to the use of such 
premises or property or any service thereof for the purpose of 
effecting or reporting a transaction on an exchange (including, 
among other things, any system of communication to or from the 
exchange, by ticker or otherwise, maintained by or with the consent 
of the exchange), and any right of the exchange to the use of any 
property or service.'' Because BSTX will share certain systems of 
the Exchange, BSTX is a facility of the Exchange.
    \20\ 15 U.S.C. 78f; 15 U.S.C. 78s.
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    The Exchange proposes to use the term ``security token'' \21\ to 
describe the

[[Page 13244]]

BSTX-listed securities that would use blockchain technology as an 
ancillary recordkeeping mechanism, as described in further detail 
below. However, ownership of securities that are security tokens under 
the BSTX rules would still be able to be transferred without regard to 
the blockchain-based ancillary recordkeeping functionality (as also 
described further below). Notwithstanding this, the Exchange believes 
that it is appropriate to describe these securities as ``security 
tokens'' to distinguish them from other securities for which there is 
no related legal and regulatory structure that is designed to use 
blockchain technology as an ancillary recordkeeping mechanism and as a 
way of indicating the additional proposed obligations of BSTX 
Participants trading security tokens to obtain a wallet address and 
report end-of-day security token balances to BSTX.\22\ The legal 
significance, therefore, of a security token is that a ``security 
token'' will be an equity security that is approved for listing on 
BSTX, and that trades on the BSTX System, and for which BSTX 
Participants are therefore required under BSTX Rule 17020 to obtain a 
whitelisted wallet address and report certain end-of-day security token 
position balance information to BSTX. A security that is offered by an 
issuer with the intent of it becoming listed on BSTX would therefore 
not become a ``security token'' under the proposed BSTX Rules unless 
and until it actually does become listed on BSTX and trades on the BSTX 
System. The Exchange believes that the obligations on a BSTX 
Participant under the proposal to obtain a wallet address and to report 
certain end-of-day security token position balance information to BSTX 
are the only legal rights or obligations associated with security 
tokens that would differ from how NMS stock is generally traded by 
market participants today.\23\
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    \21\ The Exchange proposes to define the term ``security token'' 
to mean a NMS stock, as defined in Rule 600(b)(47) of the Exchange 
Act, trading on the BSTX System. References to a ``security'' or 
``securities'' in the Rules include security tokens. See proposed 
Rule 17000(a)(30).
    \22\ See Part II, Sections G and J for further description of 
these obligations.
    \23\ The Exchange notes that its proposed Rule 17000(a)(30) 
defines ``security token'' to mean an ``NMS stock, as defined in 
Rule 600(b)(47) of the Exchange Act, trading on the BSTX System.''
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C. Security Tokens Would Be NMS Stocks
    The security tokens would qualify as NMS stocks pursuant to 
Regulation NMS,\24\ which defines the term ``NMS security'' in relevant 
part to mean ``any security or class of securities for which 
transaction reports are collected, processed and made available 
pursuant to an effective transaction reporting plan . . . .'' \25\ The 
Exchange plans to join existing transaction reporting plans, as 
discussed in Part VIII below, for the purposes of security token 
quotation and transaction reporting.\26\ The term ``NMS stock'' means 
``any NMS security other than an option'' \27\ and therefore security 
tokens traded on BSTX that represent equity securities will be 
classified as NMS stock.
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    \24\ 17 CFR 242.600 through 613.
    \25\ 17 CFR 242.600(b)(47).
    \26\ 17 CFR 242.601(a)(1). The Rule states in relevant part that 
``every national securities exchange shall file [with the SEC] a 
transaction reporting plan regarding transactions in listed equity 
and Nasdaq securities executed through its facilities . . . .''
    \27\ 17 CFR 242.600(b)(47).
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D. BSTX Would Support Trading of Registered Securities
    All security tokens traded on BSTX would generally be required to 
be registered with the Commission under both Section 12 of the Exchange 
Act \28\ and Section 6 of the Securities Act of 1933 (``Securities 
Act'').\29\ BSTX would not support trading of security tokens offered 
under an exemption from registration for public offerings, with the 
exception of certain offerings under Regulation A that meet the 
proposed BSTX listing standards.
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    \28\ 15 U.S.C. 78l.
    \29\ 15 U.S.C. 77f.
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E. Clearance and Settlement of Security Tokens
    BSTX would maintain certain rules, as described below, to address 
custody, clearance and settlement in connection with security tokens. 
All transactions in security tokens would clear and settle in 
accordance with the rules, policies and procedures of registered 
clearing agencies. Specifically, BSTX anticipates that at the time it 
commences operations, security tokens that are listed and traded on 
BSTX would be securities that have been made eligible for services by 
The Depository Trust Company (``DTC'') and that DTC would serve as the 
securities depository \30\ for such security tokens. It is also 
expected that confirmed trades in security tokens on BSTX would be 
transmitted to National Securities Clearing Corporation (``NSCC'') for 
clearing such that NSCC would clear the trades through its systems to 
produce settlement obligations that would be due for settlement between 
participants at DTC. BSTX believes that this custody, clearance and 
settlement structure is the same general structure that exists today 
for other exchange traded equity securities. Importantly, for purposes 
of NSCC's clearing activities and DTC's settlement activities in 
respect of the security tokens, the relevant securities will be cleared 
and settled by NSCC and DTC in exactly the same manner as those 
activities are performed by NSCC and DTC currently regarding a class of 
NMS Stock. This is because the tokenized ancillary recordkeeping 
process that will be implemented through the operation of the proposed 
BSTX Rules will occur separate and apart from the clearance and 
settlement process and the security itself will not exist in tokenized 
form. Rather, the security will be an ordinary equity security for 
NSCC's and DTC's purposes. The tokenized feature in connection with the 
security that will be implemented through the operation of BSTX's Rules 
is that there will also be a separate, ancillary recordkeeping process 
that will use distributed ledger technology to record BSTX Participant 
end-of-day position balance information for the relevant security.
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    \30\ 15 U.S.C. 78c(a)(23)(A). Section 3(a)(23)(A) of the 
Exchange Act defines the term ``clearing agency'' to include ``any 
person, such as a securities depository, who (i) acts as a custodian 
of securities in connection with a system for the handling of 
securities whereby all securities of a particular class or series of 
any issuer deposited within the system are treated as fungible and 
may be transferred, loaned, or pledged by bookkeeping entry without 
physical delivery of securities certificates, or (ii) otherwise 
permits or facilitates the settlement of securities transactions or 
the hypothecation or lending of securities without physical delivery 
of securities certificates.''
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1. Issuance of Equity Securities Eligible To Become a Security Token
    With the exception of certain offerings under Regulation A that 
meet the proposed BSTX listing standards, all security tokens traded on 
BSTX will have been offered and sold in registered offerings under the 
Securities Act, which means that purchasers of the security tokens will 
benefit from all of the protections of registration. The Division of 
Corporation Finance will need to make a public interest finding in 
order to accelerate the effectiveness of the registration statements 
for these offerings. Because BSTX is a facility of a national 
securities exchange, all security tokens will be registered under 
Section 12(b) of the Exchange Act, thereby subjecting all of these 
issuers to the reporting regime in Section 13(a) of the Exchange Act.
    All offerings of securities that are intended to be listed as 
security tokens on BSTX will be conducted in the same general manner in 
which offerings of exchange-listed equity securities are conducted 
today under the federal securities laws. An issuer will enter into a 
firm commitment or best efforts underwriting agreement with a sole 
underwriter or underwriting syndicate; the underwriter(s) will market 
the

[[Page 13245]]

securities and distribute them to purchasers; and secondary trading in 
the securities (that are intended to trade on BSTX as security tokens) 
will thereafter commence on BSTX. The ancillary recordkeeping function 
associated with the security token will not commence until the 
conclusion of the first day of the security token's secondary trading 
on BSTX pursuant to proposed BSTX Rule 17020.\31\
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    \31\ Although the smart contract that would be used to carry out 
the ancillary recordkeeping function related to the security would 
need to be built by or at the direction of the issuer prior to the 
commencement of the security's trading on BSTX, the corresponding 
smart contract would effectively remain dormant until the ancillary 
recordkeeping process contemplated under the proposed BSTX Rules is 
activated due to trading on the BSTX System in that security token.
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    Issuers on BSTX could include both (1) new issuers who do not 
currently have any class of securities registered on a national 
securities exchange, and (2) issuers who currently have securities 
registered on a national securities exchange and who are seeking 
registration of a separate class of equity securities for listing on 
BSTX. BSTX does not intend for security tokens listed, or intended to 
be listed, on BSTX to be fungible with any other class of securities 
from the same issuer. If an issuer sought to list securities on BSTX 
that are not a separate class of an issuer's securities, BSTX does not 
intend to approve such a class of security for listing on BSTX, 
pursuant to BSTX's authority under BSTX Rule 26101. At the commencement 
of BSTX's operations, only equity securities would be eligible for 
listing as security tokens. This would be addressed by BSTX Rules 26102 
(Equity Issues), 26103 (Preferred Security Tokens) and 26105 (Warrant 
Security Tokens), which would be part of BSTX's listing rules and would 
contemplate that only those specified types of equity securities would 
be eligible for listing.
2. Securities Depository Eligibility
    BSTX would maintain rules that would promote a structure in which 
security tokens would be held in ``street name'' with DTC.\32\ BSTX 
Rule 26136 would require that for an equity security to be eligible to 
be a security token BSTX must have received a representation from the 
issuer that a CUSIP number that identifies the security is included in 
a file of eligible issues maintained by a securities depository that is 
registered with the SEC as a clearing agency. This is based on rules 
that are currently maintained by other equities exchanges.\33\ In 
practice, BSTX Rule 26136 requires the security token to have a CUSIP 
number that is included in a file of eligible securities that is 
maintained by DTC because the Exchange believes that DTC currently is 
the only clearing agency registered with the SEC that provides 
securities depository services.\34\
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    \32\ The term ``street name'' refers to a securities holding 
structure in which DTC, through its nominee Cede & Co., would be the 
registered holder of the securities and, in turn, DTC would grant 
security entitlements in such securities to relevant accounts of its 
participants. Proposed BSTX Rule 26135 would also provide, with 
certain exceptions, that securities listed on BSTX must be eligible 
for a direct registration program operated by a clearing agency 
registered under Section 17A of the Exchange Act. DTC operates the 
only such program today, known as the Direct Registration System, 
which permits an investor to hold a security as the registered owner 
in electronic form on the books of the issuer.
    \33\ Proposed BSTX Rule 26136 is based on current NYSE Rule 777.
    \34\ See Exchange Act Release No. 78963 (September 28, 2016), 81 
FR 70744, 70748 (October 13, 2016) (footnote 46 and the accompanying 
text acknowledge that DTC is the only registered clearing agency 
that provides securities depository services for the U.S. securities 
markets).
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3. Book-Entry Settlement at a Securities Depository
    BSTX would also maintain Proposed BSTX Rule 26137 regarding uniform 
book-entry settlement. The rule would require each BSTX Participant to 
use the facilities of a securities depository for the book-entry 
settlement of all transactions in depository eligible securities with 
another BSTX Participant or a member of a national securities exchange 
that is not BSTX or a member of a national securities association.\35\ 
Proposed BSTX Rule 26137 is based on the depository eligibility rules 
of other equities exchanges and Financial Industry Regulatory Authority 
(``FINRA'').\36\ Those rules were first adopted as part of a 
coordinated industry effort in 1995 to promote book-entry settlement 
for the vast majority of initial public offerings and ``thereby reduce 
settlement risk'' in the U.S. national market system.\37\
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    \35\ FINRA is currently the only national securities association 
registered with the SEC.
    \36\ See e.g., FINRA Rule 11310. Book-Entry Settlement and NYSE 
Rule 776. Book-Entry Settlement of Transactions.
    \37\ These coordinated depository eligibility rules resulted 
from proposed listing rules amendments developed by the Legal and 
Regulatory Subgroup of the U.S. Working Committee, Group of Thirty 
Clearance and Settlement Project. See Securities Exchange Act 
Release Nos 35774 (May 26, 1995) (SR-NASD-95-24), 60 FR 28813 (June 
2, 1995); 35773 (May 26, 1995), 60 FR 28817 (June 2, 1995) (SR-NYSE-
95-19).
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4. Participation in a Registered Clearing Agency That Uses a Continuous 
Net Settlement System
    Under proposed BSTX Rule 25140, each BSTX Participant would be 
required to either (i) be a member of a registered clearing agency that 
uses a continuous net settlement (``CNS'') system, or (ii) clear 
transactions executed on BSTX through a member of such a registered 
clearing agency. The Exchange believes that today NSCC is the only 
registered clearing agency that uses a CNS system to clear equity 
securities, and proposed BSTX Rule 25140 further specifies that BSTX 
will maintain connectivity and access to the Universal Trade Capture 
system of NSCC to transmit confirmed trade details to NSCC regarding 
trades executed on BSTX. The proposed rule would also address the 
following: (i) A requirement that each security token transaction 
executed through BSTX must be executed on a locked-in basis for 
automatic clearance and settlement processing; (ii) the circumstances 
under which the identity of contra parties to a security token 
transaction that is executed through BSTX would be required to remain 
anonymous or may be revealed; and (iii) certain circumstances under 
which a security token transaction may be cleared through arrangements 
with a member of a foreign clearing agency. Proposed BSTX Rule 25140 is 
based on a substantially identical rule of the Investor's Exchange, LLC 
(``IEX''), which, in turn, is consistent with the rules of other 
equities exchanges.\38\
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    \38\ See IEX Rule 11.250 (Clearance and Settlement; Anonymity), 
which was approved by the Commission in 2016 as part of its approval 
of IEX's application for registration as a national securities 
exchange. Exchange Act Release No. 78101 (June 17, 2016); 81 FR 
41142 (June 23, 2016); see also Cboe BZX Rule 11.14 (Clearance and 
Settlement; Anonymity).
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    BSTX believes that the operation of its depository eligibility rule 
and its book-entry services rule would promote a framework in which 
security tokens that would be eligible to be listed and traded on BSTX 
would be equity securities that have been made eligible for services by 
a registered clearing agency that operates as a securities depository 
and that are settled through the facilities of the securities 
depository by book-entry. The Exchange believes that because DTC 
currently is the only clearing agency registered with the SEC that 
provides securities depository services, at the commencement of BSTX's 
operations, security tokens would be securities that have been made 
eligible for services by DTC, including book-entry settlement services.
5. Settlement Cycle
    Proposed BSTX Rule 25100(d) would address settlement cycle 
considerations regarding trades in security tokens. Security token 
trades that result from

[[Page 13246]]

orders matched against the electronic order book of BSTX would be 
required to clear and settle pursuant to the rules, policies and 
procedures of a registered clearing agency. Additionally, Rule 25100(d) 
would provide that such security token transactions occurring through 
BSTX would settle one business day after the trade date (i.e., T+1) 
where that settlement cycle timing is permitted under the rules, 
policies and procedures of the relevant registered clearing agency. 
This creates a presumption of T+1 settlement for security token trades 
because, as described below, NSCC already processes trades for T+1 
settlement pursuant to the authority in its approved rules, policies 
and procedures. However, market participants, including BSTX 
Participants, that are parties to a security token trade that occurs 
away from BTSX would have the ability to agree to a shorter or longer 
settlement cycle for the settlement of the security token trade as is 
permitted by applicable law, including under the rules, policies and 
procedures of a relevant registered clearing agency.
    As noted above in connection with the description of proposed BSTX 
Rule 25140, BSTX expects at the commencement of its operations that it 
would transmit confirmed trade details to NSCC regarding security token 
trades that occur on BSTX and that NSCC would be the registered 
clearing agency that clears security token trades. BSTX believes that 
NSCC already has authority under its rules, policies and procedures to 
clear certain trades on a T+1 or T+0 basis, which are shorter 
settlement cycles than the longest settlement cycle of T+2 that is 
generally permitted under SEC Rule 15c6-1 for a security trade that 
involves a broker-dealer.\39\ Furthermore, BSTX understands that NSCC 
does already clear trades in accordance with this authority. For 
example, based on information provided by a representative of DTCC to 
outside counsel for BSTX, BSTX understands that on average for each 
business day for the months of November and December 2019, NSCC cleared 
over 19,000 trades designated for T+1 settlement and over 2,000 trades 
designated for T+0 settlement.\40\ As described above regarding BSTX 
Rules 26136 and 26137, all security token trades occurring on BSTX that 
are cleared by NSCC, including those for which the T+1 settlement 
presumption would apply, would be settled through book-entry settlement 
at DTC pursuant to its rules, policies and procedures.
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    \39\ 17 CFR 240.15c6-1. Under SEC Rule 15c6-1, with certain 
exceptions, a broker-dealer is not permitted to enter a contract for 
the purchase or sale of security that provides for payment of funds 
and delivery of securities later than the second business day after 
the date of the contract unless otherwise expressly agreed to by the 
parties at the time of the transaction.
    \40\ Mike McClain, Managing Director and General Manager of 
Equity Clearing and DTC Settlement Services at DTCC provided this 
information to BSTX's outside counsel, Andrew Blake, Partner, Sidley 
Austin LLP during a telephone conference on February 13, 2020.
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    In adopting amendments to SEC Rule 15c6-1 in 2017 to shorten the 
standard settlement cycle for most broker-dealer transactions in 
securities from T+3 to T+2, the Commission stated its belief that the 
shorter settlement cycle would have positive effects regarding the 
liquidity risks and costs faced by members in a clearing agency, like 
NSCC, that performs central counterparty \41\ (``CCP'') services, and 
that it would also have positive effects for other market participants. 
Specifically, the Commission stated its belief that the resulting 
``reduction in the amount of unsettled trades and the period of time 
during which the CCP is exposed to risk would reduce the amount of 
financial resources that the CCP members may have to provide to support 
the CCP's risk management process . . .'' and that ``[t]his reduction 
in the potential need for financial resources should, in turn, reduce 
the liquidity costs and capital demands clearing broker-dealers face . 
. . and allow for improved capital utilization.'' \42\ The Commission 
went on to state its belief that shortening the settlement cycle 
``would also lead to benefits to other market participants, including 
introducing broker-dealers, institutional investors, and retail 
investors'' such as ``quicker access to funds and securities following 
trade execution'' and ``reduced margin charges and other fees that 
clearing broker-dealers may pass down to other market participants[.]'' 
\43\ The Commission also ``noted that a move to a T+1 standard 
settlement cycle could have similar qualitative benefits of market, 
credit, and liquidity risk reduction for market participants[.]'' \44\ 
BSTX agrees with these statements by the Commission and has therefore 
proposed BSTX Rule 25100(d) in a form that would promote the benefits 
of a T+1 settlement cycle regarding security token trades where T+1 
settlement is already permitted pursuant to the rules, policies and 
procedures of NSCC and DTC today.
---------------------------------------------------------------------------

    \41\ See 17 CFR 240.17Ad-22(a)(2) (defining the term ``central 
counterparty'' to mean ``a clearing agency that interposes itself 
between the counterparties to securities transactions, acting 
functionally as the buyer to every seller and the seller to every 
buyer'').
    \42\ Exchange Act Release No. 80295 (March 22, 2017), 82 FR 
15564, 15570-71 (March 29, 2017).
    \43\ Id. at 15571.
    \44\ Id. at 15582.
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F. Compatibility With the BSTX Security Token Protocol for BSTX-Listed 
Security Tokens To Facilitate Ancillary Recordkeeping

    BSTX would maintain listing standards that would enable security 
tokens to have an ancillary record of ownership recorded on the 
Ethereum blockchain using a protocol standard determined by BSTX (the 
``BSTX Security Token Protocol'' or the ``Protocol'').\45\ In this way, 
the Ethereum blockchain would serve as a complementary recordkeeping 
mechanism to official records of security token ownership maintained by 
market participants.
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    \45\ While BSTX initially intends to support only the trading of 
eligible security tokens that are compatible with the Ethereum 
public blockchain, BSTX may support tokens compatible with other 
blockchains that support smart contract functionality in the future.
---------------------------------------------------------------------------

1. Background on Blockchain Technology
    In general, a blockchain is an open, decentralized ledger that can 
maintain digital records of assets and transactions that are accessible 
to anyone running the same protocol.\46\ The blockchain's central 
function is to encode transitions or changes to the ledger, such as the 
movement of an asset from one person to another person. Whenever one 
change to the blockchain ledger occurs to record a state transition, 
the entire blockchain is immutably changed to reflect the state 
transition. The purpose of requiring security tokens to adopt the BSTX 
Security Token Protocol is to enable security token ownership to be 
recorded on the public Ethereum blockchain as an ancillary 
recordkeeping mechanism and to ensure uniformity among security tokens 
rather than permitting each security token to have its own unique 
specifications that might complicate updates to the blockchain and add 
unnecessary complexity.
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    \46\ A ``protocol'' for this purpose is a set of rules governing 
the format of messages that are exchanged between the participants.
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2. Background on the Ethereum Blockchain
    The Ethereum blockchain is an open-source, public blockchain that 
operates as a computing platform and operating system that supports 
smart contract

[[Page 13247]]

functionality.\47\ Smart contracts are computer protocols designed to 
digitally facilitate, verify, and enforce the performance of a 
contract. Ethereum-based smart contracts are executed on the Ethereum 
Virtual Machine, which can be thought of as a global computer network 
upon which the smart contracts run. Ether is the digital currency used 
to pay fees associated with operating smart contracts (known as 
``gas'') on the Ethereum networks. This is because there are costs 
involved in performing the computations necessary to execute a smart 
contract and to record any state transitions onto the Ethereum 
blockchain.\48\ Thus, moving tokens from one address to another address 
(i.e., a state transition) requires some amount of Ether to pay the fee 
(i.e., ``gas'') associated with recording the movement of tokens to the 
Ethereum blockchain. Parties to a transaction in Ethereum-based smart 
contracts can determine what those gas costs are depending on how 
quickly they would like the transaction to be reflected on the Ethereum 
blockchain.
---------------------------------------------------------------------------

    \47\ See Ethereum White Paper (last updated Aug. 1, 2018) 
available at https://github.com/ethereum/wiki/wiki/White-Paper.
    \48\ See What Is Gas, MyEtherWallet (2018) available at https://kb.myetherwallet.com/posts/transactions/what-is-gas/.
---------------------------------------------------------------------------

3. Background on Smart Contracts
    The term ``smart contract'' is commonly used to describe computer-
coded functions in connection with the Ethereum blockchain. An Ethereum 
smart contract is neither ``smart'' nor a legal contract in the 
traditional sense. Smart contracts in this context refer to immutable 
\49\ computer programs that run deterministically \50\ in the context 
of the Ethereum Virtual Machine. Smart contracts operate within a very 
limited execution context. They can access their own state, the context 
of the transaction that called them, and some information about the 
most recent blocks (i.e., the most recent recording of transactions and 
other events recorded to the Ethereum blockchain).
---------------------------------------------------------------------------

    \49\ Smart contracts are immutable in that, once deployed, the 
code of a smart contract cannot change. Unlike with traditional 
software, the only way to modify a smart contract is to deploy a new 
instance.
    \50\ Deterministic in this context means that the outcome of the 
execution of a smart contract is the same for everyone who runs it, 
given the context of the transaction that initiated its execution.
---------------------------------------------------------------------------

    In the context of security tokens, smart contracts generally may 
have three components: (i) Functions, (ii) configurations; (iii) and 
events.\51\ Functions describe the basic operations of a smart 
contract, such as the ability to query a particular address to 
determine how many tokens belong to that address.\52\ Configurations 
are attributes of a smart contract that are typically set at the launch 
of a smart contract, such as designating the name of the smart contract 
(e.g., as XYZ security token). Events describe the functions of a smart 
contract that, when executed, result in a log or record being recorded 
to the Ethereum blockchain, such as the transfer of tokens from one 
address to another. Not all functions of a smart contract result in a 
log or record being recorded to the Ethereum blockchain. Smart 
contracts only run if they are called by a transaction.\53\
---------------------------------------------------------------------------

    \51\ However, a smart contract need not necessarily have each of 
these components. Some smart contracts may simply be used to support 
the functioning of other smart contracts and may not itself result 
in events being recorded to the Ethereum blockchain.
    \52\ An ``address'' in this context refers to a number that is 
associated with a particular market participant within the smart 
contract that can be updated to reflect changes in ownership of 
tokens.
    \53\ The term ``transaction'' in this context refer not to an 
actual execution or transaction occurring on BSTX or in the 
marketplace, but rather to an operation triggering a smart contract 
to carry out its specified function, which must ultimately originate 
from a human source.
---------------------------------------------------------------------------

    Smart contracts can call another smart contract, which can call 
another contract, and so on. Smart contracts never run ``on their own'' 
or ``in the background,'' but rather lie dormant until a transaction 
triggers them to carry out a specified operation pursuant to the 
protocol on which they operate. All transactions execute in their 
entirety or not at all, regardless of how many smart contracts they 
call or what those smart contracts do. Only if a transaction 
successfully executes in its entirety is there an ``event'' 
representing a change to the state of the blockchain with respect that 
transaction. If an execution of a smart contract's operation fails due 
to an error, all of its effects (e.g., events) are rolled back as if 
the transaction never ran.
4. Background on Tokens
    Tokens historically referred to privately issued, special-purpose 
coin-like items (e.g., laundry tokens or arcade game tokens). In the 
context of blockchain technology, tokens generally mean blockchain-
based abstractions that can be owned and that represent assets, 
currency, or access rights. A security token on the blockchain used for 
ancillary recordkeeping of ownership can be thought of as a digital 
representation of shareholder equity in a legal entity organized under 
the authority of state or federal law and that meet BSTX's listing 
standards. Having a security token attributed to a particular address, 
however, would not convey ownership of shareholder equity in the issuer 
because the official records of ownership would be maintained by 
participants at DTC.\54\
---------------------------------------------------------------------------

    \54\ Rather, a digital representation of a security token 
associated with a particular address reflects an ancillary record of 
security token ownership based on data provided to BSTX by BSTX 
Participants. The records reflected on the Ethereum blockchain 
regarding security tokens may not be current to reflect the most 
recent transactions in the marketplace and may not reflect ownership 
by all market participants.
---------------------------------------------------------------------------

    To create a new token on Ethereum, including for purposes of 
facilitating ancillary recordkeeping of security token ownership, one 
must create a new smart contract. The smart contract would be 
configured to detail, among other things, the name of the issuer and 
the total supply of the tokens. Smart contracts can be designed to 
carry out any event that one wants, but using a set standard or 
protocol allows for participants transacting in those smart contracts 
to have uniform expectations and functionality with respect to the 
tokens.
5. Background on Protocols
    A protocol (also sometimes referred to as a ``standard'' or 
``protocol standard'') defines the functions, events, configurations, 
and other features of a given smart contract. The most common protocol 
used with Ethereum is the ERC-20 protocol, which describes the minimum 
functions that are necessary to be considered an ERC-20 token.\55\ The 
ERC-20 protocol offers basic functionalities to transfer tokens, obtain 
account balances, and query the total supply of tokens, among other 
features. The BSTX Security Token Protocol is compliant with the ERC-20 
protocol but adds additional requirements and functionality, as 
described below.
---------------------------------------------------------------------------

    \55\ See e.g., Jesus Najera, Understanding ERC20, Coin Central 
(Jan. 8, 2018), available at https://coincentral.com/understanding-erc20/; Alfonso de la Rocha, Anatomy of an ERC: An Exhaustive 
Survey, Medium (May 7, 2018), available at https://medium.com/coinmonks/anatomy-of-an-erc-an-exhaustive-survey-8bc1a323b541.
---------------------------------------------------------------------------

    As noted above, Ether is the digital currency used to pay fees 
associated with operating smart contracts (known as ``gas'') on the 
Ethereum network. Payment of gas is required to operate smart contracts 
because there are costs involved in performing the computations 
necessary to execute a smart contract and to record any state 
transitions onto the Ethereum blockchain.
    There is an important conceptual distinction between ERC-20 tokens, 
including security tokens, and Ether itself. Where Ether is transferred 
by a transaction that has a recipient address as its destination, token 
transfers occur

[[Page 13248]]

within the specific token contract state and have the token smart 
contract as their destination, not the recipient's address. The token 
smart contract tracks balances and issues events to the Ethereum 
blockchain. In a token transfer,\56\ no transaction is actually sent to 
the recipient of the token. Instead, the recipient's address is added 
to a map within the token smart contract itself. In contrast, a 
transaction sending Ether to an address changes the state of an 
address. A transaction transferring a token to an address only changes 
the state of the token contract, not the state of the recipient 
address. Thus, an address is not really full of tokens; rather it is 
the token smart contract that has the addresses and balances associated 
with each address in it.
---------------------------------------------------------------------------

    \56\ A ``transfer'' in the context of the BSTX Security Token 
Protocol regarding a security token refers to a reallocation of the 
digital representation of a security token on the Ethereum 
blockchain as an ancillary recordkeeping mechanism to reflect 
corresponding changes in ownership of the security token.
---------------------------------------------------------------------------

6. BSTX Security Token Protocol
    BSTX Rule 26138 requires that a BSTX listed company's security 
tokens must comply with the Protocol to trade on BSTX. The purpose of 
this requirement is to ensure that all security tokens are governed by 
the same set of specifications and controls that allow for ownership of 
security tokens to be recorded to the Ethereum blockchain as an 
ancillary recordkeeping mechanism.
    The Protocol involves three smart contracts. The Asset Smart 
Contract is the primary smart contract that contains the balances of 
security tokens associated with each address and carries out the 
functions necessary to reflect changes in ownership. There are two 
ancillary smart contracts that are called by the Asset Smart Contract 
in executing transactions. The first of these is the Registry Smart 
Contract (``Registry''), which contains the list of permissioned (or 
``whitelisted'') addresses, and the second is the Compliance Smart 
Contract, which includes a variable list of additional compliance 
related rules that the Asset Smart Contract must comply with in 
executing a transaction. Each of these three smart contracts are 
described in greater detail below:
    (1) Asset Smart Contract--The Asset Smart Contract defines and 
establishes the security tokens (e.g., the maximum number of security 
tokens available for a particular issuance) for purposes of the 
Ethereum blockchain ancillary recordkeeping function and records a list 
of market participant addresses and the security tokens associated with 
each address.
    (2) Registry Smart Contract--The Registry Smart Contract (or 
``Registry'') defines the permissions available to different types of 
market participants to perform certain functions. Under the Protocol, 
there are five different types of market participants connected with 
the Registry, each with different abilities and permissions (as 
detailed below): \57\ (1) Contract Owner, (2) Custodian, (3) Broker 
Dealer, (4) Custodial-Account, and (5) Investor. The Registry also 
contains the list of whitelisted addresses to which security tokens may 
be sent and additional information associated with each address (e.g., 
whether an address has been suspended).
---------------------------------------------------------------------------

    \57\ There are additional roles that are not technically part of 
the Registry and are instead specific to certain smart contracts. 
For example, an ``Issuer'' is an Asset Smart Contract-specific role. 
Also, an ``Administrator'' is a Compliance Smart Contract-specific 
role that allows such a user to, for example, freeze the transfer of 
tokens for purposes of the ancillary recordkeeping function under 
certain circumstances and modify or add compliance rules to govern a 
security token.
---------------------------------------------------------------------------

    (3) Compliance Smart Contract--The Compliance Smart Contract is the 
set of rules held in a separate smart contract that a security token 
can be configured to abide by to ensure compliance with applicable laws 
and regulations (e.g., by restricting a movement of security tokens to 
an address that has not been added to the Registry for purposes of the 
Ethereum blockchain ancillary recordkeeping mechanism). The Compliance 
Smart Contract can be modified to add or remove applicable rules in 
light of changes to applicable regulatory requirements.
    Each of these three smart contracts work together to facilitate the 
ancillary recordkeeping mechanism for Security Tokens using the 
Ethereum blockchain. The details of the specific functions, 
configurations, and events under the Protocol are set forth in greater 
detail in Exhibit 3N.
    The Exchange selected the Ethereum blockchain among other possible 
blockchains that support smart contracts as the blockchain upon which 
security tokens would be built in accordance with the BSTX Security 
Token Protocol for ancillary recordkeeping purposes because of, among 
other reasons, its widespread use, the public's familiarity with 
Ethereum, and its smart contract functionality. Ethereum has maintained 
the second largest market capitalization behind Bitcoin among 
blockchain-based digital assets for at least two years and is widely 
recognized by the public.\58\ Over 200,000 different ERC-20 tokens have 
been built on the Ethereum blockchain, demonstrating its wide-spread 
use and functionality. The Exchange believes that the Ethereum 
blockchain is able to support all of the necessary functions of the 
BSTX Security Token Protocol to carry out the security token ancillary 
recordkeeping function. The Exchange also believes that using a widely-
known smart contract platform as opposed to a lesser-known smart 
contract platform may help issuers become more comfortable with the 
ancillary recordkeeping process as well as allow them to more-readily 
locate service providers as necessary to assist them in building their 
security tokens in accordance with the BSTX Security Token Protocol. As 
noted, the Exchange may consider the use of other blockchains 
supporting smart contract functionality in the future, subject to 
applicable rule filing requirements with the Commission pursuant to 
Section 19 of the Exchange Act.\59\
---------------------------------------------------------------------------

    \58\ The Commission has also publicly recognized Ethereum and 
its native currency Ether. See William Hinman, Director, Division of 
Corporation Finance, Digital Asset Transactions: When Howey Met Gary 
(Plastic) (June 14, 2018) available at https://www.sec.gov/news/speech/speech-hinman-061418.
    \59\ 15 U.S.C. 78s.
---------------------------------------------------------------------------

G. Obtaining a Whitelisted Wallet Address

    Pursuant to proposed Rule 17020(a), a BSTX Participant must, either 
directly or through its carrying firm, establish a wallet address to 
which its end-of-day security token balances may be recorded by 
contacting BSTX.\60\ A BSTX Participant that is a carrying broker-
dealer for other BSTX Participants would be assigned the wallet address 
with the status of a Custodian, which would allow that BSTX Participant 
to request wallet addresses on behalf of other BSTX Participants (for 
which it serves as the carrying broker-dealer) as either a Custodial 
Account or Broker-Dealer wallet address, as described above. A BSTX 
Participant that is not a carrying broker-dealer could request a 
Broker-Dealer wallet address, a Custodial Account wallet address in 
coordination with its carrying firm, and an Investor wallet address on 
behalf of a customer that would like its ownership of security tokens 
to be reflected at its own address for purposes of the Ethereum 
blockchain as an ancillary recordkeeping mechanism.\61\
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    \60\ Multiple security token issuances can be attributed to a 
BSTX Participant's wallet address. A BSTX Participant would not need 
a separate wallet address for each security token issuance that it 
trades.
    \61\ A BSTX Participant that is a carrying broker-dealer, and 
which therefore has a Custodial Account address, could also request 
Investor wallet addresses on behalf of customers.

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[[Page 13249]]

    Contact information for BSTX for the purpose of establishing a 
wallet address will be published on the BSTX website. Proposed BSTX 
Rule 17020(a) requires a BSTX Participant to establish a wallet address 
by contacting BSTX directly or through its carrying firm acting on its 
behalf. BSTX expects that this process (i.e., contacting the Exchange 
and establishing a wallet address) would occur contemporaneously with 
the application by a market participant to become a BSTX Participant. 
However, under proposed BSTX Rule 17020(a), a BSTX Participant would 
have up until five business days from the date that the Exchange 
approves the application of the BSTX Participant to satisfy the 
obligation to obtain a wallet address. In the event that a BSTX 
Participant has not obtained a wallet address prior to the Exchange's 
approval of its application, the BSTX Participant would become subject 
to the end-of-day security token balance reporting requirements in 
proposed BSTX Rules 17020(b) and (c). However, because the BSTX 
Participant would not yet have a wallet address to which the position 
balance information could be attributed by a Wallet Manager, any 
security token position balances of such BSTX Participant would be 
attributed to the omnibus wallet address for the security token (as 
described below) until the time the BSTX Participant obtains a wallet 
address. For the avoidance of doubt, having end-of-day position balance 
information related to a security token attributed to a particular 
wallet address would not convey ownership of shareholder equity in the 
issuer to the person or entity with whom such wallet address is 
associated. BSTX-listed security tokens will be cleared and settled in 
the same manner as other NMS stocks through the facilities of a 
registered clearing agency, and the official records of ownership would 
be maintained as discussed above in Part II.E. Therefore, any lack of a 
wallet address would not affect the official records of ownership of 
the BSTX-listed security token.
    Once a BSTX Participant has been assigned a particular wallet 
address, the only further obligation of that BSTX Participant is to 
report its end-of-day security token position balances to BSTX, as 
described below. Non-BSTX Participants that may trade security tokens 
are not subject to the requirement that they obtain a wallet address 
prior to trading a security token or to the end-of-day security token 
balance position reporting requirements. The Exchange will not accept 
voluntary reports of end-of-day security token balances from non-BSTX 
Participants, but may consider doing so in the future, subject to any 
applicable or necessary rule filing requirements with the Commission. 
The Exchange believes that the proposed requirement in Rule 17020(a) to 
obtain a wallet address is consistent with the Exchange Act and Section 
6(b)(5) \62\ in particular because it would help foster cooperation and 
coordination with persons engaged in regulating and facilitating 
transactions in security tokens by setting forth a process through 
which BSTX Participants may obtain a wallet address to which their end-
of-day security token balances may be recorded to the Ethereum 
blockchain as an ancillary recordkeeping mechanism. The Exchange 
believes that the proposed requirement is similar to obtaining a market 
participant identifier (``MPID'') in that it establishes an identifier 
that can be attributed to a particular BSTX Participant for reporting 
purposes. The proposed requirement to obtain a wallet address is the 
same for all BSTX Participants, and is therefore not unfairly 
discriminatory, and the Exchange does not propose to charge a fee for 
obtaining a wallet address.
---------------------------------------------------------------------------

    \62\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

H. Wallet Manager 63
---------------------------------------------------------------------------

    \63\ A ``Wallet Manager'' is defined as a party approved by BSTX 
to operate software compatible with the BSTX Protocol. See proposed 
Rule 17000(a)(31). A Wallet Manager would be a third-party service 
provider for the Exchange that will help facilitate establishing 
wallet addresses for BSTX Participants and facilitate updates to the 
Ethereum blockchain as an ancillary recordkeeping mechanism 
regarding changes in ownership resulting from trading. Approved 
Wallet Managers will be listed on the Exchange's website.
---------------------------------------------------------------------------

    As described further below, following the end of a trading day, 
BSTX Participants (or their carrying firms) will be required to send 
security token position balance information to BSTX. Based on the 
information that BSTX receives, BSTX will deliver that information to 
one or more Wallet Managers who will be responsible for updates to the 
security token position balances on the Ethereum blockchain by 
allocating balances among the wallet addresses of BSTX Participants and 
the omnibus wallet address.
    The Exchange would enter into a contractual arrangement with a 
Wallet Manager as a service provider to the Exchange performing the 
function described above. The Exchange does not believe that performing 
the ancillary recordkeeping process would make a Wallet Manager a 
facility of the Exchange because the Wallet Manager's functions do not 
meet the definition of ``facility'' under the Exchange Act. Section 
3(a)(2) of the Exchange Act provides that ``the term `facility' when 
used with respect to an exchange includes its premises, tangible or 
intangible property whether on the premises or not, any right to the 
use of such premises or property or any service thereof for the purpose 
of effecting or reporting a transaction on an exchange (including, 
among other things, any system of communication to or from the 
exchange, by ticker or otherwise, maintained by or with the consent of 
the exchange), and any right of the exchange to the use of any property 
or service.'' \64\ A Wallet Manager is neither property of the Exchange 
nor does a Wallet Manager provide services for effecting or reporting a 
transaction taking place on the Exchange. Rather, a Wallet Manager 
performs the function of updating end-of-day security token position 
balance information provided by the Exchange as part of an ancillary 
recordkeeping mechanism. The Ethereum blockchain would not reflect any 
particular transaction(s) that occurred in the marketplace but would 
instead record allocations of end-of-day security token position 
balances--which may result from a variety of activities in the 
marketplace for the relevant security tokens such as trading activity, 
lending activity, and free-of-payment transfers between DTC accounts. 
The definition of ``facility'' in Section 3(a) of the Exchange Act is 
instead focused on ``effecting or reporting a transaction'' as part of 
the operations of an exchange, namely the bringing together of orders 
for securities of multiple buyers and sellers using non-discretionary 
methods under which such orders interact with each other, and the 
buyers and sellers entering such orders agree to the terms of a 
trade.\65\ Thus, systems of communication to the Exchange used to 
effect trades or to receive market data would likely be considered 
facilities of the Exchange, but an end-of-day ancillary recordkeeping 
reporting process that does not provide any real or near-time 
information regarding transactions in the market should not.\66\ The 
Commission ``long has recognized that there must be some practical 
limitations on entities encompassed within the broad definition of the 
term

[[Page 13250]]

`exchange.' '' \67\ The ancillary recordkeeping process would have no 
impact on, or perform a function related to, the bringing together of 
buyers and sellers' orders, clearance, settlement, market data or 
routing functions of the exchange (i.e., all of these functions can 
continue upon any suspension of the ancillary recordkeeping process), 
and therefore cannot reasonably be considered a ``facility'' of the 
exchange. The Exchange intends to enter into a contractual arrangement 
with at least one Wallet Manager.\68\ The Exchange intends to evaluate 
each potential Wallet Manager's capability to receive information from 
BSTX related to BSTX Participants' end-of-day security token balances 
along with its ability to update the Ethereum blockchain upon receipt 
of such information. Further, the Exchange intends to perform due 
diligence on potential Wallet Managers, including but not limited to 
checking the list produced by the U.S. Treasury Department of persons 
with whom U.S. citizens are prohibited from doing business (``OFAC 
List''). Finally, the Exchange intends to require each Wallet Manager 
in its service agreement with the Wallet Manager to agree to comply 
with all applicable securities laws. The Exchange believes that using 
the criteria listed above for evaluating potential Wallet Managers may 
prevent fraudulent and manipulative acts and practices, consistent with 
Section 6(b)(5) of the Exchange Act.\69\ The Exchange believes that 
requiring every Wallet Manager to act in a manner consistent with 
applicable securities laws and not be on the OFAC List would help 
ensure that persons reputed to have committed illegal acts and who 
violate securities laws, including any such laws meant to prevent fraud 
and market manipulation, will not operate as Wallet Managers.
---------------------------------------------------------------------------

    \64\ 15 U.S.C. 78c(a)(2).
    \65\ 17 CFR 240.3b-16.
    \66\ The Commission has not defined the term ``facility.'' See 
Exchange Act Release No. 26708 (Apr. 11, 1989), 54 FR 15429 (Apr. 
18, 1989) (noting that the term ``facility'' has not changed since 
it was originally adopted and that no hearing testimony referred to 
it because ``the Committee felt that the definition was `self-
explanatory' '').
    \67\ Id.
    \68\ The Exchange expects that it will initially operate with 
one Wallet Manager, but there is nothing to preclude the use of 
another Wallet Manager provided the prospective Wallet Manager is 
capable of operating software compatible with the BSTX Security 
Token Protocol. The Exchange expects that tZERO would operate as the 
initial Wallet Manager. BOX Exchange LLC, the self-regulatory 
organization of which BSTX is a facility, neither controls, directly 
or indirectly, nor is under common control with tZERO. The BSTX 
facility is 50% owned by tZERO and BOX Digital Markets, which is 
100% owned by BOX Holdings Group LLC. BOX Exchange LLC does not have 
direct or indirect ownership interest in BOX Holdings LLC or its 
subsidiaries. As a result, because BOX Exchange LLC does not 
exercise control over tZERO or its affiliates, tZERO would not 
constitute ``property'' of the Exchange for purposes of determining 
whether it is a facility. In any case, it is the functions of the 
particular entity that should matter for purposes of determining 
whether an entity or function is a facility of an exchange rather 
than whether an entity is affiliated or not with an exchange. See 
e.g., Exchange Act Release No. 54538 (Sept. 28, 2006), 71 FR 59184 
(Oct. 6, 2006) (order approving PHLX's new equity trading system and 
operation of optional outbound router as a facility of PHLX, where 
PHLX had no ownership interest in the third party operator).
    \69\ 15 U.S.C. 78f(b)(5).
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I. Coordination Between BSTX, Registered Clearing Agencies, and Wallet 
Managers
    Upon the occurrence of a transaction on BSTX due to the completion 
of its order matching process,\70\ BSTX would generate an execution 
report, and it would deliver drop copies to its own front-end systems 
to update the BSTX Participants and to NSCC.\71\ Where a BSTX 
transaction creates a settlement obligation to transfer registered 
ownership of a security token, clearance and settlement would be 
performed in accordance with the rules, policies and procedures of a 
registered clearing agency as described in Part II.E. above. The Wallet 
Manager would be provided with end-of-day position balance information 
of BSTX Participants necessary to update the Ethereum blockchain 
through the end of day reporting mechanism discussed below.
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    \70\ Order matching would occur through a price-time priority 
model, as discussed in greater detail below.
    \71\ The last sale transaction data would also be publicly 
disseminated pursuant to the transaction reporting plan, which would 
occur before delivery of drop copies to these parties.
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J. Reporting End-of-Day Security Token Balances To Facilitate Ancillary 
Recordkeeping
    To update the Ethereum blockchain to reflect ownership of security 
tokens as an ancillary recordkeeping mechanism, the Exchange proposes 
to require that each BSTX Participant, either directly or through its 
carrying firm, report each business day to BSTX certain end-of-day 
security token balances in a manner and form acceptable to BSTX.\72\ A 
BSTX Participant that is a participant at DTC would be required to 
report to BSTX the total number of security tokens for each class of 
security token that is credited to each DTC account of the BSTX 
Participant.\73\ For a BSTX Participant that is not a DTC participant, 
the BSTX Participant would be required to report the total number of 
security tokens for each class of security token that are credited to 
the BSTX Participant by its carrying firm.\74\ Pursuant to proposed 
Rule 17020(d), upon receipt of the end-of-day security token balances 
from BSTX Participants, the Exchange would provide such information to 
the Wallet Manager(s) to update the Ethereum blockchain as an ancillary 
recordkeeping mechanism to reflect updates in security token 
balances.\75\ Proposed Rule 17020(d) would also provide that unreported 
security token balances will be determined and allocated to an omnibus 
wallet address for each security token as described further below. The 
Exchange would determine the number of security tokens to be allocated 
to the omnibus wallet address by the Wallet Manager(s) by subtracting 
the sum of the security token position balances reported for a 
particular security token by BSTX Participants from the total 
outstanding number of that particular security token. BSTX expects that 
each security token would have a dedicated omnibus wallet address that 
the Wallet Manager(s) would use to allocate the resulting balance to 
that address.
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    \72\ See Proposed Rule 17020(b).
    \73\ See Proposed Rule 17020(b)(1). As described above in Part 
II.E., BSTX would maintain rules that would promote a structure in 
which security tokens would be held in ``street name'' with DTC.
    \74\ See Proposed Rule 17020(b)(2).
    \75\ Notably, because the Ethereum blockchain is updated each 
day using the end-of-day security token balance reports, and is, in 
any case, only functioning at this time as an ancillary 
recordkeeping function, concerns regarding a loss of private keys or 
disruption to the Ethereum blockchain are fully mitigated. For 
example, assume a BSTX Participant owns 100 security tokens of XYZ 
at the end of Day 1 and, as a result of trading on Day 2, ends Day 2 
with a balance of 200 security tokens of XYZ. If the BSTX 
Participant's wallet address were somehow compromised during the 
trading day on Day 2 and the 100 security tokens were moved to 
another address (which could only be moved to another whitelisted 
address), this would not substantively impact the functioning of the 
blockchain as an ancillary recordkeeping tool. At the end of trading 
on Day 2, the BSTX Participant would report its ownership of 200 
security tokens of XYZ to BSTX, which would then update the Ethereum 
blockchain to reflect this end of day balance.
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    The Exchange proposes that these end-of-day security token balance 
reports would be required each business day when DTC is also open for 
business, but after such time as DTC has completed its end-of-day 
settlement process.\76\ The Exchange believes that once DTC has 
completed its end-of-day settlement process, DTC participants would be 
able to determine the number of security tokens credited to their DTC 
account(s) and to other market participants that settle through that 
DTC participant. Thereafter, BSTX Participants, or their carrying 
firms, would be able to obtain their security token balance information 
and report it to BSTX by the end of the day. The Exchange understands 
that DTC typically makes end-of-day security position reports available 
to DTC participants at approximately 7:30 p.m. Eastern time. Therefore, 
the Exchange will notify BSTX Participants via

[[Page 13251]]

Regulatory Circular of the time after 7:30 p.m. Eastern time by which 
end-of-day security position balance reports will be required to be 
provided to BSTX pursuant to BSTX Rule 17020(c). The Exchange will also 
notify BSTX Participants via Regulatory Circular of the time by which 
it will provide security token position balance information to the 
Wallet Manager(s) so that the Wallet Manager(s) will have sufficient 
time to carry out their contractual obligation to update the Ethereum 
blockchain as an ancillary recordkeeping mechanism prior to the 
commencement of trading on BSTX on the next trading day.
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    \76\ See Proposed Rule 17020(c).
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    The Exchange acknowledges that, in certain circumstances, a BSTX 
Participant subject to the requirements of proposed Rule 17020 could 
fail to report end-of-day security token balances to BSTX in a timely 
manner, inaccurately report such balances, or fail to obtain a wallet 
address prior to acquiring a position in a security token. Such 
failures would impair the ability of the Exchange to report complete 
end-of-day security token balance information regarding a security 
token to the Wallet Manager(s) who will be responsible for using that 
information, in turn, to update the security token balance information 
that is reflected on the Ethereum blockchain. The Exchange notes that 
BSTX Participants would be required to comply with applicable Exchange 
Rules, including the requirement to report their end-of-day security 
token balances, and may be subject to disciplinary action for failing 
to comply with applicable rules pursuant to proposed Rule Series 24000 
(Discipline and Summary Suspension).
    As noted above, to account for instances in which a BSTX 
Participant fails to report or to accurately report its end-of-day 
security token balance pursuant to proposed Rule 17020, as well as to 
account for the positions of security token holders who are not BSTX 
Participants and therefore not subject to the end-of-day security token 
balance reporting requirement, the Exchange proposes to use an omnibus 
wallet address to account for such security tokens in the ancillary 
records that would be published on the Ethereum blockchain. 
Specifically, the Exchange would know the total number of security 
tokens outstanding and would provide information to the Wallet 
Manager(s) to allow the Wallet Manager(s) to attribute the unreported 
security token balance for a given security token to an omnibus wallet 
address for each security token. For example, assume that on Day 1 
there are 1,000 security tokens for company XYZ outstanding, 800 are 
held at DTC in accounts for the benefit of eight BSTX Participants and 
200 are otherwise held at DTC. Assume further that BSTX receives timely 
and accurate end-of-day XYZ security token balance reports from all 
eight BSTX Participants in respect of 800 XYZ security tokens. At the 
end of Day 1 as part of the end-of-day reporting process, the Exchange 
would provide information to the Wallet Manager(s) allowing the Wallet 
Manager(s) to allocate the 800 XYZ security tokens among the BSTX 
Participants consistent with their end-of-day security token balance 
reports and to allocate the remaining balance of 200 security tokens to 
the omnibus wallet address. In this same example, assume a BSTX 
Participant who holds 100 XYZ security tokens failed to report its XYZ 
security token balance to BSTX. In this case, the Exchange would 
provide information to the Wallet Manager(s) allowing the Wallet 
Manager(s) to allocate 300 XYZ security tokens to the omnibus wallet 
address for XYZ security token. The omnibus wallet address in this 
example would thus reflect the sum of XYZ security tokens held by non-
BSTX Participants who are not subject to the end-of-day security token 
balance reporting requirement as well as any missing end-of-day 
security token balance reports among BSTX Participants.\77\ In all 
cases, the security token balances displayed on the Ethereum blockchain 
would reflect end-of-day security token balances reported to BSTX 
pursuant to Rule 17020 and an omnibus wallet address for any type of 
security token for which the sum of the reported positions is less than 
the number of security tokens known by the Exchange to be issued and 
outstanding. In this way, it is possible that the end-of-day balances 
published on the Ethereum blockchain may not reflect the precise 
distribution of a security token among holders of the security token, 
even among BSTX Participants.\78\ The Ethereum blockchain could also 
reflect information that is not accurate to the extent that BSTX 
Participants inaccurately report end-of-day security token balances to 
BSTX. There could conceivably be situations where the number of 
reported security tokens exceeds the number of outstanding security 
tokens of a particular issuance (e.g., if security token XYZ were held 
entirely by BSTX Participants and one BSTX Participant over-reports). 
There could also be situations in which the Exchange is unable to 
communicate end-of-day security token balances to the Wallet Manager(s) 
or the Wallet Manager(s) is/are unable to update the blockchain. 
Additionally, it is also possible that there could be a disruption to 
the website through which security token balances may be observed 
(i.e., Etherscan.io, discussed below), to the Ethereum blockchain 
itself that prevents the updating of end-of-day security token balances 
as an ancillary recordkeeping mechanism, or potentially to the 
architecture or functioning of a particular security token.\79\
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    \77\ The omnibus wallet address for each security token could 
also have greater or fewer security tokens as a result of a 
misreport by a BSTX Participant. In the case of an under-report by a 
BSTX Participant (e.g., owns 100 of XYZ security tokens, but reports 
only 90), the omnibus address for XYZ would have an additional 10 
XYZ security tokens allocated to it. In the case of an over-report 
(e.g., owns 100 of XYZ security tokens, but reports 110), the 
omnibus address for XYZ may have 10 additional XYZ security tokens 
allocated to it.
    \78\ The Exchange notes, however, that even in such a case, the 
total number of shares of the security token outstanding should 
still be reflected on the blockchain due to unreported balances 
being attributed to the omnibus wallet address. It is also possible 
the omnibus wallet address could display the entire outstanding 
balance of a security token to the extent only non-BSTX Participants 
held the entire outstanding balance of a particular security token.
    \79\ This could potentially occur if, for example, the Ethereum 
Virtual Machine were to suffer a ``51% Attack'' whereby an 
individual or group acting together gain 51% or more of the 
computing power, essentially giving the attackers control over the 
Ethereum blockchain and the ability to disrupt or modify 
transactions on the Ethereum blockchain. The Exchange believes that 
this possibility is remote, but the Exchange will nonetheless 
monitor for such possibilities either directly or by using a vendor, 
which may include Wallet Managers that agree to perform this 
function and promptly alert the Exchange to any compromise of the 
Ethereum blockchain or other type of disruption that might impact 
the end-of-day security token balance reporting process as an 
ancillary recordkeeping mechanism (e.g., inability to access 
Etherscan.io).
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    To account for these types of situations, proposed Rule 17020(e) 
provides that the Exchange may suspend the requirements in paragraphs 
17020(a) through (d) regarding any BSTX Participant and/or regarding 
one or more security tokens, as applicable, in its discretion and in 
any such case the Exchange will provide prompt notice thereof and the 
reason(s) therefore to BSTX Participants.\80\ The Exchange will notify 
the Commission within two hours of its determination to make any such 
suspension and the suspension may continue in effect for no more than 
thirty calendar days from the date the determination is made unless the 
Exchange has submitted a

[[Page 13252]]

proposed rule change with the Commission seeking approval of such 
suspension, in which case the suspension may continue in effect until 
the Commission approves or disapproves the proposed rule change.\81\
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    \80\ The particular details included in such notice to BSTX 
Participants will vary based on the facts and circumstances giving 
rise to the suspension, but the Exchange expects that such notice 
would describe: (i) The impacted security token(s); (ii) the nature 
of the disruption; (iii) the anticipated length of the suspension; 
and (iv) any changes to BSTX Participants' obligations to report 
end-of-day security token balances.
    \81\ See proposed Rule 17020(e). The Exchange believes that 
proposed Rule 17020(e) may foster coordination with persons 
processing information with respect to securities and is not 
designed to permit unfair discrimination because such provision will 
allow the Exchange to suspend certain Rule requirements in events 
where there may be difficulty coordinating or sharing pertinent 
information with BSTX Participants and/or Wallet Manager(s). 
Further, Rule 17020(e) is designed to apply to all market 
participants equally and to provide notice to affected market 
participants and regulators of BSTX, in order to allow such 
individuals and entities to coordinate with the Exchange and react 
to potential issues as deemed necessary.
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    In all such cases involving these types of disruptions relating to 
the end-of-day security token balance reporting process, there would be 
no impact on the ability to trade, clear, or settle security token 
transactions in the ordinary course.\82\ This is because the end-of-day 
security token balance reporting is solely as an ancillary record-
keeping mechanism and because the actual trading, clearance, and 
settlement of security tokens would occur in the same manner as other 
NMS stock.
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    \82\ The Exchange acknowledges, of course, that certain issues 
such as a widespread power outage that prevents the Exchange from 
being able to transmit information to the Wallet Manager(s) could 
also result in a disruption to trading on BSTX and potentially the 
declaration of a halt in trading of the security token by the 
Exchange.
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    The Exchange would set forth via Regulatory Circular the precise 
manner in which security tokens should be reported. In general, the 
report would simply require certain identifying information regarding 
the BSTX Participant (e.g., name, carrying firm, MPID) and a list of 
the end-of-day security token position balances of the BSTX 
Participant.\83\
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    \83\ Pursuant to the BSTX Listing Rules, BSTX will allow listing 
of three types of security tokens: Equity security tokens, preferred 
security tokens, and warrant security tokens. These three types of 
security tokens will have similar end-of-day reporting processes; 
each BSTX Participant will be required to provide end-of-day 
security token position balance information to BSTX related to each 
security token issuance based on such BSTX Participant's DTC account 
balance. The BSTX Listing Rules also discuss paired security tokens, 
which are security tokens that may be transferred and traded only in 
combination with one another as a single economic unit. For paired 
security tokens, BSTX expects that BSTX Participants, when 
submitting position balance information to BSTX, will specify the 
end-of-day balances for each constituent security token that 
comprises a paired security token.
---------------------------------------------------------------------------

    As a result of this process, the Ethereum blockchain would in the 
ordinary course reflect for each security token the end-of-day balance 
associated with each BSTX Participant's wallet address. Wallet 
addresses are essentially just a string of numbers and characters, and 
it would not be made public which BSTX Participant is associated with 
which wallet address or which address is the omnibus wallet 
address.\84\ An observer of security token balances associated with a 
particular address would not be able to determine whether a particular 
address represented, for example, a carrying firm reporting end-of-day 
balances on behalf of multiple BSTX Participants, an individual BSTX 
Participant, or the omnibus wallet address. Neither could an observer 
determine which underlying customer(s) of a BSTX Participant associated 
with a particular wallet address held the security tokens or whether 
the BSTX Participant owned the security tokens proprietarily. In 
addition, an observer of the security token balances would not be able 
to tell whether a particular wallet address was long or short the 
shares.\85\ For these reasons, the Exchange believes that the security 
token balance information that would be publicly available on the 
Ethereum blockchain would be sufficiently anonymous to address privacy 
concerns related to such information. Security token balance 
information for the Ethereum blockchain is available at Etherscan.io 
(``Etherscan''). From Etherscan.io, an observer would be able to search 
for the name of the particular security token and see the holders of 
tokens and the associated quantity, as well as other information (e.g., 
transfers made as a result of the Wallet Manager(s) reallocation 
process).\86\
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    \84\ The Wallet Manager(s) would have information regarding 
security token balance information associated with a particular BSTX 
Participant. However, as noted in Part II.H, a condition of serving 
as a Wallet Manager would include, among other things, a 
representation to comply with the federal securities laws, including 
trading on the basis of material non-public information.
    \85\ This is because the end-of-day ancillary recordkeeping 
process captures only end-of-day balances as reported by DTC to BSTX 
Participants or their carrying firms. Thus, if a BSTX Participant 
borrowed security tokens and the borrowed security tokens were moved 
to its DTC account (or the DTC account of its carrying firm on its 
behalf), the borrowed security tokens would appear to be a long 
position in the security token, when in fact the BSTX Participant 
was taking a short position.
    \86\ This process can be done presently with ERC-20 tokens or 
other digital assets built on Ethereum.
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    The Exchange does not believe that the ancillary records of 
security token balance information published on the Ethereum blockchain 
would be likely to cause investor confusion because there is no similar 
source of information with which an observer of the blockchain data 
could be confused. That is, the resting position balances related to 
security token ownership of BSTX Participants and other market 
participants are not available through another medium (e.g., such as by 
DTC making such information available) in a manner that could lead an 
investor to be confused as to whether the Ethereum blockchain or some 
other source of security token balance information is accurate. 
Moreover, security token position balance information as recorded on 
the Ethereum blockchain will not reflect legal ownership of security 
tokens and the identities of BSTX Participants corresponding to each 
wallet address (as well as the omnibus wallet address) would not be 
made public. The Exchange believes that the proposed end-of-day 
security token balance reporting requirement is consistent with the 
Exchange Act, and Section 6(b)(5) \87\ in particular, because it is 
designed to foster cooperation and coordination with persons engaged in 
regulating, clearing, settling, and processing information with respect 
to transactions in security tokens and would not unfairly discriminate 
among BSTX Participants, all of whom are subject to the same reporting 
requirement. The purpose of the reporting obligation is to allow the 
Exchange to receive information from BSTX Participants regarding end-
of-day balances in security tokens so that the Exchange can provide 
that information to the Wallet Manager(s) and the Wallet Manager(s) 
can, in turn, use the information to update the Ethereum blockchain as 
an ancillary recordkeeping mechanism reflecting changes in security 
token ownership (i.e., the recording of end-of-day balance 
information). Without this information, all of the outstanding balances 
regarding a security token would be attributed by the Wallet Manager(s) 
to the omnibus wallet address rather than allocated to multiple wallet 
addresses belonging to corresponding BSTX Participants. Accordingly, to 
the extent that BTSX Participants have end-of-day balances in security 
tokens, the allocation of the security token balances to their 
respective wallet addresses by the Wallet Manager(s) will reflect a 
relatively more robust use of the functionality of the smart contracts 
than if the entire outstanding balance of a security token is 
attributed to the omnibus wallet address. Promoting this more robust 
use of the functionality of the smart contracts and their ability to 
allocate and re-allocate security token balances across multiple wallet 
addresses will enhance the ability of

[[Page 13253]]

market participants, including the Exchange, to observe and evaluate 
the capabilities of blockchain technology as an ancillary recordkeeping 
mechanism. The Exchange notes that under the existing authority of 
other equity exchanges, the exchange is able to request that exchange 
members/participants furnish to the exchange records pertaining to 
transactions executed on or through the exchange in a time and manner 
required by such exchange.\88\ Accordingly, BSTX believes that the 
proposed end-of-day security token balance reporting requirement would 
be consistent with authority that the Commission has already approved 
regarding furnishment of records by members of exchanges.
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    \87\ 15 U.S.C. 78f(b)(5).
    \88\ See e.g., BOX Rule 10000(a) and (b), Cboe BZX Rule 4.2, and 
IEX Rule 4.540. Broker-dealers are also subject to daily or real-
time reporting obligations in a variety of other contexts. For 
example, pursuant to the FINRA Rule 7000 Series. See e.g., FINRA 
Rule 7230A(b) (noting that ``Participants shall transmit trade 
reports to the System for transactions in Reportable Securities as 
soon as practicable but no later than 10 seconds after execution . . 
.''). Trades in municipal securities are generally required within 
15 minutes of the time of trade. See MSRB Rule G-14(a)(ii).
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    The Exchange recognizes that there are limitations in what the 
Ethereum blockchain will reflect with regard to end-of-day security 
token balances as an ancillary recordkeeping mechanism given that all 
non-BSTX Participants' balances will be aggregated and reflected in an 
omnibus wallet address for each security token.\89\ In addition, the 
end-of-day security token balances may be inaccurate or unavailable 
such as when a BSTX Participant misreports its balance or under 
circumstances in which BSTX is unable to send the balances to the 
Wallet Manager or the Wallet Manager is unable to update the Ethereum 
blockchain, as discussed above. For these reasons, among others, the 
Exchange believes that initially using blockchain technology as an 
ancillary recordkeeping mechanism pursuant to which the security tokens 
represented on the blockchain would not convey legal ownership is the 
appropriate way to explore the potential benefits of blockchain 
technology consistent with the protection of investors and the public 
interest.\90\ In the event of any disruption to the blockchain, the 
architecture of the security token, or to the end-of-day security token 
balance reporting process, there would be no impact on the ability of 
market participants to trade security tokens or current balances of 
security tokens actually held by each market participant through the 
facilities of DTC, which the Exchange believes furthers the protection 
of investors and the public interest, consistent with Section 6(b)(5) 
of the Exchange Act.\91\ Moreover, the Exchange believes that the 
public has an interest in exploring the use of new technology, such as 
blockchain technology, and that such technology may be able to help 
perfect the mechanism of a free and open market and a national market 
system, consistent with Section 6(b)(5) of the Exchange Act.\92\ 
Finally, the Exchange believes that use of anonymized wallet addresses 
to track end-of-day security token balances may prevent fraudulent and 
manipulative acts and practices, consistent with Section 6(b)(5) of the 
Exchange Act,\93\ because obscuring the identities of the wallet 
address owners may make it difficult to misuse any private information 
associated with these wallet addresses. The Exchange believes that the 
proposal is reasonably designed to introduce blockchain technology in a 
gradual way and in coordination and cooperation with the industry, the 
Commission, and the existing regulatory framework.
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    \89\ The Exchange does not believe that imposing the end-of-day 
security token reporting requirement on BSTX Participants is 
unfairly discriminatory or burdens competition because all market 
participants are free to choose whether to become a BSTX Participant 
or not and there is no limitation imposed by the Exchange on the 
ability to trade security tokens on other markets. Market 
participants that voluntarily choose to become BSTX Participants 
must comply with the rules of the Exchange, but they remain free to 
become a member of another exchange that supports trading of 
security tokens or to purchase the security tokens OTC. The Exchange 
further notes that it believes the end-of-day security token balance 
reporting process would not impose a substantial burden on BSTX 
Participants, because it would not require significant resources or 
time.
    \90\ 15 U.S.C. 78f(b)(5).
    \91\ Id.
    \92\ Id.
    \93\ Id.
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K. Trading Security Tokens on Other National Securities Exchanges
    Security tokens would be eligible for trading on other national 
securities exchanges that extend unlisted trading privileges (``UTP'') 
to them. As described above in Part II.E, security tokens would be held 
in ``street name'' at DTC, have a CUSIP number, and would clear and 
settle through the facilities of a clearing agency registered with the 
SEC (i.e., NSCC and DTC respectively). As a result, security tokens 
would be able to trade on other exchanges and OTC in the same manner as 
other NMS stock. Accordingly, other exchanges would be able to extend 
unlisted trading privileges to security tokens in accordance with 
Commission rules. The end-of-day security token position balance 
reporting by BSTX Participants and the publication of such balance 
information on the blockchain does not impact the ability of security 
tokens to trade on other exchanges or OTC.
    The Exchange proposes to include certain rules that contemplate the 
trading of security tokens that may be listed on other national 
securities exchanges.\94\ Since there are currently no other national 
securities exchanges trading security tokens, these rules would be 
implemented in anticipation of other exchanges eventually listing and 
trading their own security tokens. BSTX recognizes that another 
exchange trading security tokens, or the equivalent thereof, may 
require BSTX to adopt certain rules specific to such other exchange in 
order to extend unlisted trading privileges to the other exchange's 
security tokens consistent with Rule 12f-5.\95\
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    \94\ See e.g., proposed Rule 25040(e).
    \95\ 17 CFR 240.12f-5.
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L. Benefits of a Security Token
    As described above, the proposed BSTX Rules contemplate the use of 
smart contract functionality to record end-of-day security token 
position balance information to the Ethereum blockchain as an ancillary 
recordkeeping mechanism. The Exchange's proposal thereby represents an 
ancillary pairing of blockchain technology with the existing equities 
market infrastructure, in a manner consistent with Section 6(b)(5) and 
other relevant provisions of the Exchange Act, as described herein. The 
Commission has stated that it is ``mindful of the benefits of 
increasing use of new technologies for investors and the markets, and 
has encouraged experimentation and innovation . . .'' \96\ stating 
further that ``[i]nformation and communications technologies are 
critical to healthy and efficient primary and secondary markets.'' \97\ 
Regarding the judgment of whether the benefits of certain technologies 
are meritorious, the Commission has explained its view that ``[t]he 
market will ultimately prove the worth of technology--whether the 
benefits to the industry and its investors of developing and using new 
services are greater than the associated costs.'' \98\ Consistent with 
these statements, the Exchange believes that promoting use of the 
functionality of smart contracts and their ability to allocate and re-
allocate security token balances across multiple

[[Page 13254]]

addresses in connection with end-of-day security token position balance 
information of BSTX Participants will allow market participants to 
observe and increase their familiarity with the capabilities and 
potential benefits of blockchain technology in a context that parallels 
current equity market infrastructure and thereby advance and protect 
the public's interest in the use and development of new data processing 
techniques that may create opportunities for more efficient, effective 
and safe securities markets.\99\ As noted, because the blockchain and 
security token balances recorded on the Ethereum blockchain do not 
reflect legal ownership of the actual securities of BSTX-listed 
issuers, any disruption to the Ethereum blockchain, the security token 
architecture, or the end-of-day reporting process would have no impact 
on the ability of security tokens to trade on BSTX or otherwise, which 
the Exchange believes furthers the protection of investors and the 
public interest, consistent with Section 6(b)(5) of the Exchange 
Act.\100\
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    \96\ Securities and Exchange Commission, The Impact of Recent 
Technological Advances on the Securities Markets (Sep. 1997), 
available at: https://www.sec.gov/news/studies/techrp97.htm.
    \97\ Id.
    \98\ Id.
    \99\ Report of the Senate Committee on Banking, Housing & Urban 
Affairs, S. Rep. No. 94-75, at 8 (1975) (expressing Congress' 
finding that new data processing and communications systems create 
the opportunity for more efficient and effective markets). While the 
Exchange believes that its proposal represents an introductory step 
in pairing the benefits of blockchain technology with the current 
equity market infrastructure, other market participants and FINRA 
have recognized additional potential benefits to blockchain 
technology in various applications related to the securities 
markets. FINRA has stated ``[o]ne of the proposed benefits of 
[blockchain technology] is the ability to offer a timestamped, 
sequential, audit trail of transaction records. This may provide 
regulators and other interested parties (e.g., internal audit, 
public auditors) with the opportunity to leverage the technology to 
view the complete history of a transaction where it may not be 
available today and enhance existing records related to securities 
transactions.'' Financial Industry Regulatory Authority, Distributed 
Ledger Technology: Implications of Blockchain for the Securities 
Industry (January 2017), available at: https://www.finra.org/sites/default/files/FINRA_Blockchain_Report.pdf. Further, Paxos Trust 
Company echoed similar themes in connection with its receipt of no-
action relief from the Commission staff, and explained in its 
request letter certain benefits of blockchain technology including 
``greater data accuracy and transparency, advanced security, and 
increased levels of availability and operational efficiency[.]'' the 
Exchange believes such benefits may be generally relevant to future 
potential applications of blockchain technology. See Letter from 
Jeffrey S. Mooney, Division of Trading and Markets, Securities and 
Exchange Commission to Charles Cascarilla and Daniel Burstein, Paxos 
Trust Company, LLC re: Clearing Agency Registration Under Section 
17A(b)(1) of the Securities Exchange Act of 1934 (October 28, 2019), 
available at: https://www.sec.gov/divisions/marketreg/mr-noaction/2019/paxos-trust-company-102819-17a.pdf.
    \100\ 15 U.S.C. 78f(b)(5).
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III. Proposed BSTX Rules

    The discussion in this Part III addresses the proposed BSTX Rules 
that would be adopted as Rule Series 17000 through 28000.
A. General Provisions of BSTX and Definitions (Rule 17000 Series)
    The Exchange proposes to adopt as its Rule 17000 Series (General 
Provisions of BSTX) a set of general provisions relating to the trading 
of security tokens and other rules governing participation on BSTX. 
Proposed Rule 17000 sets forth the defined terms used throughout the 
BSTX Rules. The majority of the proposed definitions are substantially 
similar to defined terms used in other equities exchange rulebooks, 
such as with respect to the term ``customer.'' \101\ The Exchange 
proposes to set forth new definitions for certain terms to specifically 
identify systems, agreements, or persons as they relate to BSTX and as 
distinct from other Exchange systems, agreements, or persons that may 
be used in connection with the trading of other options on the 
Exchange.\102\ The Exchange also proposes to define certain unique 
terms relating to the trading of security tokens, including ``security 
token,'' \103\ and ``Wallet Manager.'' \104\ The term ``Wallet 
Manager'' is defined to provide context to the wallet address 
whitelisting and end-of-day security token balance reporting processes 
used to update the Ethereum blockchain as an ancillary recordkeeping 
mechanism.\105\
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    \101\ Proposed Rule 17000(a)(16) defines the term ``customer'' 
to not include a broker or dealer, which parallels the same 
definition in other exchange rulebooks. See e.g., IEX Rule 1.160(j). 
Similarly, the Exchange proposes to define the term ``Regular 
Trading Hours'' as the time between 9:30 a.m. and 4:00 p.m. Eastern 
Time. See proposed Rule 17000(a)(28) cf. IEX Rule 1.160(gg) 
(defining ``Regular Market Hours'' in the same manner).
    \102\ For example, the Exchange proposes to define the term 
``BSTX'' to mean the facility of the Exchange for executing 
transaction in security tokens, the term ``BSTX Participant'' to 
mean a Participant or Options Participant (as those terms are 
defined in the Exchange's Rule 100 Series) that is authorized to 
trade security tokens, and the term ``BSTX System'' to mean the 
automated trading system used by BSTX for the trading of security 
tokens. See proposed Rule 17000(a)(8), (11), and (14).
    \103\ Proposed Rule 17000(a)(30) provides that the term 
``security token'' means a NMS stock, as defined in Rule 600(b)(47) 
of the Exchange Act, trading on the BSTX System. The proposed 
definition further specifies that references to a ``security'' or 
``securities'' in the Rules include security tokens.
    \104\ Proposed Rule 17000(a)(31) defines the term ``Wallet 
Manager'' as a party approved by BSTX to operate software compatible 
with the BSTX Protocol. See also supra Sections II.G and H. for a 
discussion of the role of a Wallet Manager.
    \105\ See supra note 60.
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    In addition to setting forth proposed definitions used throughout 
the proposed Rules, the Exchange proposes to specify in proposed Rule 
17010 (Applicability) that the Rules set forth in the Rule 17000 Series 
to Rule 28000 Series apply to the trading, listing, and related matters 
pertaining to the trading of security tokens. Proposed Rule 17010(b) 
provides that, unless specific Rules relating to security tokens govern 
or unless the context otherwise requires, the provisions of any 
Exchange Rule (i.e., including Exchange Rules in the Rule 100 through 
16000 Series) shall be applicable to BSTX Participants.\106\ This is 
intended to make clear that BSTX Participants are subject to all of the 
Exchange's Rules that may be applicable to them, notwithstanding that 
their trading activity may be limited solely to trading security 
tokens. The Exchange believes that the proposed definitions set forth 
in Rule 17000 are consistent with Section 6(b)(5) of the Exchange Act 
\107\ [sic] because they protect investors and the public interest by 
setting forth clear definitions that help BSTX Participants understand 
and apply Exchange Rules. Without clearly defining terms used in the 
Exchanges Rules and providing clarity as to the Exchange Rules that may 
apply, market participants could be confused as to the application of 
certain rules, which could cause harm to investors.
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    \106\ Proposed Rule 17010 further specifies that to the extent 
the provisions of the Rules relating to the trading of security 
tokens contained in Rule 17000 Series to Rule 28000 Series are 
inconsistent with any other provisions of the Exchange Rules, the 
Rules relating to security token trading shall control.
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    Proposed Rule 17020 sets forth the requirements to obtain a 
whitelisted wallet address from BSTX, and the end-of-day security token 
balance reporting, which are discussed in greater detail above in Parts 
II.G through L.
B. Participation on BSTX (Rule 18000 Series)
    The Exchange proposes to adopt as its Rule 18000 Series 
(Participation on BSTX), three rules setting forth certain requirements 
relating to participation on BSTX. Proposed Rule 18000 (BSTX 
Participation) establishes ``BSTX Participants'' as a new category of 
Exchange participation for effecting transactions on the BSTX System, 
provided they: (i) Complete the BSTX Participant Application, 
Participation Agreement, and User Agreement; \108\ (ii) be an existing 
Options Participant or become a Participant of the Exchange pursuant to 
the Rule 2000 Series; and (iii) provide such other information as

[[Page 13255]]

required by the Exchange.\109\ Proposed Rule 18010 (Requirements for 
BSTX Participants) sets forth certain requirements for BSTX 
Participants including requirements that each BSTX Participant comply 
with Rule 15c3-1 under the Exchange Act, comply with applicable books 
and records requirements, and be a member of a registered clearing 
agency or clear security token transactions through another BSTX 
Participant that is a member/participant of a registered clearing 
agency.\110\ Finally, proposed Rule 18020 (Associated Persons) provides 
that associated persons of a BSTX Participant are bound by the Rules of 
the Exchange to the same extent as each BSTX Participant.
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    \108\ The BSTX Participant Application, Participation Agreement, 
and User Agreement are attached as Exhibits 3A, 3B, and 3C 
respectively.
    \109\ Proposed Rule 18000 also sets forth the Exchange's review 
process regarding BSTX Participation Agreements and certain 
limitations on the ability to transfer BSTX Participant status 
(e.g., in the case of a change of control). In addition proposed 
Rule 18000(b)(2) provides that a BSTX Participant shall continue to 
abide by all applicable requirements of the Rule 2000 Series, which 
would include, for example, IM-2040-5, which specifies continuing 
education requirements of Exchange Participants and their associated 
persons.
    \110\ Proposed Rule 18010(b) is similar to the rules of existing 
exchanges. See e.g., IEX Rule 2.160(c). Proposed Rule 18010(a) is 
also similar to the rules of existing exchanges. See e.g., IEX Rule 
1.160(s) and Cboe BZX Rule 17.2(a).
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    The Exchange believes that the proposed Rule 18000 Series 
(Participation on BSTX) is consistent with Section 6(b)(5) of the 
Exchange Act \111\ because these proposed rules are designed to promote 
just and equitable principles of trade, and protect investors and the 
public interest by setting forth the requirements to become a BSTX 
Participant and specifying that associated persons of a BSTX 
Participant are bound by Exchange Rules. Under proposed Rule 18000, a 
BSTX Participant must first become an Exchange Participant pursuant to 
the Exchange Rule 2000 Series which the Exchange believes would help 
assure that BSTX Participants meet the appropriate standards for 
trading on BSTX in furtherance of the protection of investors.\112\
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    \111\ 15 U.S.C. 78f(b)(5).
    \112\ The Exchange notes that the approach of requiring members 
of a facility of an exchange to first become members of the exchange 
is consistent with the approach used by another national securities 
exchange. See Cboe BZX Rule 17.1(b)(3) (requiring that a Cboe BZX 
options member be an existing member or become a member of the Cboe 
BZX equities exchange pursuant to the Cboe BZX Chapter II Series).
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C. Business Conduct for BSTX Participants (Rule 19000 Series)
    The Exchange proposes to adopt as its Rule 19000 Series (Business 
Conduct for BSTX Participants), twenty two rules relating to business 
conduct requirements for BSTX Participants that are substantially 
similar to business conduct rules of other exchanges.\113\ The proposed 
Rule 19000 Series would specify business conduct requirements with 
respect to: (i) Just and equitable principles of trade; \114\ (ii) 
adherence to law; \115\ (iii) use of fraudulent devices; \116\ (iv) 
false statements;\117\ (v) know your customer;\118\ (vi) fair dealing 
with customers; \119\ (vii) suitability; \120\ (viii) the prompt 
receipt and delivery of securities; \121\ (ix) charges for services 
performed; \122\ (x) use of information obtained in a fiduciary 
capacity; \123\ (xi) publication of transactions and quotations; \124\ 
(xii) offers at stated prices; \125\ (xiii) payments involving 
publications that influence the market price of a security; \126\ (xiv) 
customer confirmations; \127\ (xv) disclosure of a control relationship 
with an issuer of security tokens; \128\ (xvi) discretionary accounts; 
\129\ (xvii) improper use of customers' securities or funds and a 
prohibition against guarantees and sharing in accounts; \130\ (xviii) 
the extent to which sharing in accounts is permissible; \131\ (xix) 
communications with customers and the public; \132\ (xx) gratuities; 
\133\ (xxi) telemarketing; \134\ and (xxii) mandatory systems 
testing.\135\ The Exchange notes that the proposed financial 
responsibility rules are virtually identical to those of other national 
securities exchanges other than changes to defined terms and certain 
other provisions that would not apply to the trading of security tokens 
on the BSTX System.\136\
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    \113\ See Cboe BZX Chapter 5 rules. See also IEX Rule 5.150 with 
respect to proposed Rule 21040 (Prevention of the Misuse of 
Material, Non-Public Information).
    \114\ Proposed Rule 19000 (Just and Equitable Principles of 
Trade) provides that no BSTX Participant, including its associated 
persons, shall engage in acts or practices inconsistent with just 
and equitable principles of trade.
    \115\ Proposed Rule 19010 (Adherence to Law) generally requires 
BSTX Participants to adhere to applicable laws and regulatory 
requirements.
    \116\ Proposed Rule 19020 (Use of Fraudulent Devices) generally 
prohibits BSTX Participants from effecting a transaction in any 
security by means of a manipulative, deceptive or other fraudulent 
device or contrivance.
    \117\ Proposed Rule 19030 (False Statements) generally prohibits 
BSTX Participants and their associated persons from making false 
statements or misrepresentations in communications with the 
Exchange.
    \118\ Proposed Rule 19040 (Know Your Customer) requires BSTX 
Participants to comply with FINRA Rule 2090 as if such rule were 
part of the Exchange Rules.
    \119\ Proposed Rule 19050 (Fair Dealing with Customers) 
generally requires BSTX Participants to deal fairly with customers 
and specifies certain activities that would violate the duty of fair 
dealing (e.g., churning or overtrading in relation to the objectives 
and financial situation of a customer).
    \120\ Proposed Rule 19060 (Suitability) provides that BSTX 
Participants and their associated persons shall comply with FINRA 
Rule 2111 as if such rule were part of the Exchange Rules.
    \121\ Proposed Rule 19070 (Prompt Receipt and Delivery of 
Securities) would generally prohibit a BSTX Participant from 
accepting a customer's purchase order for a security until it can 
determine that the customer agrees to receive the securities against 
payment.
    \122\ Proposed Rule 19080 (Charges for Services Performed) 
generally requires that charges imposed on customers by broker-
dealers shall be reasonable and not unfairly discriminatory.
    \123\ Proposed Rule 19090 (Use of Information Obtained in a 
Fiduciary Capacity) generally restricts the use of information as to 
the ownership of securities when acting in certain capacities (e.g., 
as a trustee).
    \124\ Proposed Rule 19100 (Publication of Transactions and 
Quotations) generally prohibits a BSTX Participant from 
disseminating a transaction or quotation information unless the BSTX 
Participant believes it to be bona fide.
    \125\ Proposed Rule 19110 (Offers at Stated Prices) generally 
prohibits a BSTX Participant from offering to transact in a security 
at a stated price unless it is in fact prepared to do so.
    \126\ Proposed Rule 19120 (Payments Involving Publications that 
Influence the Market Price of a Security) generally prohibits direct 
or indirect payments with the aim of disseminating information that 
is intended to effect the price of a security.
    \127\ Proposed Rule 19130 (Customer Confirmations) requires that 
BSTX Participants comply with Rule 10b-10 of the Exchange Act. 17 
CFR 240.10b-10.
    \128\ Proposed Rule 19140 (Disclosure of Control Relationship 
with Issuer) generally requires BSTX Participants to disclose any 
control relationship with an issuer of a security before effecting a 
transaction in that security for the customer.
    \129\ Proposed Rule 19150 (Discretionary Accounts) generally 
provides certain restrictions on BSTX Participants handling of 
discretionary accounts, such as by effecting excessive transactions 
or obtained authorization to exercise discretionary powers.
    \130\ Proposed Rule 19160 (Improper Use of Customers' Securities 
or Funds and Prohibition against Guarantees and Sharing in Accounts) 
generally prohibits BSTX Participants from making improper use of 
customers securities or funds and prohibits guarantees to customers 
against losses.
    \131\ Proposed Rule 19170 (Sharing in Accounts; Extent 
Permissible) generally prohibits BSTX Participants and their 
associated persons from sharing directly or indirectly in the profit 
or losses of the account of a customer unless certain exceptions 
apply such as where an associated person receives prior written 
authorization from the BSTX Participant with which he or she is 
associated.
    \132\ Proposed Rule 19180 (Communications with Customers and the 
Public) generally provides that BSTX Participants and their 
associated persons shall comply with FINRA Rule 2210 as if such rule 
were part of the Exchange Rules.
    \133\ Proposed Rule 19200 (Gratuities) requires BSTX 
Participants to comply with the requirements set forth in BOX 
Exchange Rule 3060 (Gratuities).
    \134\ Proposed Rule 19210 (Telemarketing) requires that BSTX 
Participants and their associated persons comply with FINRA Rule 
3230 as if such rule were part of the Exchange's Rules.
    \135\ Proposed Rule 19220 (Mandatory Systems Testing) requires 
that BSTX Participants comply with Exchange Rule 3180 (Mandatory 
Systems Testing).
    \136\ For example, the Exchange is not proposing to adopt a rule 
contained in other exchanges' business conduct rules relating to 
disclosures that broker-dealers give to their customers regarding 
the risks of effecting securities transactions during times other 
than during regular trading hours (e.g., higher volatility, possibly 
lower liquidity) because executions may only occur during regular 
trading hours on the BSTX System. See e.g., IEX Rule 3.290, Cboe BZX 
Rule 3.21.

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[[Page 13256]]

    The Exchange believes that the proposed Rule 19000 Series (Business 
Conduct) is consistent with Section 6(b)(5) of the Exchange Act \137\ 
because these proposed rules are designed to prevent fraudulent and 
manipulative acts and practices, promote just and equitable principles 
of trade, and protect investors and the public interest by setting 
forth appropriate standards of conduct applicable to BSTX Participants 
in carrying out their business activities. For example, proposed Rule 
19000 (Just and Equitable Principles of Trade) and 19010 (Adherence to 
Law) would prohibit BSTX Participants from engaging in acts or 
practices inconsistent with just and equitable principles of trade or 
that would violate applicable laws and regulations. Similarly, proposed 
Rule 19050 (Fair Dealing with Customers) would require that BSTX 
Participants deal fairly with their customers and proposed Rule 19030 
(False Statements) would generally prohibit BSTX Participants, or their 
associated persons from making false statements or misrepresentations 
to the Exchange. The Exchange believes that requiring that BSTX 
Participants comply with the proposed business conduct rules in the 
Rule 19000 Series would further the protection of investors and the 
public interest by promoting high standards of commercial honor and 
integrity. In addition, each of the rules in the proposed Rule 19000 
Series (Business Conduct) is substantially similar to supervisory rules 
of other exchanges.\138\
---------------------------------------------------------------------------

    \137\ 15 U.S.C. 78f(b)(5).
    \138\ See supra n. 113.
---------------------------------------------------------------------------

D. Financial and Operational Rules for BSTX Participants (Rule 20000 
Series)
    The Exchange proposes to adopt as its Rule 20000 Series (Financial 
and Operational Rules), ten rules relating to financial and operational 
requirements for BSTX Participants that are substantially similar to 
financial and operational rules of other exchanges.\139\ The proposed 
Rule 20000 Series would specify financial and operational requirements 
with respect to: (i) Maintenance and furnishing of books and records; 
\140\ (ii) financial reports; \141\ (iii) net capital compliance; \142\ 
(iv) early warning notifications pursuant to Rule 17a-11 under the 
Exchange Act; \143\ (v) authority of the Chief Regulatory Officer to 
impose certain restrictions; \144\ (vi) margin; \145\ (vii) day-trading 
margin; \146\ (viii) customer account information; \147\ (ix) 
maintaining records of customer complaints; \148\ and (x) disclosure of 
financial condition.\149\
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    \139\ See Cboe BZX Chapter 6 rules and IEX Chapter 5 rules.
    \140\ Proposed Rule 20000 (Maintenance, Retention and Furnishing 
of Books, Records and Other Information) requires that BSTX 
Participants comply with current Exchange Rule 1000 (Maintenance, 
Retention and Furnishing of Books, Records and Other Information) 
and that BSTX Participants shall submit to the Exchange order, 
market and transaction data as the Exchange may specify by 
Information Circular.
    \141\ Proposed Rule 20010 (Financial Reports) provides that BSTX 
Participants shall comply with the requirements of current Exchange 
Rule 10020 (Financial Reports).
    \142\ Proposed Rule 20020 (Capital Compliance) provides that 
each BSTX Participant subject to Rule 15c3-1 under the Exchange Act 
(17 CFR 240.15c3-1) shall comply with such rule and other financial 
and operational rules contained in the proposed Rule 20000 series.
    \143\ 17 CFR 240.17a-11. Proposed Rule 20030 (``Early Warning'' 
Notification) provides that BSTX Participants subject to the 
reporting or notifications requirements of Rule 17a-11 under the 
Exchange Act (17 CFR 240.17a-11) or similar ``early warning'' 
requirements imposed by other regulators shall provide the Exchange 
with certain reports and financial statements.
    \144\ Proposed Rule 20040 (Power of CRO to Impose Restrictions) 
generally provides that the Exchange's Chief Regulatory Officer may 
impose restrictions and conditions on a BSTX Participant subject to 
the early warning notification requirements under certain 
circumstances.
    \145\ Proposed Rule 20050 (Margin) sets forth the required 
margin amounts for certain securities held in a customer's margin 
account.
    \146\ Proposed Rule 20060 (Day Trading Margin) sets forth 
additional requirements with respect to customers that engage in day 
trading.
    \147\ Proposed Rule 20070 (Customer Account Information) 
requires that BSTX Participants comply with FINRA Rule 4512 as if 
such rule were part of the Exchange Rules and further clarifies 
certain cross-references within FINRA Rule 4512.
    \148\ Proposed Rule 20080 (Record of Written Customer 
Complaints) requires that BSTX Participants comply with FINRA Rule 
4513 as if such rule were part of the Exchange Rules.
    \149\ Proposed Rule 20090 (Disclosure of Financial Condition) 
generally requires that BSTX Participants make available certain 
information regarding the BSTX Participant's financial condition 
upon request of a customer.
---------------------------------------------------------------------------

    The Exchange believes that the proposed Rule 20000 (Financial and 
Operational Rules) Series is consistent with Section 6(b)(5) of the 
Exchange Act \150\ because these proposed rules are designed to prevent 
fraudulent and manipulative acts and practices, promote just and 
equitable principles of trade, and protect investors and the public 
interest by subjecting BSTX Participants to certain recordkeeping, 
disclosure, and related requirements designed to ensure that BSTX 
Participants conduct themselves in a financially responsible manner. 
For example, proposed Rule 20000 would require BSTX Participants to 
comply with existing Exchange Rule 1000, which sets forth certain 
recordkeeping responsibilities and the obligation to furnish these to 
the Exchange upon request so that the Exchange can appropriately 
monitor the financial condition of a BSTX Participant and its 
compliance with applicable regulatory requirements. Similarly, proposed 
Rule 20050 would set forth the margin requirements that BSTX 
Participants must retain with respect to customers trading in a margin 
account to ensure that BSTX Participants are not extending credit to 
customers in a manner that might put the financial condition of the 
BSTX Participant in jeopardy. Each of the proposed rules in the Rule 
20000 Series (Financial and Operational Rules) is substantially similar 
to existing rules of other exchanges or incorporates an existing rule 
of the Exchange or another self-regulatory organization (``SRO'') by 
reference.
---------------------------------------------------------------------------

    \150\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

E. Supervision (Rule 21000 Series)
    The Exchange proposes to adopt as its Rule 21000 Series 
(Supervision), six rules relating to certain supervisory requirements 
for BSTX Participants that are substantially similar to supervisory 
rules of other exchanges.\151\ The Proposed Rule 21000 Series would 
specify supervisory requirements with respect to: (i) Enforcing written 
procedures to appropriately supervise the BSTX Participant's conduct 
and compliance with applicable regulatory requirements; \152\ (ii) 
designation of an individual to carry out written supervisory 
procedures; \153\ (iii) maintenance and keeping of records carrying out 
the BSTX Participant's written supervisory procedures; \154\ (iv) 
review of activities of each of a BSTX Participant's offices, including 
periodic examination of customer accounts to detect and prevent 
irregularities or abuses; \155\ (v) the prevention of the misuse of 
material non-public

[[Page 13257]]

information; \156\ and (vi) implementation of an anti-money laundering 
(``AML'') compliance program.\157\ These rules are designed to ensure 
that BSTX Participants are able to appropriately supervise their 
business activities, review and maintain records with respect to such 
supervision, and enforce specific procedures relating insider-trading 
and AML.
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    \151\ See Cboe BZX Chapter 5 rules. See also IEX Rule 5.150 with 
respect to proposed Rule 21040 (Prevention of the Misuse of 
Material, Non-Public Information).
    \152\ Proposed Rule 21000 (Written Procedures).
    \153\ Proposed Rule 21010 (Responsibility of BSTX Participants) 
would also require that a copy of a BSTX's written supervisory 
procedures be kept in each office and makes clear that final 
responsibility for proper supervision rests with the BSTX 
Participant.
    \154\ Proposed Rule 21020 (Records).
    \155\ Proposed Rule 21030 (Review of Activities).
    \156\ Proposed Rule 21040 (Prevention of the Misuse of Material, 
Non-Public Information) generally requires BSTX Participants to 
enforce written procedures designed to prevent misuse of material 
non-public information and sets forth examples of conduct that would 
constitute a misuse of material, non-public information.
    \157\ Proposed Rule 21050 (Anti-Money Laundering Compliance 
Program). The Exchange already has rules with respect to Exchange 
Participants enforcing an AML compliance program set forth in 
Exchange Rule 10070 (Anti-Money Laundering Compliance Program), so 
proposed Rule 21050 specifies that BSTX Participants shall comply 
with the requirements of that pre-existing rule.
---------------------------------------------------------------------------

    The Exchange believes that the proposed Rule 21000 (Supervision) 
Series is consistent with Section 6(b)(5) of the Exchange Act \158\ 
because these proposed rules are designed to prevent fraudulent and 
manipulative acts and practices, promote just and equitable principles 
of trade, and protect investors and the public interest by ensuring 
that BSTX Participants have appropriate supervisory controls in place 
to carry out their business activities in compliance with applicable 
regulatory requirements. For example, proposed Rule 21000 (Written 
Procedures) would require BSTX Participants to enforce written 
procedures which enable them to supervise the activities of their 
associated persons and proposed Rule 21010 (Responsibility of BSTX 
Participants) would require a BSTX Participant to designate a person in 
each office to carry out written supervisory procedures. Requiring 
appropriate supervision of a BSTX Participant's business activities and 
associated persons would promote compliance with the federal securities 
laws and other applicable regulatory requirements in furtherance of the 
protection of investors and the public interest.\159\ In addition, each 
of the rules in the proposed Rule 21000 Series (Supervision) is 
substantially similar to supervisory rules of other exchanges.\160\
---------------------------------------------------------------------------

    \158\ 15 U.S.C. 78f(b)(5).
    \159\ Id.
    \160\ See supra n.151.
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F. Miscellaneous Provisions (Rule 22000 Series)
    The Exchange proposes to adopt as its Rule 22000 Series 
(Miscellaneous Provisions), six rules relating to a variety of 
miscellaneous requirements applicable to BSTX Participants that are 
substantially similar to rules of other exchanges.\161\ These 
miscellaneous provisions relate to: (i) Comparison and settlement 
requirements; \162\ (ii) failures to deliver and failures to receive; 
\163\ (iii) forwarding of proxy and other issuer-related materials; 
\164\ (iv) commissions; \165\ (v) regulatory services agreements; \166\ 
and (vi) transactions involving Exchange employees.\167\ These rules 
are designed to capture additional regulatory requirements applicable 
to BSTX Participants, such as setting forth their obligation to deliver 
proxy materials at the request of an issuer and to incorporate by 
reference Rule 200-203 of Regulation SHO.\168\
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    \161\ See Cboe BZX Chapter 13 rules. See also IEX Rule 6.180 
with respect to proposed Rule 22050 (Transactions Involving BOX 
Employees).
    \162\ Proposed Rule 22000 (Comparison and Settlement 
Requirements) provides that a BSTX Participant that is a member of a 
registered clearing agency shall implement comparison and settlement 
procedures as may be required under the rules of such entity. The 
proposed rule would further provide that, notwithstanding this 
general provision, the Board may extend or postpone the time of 
delivery of a BSTX transaction whenever the Board determines that it 
is called for by the public interest, just and equitable principles 
of trade or to address unusual conditions. In such a case, delivery 
will occur as directed by the Board.
    \163\ Proposed Rule 22010 (Failure to Deliver and Failure to 
Receive) provides that borrowing and deliveries must be effected in 
accordance with Rule 203 of Regulation SHO (17 CFR 242.203) and 
incorporates Rules 200--203 of Regulation SHO by reference into the 
rule (17 CFR Sec. Sec.  242.200-203).
    \164\ Proposed Rule 22020 (Forwarding of Proxy and Other 
Information; Proxy Voting) generally provides that BSTX Participants 
shall forward proxy materials when requested by an issuer and sets 
forth certain conditions and limitations for BSTX Participants to 
give a proxy to vote stock that is registered in its name.
    \165\ Proposed Rule 22030 (Commissions) provides that the 
Exchange Rules or practices shall not be construed to allow a BSTX 
Participant or its associated persons to agree or arrange for the 
charging of fixed rates commissions for transactions on the 
Exchange.
    \166\ Proposed Rule 22040 (Regulatory Service Agreement) 
provides that the Exchange may enter into regulatory services 
agreements with other SROs to assist in carrying out regulatory 
functions, but the Exchange shall retain ultimate legal 
responsibility for, and control of, its SRO responsibilities.
    \167\ Proposed Rule 22040 (Transactions Involving Exchange 
Employees) sets forth conditions and limitations on a BSTX 
Participant providing loans or supporting the account of an Exchange 
employee (e.g., promptly obtaining and implementing an instruction 
from the employee to provide duplicate account statement to the 
Exchange) in order to mitigate any potential conflicts of interest 
that might arise from such a relationship.
    \168\ 17 CFR Sec. Sec.  242.200-203.
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    The Exchange believes that the proposed Rule 22000 (Miscellaneous 
Provisions) Series is consistent with Section 6(b)(5) of the Exchange 
Act \169\ because these proposed rules are designed to prevent 
fraudulent and manipulative acts and practices, promote just and 
equitable principles of trade, and protect investors and the public 
interest by ensuring that BSTX Participants comply with additional 
regulatory requirements, such as Rule 203 of Regulation SHO \170\ as 
provided in proposed Rule 22010 (Failure to Deliver and Failure to 
Receive), in connection with their participation on BSTX. For example, 
proposed Rule 22030 (Commissions) prohibits BSTX Participants from 
charging fixed rates of commissions for transactions on the Exchange 
consistent with Section 6(e)(1) of the Exchange Act.\171\ Similarly, 
proposed Rule 22050 (Transactions involving Exchange Employees) sets 
forth certain requirements and prohibitions relating to a BSTX 
Participant providing certain financial services to an Exchange 
employee, which the Exchange believes helps prevent potentially 
fraudulent and manipulative acts and practices and furthers the 
protection of investors and the public interest.
---------------------------------------------------------------------------

    \169\ 15 U.S.C. 78f(b)(5).
    \170\ 17 CFR 242.203.
    \171\ 15 U.S.C. 78f(e)(1).
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G. Trading Practice Rules (Rule 23000 Series)
    The Exchange proposes to adopt as its Rule 23000 Series (Trading 
Practice Rules), 14 rules relating to trading practice requirements for 
BSTX Participants that are substantially similar to trading practice 
rules of other exchanges.\172\ The proposed Rule 23000 series would 
specify trading practice requirements related to: (i) Market 
manipulation; (ii) fictitious transactions; (iii) excessive sales by a 
BSTX Participant; (iv) manipulative transactions; (v) dissemination of 
false information; (vi) prohibition against trading ahead of customer 
orders; (vii) joint activity; (viii) influencing data feeds; (ix) trade 
shredding; (x) best execution; (xi) publication of transactions and 
changes; (xii) trading ahead of research reports; (xiii) front running 
of block transactions; and (xiv) a prohibition against disruptive 
quoting and trading activity. The purpose of the trading practice rules 
is to set forth standards and rules relating to the trading conduct of 
BSTX Participants, primarily with respect to prohibiting forms of 
market manipulation and specifying certain obligations broker-dealers 
have to their customers, such as the duty of best execution. For 
example, proposed Rule 23000 (Market Manipulation) sets forth a general 
prohibition against a BSTX Participant purchasing a security at 
successively higher prices or sales of a security at

[[Page 13258]]

successively lower prices, or to otherwise engage in activity for the 
purpose of creating or inducing a false, misleading or artificial 
appearance of activity in such security.\173\ Proposed Rule 23010 
(Fictitious Transactions) similarly prohibits BSTX Participants from 
fictitious transaction activity, such as executing a transaction which 
involves no beneficial change in ownership, and proposed Rule 23020 
(Excessive Sales by a BSTX Participant) prohibits a BSTX Participant 
from executing purchases or sales in any security trading on the 
Exchange for any account in which it has an interest, which are 
excessive in view of the BSTX Participant's financial resources or in 
view of the market for such security.\174\ Proposed Rule 23060 (Joint 
Activity) prohibits a BSTX Participant from directly or indirectly 
holding any interest or participation in any joint account for buying 
or selling a security traded on the Exchange unless reported to the 
Exchange with certain information provided and proposed Rule 23090 
(Best Execution) reaffirms BSTX Participants best execution obligations 
to their customers.\175\
---------------------------------------------------------------------------

    \172\ See Cboe BZX Chapter 12 rules.
    \173\ Proposed Rule 23030 (Manipulative Transactions) specifies 
further prohibitions relating to potential manipulation by 
prohibiting BSTX Participants from, among other things, 
participating or having any direct or indirect interest in the 
profits of a manipulative operation or knowingly managing or 
financing a manipulative operation.
    \174\ Other proposed rules relating to potential manipulation 
include: (i) Rule 23040 (Dissemination of False Information), which 
generally prohibits, consistent with Exchange Rule 3080, BSTX 
Participants from spreading information that is false or misleading; 
(ii) Rule 23070 (Influencing Data Feeds), which generally prohibits 
transactions to influence data feeds; (iii) Rule 23080 (Trade 
Shredding), which generally prohibits conduct that has the intent or 
effect of splitting any order into multiple smaller orders for the 
primary purpose of maximizing remuneration to the BSTX Participant; 
(iv) Rule 23110 (Trading Ahead of Research Reports), which generally 
prohibits BSTX Participants from trading based on non-public advance 
knowledge of a research report and requires BSTX Participants to 
enforce policies and procedures to limit information flow from 
research personnel to trading personnel that might trade on such 
information; (v) Rule 23120 (Front Running Block Transactions), 
which incorporates FINRA Rule 5270 as though it were part of the 
Exchange's Rules; and (vi) Rule 23130 (Disruptive Quoting and 
Trading Activity Prohibited), which incorporates Exchange Rule 3220 
by reference.
    \175\ In addition, proposed Rule 23100 (Publication of 
Transactions and Changes) provides that the Exchange will 
disseminate transaction information to appropriate data feeds, BSTX 
participants must provide information necessary to facilitate the 
dissemination of such information, and that an Exchange official 
shall be responsible for approving corrections to any reports 
transmitted over data feeds.
---------------------------------------------------------------------------

    Proposed Rule 23050 (Prohibition against Trading Ahead of Customer 
Orders) is substantially similar to FINRA 5320 and rules adopted by 
other exchanges,\176\ and generally prohibits BSTX Participants from 
trading ahead of customer orders unless certain enumerated exceptions 
are available and requires BSTX Participants to have a written 
methodology in place governing execution priority to ensure compliance 
with the Rule. The Exchange proposes to adopt each of the exceptions to 
the prohibition against trading ahead of customer orders as provided in 
FINRA Rule 5320 other than the exception related to trading outside of 
normal market hours, since trading on the Exchange would be limited to 
regular trading hours.
---------------------------------------------------------------------------

    \176\ See e.g., Cboe BZX Rule 12.6.
---------------------------------------------------------------------------

    The Exchange proposes to adopt the order handling procedures 
requirement in proposed Rule 23050(i) consistent with the rules of 
other exchanges.\177\ Specifically, proposed Rule 23050(i) would 
provide that a BSTX Participant must make every effort to execute a 
marketable customer order that it receives fully and promptly and must 
cross customer orders when they are marketable against each other 
consistent with the proposed Rule.
---------------------------------------------------------------------------

    \177\ See e.g., Cboe BZX Rule 12.6.07.
---------------------------------------------------------------------------

    The Exchange proposes to adopt a modified version of the exception 
set forth in FINRA Rule 5320.06 relating to minimum price improvement 
standards as proposed in Rule 23050(h). Under proposed Rule 23050(h), 
BSTX Participants would be permitted to execute an order on a 
proprietary basis when holding an unexecuted limit order in that same 
security without being required to execute the held limit order 
provided that they give price improvement of $0.01 to the unexecuted 
held limit order. While FINRA Rule 5320.06 sets forth alternate, lower 
price improvement standards for securities priced below $1, the 
Exchange proposes to adopt a uniform price improvement requirement of 
$0.01 for securities traded on the BSTX System consistent with the 
Exchange's proposed uniform minimum price variant of $0.01 set forth in 
proposed Rule 25030.
    In addition, the Exchange proposes to adopt an exception for bona 
fide error transactions as proposed in Rule 25030(g) which would allow 
a BSTX Participant to trade ahead of a customer order if the trade is 
to correct a bona fide error, as defined in the rule. This proposed 
exception is nearly identical to similar exceptions of other exchanges 
\178\ except that other exchange rules also provide an exception 
whereby firms may submit a proprietary order ahead of a customer order 
to offset a customer order that is in an amount other than a round lot 
(i.e., 100 shares). The Exchange is not adopting an exception for odd-
lot orders under these circumstances because the minimum unit of 
trading for security tokens pursuant to proposed Rule 25020 is one 
security token. The Exchange believes that there may be a notable 
amount of trading in amounts of less than 100 security tokens (i.e., 
trading in odd-lot amounts), and the Exchange accordingly does not 
believe that it is appropriate to allow BSTX Participants to trade 
ahead of customer orders just to offset an odd-lot customer order.
---------------------------------------------------------------------------

    \178\ See e.g., Cboe BZX Rule 12.5.05.
---------------------------------------------------------------------------

    The Exchange believes that the proposed Rule 23000 Series relating 
to trading practice rules is consistent with Section 6(b)(5) of the 
Exchange Act \179\ because these proposed rules are designed to prevent 
fraudulent and manipulative acts and practices that could harm 
investors and to promote just and equitable principles of trade. The 
proposed rules in the Rule 23000 Series are substantially similar to 
the rules of other exchanges and generally include a variety of 
prohibitions against types of trading activity or other conduct that 
could potentially be manipulative, such as prohibitions against market 
manipulation, fictitious transactions, and the dissemination of false 
information. The Exchange has proposed to exclude certain provisions 
from, or make certain modifications to, comparable rules of other SROs, 
as detailed above, in order to account for certain unique aspects 
related to the proposed trading of security tokens. The Exchange 
believes that it is consistent with applicable requirements under the 
Exchange Act to exclude these provisions and exceptions because they 
set forth requirements that would not apply to BSTX Participants 
trading in security tokens and are not necessary for the Exchange to 
carry out its functions of facilitating security token transactions and 
regulating BSTX Participants.
---------------------------------------------------------------------------

    \179\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

H. Disciplinary Rules (Rule 24000 Series)
    With respect to disciplinary matters, the Exchange proposes to 
adopt Rule 24000 (Discipline and Summary Suspension), which provides 
that the provisions of the Exchange Rule 11000 Series (Summary 
Suspension), 12000 Series (Discipline), 13000 Series (Review of Certain 
Exchange Actions), and 14000 Series (Arbitration) of the Exchange Rules 
shall be applicable to BSTX Participants and trading on the BSTX 
System. The Exchange already has Rules pertaining to discipline and

[[Page 13259]]

suspension of Exchange Participants that it proposes to extend to BSTX 
Participants and trading on the BSTX System. The Exchange also proposes 
to adopt as Rule 24010 a minor rule violation plan with respect to 
transactions on BSTX.\180\
---------------------------------------------------------------------------

    \180\ The proposed additions to the Exchange's minor rule 
violation plan pursuant to proposed Rule 25010 are discussed below 
in Part IV.
---------------------------------------------------------------------------

    Proposed Rule 24000 incorporates by reference existing rules that 
have already been approved by the Commission.
I. Trading Rules and the BSTX System (Rule 25000 Series)
1. Rule 25000--Access to and Conduct on the BSTX Marketplace
    The Exchange proposes to adopt Rule 25000 (Access to and Conduct on 
the BSTX Marketplace) to set forth rules relating to access to the BSTX 
System and certain conduct requirements applicable to BSTX 
Participants. Specifically, proposed Rule 25000 provides that only BSTX 
Participants, including their associated persons, that are approved for 
trading on the BSTX System shall effect any transaction on the BSTX 
System. Proposed Rule 25000(b) generally requires that a BSTX 
Participant maintain a list of authorized traders that may obtain 
access to the BSTX System on behalf of the BSTX Participant, have 
procedures in place reasonably designed to ensure that all authorized 
traders comply with Exchange Rules and to prevent unauthorized access 
to the BSTX System, and to provide the list of authorized traders to 
the Exchange upon request. Proposed Rule 25000(c) and (d) restate 
provisions that are already set forth in Exchange Rule 7000, generally 
providing that BSTX Participants shall not engage in conduct that is 
inconsistent with the maintenance of a fair and orderly market or the 
ordinary and efficient conduct of business, as well as conduct that is 
likely to impair public confidence in the operations of the Exchange. 
Examples of such prohibited conduct include failure to abide by a 
determination of the Exchange, refusal to provide information requested 
by the Exchange, and failure to adequately supervise employees. 
Proposed Rule 25000(f) provides the Exchange with authority to suspend 
or terminate access to the BSTX System under certain circumstances.
    The Exchange believes that proposed Rule 25000 is consistent with 
Section 6(b)(5) of the Exchange Act \181\ because it is designed to 
protect investors and the public interest and promote just and 
equitable principles of trade by ensuring that BSTX Participants would 
not allow for unauthorized access to the BSTX System and would not 
engage in conduct detrimental to the maintenance of fair and orderly 
markets.
---------------------------------------------------------------------------

    \181\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

2. Rule 25010--Days/Hours
    Proposed Rule 25010 sets forth the days and hours during which BSTX 
would be open for business and during which transactions may be 
effected on the BSTX System. Under the proposed rule, transactions may 
be executed on the BSTX System between 9:30 a.m. and 4:00 p.m. Eastern 
Time. The proposed rule also specifies certain holidays BSTX would be 
not be open (e.g., New Year's Day) and provides that the Chief 
Executive Officer, President, or Chief Regulatory Officer of the 
Exchange, or such person's designee who is a senior officer of the 
Exchange, shall have the power to halt or suspend trading in any 
security tokens, close some or all of BSTX's facilities, and determine 
the duration of any such halt, suspension, or closing, when such person 
deems the action necessary for the maintenance of fair and orderly 
markets, the protection of investors, or otherwise in the public 
interest.
    The Exchange believes that proposed Rule 25010 is designed to 
protect investors and the public interest, consistent with Section 
6(b)(5) of the Exchange Act,\182\ by setting forth the days and hours 
that trades may be effected on the BSTX System and by providing 
officers of the Exchange with the authority to halt or suspend trading 
when such officers believe that such action is necessary or appropriate 
to maintain fair and orderly markets or to protect investors or in the 
public interest.
---------------------------------------------------------------------------

    \182\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

3. Rule 25020--Units of Trading
    Proposed Rule 25020 sets forth the minimum unit of trading on the 
BSTX System, which shall be one security token. The Exchange believes 
that proposed Rule 25020 is consistent with Section 6(b)(5) of the 
Exchange Act \183\ because it fosters cooperation and coordination of 
persons engaged in facilitating transactions in securities by 
specifying the minimum unit of trading of security tokens on the BSTX 
System. In addition, other exchanges similarly provide that the minimum 
unit of trading is one share for their market and/or for certain 
securities.\184\
---------------------------------------------------------------------------

    \183\ 15 U.S.C. 78f(b)(5).
    \184\ See e.g., IEX Rule 11.180.
---------------------------------------------------------------------------

4. Rule 25030--Minimum Price Variant
    Proposed Rule 25030 provides the minimum price variant for security 
tokens shall be $0.01. The Exchange believes that proposed Rule 25030 
is consistent with Section 6(b)(5) of the Exchange Act because it 
fosters cooperation and coordination of persons engaged in facilitating 
transactions in securities by specifying the minimum price variant for 
security tokens and promotes compliance with Rule 612 of Regulation 
NMS.\185\ Under Rule 612 of Regulation NMS, the Exchange is, among 
other things, prohibited from displaying, ranking or accepting from any 
person a bid or offer or order in an NMS stock in an increment smaller 
than $0.01 if that bid or offer or order is priced equal to or greater 
than $1.00 per share. Where a bid or offer or order is priced less than 
or equal to $1.00 per share, the minimum acceptable increment is 
$0.0001. Proposed Rule 25030 sets a uniform minimum price variant for 
all security tokens of $0.01 irrespective of whether the security token 
is trading below $1.00.
---------------------------------------------------------------------------

    \185\ 17 CFR 242.611.
---------------------------------------------------------------------------

5. Rule 25040--Opening the Marketplace
    Proposed Rule 25040 sets forth the opening process for the BSTX 
System for BSTX-listed security tokens and non-BSTX-listed security 
tokens. For BSTX-listed security tokens, the Exchange proposes to allow 
for order entry to commence at 8:30 a.m. ET during the Pre-Opening 
Phase. Proposed Rule 25040(a) provides that orders will not execute 
during the Pre-Opening Phase, which lasts until regular trading hours 
begin at 9:30 a.m. ET.\186\ Similar to how the Exchange's opening 
process works for options trading, BSTX would disseminate a theoretical 
opening price (``TOP'') to BSTX Participants, which is the price at 
which the opening match would occur at a given moment in time.\187\ 
Under the proposed rule, the Exchange will also broadcast other 
information during the Pre-Opening Phase. Specifically, in addition to 
the TOP, the Exchange would disseminate pursuant to proposed Rule 
25040(a)(3): (i) ``Paired Tokens,'' which is the quantity of security 
tokens that would execute at the TOP; (ii) the ``Imbalance Quantity,'' 
which is the number of security tokens that may not be matched with 
other orders at the TOP at the time

[[Page 13260]]

of dissemination; and (iii) the ``Imbalance Side,'' which is the buy/
sell direction of any imbalance at the time of dissemination 
(collectively, with the TOP, ``Broadcast Information'').\188\ Broadcast 
Information will be recalculated and disseminated every time a new 
order is received or cancelled and where such event causes the TOP or 
Paired Tokens to change. With respect to priority during the opening 
match for all security tokens, consistent with proposed Rule 25080 
(Execution and Price/Time Priority), among multiple orders at the same 
price, execution priority during the opening match is determined based 
on the time the order was received by the BSTX System.
---------------------------------------------------------------------------

    \186\ As a result, orders marked IOC submitted during the Pre-
Opening Phase will be rejected by the BSTX System. See proposed Rule 
25040(a)(7).
    \187\ The TOP can only be calculated where the BSTX Book is 
crossed during the Pre-Opening Phase. See proposed Rule 25040(a)(2).
    \188\ Pursuant to proposed Rule 25040(a)(3), any orders which 
are at a better price (i.e., bid higher or offer lower) than the TOP 
will be shown only as a total quantity on the BSTX Book at a price 
equal to the TOP.
---------------------------------------------------------------------------

    Consistent with the manner in which the Exchange opens options 
trading, the BSTX System would determine a single price at which a 
BSTX-listed security token will be opened by calculating the optimum 
number of security tokens that could be matched at a price, taking into 
consideration all the orders on the BSTX Book.\189\ Proposed Rule 
25040(a)(5) provides that the opening match price is the price which 
results in the matching of the highest number of security tokens. If 
two or more prices would satisfy this maximum quantity criteria, the 
price leaving the fewest resting security tokens in the BSTX Book will 
be selected at the opening price and where two or more prices would 
satisfy the maximum quantity criteria and leave the fewest security 
tokens in the BSTX Book, the price closest to the previous day's 
closing price will be selected.\190\ Unexecuted trading interest during 
the opening match will move to the BSTX Book and will preserve price 
time priority.\191\ When the BSTX System cannot determine an opening 
price of a BSTX-listed security token at the start of regular trading 
hours, BSTX would nevertheless open the security token for trading and 
move all trading interest received during the Pre-Opening Phase to the 
BSTX Book.\192\
---------------------------------------------------------------------------

    \189\ See proposed Rule 25040(a)(4)(ii).
    \190\ With respect to an initial public offering of a security 
token where there is no previous day's closing price, the opening 
price will be the price assigned to the security token by the 
underwriter for the offering, referred to as the ``ISTO Reference 
Price.'' See Proposed Rule 25040(a)(5)(ii)(3).
    \191\ See proposed Rule 25040(a)(6).
    \192\ Id.
---------------------------------------------------------------------------

    For initial public offerings of security tokens (``ISTOs''), the 
process will be generally the same as regular market openings. However, 
in advance of an ISTO auction (``ISTO Auction''), the Exchange shall 
announce a ``Quote-Only Period'' that shall be between fifteen (15) and 
thirty (30) minutes plus a short random period prior to the ISTO 
Auction.\193\ The Quote-Only Period may be extended in certain 
cases.\194\ As with regular market openings the Exchange would 
disseminate Broadcast Information at the commencement of the Quote Only 
Period, and Broadcast Information would be re-calculated and 
disseminated every time a new order is received or cancelled and where 
such event causes the TOP price or Paired Tokens to change.\195\ In the 
event of any extension to the Quote-Only Period or a trading pause, the 
Exchange will notify market participants regarding the circumstances 
and length of the extension.\196\ Orders will be matched and executed 
at the conclusion of the Quote-Only Period, rather than at 9:30 a.m. 
Eastern Time.\197\ Following the initial cross at the end of the Quote-
Only Period wherein orders will execute based on price/time priority 
consistent with proposed Rule 25080, the Exchange will transition to 
normal trading pursuant to proposed Rule 25040(a)(6).\198\
---------------------------------------------------------------------------

    \193\ See proposed Rule 25040(b)(1).
    \194\ Such cases are when: (i) There is no TOP; (ii) the 
underwriter requests an extension; (iii) the TOP moves the greater 
of 10% or fifty (50) cents in the fifteen (15) seconds prior to the 
initial cross; or (iv) in the event of a technical or systems issue 
at the Exchange that may impair the ability of BSTX Participants to 
participate in the ISTO or of the Exchange to complete the ISTO. See 
proposed Rule 25040(b)(2).
    \195\ See proposed Rule 25040(b)(3).
    \196\ See proposed Rule 25040(b)(4). The Exchange also proposes 
that if a trading pause is triggered by the Exchange or if the 
Exchange is unable to reopen trading at the end of the trading pause 
due to a systems or technology issue, the Exchange will immediately 
notify the single plan processor responsible for consolidation of 
information for the security pursuant to Rule 603 of Regulation NMS 
under the Securities Exchange Act of 1934. Id.
    \197\ See proposed Rule 25040(b)(5).
    \198\ As with the regular opening process, orders marked IOC 
submitted during the Pre-Opening Phase of an ISTO Auction would be 
rejected. See proposed Rule 25040(b)(6).
---------------------------------------------------------------------------

    The Exchange also proposes a process for reopening trading 
following a Limit Up-Limit Down Halt or trading pause (``Halt 
Auctions''). For Halt Auctions, the Exchange proposes that in advance 
of reopening, the Exchange shall announce a Quote-Only Period that 
shall be five (5) minutes prior to the Halt Auction.\199\ This Quote-
Only Period may be extended in certain circumstances.\200\ The Exchange 
proposes to disseminate the same Broadcast Information as it does for 
an ISTO Auction and would similarly provide notification of any 
extension to the quote-only period as with an ISTO Auction.\201\ The 
transition to normal trading would also occur in the same manner as 
ISTO Auctions, as described above.\202\
---------------------------------------------------------------------------

    \199\ See proposed Rule 25040(c)(1). Orders marked IOC submitted 
during the Quote-Only Period would be rejected.
    \200\ See proposed Rule 25040(c)(2). The Quote-Only Period shall 
be extended for an additional five (5) minutes should a Halt Auction 
be unable to be performed due to the absence of a TOP (``Initial 
Extension Period''). After the Initial Extension Period, the 
Exchange proposes that the Quote-Only Period shall be extended for 
additional five (5) minute periods should a Halt Auction be unable 
to be performed due to absence of a TOP (``Additional Extension 
Period'') until a Halt Auction occurs. Under the proposed Rule, the 
Exchange shall attempt to conduct a Halt Auction during the course 
of each Additional Extension Period. Id.
    \201\ See proposed Rule 25040(c)(3)-(5).
    \202\ Id.
---------------------------------------------------------------------------

    The Exchange also proposes to adopt certain contingency procedures 
in proposed Rule 25040(d) that would provide that when a disruption 
occurs that prevents the execution of an ISTO Auction the Exchange will 
publicly announce the Quote-Only Period for the ISTO Auction, and the 
Exchange will then cancel all orders on the BSTX Book and disseminate a 
new scheduled time for the Quote-Only Period and opening match.\203\ 
Similarly, when a disruption occurs that prevents the execution of a 
Halt Auction, the Exchange will publicly announce that no Halt Auction 
will occur, and all orders in the halted security token on the BSTX 
Book will be canceled after which the Exchange will open the security 
token for trading without an auction.\204\
---------------------------------------------------------------------------

    \203\ See proposed Rule 25040(d)(1).
    \204\ See proposed Rule 25040(d)(2). The Exchange notes that 
these contingency procedures are substantially similar to those of 
another exchange (see e.g., IEX Rule 11.350(c)(4)) and are designed 
to ensure that the Exchange has appropriate mechanisms in place to 
address possible disruptions that may arise in an ISTO Auction or 
Halt Auction, consistent with the protection of investors and the 
public interest pursuant to Section 6(b)(5) of the Exchange Act. 15 
U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The opening process with respect to non-BSTX-listed security tokens 
is set forth in proposed Rule 25040(e). Pursuant to that Rule, BSTX 
Participants who wish to participate in the opening process may submit 
orders and quotes for inclusion in the BSTX Book, but such orders and 
quotes cannot execute until the termination of the Pre-Opening Phase 
(``Opening Process''). Orders that are canceled before the Opening 
Process will not participate in the Opening Process. The Exchange will 
attempt to perform the Opening Process and will match buy and sell 
orders that are executable at the midpoint of the NBBO.\205\ Generally, 
the price of the

[[Page 13261]]

Opening Process will be at the midpoint of the first NBBO subsequent to 
the first two-sided quotation published by the listing exchange after 
9:30:00 a.m. Eastern Time. Pursuant to proposed Rule 25040(e)(4), if 
the conditions to establish the price of the Opening Process set forth 
above do not occur by 9:45:00 a.m. Eastern Time, orders will be handled 
in time sequence, beginning with the order with the oldest time stamp, 
and will be placed on the BSTX Book cancelled, or executed in 
accordance with the terms of the order. A similar process will occur 
for re-opening a non-BSTX-listed security token subject to a halt.\206\ 
The proposed opening process for security tokens listed on another 
exchange serves as a placeholder in anticipation of other exchanges 
eventually listing and trading security tokens, or the equivalent 
thereof, given that there are no other exchanges currently trading 
security tokens. The proposed process for opening security tokens 
listed on another exchange is similar to existing exchange rules 
governing the opening of trading of a security listed on another 
exchange.\207\
---------------------------------------------------------------------------

    \205\ See proposed Rule 25040(e)(2).
    \206\ See proposed Rule 25040(e)(5).
    \207\ See e.g., Cboe BZX Rule 11.24.
---------------------------------------------------------------------------

    Consistent with Section 6(b)(5) of the Exchange Act,\208\ the 
Exchange believes that the proposed process for opening trading in 
BSTX-listed security tokens and security tokens listed on other 
exchanges will promote just and equitable principles of trade and will 
help perfect the mechanism of a free and open market by establishing a 
uniform process to determine the opening price of security tokens.\209\ 
Proposed Rule 25040 provides a mechanism by which BSTX Participants may 
submit orders in advance of the start of regular trading hours, perform 
an opening cross, and commence regular hours trading in security tokens 
listed on BSTX or otherwise. Where an opening cross is not possible in 
a BSTX-listed security token, the Exchange will proceed by opening 
regular hours trading in the security token anyway, which is consistent 
with the manner in which other exchanges open trading in 
securities.\210\ With respect to initial public offerings of security 
tokens and openings after a Limit Up-Limit Down halt or trading pause, 
BSTX proposes to use a process with features similar to its normal 
opening process. There are a variety of different ways in which an 
exchange can open trading in securities, including with respect to an 
initial public offering of a security token, and the Exchange believes 
that proposed Rule 25040 provides a simple and clear method for opening 
transactions that is consistent with the protection of investors and 
the public interest.\211\ Additionally, proposed Rule 25040 applies to 
all BSTX Participants in the same manner and is therefore not designed 
to permit unfair discrimination among BSTX Participants.
---------------------------------------------------------------------------

    \208\ 15 U.S.C. 78f(b)(5).
    \209\ The Exchange has not proposed to operate a closing auction 
at this time. As a result, the closing price of a security token on 
BSTX would be the last regular way transaction occurring on BSTX, 
which the Exchange believes is a simple and fair way to establish 
the closing price of a security token that does not permit unfair 
discrimination among customers, issuers, or broker-dealers 
consistent with Section 6(b)(5) of the Exchange Act. Id. This 
proposed process is consistent with the overall proposed simplified 
market structure for BSTX, which does not include a variety of order 
types offered by other exchanges such as market-on-close and limit-
on-close orders. The Exchange believes that a simplified market 
structure, including the proposed manner in which a closing price 
would be determined, promotes the public interest and the protection 
of investors consistent with Section 6(b)(5) of the Exchange Act 
through reduced complexity. Id.
    \210\ See e.g., BOX Rule 7070.
    \211\ The Exchange notes that its proposed opening, ISTO 
Auction, and Halt Auction processes are substantially similar to 
those of another exchange. See Cboe BZX Rule 11.23. The key 
differences between the Exchange's proposed processes and those of 
the Cboe BZX exchange are that the Exchange has substantially fewer 
order types, which make its opening process less complex, and that 
the Exchange does not proposes to use order auction collars to limit 
the price at which a security token opens. The Exchange does not 
believe that auction collars are necessary at this time because 
there are a variety of other mechanisms in place to prevent 
erroneous orders and the execution of an opening cross at an 
erroneous price (e.g., market access controls pursuant to Rule 15c3-
5 and the ability of an underwriter to request an extension to the 
Quote-Only Period in an ISTO Auction).
---------------------------------------------------------------------------

6. Rule 25050--Trading Halts
    BSTX proposes to adopt rules relating to trading halts \212\ that 
are substantially similar to other exchange rules adopted in connection 
with the NMS Plan to Address Extraordinary Market Volatility (``LULD 
Plan''), with certain exceptions that reflect Exchange functionality. 
BSTX intends to join the LULD Plan prior to the commencement of trading 
security tokens. Below is an explanation of BSTX's approach to certain 
categories of orders during a trading halt:
---------------------------------------------------------------------------

    \212\ The Exchange notes that rules on opening trading for non-
BSTX-listed security token are set forth in proposed Rule 25040(e).
---------------------------------------------------------------------------

    [ssquf] Short Sales--BSTX cancels all orders on the book during a 
halt and rejects any new orders, so rules relating to the repricing of 
short sale orders during a trading halt that certain other exchanges 
have adopted have been omitted.
    [ssquf] Pegged Orders--BSTX would not support pegged orders, at 
least initially, so rules relating to pegged orders during a trading 
halt have been omitted.
    [ssquf] Routable Orders--Pursuant to proposed Rule 25130, the BSTX 
System will reject any order or quotation that would lock or cross a 
protected quotation of another exchange (rather than routing such order 
or quotation), and therefore rules relating to handling of routable 
orders during a trading halt have been omitted.
    [ssquf] Limit Orders--Because BSTX would cancel resting order 
interest and reject incoming orders during a trading halt, specific 
rules relating to the repricing of limit-priced interest that certain 
other exchanges have adopted have been omitted.\213\
---------------------------------------------------------------------------

    \213\ See e.g., Cboe BZX 11.18(e)(5)(B).
---------------------------------------------------------------------------

    [ssquf] Auction Orders, Market Orders, and FOK Orders--BSTX would 
not support these order types, at least initially, so rules relating to 
these order types during a trading halt have been omitted.\214\
---------------------------------------------------------------------------

    \214\ IOC orders will be handled pursuant to proposed Rule 
25050(g)(5).
---------------------------------------------------------------------------

    Pursuant to proposed Rule 25050(d), the Exchange would cancel all 
resting orders in a non-BSTX listed security token subject to a trading 
halt, reject any incoming orders in that security token, and will only 
resume accepting orders following a broadcast message to BSTX 
Participants indicating a forthcoming re-opening of trading.\215\
---------------------------------------------------------------------------

    \215\ Trading would resume pursuant to proposed Rule 
25040(e)(5). See proposed Rule 25050(g)(7).
---------------------------------------------------------------------------

    BSTX believes that it is in the public interest and furthers the 
protection of investors, consistent with Section 6(b)(5) of the 
Exchange Act \216\ to provide for a mechanism to halt trading in 
security tokens during periods of extraordinary market volatility 
consistent with the LULD Plan. However, the Exchange has excluded rules 
relating to order types and other aspects of the LULD Plan that would 
not be supported by the Exchange, such as market orders and auction 
orders. The Exchange has also reserved the right in proposed Rule 
25050(f) to halt or suspend trading in other circumstances where the 
Exchange deems it necessary to do so for the protection of investors 
and in the furtherance of the public interest.
---------------------------------------------------------------------------

    \216\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that canceling resting order interest during 
a trading halt and rejecting incoming orders received during the 
trading halt is consistent with Section 6(b)(5) of the Exchange Act 
\217\ because it is not designed to permit unfair discrimination among 
BSTX Participants. The orders and trading interest of all BSTX 
Participants would

[[Page 13262]]

be canceled in the event of a trading halt and each BSTX Participant 
would be required to resubmit any orders they had resting on the order 
book.
---------------------------------------------------------------------------

    \217\ Id.
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7. Rule 25060--Order Entry
    Proposed Rule 25060 sets forth the manner in which BSTX 
Participants may enter orders to the BSTX System. The BSTX System would 
initially only support limit orders.\218\ Orders that do not designate 
a limit price would be rejected.\219\ The BSTX System would also only 
support two time-in-force (``TIF'') designations initially: (i) DAY; 
and (ii) immediate or cancel (``IOC''). DAY orders will queue during 
the Pre-Opening Phase, may trade during regular market hours, and, if 
unexecuted at the close of the trading day (4:00 p.m. ET), are canceled 
by the BSTX System.\220\ All orders are given a default TIF of DAY. 
BSTX Participants may also designate orders as IOC, which designation 
overrides the default TIF of DAY. IOC orders are not accepted by the 
BSTX System during the Pre-Opening Phase. During regular trading hours, 
IOC orders will execute in whole or in part immediately upon receipt by 
the BSTX System. The BSTX System will not support modification of 
resting orders. To change the price or quantity of an order resting on 
the BSTX Book, a BSTX Participant must cancel the resting order and 
submit a new order, which will result in a new time stamp for purposes 
of BSTX Book priority. In addition, all orders on BSTX will be 
displayed, and the BSTX System will not support hidden orders or 
undisplayed liquidity, as set forth in proposed Rule 25100.
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    \218\ The BSTX System will also accept incoming Intermarket 
Sweep Orders (``ISO'') pursuant to proposed Rule 25060(c)(2). ISOs 
must be limit orders, are ineligible for routing, may be submitted 
with a limit price during Regular Trading Hours, and must have a 
time-in-force of IOC. Proposed Rule 25060(c)(2) is substantially 
similar to rules of other national securities exchanges. See e.g., 
Cboe BZX Rule 11.9(d).
    \219\ Proposed Rule 25060(c)(1).
    \220\ Proposed Rule 25060(d)(1).
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    Consistent with Section 6(b)(5) of the Exchange Act,\221\ the 
Exchange believes that the proposed order entry rules will promote just 
and equitable principles of trade and help perfect the mechanism of a 
free and open market by establishing the types of orders and modifiers 
that all BSTX Participants may use in entering orders to the BSTX 
System. Because these order types and TIFs are available to all BSTX 
Participants, the proposed rule does not unfairly discriminate among 
market participants, consistent with Section 6(b)(5) of the Exchange 
Act. The proposed rule sets forth a very simple exchange model whereby 
there is only one order type--limit orders--and two TIFs. Upon the 
initial launch of BSTX, there will be no hidden orders, price sliding, 
pegged orders, or other order type features that add complexity. The 
Exchange believes that creating a simplified exchange model is designed 
to protect investors and is in the public interest because it reduces 
complexity, thereby helping market participants better understand how 
orders would operate on the BSTX System.
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    \221\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

8. Rule 25070--Audit Trail
    Proposed Rule 25070 (Audit Trail) is designed to ensure that BSTX 
Participants provide the Exchange with information to be able to 
identify the source of a particular order and other information 
necessary to carry out the Exchange's oversight functions. The proposed 
rule is substantially similar to existing BOX Rule 7120 but eliminates 
certain information unique to orders for options contracts (e.g., 
exercise price) because security tokens are equity securities. The 
proposed rule also provides that BSTX Participants that employ an 
electronic order routing or order management system that complies with 
Exchange requirements will be deemed to comply with the Rule if the 
required information is recorded in an electronic format. The proposed 
rule also specifies that order information must be kept for no less 
than three years and that where specific customer or account number 
information is not provided to the Exchange, BSTX Participants must 
maintain such information on their books and records.
    The Exchange believes that proposed Rule 25070 is designed to 
protect investors and the public interest, consistent with Section 
6(b)(5) of the Exchange Act,\222\ because it will provide the Exchange 
with information necessary to carry out its oversight role. Without 
being able to identify the source and terms of a particular order, the 
Exchange's ability to adequately surveil its market, with or through 
another SRO, for trading inconsistent with applicable regulatory 
requirements would be impeded. In order to promote compliance with Rule 
201 of Regulation SHO, proposed Rule 25080(b)(3) provides that when a 
short sale price test restriction is in effect, the execution price of 
the short sale order must be higher than (i.e., above) the best bid, 
unless the sell order is marked ``short exempt'' pursuant to Regulation 
SHO.
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    \222\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

9. Rule 25080--Execution and Price Time Priority
    Proposed Rule 25080 governs the execution of orders on the BSTX 
System, providing a price-time priority model. The proposed rule 
provides that orders of BSTX Participants shall be ranked and 
maintained in the BSTX Book according to price-time priority, such that 
within each price level, all orders shall be organized by the time of 
entry. The proposed rule further provides that sell orders may not 
execute a price below the best bid in the marketplace and buy orders 
cannot execute at a price above the best offer in the marketplace. 
Further, the proposed rule ensures compliance with Regulation SHO, 
Regulation NMS, and the LULD Plan, in a manner consistent with the 
rulebooks of other national securities exchanges.\223\
---------------------------------------------------------------------------

    \223\ See e.g., Cboe BZX Rule 11.13(a)(2)-(3) governing regular 
trading hours.
---------------------------------------------------------------------------

    The Exchange believes that proposed Rule 25080 is consistent with 
Section 6(b)(5) of the Exchange Act \224\ because it is designed to 
promote just and equitable principles of trade and foster cooperation 
and coordination with persons facilitating transactions in securities 
by setting forth the order execution priority scheme for security token 
transactions. Numerous other exchanges similarly operate a price-time 
priority structure for effecting transactions. The proposed rule also 
does not permit unfair discrimination among BSTX Participants because 
all BSTX Participants are subject to the same price-time priority 
structure. In addition, the Exchange believes that specifying in 
proposed Rule 25080(b)(3) that execution of short sale orders when a 
short sale price test restriction is in effect must occur at a price 
above the best bid unless the order is market ``short exempt,'' is 
consistent with the Exchange Act because it is intended promote 
compliance with Regulation SHO in furtherance of the protection of 
investors and the public interest.
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    \224\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

10. Rule 25090--BSTX Risk Controls
    Proposed Rule 25090 sets forth certain risk controls applicable to 
orders submitted to the BSTX System. The proposed risk controls are 
designed to prevent the submission and execution of potentially 
erroneous orders. Under the proposed rule, the BSTX System will reject 
orders that exceed a maximum order size, as designated by each BSTX 
Participant. The Exchange, however may set default values for this 
control. The proposed rule also provides a means by which all of a BSTX

[[Page 13263]]

Participant's orders will be canceled in the event that the BSTX 
Participant loses its connection to the BSTX System. Proposed Rule 
25090(c) provides a risk control that prevents incoming limit orders 
from being accepted by the BSTX System if the order's price is more 
than a designated percentage away from the National Best Bid or Offer 
in the marketplace. Proposed Rule 25090(d) provides a maximum order 
rate control whereby the BSTX System will reject an incoming order if 
the rate of orders received by the BSTX System exceeds a designated 
threshold. With respect to both of these risk controls (price 
protection for limit orders and maximum order rate), BSTX Participants 
may designate the appropriate thresholds, but the Exchange may also 
provide default values and mandatory minimum levels.
    The Exchange believes the proposed risk controls in Rule 25090 are 
consistent with Section 6(b)(5) of the Exchange Act \225\ because they 
are designed to help prevent the execution of potentially erroneous 
orders, which furthers the protection of investors and the public 
interest. Among other things, erroneous orders can be disruptive to the 
operation of an exchange marketplace, can lead to temporary price 
dislocations, and can hinder price formation. The Exchange believes 
that offering configurable risk controls to BSTX Participants, along 
with default values where a BSTX Participant has not designated its 
desired controls, will protect investors by reducing the number of 
erroneous executions on the BSTX System and will remove impediments to 
and perfect the mechanism of a free and open market system. The 
proposed risk controls are also similar to existing risk controls 
provided by the Exchange to Options Participants.
---------------------------------------------------------------------------

    \225\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

11. Rule 25100--Trade Execution, Reporting, and Dissemination of 
Quotations
    Proposed Rule 25100 provides that the Exchange shall collect and 
disseminate last sale information for transactions executed on the BSTX 
system. The proposed rule further provides that the aggregate of the 
best-ranked non-marketable Limit Order(s), pursuant to Rule 25080, to 
buy and the best-ranked non-marketable Limit Order(s) to sell in the 
BSTX Book shall be collected and made available to quotation vendors 
for dissemination. Proposed Rule 25100 further provides that the BSTX 
System will operate as an ``automated market center'' within the 
meaning of Regulation NMS and will display ``automated quotations'' at 
all times except in the event of a system malfunction.\226\ In 
addition, the proposed Rule specifies that the Exchange shall identify 
all trades executed pursuant to an exception or an exemption of 
Regulation NMS. The Exchange will disseminate last sale and quotation 
information pursuant to Rule 602 of Regulation NMS and will maintain 
connectivity to the securities information processors for dissemination 
of quotation information.\227\ BSTX Participants may obtain access to 
this information through the securities information processors.
---------------------------------------------------------------------------

    \226\ 17 CFR 242.600(b)(4) and (5). The general purpose of an 
exchange being deemed an ``automated trading center'' displaying 
``automated quotations'' relates to whether or not an exchange's 
quotations may be considered protected under Regulation NMS. See 
Exchange Act Release No. 51808, 70 FR 37495, 37520 (June 29, 2005). 
Other trading centers may not effect transactions that would trade 
through a protected quotation of another trading center. The 
Exchange believes that it is useful to specify that it will operate 
as an automated trading center at this time to make clear to market 
participants that it is not operating a manual market with respect 
to security tokens.
    \227\ 17 CFR 242.602.
---------------------------------------------------------------------------

    Proposed Rule 25100(d) provides that executions that occur as a 
result of orders matched against the BSTX Book, pursuant to Rule 25080, 
shall clear and settle pursuant to the rules, policies, and procedures 
of a registered clearing agency and shall settle on a T+1 basis (i.e., 
trade date plus one additional business day) where permitted under the 
rules, policies, and procedures of the relevant registered clearing 
agency. However, pursuant to proposed Rule 25100(d), the BSTX 
Participants that are party to the trade may agree to a shorter or 
longer settlement cycle as may be permitted by the relevant registered 
clearing agency and where they have so agreed shall communicate that 
agreement to the Exchange in a manner consistent with the Exchange's 
procedures. Rule 25100(e) obliges BSTX Participants, or a clearing 
member/participant clearing on behalf of a BSTX Participant to honor 
trades effected on the BSTX System on the scheduled settlement date, 
and the Exchange shall not be liable for the failure of BSTX 
Participants to satisfy these obligations.\228\
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    \228\ These proposed provisions are substantially similar to 
those of exchanges. See e.g., Nasdaq Rule 4627 and IEX Rule 10.250.
---------------------------------------------------------------------------

    The Exchange believes that proposed Rule 25100 is consistent with 
Section 6(b)(5) of the Exchange Act \229\ because it will foster 
cooperation and coordination with persons processing information with 
respect to, and facilitating transactions in securities by requiring 
the Exchange to collect and disseminate quotation and last sale 
transaction information to market participants. BSTX Participants will 
need last sale and quotation information to effectively trade on the 
BSTX System, and proposed Rule 25100 sets forth the requirement for the 
Exchange to provide this information as well as the information to be 
provided. The proposed rule is similar to rules of other exchanges 
relating to the dissemination of last sale and quotation information. 
The Exchange believes that requiring BSTX Participants (or firms 
clearing trades on behalf of other BSTX Participants) to honor their 
trade obligations on the settlement date is consistent with the 
Exchange Act because it will foster cooperation with persons engaged in 
clearing and settling transactions in security tokens, consistent with 
Section 6(b)(5) of the Exchange Act.\230\
---------------------------------------------------------------------------

    \229\ 15 U.S.C. 78f(b)(5).
    \230\ Id.
---------------------------------------------------------------------------

12. Rule 25110--Clearly Erroneous
    Proposed Rule 25110 sets forth the manner in which BSTX will 
resolve clearly erroneous executions that might occur on the BSTX 
System and is substantially similar to comparable clearly erroneous 
rules on other exchanges. Under proposed Rule 25100, transactions that 
involve an obvious error such as price or quantity, may be canceled 
after review and a determination by an officer of BSTX or such other 
employee designee of BSTX (``Official'').\231\ BSTX Participants that 
believe they submitted an order erroneously to the Exchange may request 
a review of the transaction, and must do so within thirty (30) minutes 
of execution and provide certain information, including the factual 
basis for believing that the trade is clearly erroneous, to the 
Official.\232\ Under proposed Rule 25100(c), an Official may determine 
that a transaction is clearly erroneous if the price of the transaction 
to buy (sell) that is the subject of the complaint is greater than 
(less than) the

[[Page 13264]]

``Reference Price'' \233\ by an amount that equals or exceeds specified 
``Numerical Guidelines.'' \234\ The Official may consider additional 
factors in determining whether a transaction is clearly erroneous, such 
as whether trading in the security had recently halted or overall 
market conditions.\235\ Similar to other exchanges `clearly erroneous 
rules, the Exchange may determine that trades are clearly erroneous in 
certain circumstances such as during a system disruption or 
malfunction, on a BSTX Officer's (or senior employee designee) own 
motion, during a trading halt, or with respect to a series of 
transactions over multiple days.\236\ Under proposed Rule 25110(e)(2), 
BSTX Participants affected by a determination by an Official may appeal 
this decision to the Chief Regulatory Officer of BSTX, provided such 
appeal is made within thirty (30) minutes after the party making the 
appeal is given notice of the initial determination being 
appealed.\237\ The Chief Regulatory Officer's determination shall 
constitute final action by the Exchange on the matter at issue pursuant 
to proposed Rule 25110(e)(2)(ii).
---------------------------------------------------------------------------

    \231\ A transaction made in clearly erroneous error and canceled 
by both parties or determined by the Exchange to be clearly 
erroneous will be removed from the Consolidated Tape. Proposed Rule 
25110(a).
    \232\ Proposed Rule 25110(b). The Official may also consider 
certain ``outlier'' transactions on a case by case basis where the 
request for review is submitted after 30 minutes but no longer than 
sixty (60) minutes after the transaction. Proposed Rule 2511(d).
    \233\ The Reference Price will be equal to the consolidated last 
sale immediately prior to the execution(s) under review except for 
in circumstances, such as, for example, relevant news impacting a 
security or securities, periods of extreme market volatility, 
sustained illiquidity, or widespread system issues, where use of a 
different Reference Price is necessary for the maintenance of a fair 
and orderly market and the protection of investors and the public 
interest. Proposed Rule 25110(c)(1).
    \234\ The proposed Numerical Guidelines are 10% where the 
Reference Price ranges from $0.00 to $25.00, 5% where the Reference 
Price is greater than $25.00 up to and including $50.00, and 3% 
where the Reference Price ranges is greater than $50. Proposed Rule 
25110(c)(1).
    \235\ Proposed Rule 25110(c)(1).
    \236\ See proposed Rule 25110(f)-(j). These provisions are 
virtually identical to similar provisions of other exchanges' 
clearly erroneous rules other than by making certain administrative 
edits (e.g., replacing the term ``security'' with ``security 
token'').
    \237\ Determinations by an Official pursuant to proposed Rule 
25110(f) relating to system disruptions or malfunctions may not be 
appealed if the Official made a determination that the nullification 
of transactions was necessary for the maintenance of a fair and 
orderly market or the protection of invests and the public interest. 
Proposed Rule 25110(d)(2).
---------------------------------------------------------------------------

    The Exchange believes that proposed Rule 25110 is consistent with 
Section 6(b)(5) of the Exchange Act,\238\ because it would promote just 
and equitable principles of trade, remove impediments to, and perfect 
the mechanism of, a free and open market and a national market system 
by setting forth the process by which clearly erroneous trades on the 
BSTX System may be identified and remedied. Proposed Rule 25110 would 
apply equally to all BSTX Participants and is therefore not designed to 
permit unfair discrimination among BSTX Participants, consistent with 
Section 6(b)(5) of the Exchange Act.\239\ The proposed rule is 
substantially similar to the clearly erroneous rules of other 
exchanges.\240\ For example, proposed Rule 25110 does not include 
provisions related to clearly erroneous transactions for routed orders 
because orders for security tokens will not route to other 
exchanges.\241\ Security tokens would also only trade during regular 
trading hours (i.e., 9:30 a.m. ET to 4:00 p.m. ET), so provisions from 
comparable exchange rules relating to clearly erroneous executions 
occurring outside of regular trading hours have been excluded. Proposed 
Rule 25110 also excludes provisions from comparable clearly erroneous 
rules of certain other exchanges relating to clearly erroneous 
executions in: (i) Leverage ETF/ETNs; and (ii) unlisted trading 
privileges securities that are subject to an initial public 
offering.\242\
---------------------------------------------------------------------------

    \238\ 15 U.S.C. 78f(b)(5).
    \239\ Id.
    \240\ See e.g., Cboe BZX Rule 11.17. Similar to other exchanges' 
comparable rules, proposed Rule 25110 provides BSTX with the ability 
to determine clearly erroneous trades that result from a system 
disruption or malfunction, a BSTX Official acting on his or her own 
motion, trading halts, multi-day trading events, multi-stock events 
involving five or more (but less than twenty) securities whose 
executions occurred within a period of five minutes or less, multi-
stock events involving twenty or more securities whose executions 
occurred within a period of five minutes or less, and securities 
subject to the LULD Plan.
    \241\ Other exchange clearly erroneous rules reference removing 
trades from the Consolidated Tape. Because security token 
transactions will be reported pursuant to a separate transaction 
reporting plan, proposed Rule 25110 eliminates references to the 
``Consolidated Tape'' and provides that clearly erroneous security 
token transactions will be removed from ``all relevant data feeds 
disseminating last sale information for security token 
transactions.'' See proposed Rule 25110(a).
    \242\ The Exchange notes that not all equities exchanges have a 
provision with respect to trade nullification for UTP securities 
that are the subject of an initial public offering. See IEX Rule 
11.270. With respect to leveraged ETFs/ETNs, the Exchange does not 
expect to support trading of such products at this time, so the 
Exchange does not believe it is necessary to include provisions 
related to them.
---------------------------------------------------------------------------

    The Exchange believes that its proposed process for BSTX 
Participants to appeal clearly erroneous execution determinations made 
by an Exchange Official pursuant to proposed Rule 25110 to the Chief 
Regulatory Officer of BSTX is consistent with Section 6(b)(5) of the 
Exchange Act \243\ because it promotes just and equitable principles of 
trade and fosters cooperation and coordination with persons regulating, 
settling, and facilitating transactions in securities by providing a 
clear and expedient process to appeal determinations made by an 
Official. BSTX Participants benefit from having a quick resolution to 
potentially clearly erroneous executions and giving the Chief 
Regulatory Officer discretion to decide any appeals of an Official's 
determination provides an efficient means to resolve potential appeals 
that applies equally to all BSTX Participants and therefore does not 
permit unfair discrimination among BSTX Participants, consistent with 
Section 6(b)(5) of the Exchange Act. The Exchange notes that, with 
respect to options trading on the Exchange, the Exchange's Chief 
Regulatory Officer similarly has sole authority to overturn or modify 
obvious error determinations made by an Exchange Official and that such 
determination constitutes final Exchange action on the matter at 
issue.\244\ In addition, proposed Rule 25110(e)(2)(iii) provides that 
any determination made by an Official or the Chief Regulatory Officer 
of BSTX under proposed Rule 25110 shall be rendered without prejudice 
as to the rights of the parties to the transaction to submit their 
dispute to arbitration. Accordingly, there is an additional safeguard 
in place for BSTX Participants to seek further review of the Exchange's 
clearly erroneous determination.
---------------------------------------------------------------------------

    \243\ 15 U.S.C. 78f(b)(5).
    \244\ See BOX Rule 7170(n).
---------------------------------------------------------------------------

    To the extent security tokens become tradeable on other national 
securities exchanges or other changes arise that may necessitate 
changes to proposed Rule 25110 to conform more closely with the clearly 
erroneous execution rules of other exchanges, the Exchange intends to 
implement changes as necessary through a proposed rule change filed 
with the Commission pursuant to Section 19 of the Exchange Act \245\ at 
such future date.
---------------------------------------------------------------------------

    \245\ 15 U.S.C. 78s.
---------------------------------------------------------------------------

13. Rule 25120--Short Sales
    Proposed Rule 25120 sets forth certain requirements with respect to 
short sale orders submitted to the BSTX System that is virtually 
identical to similar rules on other exchanges.\246\ Specifically, 
proposed Rule 25120 requires BSTX Participants to appropriately mark 
orders as long, short, or short exempt and provides that the BSTX 
System will not execute or display a short sale order not marked short 
exempt with respect to a ``covered security'' \247\ at a price that is 
less than or equal to the current

[[Page 13265]]

national best bid if the price of that security decreases by 10% or 
more, as determined by the listing market for the covered security, 
from the covered security's closing price on the listing market as of 
the end of Regular Trading Hours on the prior day (the ``Trigger 
Price''). The proposed rule further specifies the duration of the 
``Short Sale Price Test'' and that the BSTX System shall determine 
whether a transaction in a covered security has occurred at a Trigger 
Price and shall immediately notify the responsible single plan 
processor.\248\
---------------------------------------------------------------------------

    \246\ See e.g., IEX Rule 11.290.
    \247\ Proposed Rule 25120(b) provides that the terms ``covered 
security,'' ``listing market,'' and ``national best bid'' shall have 
the same meaning as in Rule 201 of Regulation SHO. 17 CFR 
242.201(a).
    \248\ Proposed Rule 25120(d). The proposed rule further provides 
in paragraph (d)(1) that if a covered security did not trade on BSTX 
on the prior trading day, BSTX's determination of the Trigger Price 
shall be based on the last sale price on the BSTX System for that 
security token on the most recent day on which the security token 
traded.
---------------------------------------------------------------------------

    The Exchange believes that proposed Rule 25120 is consistent with 
Section 6(b)(5) of the Exchange Act,\249\ because it would promote just 
and equitable principles of trade and further the protection of 
investors and the public interest by enforcing rules consistent with 
Regulation SHO. Pursuant to Regulation SHO, broker-dealers are required 
to appropriately mark orders as long, short, or short exempt,\250\ and 
trading centers are required to establish, maintain, and enforce 
written policies and procedures reasonably designed to, among other 
things, prevent the execution or display of a short sale order of a 
covered security at a price that is less than or equal to the current 
national best bid if the price of that covered security decreases by 
10% or more from its closing price on the primary listing market on the 
prior day.\251\ Proposed Rule 25120 is designed to promote compliance 
with Regulation SHO, is nearly identical to similar rules of other 
exchanges, and would apply equally to all BSTX Participants.
---------------------------------------------------------------------------

    \249\ 15 U.S.C. 78f(b)(5).
    \250\ 17 CFR 242.200(g).
    \251\ 17 CFR 242.201(b)(1).
---------------------------------------------------------------------------

14. Rule 25130--Locking or Crossing Quotations in NMS Stocks
    Proposed Rule 25130 sets forth provisions related to locking or 
crossing quotations. The proposed rule is substantially similar to the 
rules of other national securities exchanges.\252\ Proposed Rule 25130 
is designed to promote compliance with Regulation NMS and prohibits 
BSTX participants from engaging in a pattern or practice of displaying 
quotations that lock or cross a protected quotation unless an exception 
applies. The Exchange notes that there may be no other national 
securities exchanges trading security tokens upon the launch of BSTX 
that may be displaying protected quotations. Notwithstanding that there 
may be no other away markets displaying a protected quotation when 
trading on BSTX commences, the Exchange proposes in Rule 25130(d) that 
the BSTX System will reject any order or quotation that would lock or 
cross a protected quotation of another exchange at the time of entry.
---------------------------------------------------------------------------

    \252\ See IEX Rule 25130.
---------------------------------------------------------------------------

    The Exchange believes proposed Rule 25130 is consistent with 
Section 6(b)(5) of the Exchange Act \253\ because it is designed to 
promote just and equitable principles of trade and foster cooperation 
and coordination with persons facilitating transactions in securities 
by ensuring that the Exchange prevents display of quotations that lock 
or cross any protected quotation in an NMS stock, in compliance with 
applicable provisions of Regulation NMS.
---------------------------------------------------------------------------

    \253\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

15. Rule 25140--Clearance and Settlement: Anonymity
    Proposed Rule 25140 provides that each BSTX Participant must either 
(1) be a member of a registered clearing agency that uses a CNS system, 
or (2) clear transactions executed on the Exchange through another 
Participant that is a member of such a registered clearing agency. The 
Exchange would maintain connectivity and access to the UTC of NSCC for 
transmission of executed transactions. The proposed Rule requires a 
Participant that clears through another participant to obtain a written 
agreement, in a form acceptable to the Exchange, that sets out the 
terms of such arrangement. The proposed Rule also provides that BSTX 
transaction reports shall not reveal contra party identities and that 
transactions would be settled and cleared anonymously. In certain 
circumstances, such as for regulatory purposes, the Exchange may reveal 
the identity of a Participant or its clearing firm such as to comply 
with a court order.
    The Exchange believes that proposed Rule 25140 is consistent with 
Section 6(b)(5) of the Exchange Act \254\ because it would foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities. Proposed Rule 25140 is similar 
to rules of other exchanges relating to clearance and settlement.\255\
---------------------------------------------------------------------------

    \254\ 15 U.S.C. 78f(b)(5).
    \255\ See e.g. IEX Rule 11.250.
---------------------------------------------------------------------------

J. Market Making on BSTX (Rule 25200 Series)
    The BSTX Market Making Rules (Rules 25200-25240) provide for 
registration and describe the obligations of Market Makers on the 
Exchange. The proposed Market Making Rules also provide for 
registration and obligations of Designated Market Makers (``DMMs'') in 
a given security token, allocation of a DMM to a particular security 
token, and parameters for business combinations of DMMs.
    Proposed Rule 25200 sets forth the basic registration requirement 
for a BSTX Market Maker by noting that a Market Maker must enter a 
registration request to BSTX and that such registration shall become 
effective on the next trading day after the registration is entered, 
or, in the Exchange's discretion, the registration may become effective 
the day that it is entered (and the Exchange will provide notice to the 
Market Maker in such cases). The proposed Rule further provides that a 
BSTX Market Maker's registration shall be terminated by the Exchange if 
the Market Maker fails to enter quotations within five business days 
after the registration becomes effective.\256\
---------------------------------------------------------------------------

    \256\ Proposed Rule 25200 is substantially similar to IEX Rule 
11.150.
---------------------------------------------------------------------------

    Proposed Rule 25210 sets forth the obligations of Market Makers, 
including DMMs. Under the proposed Rule, a BSTX Participant that is a 
Market Maker, including a DMM, is generally required to post two-sided 
quotes during the regular market session for each security token in 
which it is registered as a Market Maker.\257\ The Exchange proposes 
that such quotes must be entered within a certain percentage, called 
the ``Designated Percentage,'' of the National Best Bid (Offer) price 
in such security token (or last sale price, in the event there is no 
National Best Bid (Offer)) on the Exchange.\258\ The Exchange proposes 
that the Designated Percentage would be 30%.\259\ The Exchange notes 
that the proposed Designated Percentage is substantially similar to the 
corresponding Designated Percentage for NYSE American market makers 
with respect to Tier 2 NMS stocks (as defined under the LULD 
plan).\260\ The Exchange

[[Page 13266]]

believes that the proposed Designated Percentage for quotation 
obligations of Market Makers would be sufficient to ensure that there 
is adequate liquidity sufficiently close to the National Best Bid or 
Offer (``NBBO'') in security tokens and to ensure fair and orderly 
markets. The Exchange notes that pursuant to proposed Rule 
25210(a)(1)(iii), there is nothing to preclude a Market Maker from 
entering trading interest at price levels that are closer to the NBBO, 
so Market Makers have the ability to quote must closer to the NBBO than 
required by the Designated Percentage requirement if they so choose.
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    \257\ See proposed Rule 25210(a)(1).
    \258\ See proposed Rule 25210(a)(1)(ii)(A).
    \259\ See proposed Rule 25210(a)(1)(ii)(B).
    \260\ See NYSE American Rule 7.23E(a)(1)(B)(iii) (providing 
that, other than during certain time periods around the market open 
and close, the Designated Percentage for Tier 2 NMS stocks priced 
below $1.00 is 30% and for Tier 2 NMS stocks priced above $1.00 is 
28%).
---------------------------------------------------------------------------

    The Exchange proposes in Rule 25210(a)(4) that, in the event that 
price movements cause a Market Maker or DMM's quotations to fall 
outside of the National Best Bid (Offer) (or last sale price in the 
event there is no National Best Bid (Offer)) by a given percentage, 
with such percentage called the ``Defined Limit,'' in a security token 
for which they are a Market Maker, the Market Maker or DMM must enter a 
new bid or offer at not more than the Designated Percentage away from 
the National Best Bid (Offer) in that security token. The Exchange 
proposes that the Defined Limit shall be 31.5%.\261\ Under the proposed 
Rules, a Market Maker's quotations must be firm and automatically 
executable for their size, and, to the extent the Exchange finds that a 
Market Maker has a substantial or continued failure to meet its 
quotation obligations, such Market Maker may face disciplinary action 
from the Exchange.\262\ Under the proposed Market Maker and DMM Rules, 
Market Makers and DMMs' two-sided quotation obligations must be 
maintained for a quantity of a ``normal unit of trading'' which is 
defined as one security token.\263\ The Exchange believes that security 
tokens may initially trade in smaller increments relative to other 
listed equities and that reducing the two-sided quoting increment from 
one round lot (i.e., 100 shares) to one security token will be 
sufficient to meet liquidity demands and would make it easier for 
Market Makers and DMMs to meet their quotation obligations, which in 
turn incentivize more Market Maker participation.
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    \261\ See proposed Rule 25210(a)(1)(ii)(3).
    \262\ See proposed Rule 25210(b) and (c). Pursuant to proposed 
Rule 25310(d), a BSTX Market Maker, other than a DMM, may apply for 
a temporary withdrawal from its Market Maker status provided it 
meets certain conditions such a demonstrating legal or regulatory 
requirements that necessitate its temporary withdrawal.
    \263\ See proposed Rule 25210(a)(1).
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    The Exchange notes that proposed Rule 25210 is substantially 
similar to NYSE American Rule 7.23E, with the exceptions of: (i) The 
modified normal unit of trading, Designated Percentage, and Defined 
Limit (as discussed above); (ii) specifying that the minimum quotation 
increment shall be $0.01; and (iii) specifying that Market Maker 
quotations must be firm for their displayed size and automatically 
executable. The Exchange believes that the additional specifications 
with respect to the minimum quotation increment and firm quotation 
requirement will add additional clarity to the expectations of Market 
Makers on the Exchange.
    Proposed Rule 25220 sets forth the registration requirements for a 
DMM. Under proposed Rule 25220, a DMM must be a registered Market Maker 
and be approved as a DMM in order to receive an allocation of security 
tokens pursuant to proposed Rule 25230, which is described below.\264\ 
For security tokens in which a Participant serves as a DMM, it must 
meet the same obligations as if it were a Market Maker and must also 
maintain a bid or offer at the National Best Bid and Offer at least 25% 
of the day measured across all security tokens in which such 
Participant serves as DMM.\265\ The proposed Rule provides, among other 
things, that a there will be no more than one DMM per security token 
and that a DMM must maintain information barriers between the trading 
unit operating as a DMM and the trading unit operating as a BSTX Market 
Maker in the same security token (to the extent applicable).\266\ The 
Rule further provides a process by which a DMM may temporarily withdraw 
from its DMM status, which is similar to the same process for a BSTX 
Market Maker \267\ and similar to the same process for DMMs on other 
exchanges.\268\ The Exchange notes that proposed Rule 25220 is 
substantially similar to NYSE American Rule 7.24E with the exception 
that the Exchanges proposes to add a provision stating that the 
Exchange is not required to assign a DMM if the security token has an 
adequate number of BSTX Market Makers assigned to such security token. 
The purpose of this requirement is to acknowledge the possibility that 
a security token need not necessarily have a DMM provided that each 
security token has been assigned at least three active Market Makers at 
initial listing and two Market Makers for continued listing, consistent 
with proposed Rule 26106 (Market Maker Requirement), which is discussed 
further below.
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    \264\ See proposed 25220(b). DMMs would be approved by the 
Exchange pursuant to an application process an [sic].
    \265\ See proposed Rule 25220(c).
    \266\ See proposed Rule 25220(b).
    \267\ See proposed Rule 25210(d).
    \268\ See e.g., NYSE American Rule 7.24E(b)(4).
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    In proposed Rule 25230, the Exchange proposes to set forth the 
process by which a DMMs are allocated and reallocated responsibility 
for a particular security token. Proposed Rule 25230(a) sets forth the 
basic eligibility criteria for a when a security token may be allocated 
to a DMM, providing that this may occur when the security token is 
initially listed on BSTX, when it is reassigned pursuant to Rule 25230, 
or when it is currently listed without a DMM assigned to the security 
token.\269\ Proposed Rule 2530(a) also specifies that a DMM's 
eligibility to participate in the allocation process is determined at 
the time the interview is scheduled by the Exchange and specifies that 
a DMM must meet with the quotation requirements set forth in proposed 
Rule 25220(c) (DMM obligations). The proposed Rule further specifies 
how the Exchange will handle several situations in which the DMM does 
not meet its obligations, such as, for example, by issuing an initial 
warning advising of poor performance if the DMM fails to meet its 
obligations for a one-month period.\270\
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    \269\ As previously noted, pursuant to proposed Rule 26106, a 
security token may, in lieu of having a DMM assigned to it, have a 
minimum of three non-DMM Market Makers at initial listing and two 
non-DMM Market Makers for continued listing to be eligible for 
listing on the Exchange. Consequently, a security token might not 
have a DMM when it initially begins trading on BSTX, but may acquire 
a DMM later.
    \270\ See proposed Rule 25230(a)(4). The proposed handling of 
these scenarios where a DMM does not meet its obligations is 
substantially similar to parallel requirements in NYSE American Rule 
7.25E(a)(4).
---------------------------------------------------------------------------

    Proposed Rule 25230(b) sets forth the manner in which a DMM may be 
selected and allocated a security token. Under proposed Rule 25230(b), 
an issuer may select its DMM directly, delegate the authority to the 
Exchange to selects its DMM, or may opt to proceed with listing without 
a DMM, in which case a minimum of three non-DMM Market Makers at 
initial listing and two non-DMM Market Makers for continued listing 
must be assigned to its security token consistent with proposed Rule 
26106. Proposed Rule 25230(b) further sets forth provisions relating to 
the interview between the issuer and DMMs, the Exchange selection by 
delegation, and a requirement that a DMM serve as a DMM for a security 
token for at least one year unless

[[Page 13267]]

compelling circumstances exist for which the Exchange may consider a 
shorter time period. Each of these provisions is substantially similar 
to corresponding provisions in NYSE American Rule 7.25E(b)(1)-(3), with 
the exception that the Exchange may shorten the one year DMM commitment 
period in compelling circumstances.\271\ Proposed Rule 25230(b) further 
sets forth specific provisions related to a variety of different 
issuances and types of securities, including spin-offs or related 
companies, warrants, rights, relistings, equity security token listing 
after preferred security token, listed company mergers, target security 
tokens, and closed-end management investment companies.\272\ Each of 
these provisions is substantially similar to corresponding provisions 
in NYSE American Rule 7.25E(b)(4)-(11).
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    \271\ The Exchange believes that providing the Exchange with 
flexibility to shorten the one year commitment period is appropriate 
to accommodate unforeseen events or circumstances that might arise 
with respect to a DMM, such as a force majeure event, preventing a 
DMM from being able to carry out its functions.
    \272\ See proposed Rule 25230(b)(4)-(11).
---------------------------------------------------------------------------

    Proposed Rule 25230(c) sets forth the reallocation process for a 
DMM in a manner that is substantially similarly to corresponding 
provisions in NYSE American Rule 7.25E(c). Generally, under the 
proposed Rule, an issuer may request a reallocation to a new DMM and 
Exchange staff will review this request, along with any DMM response 
letter, and eventually make a determination.\273\ Proposed Rule 
25230(d), (e), and (f), set forth provisions governing an allocation 
freeze, allocation sunset, and criteria for applicants that are not 
currently DMMs to be eligible to be allocated a security token as a DMM 
respectively. Each of these provisions are likewise substantially 
similar to corresponding provisions in NYSE American Rule 7.25E(d)-(f).
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    \273\ In addition, proposed Rule 25230(c)(2) sets forth 
provisions that allow for the Exchange's CEO to immediately initiate 
a reallocation proceeding upon written notice to the DMM and the 
issuer when the DMM's performance in a particular market situation 
was, in the judgment of the Exchange, so egregiously deficient as to 
call into question the Exchange's integrity or impair the Exchange's 
reputation for maintaining an efficient, fair, and orderly market.
---------------------------------------------------------------------------

    Finally, proposed Rule 25240 sets forth the DMM combination review 
policy. The proposed Rule, among other things, defines a proposed 
combination among DMMs, requires that DMMs provide a written submission 
to the Office of the Corporate Secretary of the Exchange and specifies, 
among other things, the items to be disclosed in the written 
submission, the criteria that the Exchange will use to evaluate a 
proposed combination, and the timing for a decision by the Exchange, 
subject to the Exchange's right to extend such time period. The 
Exchange notes that proposed Rule 25240 is substantially similar to 
NYSE American Rule 7.26E.
    The Exchange believes that the proposed Market Making Rules set 
forth in the Rule 25200 Series are consistent with Section 6(b)(5) of 
the Exchange Act \274\ because they are designed to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in facilitating transactions in securities, and to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system. The Exchange notes that the 
proposed Rules are substantially similar to the market making rules of 
other exchanges, as detailed above,\275\ and that all BSTX Participants 
are eligible to become a Market Maker or DMM provided they comply with 
the proposed requirements.\276\ The proposed Market Maker Rules set 
forth the quotation and related expectations of BSTX Market Makers 
which the Exchange believes will help ensure that there is sufficient 
liquidity in security tokens. Although the corresponding NYSE American 
rules upon which the proposed Rules are based provide for multiple 
tiers and classes of stocks that were each associated with a different 
Designated Percentage and Defined Limit, the Exchange has collapsed all 
such classes in to one category and provided a single Designated 
Percentage of 30% and Defined Limit of 31.5% for all security token 
trading on BSTX. The Exchange believes that simplifying the Rules in 
this manner can reduce the potential for confusion and allows for 
easier compliance and will still adequately serve the liquidity needs 
of investors of security token investors, which the Exchange believes 
promotes the removal of impediments to and perfection of the mechanism 
of a free and open market and a national market system, consistent with 
Section 6(b)(5) of the Exchange Act.\277\
---------------------------------------------------------------------------

    \274\ 15 U.S.C. 78f(b)(5).
    \275\ See NYSE American Rule 7, Section 2.
    \276\ In this regard, the Exchange believes the proposed Market 
Making Rules are not designed to permit unfair discrimination 
between BSTX Participants, consistent with Section 6(b)(5) of the 
Exchange Act. 15 U.S.C. 78f(b)(5).
    \277\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange has also proposed that the minimum quotation size of 
Market Makers will be one security token. As noted above, the Exchange 
believes that security tokens may initially trade in smaller increments 
relative to other listed equities and that reducing the two-sided 
quoting increment from one round lot (i.e., 100 shares) to one security 
token would be sufficient to meet liquidity demands and would make it 
easier for Market Makers and DMMs to meet their quotation obligations, 
which in turn incentivize more Market Maker participation. The Exchange 
believes that adopting quotation requirements and parameters that are 
appropriate for the nature and types of securities that will trade on 
the Exchange will promote the protection of investors and the public 
interest by assuring that the Exchange Rules are appropriately tailored 
to its market.
K. BSTX Listing Rules (Rule 26000 and 27000 Series)
    The BSTX Listing Rules, which include the Rule 26000 and 27000 
Series, have been adapted from, and are substantially similar to, Parts 
1-12 of the NYSE American LLC Company Guide.\278\ Except as described 
below, each proposed Rule in the BSTX 26000 and 27000 series is 
substantially similar to a Section of the NYSE American Company 
Guide.\279\ Below is further detail.
---------------------------------------------------------------------------

    \278\ All references to various ``Sections'' in the discussion 
of these Listing Rules refer to the various Sections of the NYSE 
American Company Guide.
    \279\ The Exchange notes that while the numbering of BSTX's 
Listing Rules generally corresponds to a Section of the NYSE 
American LLC Company Guide, BSTX did not integrate certain Sections 
of the NYSE American Company Guide that the Exchange deemed 
inapplicable to its operations, such as with respect to types of 
securities which the Exchange is not proposing to make eligible for 
listing (e.g., foreign issuers, other than those from Canada). 
Further, the Exchange formulated a small amount of new rules to 
reflect requirements relating to the use of blockchain technology as 
an ancillary recordkeeping mechanism, as described more fully 
herein. The Exchange also proposes to modify cross-references in the 
proposed Listing Rules to accord with its Rules.
---------------------------------------------------------------------------

     The BSTX Listing Rules (26100 series) are based on the 
NYSE American Original Listing Requirements (Sections 101-146).\280\
---------------------------------------------------------------------------

    \280\ Pursuant to proposed Rule 26135, all securities initially 
listing on BSTX, except securities which are book-entry only, must 
be eligible for a Direct Registration Program operated by a clearing 
agency registered under Section 17A of the Exchange Act. 15 U.S.C. 
78q-1.
---------------------------------------------------------------------------

     The BSTX Original Listing Procedures (26200 series) are 
based on the NYSE American Original Listing Procedures (Sections 201-
222).
     The BSTX Additional Listings Rules (26300 series) are 
based on the NYSE American Additional Listings Sections (Sections 301-
350).
     The BSTX Disclosure Policies (26400 series) are based on 
the NYSE American Disclosure Policies (Sections 401-404).

[[Page 13268]]

     The BSTX Dividends and Splits Rules (26500 series) are 
based on the NYSE American Dividends and Stock Splits Sections 
(Sections 501-522).
     The BSTX Accounting; Annual and Quarterly Reports Rules 
(26600 series) are based on the NYSE American Accounting; Annual and 
Quarterly Reports Sections (Sections 603-624).
     The BSTX Shareholders' Meetings, Approval and Voting of 
Proxies Rules (26700 series) are based on the NYSE American 
Shareholders' Meetings, Approval and Voting of Proxies Sections 
(Sections 701-726).\281\
---------------------------------------------------------------------------

    \281\ The Exchange notes that the proposed fees for certain 
items in the proposed Listing Rules (e.g., proxy follow-up mailings) 
are the same as those charged by NYSE American. See e.g., proposed 
IM-26722-8 cf. NYSE American Section 722.80.
---------------------------------------------------------------------------

     The BSTX Corporate Governance Rules (26800 series) are 
based on the NYSE American Corporate Governance Sections (Sections 801-
809).
     The BSTX Additional Matters Rules (26900 series) are based 
on the NYSE American Additional Matters Sections (Sections 920-994).
     The BSTX Suspension and Delisting Rules (27000 series) are 
based on the NYSE American Suspension and Delisting Sections (Sections 
1001-1011).
     The BSTX Guide to Filing Requirements (27100 series) are 
based on the NYSE American Guide to Filing Requirements (Section 1101).
     The BSTX Procedures for Review of Exchange Listing 
Determinations (27200 series) are based on the NYSE American Procedures 
for Review of Exchange Listing Determinations (Sections 1201-1211).
    Notwithstanding that the proposed BSTX Listing Rules are 
substantially similar to those of other exchanges, BSTX proposes 
certain additions or modifications to these rules specific to its 
market. For example, BSTX proposes to add definitions that apply to the 
proposed BSTX Listing Rules. The definitions set forth in proposed Rule 
26000 are designed to facilitate understanding of the BSTX Listing 
Rules by market participants. Increased clarity may serve to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system and may also foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, consistent with Section 6(b)(5) of the Exchange 
Act.\282\
---------------------------------------------------------------------------

    \282\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    With respect to initial listing standards, which begin at proposed 
Rule 26101, the Exchange proposes to adopt listing standards that are 
substantially similar to the NYSE American listing rules.\283\ The 
Exchange believes that adopting listing rules similar to those in place 
on other national securities exchanges will facilitate more uniform 
standards across exchanges, which helps foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, consistent with Section 6(b)(5) of the Exchange 
Act.\284\ Market participants that are already familiar with NYSE 
American's listing standards will already be familiar with most of the 
substance of the proposed listing rules. The Exchange also believes 
that adopting proposed listing standards that closely resemble those of 
NYSE American may also foster competition among listing exchanges for 
companies seeking to publicly list their securities. The Exchange is 
proposing an addition (relative to the NYSE American listing rules) to 
the initial listing standards for preferred security tokens.\285\ 
Specifically, the Exchange proposes an additional standard for 
preferred security tokens to list on the Exchange based on NASDAQ Rule 
5510.\286\ The Exchange believes a proposed rule providing an 
additional initial listing standard for preferred security tokens 
consistent with a similar provision of NASDAQ would expand the possible 
universe of issuances that would be eligible to list on the Exchange to 
include preferred security tokens. The Exchange believes that such a 
rule would help remove impediments to and perfect the mechanism of a 
free and open market and a national market system, consistent with 
Section 6(b)(5) of the Exchange Act by giving issuers an additional 
means by which it could list a different type of security (i.e., a 
preferred security token) and investors the opportunity to trade in 
such preferred security tokens.\287\ Further, consistent with the 
public interest, rules that provide more opportunity for listings may 
promote competition among listing exchanges and capital formation for 
issuers.
---------------------------------------------------------------------------

    \283\ See NYSE American Section 101. The Exchange understands 
that the Commission has extended relief to NYSE American with 
respect to certain quantitative listing standards that do not meet 
the thresholds of SEC Rule 3a51-1. 17 CFR 240.3a51-1. Initial 
listings of securities that do not meet such thresholds and are not 
subject to the relief provided to NYSE American would qualify as 
``penny stocks'' and would be subject to additional regulation. BSTX 
notes that it is not seeking relief related to SEC Rule 3a51-1 and 
therefore has clarified proposed Rule 26101(a)(2) to ensure that 
issuers have at least one year of operating history. BSTX will also 
require new listings pursuant to proposed Rule 26102 to have a 
public distribution of 1 million security tokens, 400 public 
security token holders, and a minimum market price of $4 per 
security token. These provisions meet the requirements in SEC Rule 
3a51-1 and are consistent with the rules of other national 
securities exchanges. See e.g., Nasdaq Rule 5510. The quantitative 
thresholds specified in Rule 26102 are also reflected in the Sample 
Underwriter's Letter that is Exhibit 3M to this proposal. In 
addition, the Exchange notes that proposed Rule 26140, which governs 
the additional listing requirements of a company that is affiliated 
with the Exchange, is based on similar provisions in NYSE American 
Rule 497 and IEX 14.205.
    \284\ 15 U.S.C. 78f(b)(5).
    \285\ See proposed Rule 26103.
    \286\ See proposed Rule 26103(b)(2). Preferred Security Token 
Distribution Standard 2 requires that a preferred security token 
listing satisfy the following conditions: Minimum bid price of at 
least $4 per security token; at least 10 Round Lot holders; at least 
200,000 Publicly Held Security Tokens; and Market Value of Publicly 
Held Security Tokens of at least $3.5 million.
    \287\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    In certain instances, BSTX proposes to add additional provisions 
not currently provided for in the NYSE American LLC Company Guide that 
are specific to security tokens. For example, pursuant to proposed Rule 
26230(a) (Security Token Architecture Responsibility and Audit), prior 
to approving a security token for trading on BSTX, the Exchange would 
conduct an audit of the security token's architecture to ensure 
compliance with the BSTX Protocol as outlined in Rule 26138.\288\ The 
purpose of this requirement is to ensure that the design and structure 
of a prospective BSTX-listed company's security token is compatible 
with the BSTX Protocol for purposes of facilitating updates to the 
blockchain as an ancillary recordkeeping mechanism. The Exchange may 
use third party service providers that have demonstrated sufficient 
technical expertise in blockchain technology and an understanding of 
the BSTX Protocol to conduct this audit on behalf of the Exchange. To 
the extent an issuer looking to list its shares on BSTX as security 
tokens failed the audit by BSTX of its security token architecture, the 
issuer would not meet the requirements of BSTX's listing rules and 
would therefore not be permitted to list its shares on BSTX until it 
successfully passed the security token audit.\289\
---------------------------------------------------------------------------

    \288\ Proposed Rule 26230 further provides that an applicant 
that is denied pursuant to this section may appeal the decision via 
the process outlined in the Rule 27200 Series.
    \289\ The Exchange expects that some issuers may choose to use 
an outside vendor to help build their security token in a manner 
that complies with the BSTX Security Token Protocol. The BSTX 
Security Token Protocol is open-source, so there is no need to use 
any particular vendor over another. The Exchange understands that 
there are numerous technology companies that offer these services, 
and issuers would be free to select one of their choosing.

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[[Page 13269]]

    Further, the Exchange proposes that Rule 26230(b) would provide 
that a listed company (i.e., issuer) remains responsible for ensuring 
that its security token remains compatible with the BSTX Protocol and 
accurately reflects the number of shares outstanding. The Exchange 
recognizes that, in certain circumstances, it may be necessary for a 
listed company to modify certain aspects of the smart contract 
corresponding to a security token. For example, in the case of a stock 
split, a listed company may need to increase the total supply of 
security tokens as programmed into its security token smart contract. 
Proposed Rule 26230(b) would provide that notice of any such 
modification of the smart contract corresponding to a security token 
(e.g., to increase the total supply) must be provided to the Exchange 
at least five calendar days in advance of implementation to allow the 
Exchange to audit the proposed modification.\290\ While the Exchange 
believes that five calendar days will provide sufficient time for it to 
ensure that a security token is appropriately updated in advance of any 
implementation, the Exchange recognizes that there could conceivably be 
circumstances in which a change takes longer than expected to 
implement. Accordingly, the Exchange proposes that Rule 26230(b) would 
also provide that, to the extent additional time is needed to 
appropriately implement the modification, the Exchange may exercise its 
authority to suspend the ancillary recordkeeping process pursuant to 
Rule 17020(e). The Exchange notes that the primary circumstances under 
which a modification to a smart contract corresponding to a security 
token may be necessary is where there is a change to the total supply 
of the security token, which could occur in the case of a stock split, 
a reverse stock split, a buy-back, or a dividend in kind. The Exchange 
notes that any delay in the implementation of a change to a smart 
contract that corresponds to a security token shall in no way impact 
the record date or ex-dividend date for any dividend, distribution, or 
other action. The Exchange believes that proposed Rule 26230 would 
foster cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, consistent with Section 
6(b)(5) of the Exchange Act,\291\ because it facilitates the ancillary 
recordkeeping mechanism for BSTX-listed security tokens which is a 
first step toward the potential integration of blockchain technology to 
securities transactions. Without ensuring that BSTX-listed companies' 
security tokens are compatible with the BSTX Protocol, the use of 
blockchain technology as an ancillary recordkeeping mechanism could be 
impaired.
---------------------------------------------------------------------------

    \290\ The Exchange expects that it will work with issuers to 
help ensure that there security tokens comply with the BSTX 
Protocol. However, as with all Exchange Rules, failure to comply 
could result in potential suspension and delisting in accordance 
with the Rule 27000 Series.
    \291\ Id.
---------------------------------------------------------------------------

    With respect to the definitions in proposed Rule 26000, these are 
designed to facilitate understanding of the BSTX Listing Rules by 
market participants. The Exchange believes that allowing market 
participants to better understand and interpret the BSTX Listing Rules 
removes impediments to and perfects the mechanism of a free and open 
market and a national market system, and may also foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities, consistent with Section 6(b)(5) of the 
Exchange Act.\292\
---------------------------------------------------------------------------

    \292\ Id.
---------------------------------------------------------------------------

    The Exchange also proposes certain enhancements to the notice 
requirements for listed companies to communicate to BSTX related to 
record dates and defaults.\293\ The Exchange believes that these 
additional disclosure and communication obligations can help BSTX in 
monitoring for listed company compliance with applicable rules and 
regulations; such additional disclosure obligations are designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest, consistent with Section 
6(b)(5) of the Exchange Act.\294\
---------------------------------------------------------------------------

    \293\ See Proposed Rule 26502, which requires, among other 
things, a listing company to give the Exchange at least ten days' 
notice in advance of a record date established for any other 
purpose, including meetings of shareholders.
    \294\ Id.
---------------------------------------------------------------------------

    The Exchange's proposed Rules provide additional flexibility for 
listed companies in choosing how liquidity would be provided in their 
listings by allowing listed companies to meet either the DMM 
Requirement or Active Market Maker Requirement for initial listing and 
continued trading.\295\ Pursuant to proposed Rule 26205, a company may 
choose to be assigned a DMM by the Exchange or to select its own 
DMM.\296\ Alternatively, a company may elect, or the Exchange may 
determine, that, in lieu of a DMM, a minimum of three (3) market makers 
would be assigned to the security token at initial listing; such 
requirement may be reduced to two (2) market makers following the 
initial listing, consistent with proposed Rule 26106. The Exchange 
believes that such additional flexibility would promote the removal of 
impediments to and perfection of the mechanism of a free and open 
market and a national market system, consistent with Section 6(b)(5) of 
the Exchange Act.\297\ The Commission has previously approved exchange 
rules providing for three market makers to be assigned to a particular 
security upon initial listing and only two for continued listing.\298\ 
In accordance with these previously approved rules, the Exchange 
believes proposed Rule 26205 would ensure fair and orderly markets and 
would facilitate the provision of sufficient liquidity for security 
tokens.
---------------------------------------------------------------------------

    \295\ See proposed Rule 26205. BSTX-listed security tokens must 
meet the criteria specified in proposed Rule 26106, which provides 
that unless otherwise provided, all security tokens listed pursuant 
to the BSTX Listing Standards must meet one of the following 
requirements: (1) The DMM Requirement whereby a DMM must be assigned 
to a given security token; or (2) the Active Market Maker 
Requirement which states that (i) for initial inclusion the security 
token must have at least three registered and active Market Makers, 
and (ii) for continued listing, a security token must have at least 
two registered and active Market Makers, one of which may be a 
Market Maker entering a stabilizing bid.
    \296\ Exchange personnel responsible for managing the listing 
and onboarding process will be responsible for determining to which 
DMM a security token will be assigned. As provided in proposed Rule 
26205, the Exchange makes every effort to see that each security 
token is allocated in the best interests of the company and its 
shareholders, as well as that of the public and the Exchange. 
Similarly, the Exchange anticipates that these same personnel will 
be responsible for answering questions relating to the Exchange's 
listing rules pursuant to proposed Rule 26994 (New Policies). The 
Exchange notes that certain provisions in the NYSE American Listing 
Manual contemplate a ``Listing Qualifications Analyst'' that would 
perform a number of these functions. The Exchange is not proposing 
to adopt provisions that specifically contemplate a ``Listing 
Qualifications Analyst,'' but expects to have personnel that will 
perform the same basic functions, such as advising issuers and 
prospective issuers with respect to the BSTX Listing Rules.
    \297\ Id.
    \298\ See e.g., IEX Rule 14.206.
---------------------------------------------------------------------------

    The Exchange also proposes a number of other non-substantive 
changes from the baseline NYSE American listing rules, such as to 
eliminate references to the concept of a ``specialist,'' since

[[Page 13270]]

BSTX will not have a specialist,\299\ or references to certificated 
equities, since security tokens will be uncertificated equities.\300\ 
As another example, NYSE American Section 623 requires that three 
copies of certain press releases be sent to the exchange, while the 
Exchange proposes only that a single copy of such press release be 
shared with the Exchange.\301\ In addition, the Exchange proposes to 
adopt Rule 26720 in a manner that is substantially similar to NYSE 
American Section 720, but proposes to modify the internal citations to 
ensure consistency with its proposed Rulebook.\302\ In its proposed 
Rules, the Exchange has not included certain form letters related to 
proxy rules that are included in the NYSE American rules; \303\ 
instead, these forms will be included in the BSTX Listing 
Supplement.\304\ The Exchange is not proposing to adopt provisions 
relating to future priced securities at this time.\305\ In addition, 
the Exchange is not proposing to allow for listing of foreign 
companies, other than Canadian companies,\306\ or to allow for issuers 
to transfer their existing securities to BSTX.\307\ Similarly, the 
Exchange is not proposing at this time to support security token debt 
securities, so the Exchange has not proposed to adopt certain 
provisions from the NYSE American Listing Manual related to bonds/debt 
securities \308\ or the trading of units.\309\ The Exchange believes 
that the departures from the NYSE American rules upon which the 
proposed Rules are based, as described above, are non-substantive 
(e.g., by not including provisions relating to instruments that will 
not trade on the Exchange), would apply to all issuers in the same 
manner and are therefore not designed to permit unfair discrimination, 
consistent with Section 6(b)(5) of the Exchange Act.\310\
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    \299\ See e.g., NYSE American Section 513(f), noting that open 
orders to buy and open orders to sell on the books of a specialist 
on an ex rights date are reduced by the cash value of the rights. 
Proposed Rule 26340(f) deletes this provision because BSTX will not 
have specialists. Similarly, because BSTX will not have specialists, 
the Exchange is not proposing to adopt a parallel rule to NYSE 
American Section 516, which specifies that certain types of orders 
are to be reduced by a specialist when a security is quoted ex-
dividend, ex-distribution or ex-rights are set forth in NYSE 
American Rule 132.
    \300\ See e.g., NYSE American Section 117 including a clause 
relating to paired securities for which ``the stock certificates of 
which are printed back-to-back on a single certificate''). 
Similarly, the Exchange has proposed to replace certain references 
to the ``Office of General Counsel'' contained in certain NYSE 
American Listing Rule (see e.g., Section 1205) with references to 
the Exchange's ``Legal Department'' to accommodate differences in 
BSTX's organizational structure. See proposed Rule 27204. As another 
example, proposed Rule 27205 refers to the Exchange's ``Hearing 
Committee'' as defined in Section 6.08 of the Exchange's By-Laws to 
similarly accommodate organizational differences between the 
Exchange and NYSE American.
    \301\ See proposed Rule 26623.
    \302\ Specifically, proposed Rule 26720 would provide that 
participants must comply with Rules 26720 through 26725 and BSTX's 
Rule 22020 (Forwarding of Proxy and Other Issuer-Related Materials; 
Proxy Voting). NYSE American Section 726, upon which proposed Rule 
26720 is based, includes cross-references to NYSE American's 
corresponding rules to proposed Rules 26720 through 26725, and also 
includes cross-references to NYSE American Rules 578 through 585, 
for which the Exchange is not proposing corresponding rules. These 
NYSE American rules for which the Exchange is not proposing to adopt 
a parallel rule relate to certain requirements specific to proxy 
voting (e.g., requiring that a member state the actual number of 
shares for which a proxy is given--NYSE American Rule 578) or, in 
some cases, relate to certificated securities (e.g., NYSE American 
Rule 579), which would be inapplicable to the Exchange since it 
proposes to only list uncertificated securities. The Exchange 
believes that it does not need to propose to adopt parallel rules 
corresponding to NYSE American Rules 578-585 at this time and notes 
that other listing exchanges do not appear have corresponding 
versions of these NYSE American Rules. See e.g., Cboe BZX Rules. The 
Exchange believes that proposed Rule 26720 and the Exchange's other 
proposed Rules governing proxies, including those referenced in 
proposed Rule 26720, are sufficient to govern BSTX Participants' 
obligations with respect to proxies.
    \303\ The forms found in NYSE American Section 722.20 and 722.40 
will be included in the BSTX Listing Supplement.
    \304\ The BSTX Listing Supplement would contain samples of 
letters containing the information and instructions required 
pursuant to the proxy rules to be given to clients in the 
circumstances indicated in the appropriate heading. These are 
intended to serve as examples and not as prescribed forms. 
Participants would be permitted to adapt the form of these letters 
for their own purposes provided all of the required information and 
instructions are clearly enumerated in letters to clients. Pursuant 
to proposed Rule 26212, the BSTX Listing Supplement would also 
include a sample application for original listing, which the 
Exchange has included as Exhibit 3G. In addition, proposed Rule 
26350 states that the BSTX Listing Supplement will include a sample 
cancellation notice; the Exchange expects such notice to be 
substantially in the same form as NYSE American's sample notice in 
NYSE American Section 350. Other examples of items that would appear 
in the BSTX Listing Supplement include certain certifications to be 
completed by the CEO of listed companies pursuant to proposed Rule 
26810(a) and (c), and forms of letters to be sent to clients 
requesting voting instructions and other letters relating to proxy 
votes pursuant to proposed IM-26722-2 and IM-26722-4. The Exchange 
expects that these proposed materials in the BSTX Listing Supplement 
will be substantially similar to the corresponding versions of such 
samples used by NYSE American. The purpose of putting these sample 
letters and other information into the BSTX Listing Supplement 
rather than directly in the rules is to improve the readability of 
the Rules.
    \305\ See e.g., NYSE American Section 101, Commentary .02. The 
Exchange is also not proposing to adopt a parallel provision to NYSE 
American Section 950 (Explanation of Difference between Listed and 
Unlisted Trading Privileges) because the Exchange believes that such 
provision is not necessary and contains extraneous historical 
details that are not particularly relevant to the trading of 
security tokens. The Exchange notes that numerous other listing 
exchanges do not have a similar provision to NYSE American Section 
950. See e.g., IEX Listing Rules.
    \306\ See proposed Rule 26109. Because the Exchange does not 
propose to allow foreign issuers of security tokens, it does not 
propose to adopt a parallel provision to NYSE American Section 110 
and other similar provisions relating to foreign issuers--e.g., NYSE 
American Section 801(f).
    \307\ Consequently, the Exchange does not propose to adopt a 
parallel provision to NYSE American Section 113 at this time.
    \308\ See e.g., NYSE American Sections 1003(b)(iv) and (e).
    \309\ See e.g., NYSE American Sections 106(f), 401(i), and 
1003(g).
    \310\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange proposes in Rule 26507 to prohibit the issuance of 
fractional security tokens and to provide that cash must be paid in 
lieu of any distribution or part of a distribution that might result in 
fractional interests in security tokens.\311\ The Exchange believes 
that disallowing fractional shares reduces complexity. By extension, 
the requirement to provide cash in lieu of fractional shares simplifies 
the process related to share transfer and tracking of share ownership. 
The Exchange believes that this simplification promotes just and 
equitable principles of trade, fosters cooperation and coordination 
with persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, removes impediments to and perfect the mechanism of a free 
and open market and a national market system, and, in general, protects 
investors and the public interest, consistent with Section 6(b)(5) of 
the Exchange Act.\312\
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    \311\ The Exchange also proposes certain conforming changes in 
Rule 26503 (Form of Notice) to reiterate that fractional interests 
in security tokens are not permitted by the Exchange.
    \312\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Proposed BSTX Rule 26130 (Original Listing Applications) would 
require listing applicants to furnish a legal opinion that the 
applicant's security token is a security under applicable United States 
securities laws. Such a requirement provides assurance to the Exchange 
that security token trading relates to appropriate asset classes. The 
Exchange believes that this Rule promotes just and equitable principles 
of trade and, in general, protects investors and the public interest, 
consistent with Section 6(b)(5) of the Exchange Act.\313\
---------------------------------------------------------------------------

    \313\ Id.
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    The Exchange proposes to adopt corporate governance listing 
standards as its Rule 26800 series that are substantially similar to 
the corporate governance listing standards set forth in Part 8 of the 
NYSE American Listing Manual. However, it includes certain 
clarifications, most notably that certain proposed provisions are not 
intended to restrict the number of terms that a

[[Page 13271]]

director may serve \314\ and that, if a limited partnership is managed 
by a general partner rather than a board of directors, the audit 
committee requirements applicable to the listed entity should be 
satisfied by the general partner.\315\ The Exchange also notes that, 
unlike the current NYSE American rules upon which the proposed Rules 
are based, the proposed Rules on corporate governance do not include 
provisions on asset-asset backed securities and foreign issues (other 
than those from Canada), since the Exchange does not proposed to allow 
for such foreign issuers to list on BSTX at this time.
---------------------------------------------------------------------------

    \314\ See proposed Rule 26802(d).
    \315\ See proposed Rule 26801(b).
---------------------------------------------------------------------------

    The Exchange proposes to adopt additional listing rules as its Rule 
26900 series that are substantially similar to the corporate governance 
listing standards set forth in Part 9 of the NYSE American Listing 
Manual. The only significant difference from the baseline NYSE American 
rules is that the proposed BSTX Rules do not include provisions related 
to certificated securities, since security tokens listed on BSTX will 
be uncertificated.
    The Exchange proposes to adopt suspension and delisting rules as 
its Rule 27000 series that are substantially similar to the corporate 
governance listing standards set forth in Parts 10, 11, and 12 of the 
NYSE American Listing Manual. The proposed rules do not include 
concepts from the baseline NYSE American rules regarding foreign, fixed 
income securities, or other non-equity securities because the Exchange 
is not proposing to allow for listing of such securities at this 
time.\316\
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    \316\ As with all sections of the proposed rules, references to 
``securities'' have been changed to ``security tokens'' where 
appropriate and, in the Rule 27000 series, certain references have 
been conformed from the baseline NYSE American provisions to account 
for the differences in governance structure and naming conventions 
of BSTX.
---------------------------------------------------------------------------

    The Exchange believes that the proposals in the Rule 26800 to Rule 
27000 Series, which are based on the rules of NYSE American with the 
differences explained above, are designed to foster cooperation and 
coordination with persons engaged in facilitating transactions in 
securities, remove impediments to and perfect the mechanism of a free 
and open market and a national market system, and, in general to 
protect investors and the public interest. Further, the differences in 
the proposals compared to the analogous NYSE American provisions 
appropriately reflect the differences between the two exchanges. The 
Exchange believes that ensuring that its systems are appropriately 
described in the BSTX Rules facilitates market participants' review of 
such Rules, which serves to remove impediments to and perfect the 
mechanism of a free and open market and a national market system by 
ensuring that market participants can easily navigate, understand and 
comply with the Exchange's rulebook. Therefore, the Exchange believes 
its proposals are consistent with Section 6(b)(5) of the Exchange 
Act.\317\
---------------------------------------------------------------------------

    \317\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

L. Fees (Rule 28000 Series)
    The Exchange proposes to set forth as its Rule 28000 Series (Fees) 
the Exchange's authority to prescribe reasonable dues, fees, 
assessments or other charges as it may deem appropriate.\318\ As 
provided in proposed Rule 28000 (Authority to Prescribe Dues, Fees, 
Assessments and Other Charges), these fees may include membership dues, 
transaction fees, communication and technology fees, regulatory fees, 
and other fees, which will be equitably allocated among BSTX 
Participants, issuers, and other persons using the Exchange's 
facilities.\319\ Proposed Rule 28010 (Regulatory Revenues) generally 
provides that any revenues received by the Exchange from fees derived 
from its regulatory function or regulatory fines will not be used for 
non-regulatory purposes or distributed to the stockholder, but rather, 
shall be applied to fund the legal and regulatory operations of the 
Exchange (including surveillance and enforcement activities).
---------------------------------------------------------------------------

    \318\ As described above, recording information to the Ethereum 
blockchain requires payment of gas by the individual or entity who 
desires to post such a record. The payment of gas will be performed 
by the Wallet Manager as a service provider to the Exchange carrying 
out the function of updating the Ethereum blockchain as an ancillary 
recordkeeping mechanism. The Exchange does not plan to charge a fee 
to cover the costs associated with gas and updating the Ethereum 
blockchain. The Exchange also notes that gas costs are typically 
negligible and anticipates actual monthly gas expenditures to be of 
a de minims amount.
    \319\ Proposed Rule 28000 further provides authority for the 
Exchange to charge BSTX Participants a regulatory transaction fee 
pursuant to Section 31 of the Exchange Act (15 U.S.C. 78ee) and that 
the Exchange will set forth fees pursuant to publicly available 
schedule of fees.
---------------------------------------------------------------------------

    The Exchange believes that the proposed Rule 28000 Series (Fees) is 
consistent with Sections 6(b)(5) of the Exchange Act because these 
proposed rules are designed to protect investors and the public 
interest by setting forth the Exchange's authority to assess fees on 
BSTX Participants, which would be used to operate the BSTX System and 
surveil BSTX for compliance with applicable laws and rules. The 
Exchange believes that the proposed Rule 28000 Series (Fees) is also 
consistent with Sections 6(b)(3) of the Exchange Act \320\ because the 
proposed Rules specify that all fees assessed by the Exchange shall be 
equitably allocated among BSTX Participants, issuers and other persons 
using the Exchange's facilities. The Exchange notes that the proposed 
Rule 28000 Series is substantially similar to the existing rules of 
another exchange.\321\ The Exchange intends to submit a proposed rule 
change to the Commission setting forth the proposed fees relating to 
trading on BSTX in advance of the launch of BSTX.
---------------------------------------------------------------------------

    \320\ 15 U.S.C. 78f(b)(5).
    \321\ See Cboe BZX Rules 15.1 and 15.2.
---------------------------------------------------------------------------

IV. Minor Rule Violation Plan
    The Exchange's disciplinary rules, including Exchange Rules 
applicable to ``minor rule violations,'' are set forth in the Rule 
12000 Series of the Exchange's current Rules. Such disciplinary rules 
would apply to BSTX Participants and their associated persons pursuant 
to proposed Rule 24000. The Exchange's Minor Rule Violation Plan 
(``MRVP'') specifies those uncontested minor rule violations with 
sanctions not exceeding $2,500 that would not be subject to the 
provisions of Rule 19d-1(c)(1) under the Exchange Act \322\ requiring 
that an SRO promptly file notice with the Commission of any final 
disciplinary action taken with respect to any person or 
organization.\323\ The Exchange's MRVP includes the policies and 
procedures set forth in Exchange Rule 12140 (Imposition of Fines for 
Minor Violations).
---------------------------------------------------------------------------

    \322\ 17 CFR 240.19d-1(c)(1).
    \323\ The Commission adopted amendments to paragraph (c) of Rule 
19d-1 to allow SROs to submit for Commission approval plans for the 
abbreviated reporting of minor disciplinary infractions. See 
Exchange Act Release No. 21013 (June 1, 1984), 49 FR 23828 (June 8, 
1984). Any disciplinary action taken by an SRO against any person 
for violation of a rule of the SRO which has been designated as a 
minor rule violation pursuant to such a plan filed with and declared 
effective by the Commission will not be considered ``final'' for 
purposes of Section 19(d)(1) of the Exchange Act if the sanction 
imposed consists of a fine not exceeding $2,500 and the sanctioned 
person has not sought an adjudication, including a hearing, or 
otherwise exhausted his administrative remedies.
---------------------------------------------------------------------------

    The Exchange proposes to amend its MRVP and Rule 12140 to include 
proposed Rule 24010 (Penalty for Minor Rule Violations). The Rules 
included in proposed Rule 24010 as appropriate for disposition under 
the Exchange's MRVP are: (a) Rule 20000 (Maintenance, Retention and 
Furnishing of Records); (b) Rule 25070 (Audit Trail); (c) Rule 
25210(a)(1) (Two-Sided Quotation

[[Page 13272]]

Obligations of BSTX Market Makers); and Rule 25120 (Short Sales). The 
rules included in proposed Rule 12140 are the same as the rules 
included in the MRVPs of other exchanges.\324\ Upon implementation of 
this proposal, the Exchange will include the enumerated trading rule 
violations in the Exchange's standard quarterly report of actions taken 
on minor rule violations under the MRVP. The quarterly report includes: 
The Exchange's internal file number for the case, the name of the 
individual and/or organization, the nature of the violation, the 
specific rule provision violated, the sanction imposed, the number of 
times the rule violation has occurred, and the date of disposition. The 
Exchange's MRVP, as proposed to be amended, is consistent with Sections 
6(b)(1), 6(b)(5) and 6(b)(6) of the Exchange Act,\325\ which require, 
in part, that an exchange have the capacity to enforce compliance with, 
and provide appropriate discipline for, violations of the rules of the 
Commission and of the exchange. In addition, because amended Rule 12140 
will offer procedural rights to a person sanctioned for a violation 
listed in proposed Rule 24010, the Exchange will provide a fair 
procedure for the disciplining of members and associated persons, 
consistent with Section 6(b)(7) of the Exchange Act.\326\
---------------------------------------------------------------------------

    \324\ See e.g., IEX Rule 9.218 and Cboe BZX Rule 8.15.01.
    \325\ 15 U.S.C. 78f(b)(1), 78f(b)(5) and 78f(b)(6).
    \326\ 15 U.S.C. 78f(b)(7).
---------------------------------------------------------------------------

    This proposal to include the rules listed in Rule 24010 in the 
Exchange's MRVP is consistent with the public interest, the protection 
of investors, or otherwise in furtherance of the purposes of the 
Exchange Act, as required by Rule 19d-1(c)(2) under the Exchange 
Act,\327\ because it should strengthen the Exchange's ability to carry 
out its oversight and enforcement responsibilities as an SRO in cases 
where full disciplinary proceedings are unsuitable in view of the minor 
nature of the particular violation. In requesting the proposed change 
to the MRVP, the Exchange in no way minimizes the importance of 
compliance with Exchange Rules and all other rules subject to the 
imposition of fines under the MRVP. However, the MRVP provides a 
reasonable means of addressing rule violations that do not rise to the 
level of requiring formal disciplinary proceedings, while providing 
greater flexibility in handling certain violations. The Exchange will 
continue to conduct surveillance with due diligence and make a 
determination based on its findings, on a case-by-case basis, whether a 
fine of more or less than the recommended amount is appropriate for a 
violation under the MRVP or whether a violation requires a formal 
disciplinary action.
---------------------------------------------------------------------------

    \327\ 17 CFR 240.19d-1(c)(2).
---------------------------------------------------------------------------

V. Amendments to Existing BOX Rules
    Due to the new BSTX trading facility and the introduction of 
trading in security tokens, a type of equity security, on the Exchange, 
the Exchange proposes to amend those Exchange Rules that would apply to 
BSTX Participants, but that currently only contemplate trading in 
options. Therefore, the Exchange is seeking to amend the following 
Exchange Rules, each of which is set forth in Exhibit 5B:
     Rule 100(a) (Definitions) ``Options Participant'' or 
``Participant'': The Exchange proposes to change the definition of 
``Options Participant or Participant'' to ``Participant'' to reflect 
Options Participants and BSTX Participants and to amend the definition 
as follows: ``The term `Participant' means a firm, or organization that 
is registered with the Exchange pursuant to the Rule 2000 Series for 
purposes of participating in trading on a facility of the Exchange and 
includes an `Options Participant' and `BSTX Participant.' ''
     Rule 100(a) (Definitions) ``Options Participant'': The 
Exchange proposes to add a definition of ``Options Participant'' that 
would be defined as follows: ``The term `Options Participant' is a 
Participant registered with the Exchange for purposes of participating 
in options trading on the Exchange.'' \328\
---------------------------------------------------------------------------

    \328\ In addition, as a result of these new defined terms, the 
Exchange proposes to renumber definitions set forth in Rule 100(a) 
to keep the definitions in alphabetically order.
---------------------------------------------------------------------------

     Rule 2020(g)(2) (Participant Eligibility and 
Registration): The Exchange proposes to delete subsection (g)(2) and 
replace it with the following: ``(2) persons associated with a 
Participant whose functions are related solely and exclusively to 
transactions in municipal securities; (3) persons associated with a 
Participant whose functions are related solely and exclusively to 
transactions in commodities; (4) persons associated with a Participant 
whose functions are related solely and exclusively to transactions in 
securities futures, provided that any such person is appropriately 
registered with a registered futures association; and (5) persons 
associated with a Participant who are restricted from accessing the 
Exchange and that do not engage in the securities business of the 
Participant relating to activity that occurs on the Exchange.'' \329\
---------------------------------------------------------------------------

    \329\ In addition to revising Rule 2020(g)(2) to broaden it to 
include securities activities beyond just options trading, the 
Exchange proposes to add greater specificity to define persons that 
are exempt from registration, consistent with the approach adopted 
by other exchanges. See e.g., IEX Rule 2.160(m).
---------------------------------------------------------------------------

     Rule 2060 (Revocation of Participant Status or Association 
with a Participant): The Exchange proposes to amend Rule 2060 to refer 
to ``securities transactions'' rather than ``options securities 
transactions.''
     Rule 3180(a) (Mandatory Systems Testing): The Exchange 
proposes to amend subsection (a)(1) of Rule 3180 to also include BSTX 
Participants, in addition to the categories of Market Makers and OFPs.
     Rule 7130(a)(2)(v) Execution and Price/Time Priority: The 
Exchange proposes to update the cross reference to Rule 100(a)(58) to 
refer to Rule 100(a)(59), which defines the term ``Request for Quote'' 
or ``RFQ'' under the Rules after the proposed renumbering.
     Rule 7150(a)(2) (Price Improvement Period): The Exchange 
proposes to amend Rule 7150(a)(2) to update the cross reference to the 
definition of a Professional in Rule 100(a)(51) to instead refer to 
Rule 100(a)(52), which is where that term would be defined in the Rules 
after the proposed renumbering.
     Rule 7230 (Limitation of Liability): The Exchange proposes 
to amend the references in Rule 7230 to ``Options Participants'' to 
simply ``Participants.''
     Rule 7245(a)(4) (Complex Order Price Improve Period): The 
Exchange proposes to update the cross reference to Rule 100(a)(51) to 
refer to Rule 100(a)(52), which defines the term ``Professional'' after 
the proposed renumbering.
     IM-8050-3: The Exchange proposes to update the cross 
reference to Rule 100(a)(55) to refer to Rule 100(a)(56), which defines 
the term ``quote'' or ``quotation'' after the proposed 
renumbering.\330\
---------------------------------------------------------------------------

    \330\ Current Exchange Rule 100(a)(55) defines the term 
``Quarterly Options Series,'' but the intended reference in IM-8050-
3 was the definition of ``quote'' or ``quotation.'' The term 
``quote'' or ``quotation'' is currently defined in Rule 100(a)(56), 
but is proposed to be renumbered as Rule 100(a)(57).
---------------------------------------------------------------------------

     Rule 11010(a) ``Investigation Following Suspension'': The 
Exchange proposes to amend subsection (a) of Rule 11010 to remove the 
reference to ``in BOX options contracts'' and to modify the word 
``position'' with the word ``security'' as follows: `` . . . the amount 
owing to each and a complete

[[Page 13273]]

list of each open long and short security position maintained by the 
Participant and each of his or its Customers.''
     Rule 11030 (Failure to Obtain Reinstatement): The Exchange 
proposes to amend Rule 11030 to replace the reference to ``Options 
Participant'' to simply ``Participant.''
     Rule 12030(a)(1) (Letters of Consent): The Exchange 
proposes to amend subsection (a)(1) of Rule 12030 to replace the 
reference to ``Options Participant'' to simply ``Participant.''
     Rule 12140 (Imposition of Fines for Minor Rule 
Violations): The Exchange proposes to amend Rule 12140 to replace 
references to ``Options Participant'' to simply ``Participant.'' In 
addition, the Exchange proposes to add paragraph (f) to Rule 12140, to 
incorporate the aforementioned modifications to the Exchange's MRVP. 
New paragraph (f) of Rule 12140 would provide: ``(f) Transactions on 
BSTX. Rules and penalties relating to trading on BSTX that are set 
forth in Rule 24010 (Penalty for Minor Rule Violations).''
    The Exchange believes that the proposed amendments to the 
definitions set forth in Rule 100 are consistent with Section 6(b)(5) 
of the Exchange Act \331\ because they protect investors and the public 
interest by setting forth clear definitions that help BOX and BSTX 
Participants understand and apply Exchange Rules. Without defining 
terms used in the Exchange Rules clearly, market participants could be 
confused as to the application of certain rules, which could cause harm 
to investors.
---------------------------------------------------------------------------

    \331\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that the proposed amendments to the other 
Exchange Rules detailed above are consistent with Section 6(b)(5) of 
the Exchange Act \332\ because the proposed rule change is designed to 
foster cooperation and coordination with persons engaged in 
facilitating transactions in securities, remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general to protect investors and the public interest. 
The Exchange believes that the proposed rule change would remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system by ensuring that market participants can 
easily navigate, understand and comply with the Exchange's rulebook. 
The Exchange believes that the proposed rule change enables the 
Exchange to continue to enforce the Exchange's rules. The Exchange 
notes that none of the proposed changes to the current Exchange 
rulebook would materially alter the application of any of those Rules, 
other than by extending them to apply to BSTX Participants and trading 
on the BSTX System. As such, the proposed amendments would foster 
cooperation and coordination with persons engaged in facilitating 
transactions in securities and would remove impediments to and perfect 
the mechanism of a free and open market and a national exchange system. 
Further, the Exchange believes that, by ensuring the rulebook 
accurately reflects the intention of the Exchange's rules, the proposed 
rule change reduces potential investor or market participant confusion.
---------------------------------------------------------------------------

    \332\ Id.
---------------------------------------------------------------------------

VI. Forms To Be Used in Connection With BSTX
    In connection with the operation of BSTX, the Exchange proposes to 
uses a series of new forms to facilitate becoming a BSTX Participant 
and for issuers to list their security tokens. These forms have been 
attached hereto as Exhibits 3A-3N. Each are described below.
A. BSTX Participant Application
    Pursuant to proposed Rule 18000(b), in order to become a BSTX 
Participant, an applicant must complete a BSTX Participant Application, 
which is attached as Exhibit 3A. The proposed BSTX Participant 
Application requires the applicant to provide certain basic information 
such as identifying the applicants name and contact information, 
Designated Examining Authority, organizational structure, and Central 
Registration Depository (``CRD'') number. The BSTX Participant 
Application also requires applicants to provide additional information 
including certain beneficial ownership information, the applicant's 
current Form BD, an organization chart, a description of how the 
applicant receives orders from customers, how it will send orders to 
BSTX, and a copy of written supervisory procedures and information 
barrier procedures.
    In addition, the BSTX Participant Application allows applicants to 
indicate whether they are applying to be a BSTX Market Maker or a 
Designated Market Maker. Applicants wishing to become a BSTX Market 
Maker or Designated Market Maker must provide certain additional 
information including a list of each of the applicant's trading 
representatives (including a copy of each representative's Form U4), a 
copy of the applicant's written supervisory procedures relating to 
market making, a description of the source and amount of the 
applicant's capital, and information regarding the applicant's other 
business activities and information barrier procedures.
B. BSTX Participant Agreement
    Pursuant to Exchange Rule 18000(b), to transact business on BSTX, 
prospective BSTX Participants must complete a BSTX Participant 
Agreement. The BSTX Participant Agreement is attached as Exhibit 3B. 
The BSTX Participant Agreement provides that a BSTX Participant must 
agree with the Exchange as follows:
    1. Participant agrees to abide by the Rules of the Exchange and 
applicable bylaws, as amended from time to time, and all circulars, 
notices, interpretations, directives and/or decisions adopted by the 
Exchange.
    2. Participant acknowledges that BSTX Participant and its 
associated persons are subject to the oversight and jurisdiction of the 
Exchange.
    3. Participant authorizes the Exchange to make available to any 
governmental agency or SRO any information it may have concerning the 
BSTX Participant or its associated persons, and releases the Exchange 
from any and all liability in furnishing such information.
    4. Participant acknowledges its obligation to update any and all 
information contained in any part of the BSTX Participant's 
application, including termination of membership with another SRO.
    These provisions of the BSTX Participant Agreement and others 
therein are generally designed to reflect the Exchange's SRO 
obligations to regulate BSTX Participants. Accordingly, these 
provisions contractually bind a BSTX Participant to comply with 
Exchange rules, acknowledge the Exchange's oversight and jurisdiction, 
authorize the Exchange to disclose information regarding the 
Participant to any governmental agency or SRO and acknowledge the 
obligation to update any and all Application contained in the 
Participant's application.
C. BSTX User Agreement
    In order to become a BSTX Participant, prospective participants 
must also execute a BSTX User Agreement pursuant to proposed Rule 
18000(b). The BSTX User Agreement, attached as Exhibit 3C, includes 
provisions related to the term of the agreement, compliance with 
exchange rules, right and obligations under the agreement, changes to 
BSTX, proprietary rights under the agreement, use of information 
received under the relationship, disclaimer of warranty, limitation of 
liability, indemnification,

[[Page 13274]]

termination and assignment. The information is necessary to outline the 
rights and obligations of the prospective Participant and the Exchange 
under the terms of the agreement. Both the BSTX Participant Agreement 
and BSTX User Agreement will be available on the Exchange's website 
(boxoptions.com).
D. BSTX Security Token Market Designated Market Maker Selection Form
    In accordance with proposed Rule 25230(b)(1), BSTX will maintain 
the BSTX Security Token Designated Market Maker Selection Form, which 
is attached as Exhibit 3D. The issuer may select its DMM from among a 
pool of DMMs eligible to participate in the process. Within two 
business days of the issuer selecting its DMM, it will use the BSTX 
Security Token Market Designated Market Maker Selection form to notify 
BSTX of the selection. The form must be signed by a duly authorized 
officer as specified in proposed Rule 25230(b)(1).
E. Clearing Authorization Forms
    In accordance with proposed Rule 18010, BSTX Participants that are 
not members/participants of a registered clearing agency must clear 
their transactions through a BSTX Participant that is a member of a 
registered clearing agency. A BSTX Participant clearing through another 
BSTX Participant would do so using, as applicable, either the BSTX 
Clearing Authorization (non-Market Maker) form (attached as Exhibit 3E) 
or the BSTX Participant Clearing Authorization (Market Maker) form 
(attached as Exhibit 3F). Each form would be maintained by BSTX and 
each form specifies that the BSTX Participant clearing on behalf of the 
other BSTX Participant accepts financial responsibility for all 
transactions on BSTX that are made by the BSTX Participant designated 
on the form.
F. BSTX Listing Applications
    The Exchange proposes to specify the required forms of listing 
application, listing agreement and other documentation that listing 
applicants and listed companies must execute or complete (as 
applicable) as a prerequisite for initial and ongoing listing on the 
Exchange, as applicable (collectively, ``listing documentation''). As 
proposed, the listing forms are substantially similar to those 
currently in use by NYSE American LLC, with certain differences to 
account for the trading of security tokens. All listing documentation 
will be available on the Exchange's website (boxoptions.com). Each of 
the listing documents form a duly authorized representative of the 
company must sign an affirmation that the information provided is true 
and correct as of the date the form was signed. In the event that in 
the future the Exchange makes any substantive changes (including 
changes to the rights, duties, or obligations of a listed company or 
listing applicant or the Exchange, or that would otherwise require a 
rule filing) to such documents, it will submit a rule filing in 
accordance with Rule 19b-4.\333\
---------------------------------------------------------------------------

    \333\ The Exchange will not submit a rule filing if the changes 
made to a document are solely typographical or stylistic in nature.
---------------------------------------------------------------------------

    Pursuant to Rule 26130 and 26300 of the Exchange Rules, a company 
must file and execute the BSTX Original Listing Application (attached 
as Exhibit 3G) or the BSTX Additional Listing Application (attached as 
Exhibit 3H) to apply for the listing of security tokens on BSTX.\334\ 
The BSTX Original Listing Application provides information necessary, 
and in accordance with Section 12(b) of the Exchange Act,\335\ for 
Exchange regulatory staff to conduct a due diligence review of a 
company to determine if it qualifies for listing on the Exchange. The 
BSTX Additional Listing Application requires certain further 
information for an additional listing of security tokens. Relevant 
factors regarding the company and securities to be listed would 
determine the type of information required. The following describes 
each category and use of application information:
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    \334\ Pursuant to proposed Exchange Rule 26130, an applicant 
seeking the initial listing of its security token must also provide 
a legal opinion that the applicant's security token is a security 
under applicable United States securities laws.
    \335\ 15 U.S.C. 78l(b).
---------------------------------------------------------------------------

    1. Corporate information regarding the issuer of the security to be 
listed, including company name, address, contact information, Central 
Index Key Code (CIK), SEC File Number, state and country of 
incorporation, date of incorporation, whether the company is a foreign 
private issuer, website address, SIC Code, CUSIP number of the security 
being listed and the date of fiscal year end. This information is 
required of all applicants and is necessary in order for the Exchange's 
regulatory staff to collect basic company information for recordkeeping 
and due diligence purposes, including review of information contained 
in the company's SEC filings.
    2. For original listing applications only, corporate contact 
information including the company's Chief Executive Officer, Chief 
Financial Officer, Corporate Secretary, General Counsel and Investor 
Relations Officer. This information is required of all initial 
applicants and is necessary in order for the Exchange's regulatory 
staff to collect current company contact information for purposes of 
obtaining any additional due diligence information to complete a 
listing qualification review of the applicant.
    3. For original listing applications only, offering and security 
information regarding an offering, including the type of offering, a 
description of the issue, par value, number of security tokens 
outstanding or offered, total security tokens unissued, but reserved 
for issuance, date authorized, purpose of security tokens to be issued, 
number of security tokens authorized, and information relating to 
payment of dividends. This information is required of all applicants 
listing security tokens on the Exchange, and is necessary in order for 
the Exchange's regulatory staff to collect basic information about the 
offering.
    4. For original listing applications only, information regarding 
the company's transfer agent. Transfer agent information is required 
for all applicants. This information is necessary in order for the 
Exchange's regulatory staff to collect current contact information for 
such company transfer agent for purposes of obtaining any additional 
due diligence information to complete a listing qualification review of 
the applicant.
    5. For original listing applications only, contact information for 
the outside counsel with respect to the listing application, if any. 
This information is necessary in order for the Exchange's regulatory 
staff to collect applicable contact information for purposes of 
obtaining any additional due diligence information to complete a 
listing qualification review of the applicant and assess compliance 
with Exchange Rule 26130.
    6. For original listing applications only, a description of any 
security preferences. This information is necessary to determine 
whether the Applicant issuer has any existing class of common stock or 
equity securities entitling the holders to differential voting rights, 
dividend payments, or other preferences.
    7. For original listing applications only, type of security token 
listing, including the type of transaction (initial public offering of 
a security token, merger, spin-off, follow on offering, reorganization, 
exchange offer or conversion) and other details related to the 
transaction, including the name and contact information for the 
investment banker/financial advisor contacts. This information is 
necessary in order for the

[[Page 13275]]

Exchange's regulatory staff to collect information for such company for 
purposes of obtaining any additional due diligence information to 
complete a listing qualification review of the applicant.
    8. For original listing applications only, exchange requirements 
for listing consideration. This section notes that to be considered for 
listing, the Applicant Issuer must meet the Exchange's minimum listing 
requirements, that the Exchange has broad discretion regarding the 
listing of any security token and may deny listing or apply additional 
or more stringent criteria based on any event, condition or 
circumstance that makes the listing of an Applicant Issuer's security 
token inadvisable or unwarranted in the opinion of the Exchange. The 
section also notes that even if an Applicant Issuer meets the 
Exchange's listing standards for listing on the BSTX Security Token 
Market, it does not necessarily mean that its application will be 
approved. This information is necessary in order for the Exchange's 
regulatory staff to assess whether an Applicant Issuer is qualified for 
listing.
    9. For original listing applications only, regulatory review 
information, including a certification that no officer, board member or 
non-institutional shareholder with greater than 10% ownership of the 
company has been convicted of a felony or misdemeanor relating to 
financial issues during the past ten years or a detailed description of 
any such matters. This section also notes that the Exchange will review 
background materials available to it regarding the aforementioned 
individuals as part of the eligibility review process. This regulatory 
review information is necessary in order for the Exchange's regulatory 
staff to assess whether there are regulatory matters related to the 
company that render it unqualified for listing.
    10. For original listing applications only, supporting 
documentation required prior to listing approval includes a listing 
agreement, corporate governance affirmation, security token design 
affirmation, listing application checklist and underwriter's letter. 
This documentation is necessary in order to support the Exchange's 
regulatory staff listing qualification review (corporate governance 
affirmation, listing application checklist and underwriter's letter) 
and to effectuate the listed company's agreement to the terms of 
listing (listing agreement).
    11. For additional listing applications only, transaction details, 
including the purpose of the issuance, total security tokens, date of 
board authorization, date of shareholder authorization and anticipated 
date of issuance. This information is required of all applicants 
listing additional security tokens on the Exchange, and is necessary in 
order for the Exchange's regulatory staff to collect basic information 
about the offering.
    12. For additional listing applications only, insider participation 
and future potential issuances, including whether any director, officer 
or principal shareholder of the company has a direct or indirect 
interest in the transaction, and if the transaction potentially 
requires the company to issue any security tokens in the future above 
the amount they are currently applying for. This information is 
required of all applicants listing additional security tokens on the 
Exchange, and is necessary in order for the Exchange's regulatory staff 
to collect basic information about the offering.
    13. For additional listing applications only, information for a 
technical original listing, including reverse security token splits and 
changes in states of incorporation. This information is required of all 
applicants listing additional security tokens on the Exchange, and is 
necessary in order for the Exchange's regulatory staff to collect basic 
information about the offering.
    14. For additional listing applications only, information for a 
forward security token split or security token dividend, including 
forward security token split ratios and information related to security 
token dividends. This information is required of all applicants listing 
additional security tokens on the Exchange, and is necessary in order 
to determine the rights associated with the security tokens.
    15. For additional listing applications only, relevant company 
documents. This information is required of all applicants listing 
additional security tokens on the Exchange, and is necessary to assess 
to support the Exchange's regulatory staff listing qualification 
review.
    16. For additional listing applications only, reconciliation for 
technical original listing, including security tokens issued and 
outstanding after the technical original event, listed reserves 
previously approved for listing, and unlisted reserves not yet approved 
by the Exchange. This information is required of all applicants listing 
additional security tokens on the Exchange, and is necessary to assess 
to support the Exchange's regulatory staff listing qualification review 
and to obtain all of the information relevant to the offering.
G. Checklist for Original Listing Application
    In order to assist issuers seeking to list its security tokens on 
BSTX, the Exchange has provided a checklist for issuers to seeking to 
file an original listing application with BSTX. The BSTX Listing 
Application Checklist, attached as Exhibit 3I, provides that issuers 
must provide BSTX with a listing application, listing agreement, 
corporate governance affirmation, BSTX security token design 
affirmation, underwriter's letter (for an initial public offering of a 
security token only) and relevant SEC filings (e.g., 8-A, 10, 40-F, 20-
F). Each of the above referenced forms are fully described herein. The 
checklist is necessary to assist issuers and the Exchange regulatory 
staff in assessing the completion of the relevant documents.
H. BSTX Security Token Market Listing Agreement
    Pursuant to proposed Exchange Rule 26132, to apply for listing on 
the Exchange, a company must execute the BSTX Security Token Market 
Listing Agreement (the ``Listing Agreement''), which is attached as 
Exhibit 3J. Pursuant to the proposed Listing Agreement, a company 
agrees with the Exchange as follows:
    1. Company certifies that it will comply with all Exchange rules, 
policies, and procedures that apply to listed companies as they are now 
in effect and as they may be amended from time to time, regardless of 
whether the Company's organization documents would allow for a 
different result.
    2. Company shall notify the Exchange at least 20 days in advance of 
any change in the form or nature of any listed security tokens or in 
the rights, benefits, and privileges of the holders of such security 
tokens.
    3. Company understands that the Exchange may remove its security 
tokens from listing on the BSTX Security Token Market, pursuant to 
applicable procedures, if it fails to meet one or more requirements of 
Paragraphs 1 and 2 of this agreement.
    4. In order to publicize the Company's listing on the BSTX Security 
Token Market, the Company authorizes the Exchange to use the Company's 
corporate logos, website address, trade names, and trade/service marks 
in order to convey quotation information, transactional reporting 
information, and other information regarding the Company in connection 
with the Exchange. In order to ensure the accuracy of the information, 
the Company agrees to provide the

[[Page 13276]]

Exchange with the Company's current corporate logos, website address, 
trade names, and trade/service marks and with any subsequent changes to 
those logos, trade names and marks. The Listing Agreement further 
requires that the Company specify a telephone number to which questions 
regarding logo usage should be directed.
    5. Company indemnifies the Exchange and holds it harmless from any 
third-party rights and/or claims arising out of use by the Exchange or, 
any affiliate or facility of the Exchange (``Corporations'') of the 
Company's corporate logos, website address, trade names, trade/service 
marks, and/or the trading symbol used by the Company.
    6. Company warrants and represents that the trading symbol to be 
used by the Company does not violate any trade/service mark, trade 
name, or other intellectual property right of any third party. The 
Company's trading symbol is provided to the Company for the limited 
purpose of identifying the Company's security in authorized quotation 
and trading systems. The Exchange reserves the right to change the 
Company's trading symbol at the Exchange's discretion at any time.
    7. Company agrees to furnish to the Exchange on demand such 
information concerning the Company as the Exchange may reasonably 
request.
    8. Company agrees to pay when due all fees associated with its 
listing of security tokens on the BSTX Security Token Market, in 
accordance with the Exchange's rules.
    9. Company agrees to file all required periodic financial reports 
with the SEC, including annual reports and, where applicable, quarterly 
or semi-annual reports, by the due dates established by the SEC.
    The various provisions of the Listing Agreement are designed to 
accomplish several objectives. First, clauses 1-3 and 6-8 reflect the 
Exchange's SRO obligations to assure that only listed companies that 
are compliant with applicable Exchange rules may remain listed. Thus, 
these provisions contractually bind a listed company to comply with 
Exchange rules, provide notification of any corporate action or other 
event that will cause the company to cease to be in compliance with 
Exchange listing requirements, evidence the company's understanding 
that it may be removed from listing (subject to applicable procedures) 
if it fails to be in compliance or notify the Exchange of any event of 
noncompliance, furnish the Exchange with requested information on 
demand, pay all fees due and file all required periodic reports with 
the SEC. Clauses four and five contain standard legal representations 
and agreements from the listed company to the Exchange regarding use of 
its logo, trade names, trade/service markets, and trading symbols as 
well as potential legal claims against the Exchange in connection 
thereto.
I. BSTX Security Token Market Company Corporate Governance Affirmation
    In accordance with the proposed Rule 26800 Series, companies listed 
on BSTX would be required to comply with certain corporate governance 
standards, relating to, for example, audit committees, director 
nominations, executive compensation, board composition, and executive 
sessions. In certain circumstances the corporate governance standards 
that apply vary depending on the nature of the company. In addition, 
there are phase-in periods and exemptions available to certain types of 
companies. The proposed BSTX Security Token Market Corporate Governance 
Affirmation, attached as Exhibit 3K, enables a company to confirm to 
the Exchange that it is in compliance with the applicable standards, 
and specify any applicable phase-ins or exemptions. Companies are 
required to submit a BSTX Security Token Market Corporate Governance 
Affirmation upon initial listing on the Exchange and thereafter when an 
event occurs that makes an existing form inaccurate. This BSTX Security 
Token Market Corporate Governance Affirmation assists the Exchange 
regulatory staff in monitoring listed company compliance with the 
corporate governance requirements.
J. Security Token Design Affirmation for the BSTX Security Token Market
    In accordance with proposed Rule 26138, in order for a security 
token to be admitted to dealings on BSTX, such security token must 
follow the BSTX Security Token Protocol. The BSTX Security Token 
Protocol will be provided via Regulatory Circular and posted on the 
Exchange's website. The Exchange has included an overview of the BSTX 
Security Token Protocol as Exhibit 3N. The Security Token Design 
Affirmation, attached as Exhibit 3L, enables a company to affirm to the 
Exchange that it is in compliance with the applicable standards. 
Companies are required to submit a Security Token Design Affirmation 
upon initial listing on the Exchange. This Security Token Design 
Affirmation assists the Exchange's staff in verifying that an issuer's 
security tokens meet the requirements of the BXTS security token 
protocol.
K. Sample Underwriter's Letter
    In accordance with proposed Rule 26101, an initial public offering 
of a security token must meet certain listing requirements. The 
Exchange seeks to require the issuer's underwriter to execute a letter 
setting forth the details of the offering, including the name of the 
offering and why the offering meets the criteria of the BSTX rules. 
This information, set forth in the proposed Sample Underwriter's Letter 
and attached as Exhibit 3M, is necessary to assist the Exchange's 
regulatory staff in assessing the offering's compliance with BSTX 
listing standards for an initial public offering of a security token.
L. BSTX Security Token Protocol Summary Overview
    BSTX Rule 26138 requires that a BSTX listed company's security 
tokens must comply with the BSTX Security Token Protocol to trade on 
BSTX. Exhibit 3N provides fundamental information related to the 
Ethereum blockchain and background information on the functions, 
configurations, and events of the Asset Smart Contract of the BSTX 
Security Token Protocol. Exhibit 3N also provides information on the 
Registry and Compliance features of the BSTX Security Token Protocol.
VII. Regulation
    In connection with the operation of BSTX, the Exchange will 
leverage many of the structures it established to operate a national 
securities exchange in compliance with Section 6 of the Exchange 
Act.\336\ Specifically, the Exchange will extend its Regulatory 
Services Agreement with FINRA to cover BSTX Participants and trading on 
the BSTX System. This Regulatory Services Agreement will govern many 
aspects of the regulation and discipline of BSTX Participants, just as 
it does for options regulation. The Exchange will perform security 
token listing regulation, authorize BSTX Participants to trade on the 
BSTX System, and conduct surveillance of security token trading on the 
BSTX System.
---------------------------------------------------------------------------

    \336\ 15 U.S.C. 78f.
---------------------------------------------------------------------------

    Section 17(d) of the Exchange Act \337\ and the related Exchange 
Act rules permit SROs to allocate certain regulatory responsibilities 
to avoid duplicative oversight and regulation. Under Exchange Act Rule 
17d-1,\338\ the SEC designates one SRO to be the Designated Examining 
Authority, or DEA, for each broker-dealer that is a member of more than 
one SRO. The DEA is responsible for the financial

[[Page 13277]]

aspects of that broker-dealer's regulatory oversight. Because Exchange 
Participants, including BSTX Participants, also must be members of at 
least one other SRO, the Exchange would generally not be designated as 
the DEA for any of its members.\339\
---------------------------------------------------------------------------

    \337\ 15 U.S.C. 78q(d).
    \338\ 17 CFR 240.17d-1.
    \339\ See Exchange Rule 2020(a) (requiring that a Participant be 
a member of another registered national securities exchange or 
association).
---------------------------------------------------------------------------

    Rule 17d-2 under the Exchange Act \340\ permits SROs to file with 
the Commission plans under which the SROs allocate among each other the 
responsibility to receive regulatory reports from, and examine and 
enforce compliance with specified provisions of the Exchange Act and 
rules thereunder and SRO rules by, firms that are members of more than 
one SRO (``common members''). If such a plan is declared effective by 
the Commission, an SRO that is a party to the plan is relieved of 
regulatory responsibility as to any common member for whom 
responsibility is allocated under the plan to another SRO. The Exchange 
plans to join the Plan for the Allocation of Regulatory 
Responsibilities Regarding Regulation NMS.\341\ The Exchange may choose 
to join certain Rule 17d-2 agreements such as the agreement allocating 
responsibility for insider trading rules.\342\
---------------------------------------------------------------------------

    \340\ 17 CFR 240.17d-2.
    \341\ Exchange Act Release No. 85046 (February 4, 2019), 84 FR 
2643 (February 7, 2019).
    \342\ Exchange Act Release No. 84392 (October 10, 2018), 83 FR 
52243 (October 16, 2018).
---------------------------------------------------------------------------

    For those regulatory responsibilities that fall outside the scope 
of any Rule 17d-2 agreements that the Exchange may join, subject to 
Commission approval, the Exchange will retain full regulatory 
responsibility under the Exchange Act. However, as noted, the Exchange 
will extend its existing Regulatory Services Agreement with FINRA to 
provide that FINRA personnel will operate as agents for the Exchange in 
performing certain regulatory functions with respect to BSTX. As is the 
case with the Exchange's options trading platform, the Exchange will 
supervise FINRA and continue to bear ultimate regulatory responsibility 
for BSTX. Consistent with the Exchange's existing regulatory structure, 
the Exchange's Chief Regulatory Officer shall have general supervision 
of the regulatory operations of BSTX, including responsibility for 
overseeing the surveillance, examination, and enforcement functions and 
for administering all regulatory services agreements applicable to 
BSTX. Similarly, the Exchange's existing Regulatory Oversight Committee 
will be responsible for overseeing the adequacy and effectiveness of 
Exchange's regulatory and self-regulatory organization 
responsibilities, including those applicable to BSTX. Finally, as it 
does with options, the Exchange will perform automated surveillance of 
trading on BSTX for the purpose of maintaining a fair and orderly 
market at all times and monitor BSTX to identify unusual trading 
patterns and determine whether particular trading activity requires 
further regulatory investigation by FINRA.
    In addition, the Exchange will oversee the process for determining 
and implementing trade halts, identifying and responding to unusual 
market conditions, and administering the Exchange's process for 
identifying and remediating ``clearly erroneous trades'' pursuant to 
proposed Rule 25110. The Exchange shall also oversee the onboarding and 
application process for BSTX Participants as well as compliance by 
issuers of security tokens with the applicable initial and continuing 
listing requirements, including compliance with the BSTX Protocol.\343\
---------------------------------------------------------------------------

    \343\ See proposed Exchange Rules 26230 (Security Token 
Architecture Audit) and 26138 (BSTX Security Token Protocol).
---------------------------------------------------------------------------

VIII. NMS Plans
    The Exchange intends to join the Order Execution Quality Disclosure 
Plan, the Plan to Address Extraordinary Market Volatility, the Plan 
Governing the Process of Selecting a Plan Processor, and the applicable 
plans for consolidation and dissemination of market data. The Exchange 
is already a participant in the NMS plan related to the Consolidated 
Audit Trail. Consistent with Section 6(b)(5) of the Exchange Act,\344\ 
the Exchange believes that joining the same set of NMS plans that all 
other national securities exchanges that trade equities must join 
fosters cooperation and coordination with other national securities 
exchanges and other market participants engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities.
---------------------------------------------------------------------------

    \344\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of the Exchange Act,\345\ in general and with 
Section 6(b)(5) of the Exchange Act,\346\ in particular, in that it is 
designed to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public interest; 
and it is not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers, or to regulate by virtue of 
any authority conferred by this title matters not related to the 
purposes of this title or the administration of the Exchange.
---------------------------------------------------------------------------

    \345\ 15 U.S.C. 78a et seq.
    \346\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that BSTX will benefit individual investors, 
other market participants, and the equities market generally. The 
Exchange proposes to establish BSTX as a facility of the Exchange that 
would trade equities in a similar manner to how equities presently 
trade on other exchanges. However, BSTX would also require reporting of 
end-of-day security token balances to the Exchange in order to 
facilitate the use of blockchain technology as an ancillary 
recordkeeping mechanism. The Exchange believes that using blockchain 
technology as an ancillary recordkeeping mechanism that operates in 
parallel with the traditional trading, recordkeeping, and clearance and 
settlement structures that market participants are familiar with is an 
important first step toward exploring the potential uses and benefits 
of blockchain technology in securities transactions. The entry of an 
innovative competitor such as BSTX seeking to implement a measured 
introduction of blockchain technology in connection with the trading of 
equity securities may promote competition by encouraging other market 
participants to find ways of using blockchain technology in connection 
with securities transactions. The proposed regulation of BSTX and BSTX 
Participants, as well as the execution of security tokens using a 
price-time priority model and the clearance and settlement of security 
tokens will all operate in a manner substantially similar to existing 
equities exchanges. In this way, the Exchange believes that BSTX 
provides a robust regulatory structure that protects investors and the 
public interest while introducing the use of blockchain technology as 
an ancillary recordkeeping mechanism in connection with listed equity 
securities.
    In order to implement the use of blockchain technology as an 
ancillary recordkeeping mechanism, the Exchange proposes two 
requirements pursuant to proposed Rule 17020 to: (i) Obtain a wallet 
address through BSTX to which end-of-day security token

[[Page 13278]]

balances may be recorded to the Ethereum blockchain as an ancillary 
recordkeeping mechanism; and (ii) requiring BSTX Participants to report 
their end-of-day security token balances to BSTX to facilitate updates 
to the Ethereum blockchain as an ancillary recordkeeping mechanism to 
reflect changes in ownership as a result of trading security tokens.
    The Exchange believes that the proposed address whitelisting and 
end-of-day security token balance reporting requirement is consistent 
with the Exchange Act, and Section 6(b)(5) \347\ in particular, because 
it is designed to foster cooperation and coordination with persons 
engaged in regulating, clearing, settling, and processing information 
with respect to transactions in security tokens and does not unfairly 
discriminate among BSTX Participants, all of whom are subject to the 
same wallet address and end-of-day reporting requirement. The 
requirement to obtain a wallet address is a one-time, minimal 
obligation similar to obtaining an MPID or other market participant 
identifier that is applicable to each BSTX Participant. The end-of-day 
security token balance reporting obligation would be used to update the 
Ethereum blockchain as an ancillary recordkeeping mechanism, which the 
Exchange believes would be a first step in demonstrating the potential 
use of blockchain technology in connection with securities 
transactions. The Exchange does not propose to charge a fee in 
connection with either of these requirements. As discussed in greater 
detail above,\348\ the Exchange believes that these proposed 
requirements are consistent with the Exchange Act as they are necessary 
to facilitate the blockchain-based ancillary recordkeeping mechanism 
and are consistent with authority that the Commission has already 
approved for exchanges regarding furnishment of records by members of 
the exchange. The Exchange believes that blockchain technology offers 
potential benefits to investors, and while such benefits may not be 
immediately evident while the blockchain is used only as ancillary 
recordkeeping mechanism, the Exchange believes that a measured and 
gradual introduction of blockchain technology is a useful way to 
explore these potential benefits that is consistent with the protection 
of investors and the public interest.
---------------------------------------------------------------------------

    \347\ 15 U.S.C. 78f(b)(5).
    \348\ See supra Parts II.G. through J for further discussion 
regarding why these proposed requirements are consistent with the 
Exchange Act.
---------------------------------------------------------------------------

    The Exchange also believes that the proposed rule change is 
consistent with Section 11A of Exchange Act which sets forth the 
Commission's authority to establish and maintain a national market 
system.\349\ In setting forth the Commission's authority to establish a 
national market system, Congress expressly contemplated that the 
national market system ``may include use of subsystems for particular 
types of securities with unique trading characteristics.'' \350\ The 
Exchange has proposed here a type of security (i.e., security tokens) 
that trade, clear, and settle entirely within the scope and using the 
same processes as the existing national market system, but that 
pursuant to the proposed BSTX Rules would have the unique 
characteristic of an end-of-day security token balance reporting 
process as an ancillary recordkeeping function using the ``subsystem'' 
of blockchain technology.\351\ The clear intent of Congress was to 
provide for a national market system that could include such 
``securities with unique trading characteristics.'' For these reasons 
the Exchange believes that the proposed rule change is consistent with 
Section 11A of the Exchange Act.
---------------------------------------------------------------------------

    \349\ 15 U.S.C. 78k-1.
    \350\ 15 U.S.C. 78k-1(a)(2).
    \351\ The Exchange notes that to the extent the Commission 
believes that the ancillary recordkeeping process regarding security 
tokens under the proposed BSTX Rules is not a ``unique trading 
characteristic'' of security tokens for purposes of Section 11A of 
the Exchange Act insofar as it does not directly relate to 
``trading'' of security tokens, then there would not be any concern 
with respect to security tokens regarding consistency with Section 
11A. In other words, either the ancillary recordkeeping process is a 
unique trading characteristic of security tokens as explicitly 
contemplated by Congress as part of the national market system or it 
is not a unique trading characteristic of security tokens because 
they will trade, clear, and settle the same as all other NMS stock. 
In the latter case, security tokens would be consistent with Section 
11A just like all other NMS stock.
---------------------------------------------------------------------------

    Finally, the Exchange believes that the proposal is consistent with 
Section 6(b)(5) of the Exchange Act because the BSTX Rules would not be 
designed to regulate by virtue of any authority conferred by the 
Exchange Act matters that are not related to the purposes of the 
Exchange Act or the administration of the Exchange. Congress adopted 
Section 2 of the Exchange Act to set forth the reasons for the 
necessity of the Exchange Act, which expressly include that 
``transactions in securities as commonly conducted upon securities 
exchanges and over-the-counter markets are effected with a national 
public interest which makes it necessary to provide for regulation and 
control of such transactions and of practices and matters related 
thereto, including . . . to require appropriate reports[.]'' \352\ 
[emphasis added.] The Exchange Act and rules of self-regulatory 
organizations, including national securities exchanges and national 
securities associations, include reporting requirements that regulate 
and control matters and practices related to securities transactions 
conducted on securities exchanges and in the over-the-counter markets. 
For example, all of the U.S. options exchanges and FINRA maintain rules 
approved by the Commission that require their member broker-dealers to 
prepare and submit daily large options position reports to a third-
party administrator that maintains a large options position reporting 
system.\353\ These large option positions reports are not reports 
regarding the trading or clearance and settlement of securities 
transactions themselves but, instead, are reports that are related to 
end-of-day positions of the members of the options exchange and/or 
FINRA in a particular class of standardized or over-the-counter 
securities option. As described above, the proposed BSTX Rules 
regarding the ancillary recordkeeping process would similarly require 
BSTX Participants to provide reports regarding their end-of-day 
positions in security tokens. Also as described above, the Exchange 
believes that the requirements regarding the ancillary recordkeeping 
process will promote the use of the functionality of smart contracts 
and their ability to allocate and re-allocate security token balances 
across multiple addresses in connection with end-of-day security token 
position balance information of BSTX Participants such that the 
requirements will allow market participants to observe and increase 
their familiarity with the capabilities and potential benefits of 
blockchain technology in a context that parallels current equity market 
infrastructure and thereby advances and protects the public's interest 
in the use and development of new data processing techniques that may 
create opportunities for more efficient, effective and safe securities 
markets.\354\
---------------------------------------------------------------------------

    \352\ 15 U.S.C. 78(b).
    \353\ See e.g., FINRA Rule 2360(b)(5) and Cboe Rule 8.43.
    \354\ Report of the Senate Committee on Banking, Housing & Urban 
Affairs, S. Rep. No. 94-75, at 8 (1975) (expressing Congress' 
finding that new data processing and communications systems create 
the opportunity for more efficient and effective markets).

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[[Page 13279]]

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Exchange Act. The 
Exchange operates in an intensely competitive global marketplace for 
transaction services. Relying on its array of services and benefits, 
the Exchange competes for the privilege of providing market services to 
broker-dealers. The Exchange's ability to compete in this environment 
is based in large part on the quality of its trading systems, the 
overall quality of its market and its attractiveness to the largest 
number of investors, as measured by speed, likelihood and costs of 
executions, as well as spreads, fairness, and transparency.
    The Exchange believes that the primary areas where the proposed 
rule change has the potential to result in a burden on competition are 
with regard to the terms on which: (1) Issuers may list their 
securities for trading, (2) market participants that may access the 
Exchange and use its facilities, (3) security token transactions may be 
cleared and settled, (4) security token transactions occurring OTC, and 
(5) security token transactions occurring on other exchanges that might 
extend unlisted trading privileges to security tokens.
    Regarding considerations (1) and (2), and as described in detail in 
Item 3 above, the BSTX Rules are drawn substantially from the existing 
rules of other exchanges that the Commission has already found to be 
consistent with the Exchange Act, including regarding whether they 
impose any burden on competition that is not necessary or appropriate 
in furtherance of its purposes. For example, the BSTX Listing Rules in 
the 26000 and 27000 Series that affect issuers and their ability to 
list security tokens for trading are based substantially on the current 
rules of NYSE American. The Exchange has proposed that issuers would be 
required to create and maintain a security token compliant with the 
BSTX Protocol. The Exchange recognizes that these requirements are 
additional to those of other exchanges. However, the Exchange does not 
believe this poses a burden on competition because issuers are free to 
choose to list on other exchanges without such requirements. The 
Exchange believes that these requirements may attract issuers that are 
interested in exploring the potentials of blockchain technology. 
Additionally, the BSTX Rules regarding membership and access to and use 
of the facilities of BSTX are also substantially based on existing 
exchange rules. Specifically, the relevant BSTX Rules are as follows: 
Participation on BSTX (Rule 18000 Series); business conduct for BSTX 
participants (Rule 19000 Series); financial and operational rules for 
BSTX participants (Rule 20000 Series); supervision (Rule 21000 Series); 
miscellaneous provisions (Rule 22000 Series); trading practices (Rule 
23000 Series); discipline and summary suspension (Rule 24000 Series); 
trading (Rule 25000 Series); market making (Rule 25200 Series); and 
dues, fees, assessments, and other charges (Rule 28000 Series). As 
described in detail in Item 3, these rules are substantially based on 
analogous rules of the following exchanges, as applicable: BOX; 
Investors Exchange LLC; Cboe BZX Exchange, Inc.; The Nasdaq Stock 
Market LLC; and NYSE American LLC. The address whitelisting and end-of-
day security token balance reporting requirements to facilitate the use 
of the Ethereum blockchain as an ancillary recordkeeping mechanism in 
proposed Rule 17020 would apply equally to all BSTX Participants and 
therefore would not impose any different burden on one BSTX Participant 
compared to another. The Exchange believes that these requirements 
would impose only a minimal burden on BSTX Participants that is 
unlikely to materially impact the competitive balance among investors 
and traders of security tokens.
    Regarding consideration (3) above and the manner in which security 
token transactions may be cleared and settled, the Exchange proposes to 
clear and settle security tokens in accordance with the rules, policies 
and procedures of a registered clearing agency, similar to how the 
Exchange believes other exchange-listed equity securities are cleared 
and settled today. Therefore, BSTX's rules do not impose any burden on 
competition regarding the manner in which trades may be cleared or 
settled because market participants would be able to clear and settle 
security token transactions insubstantially the same manner as they 
already clear and settle transactions in other types of NMS stock.
    With respect to consideration (4) above, as previously noted, 
market participants would not be limited in their ability to trade 
security tokens OTC because security tokens could be traded OTC and 
would be cleared and settled in the same manner as other NMS stocks 
through the facilities of a registered clearing agency. Thus, the 
Exchange does not believe that its proposal will place any new burden 
on competition with respect to OTC trading, given that trading, 
clearance and settlement will take place in the same manner as for 
other NMS stocks. The Exchange acknowledges that BSTX Participants 
would be subject to additional requirements (i.e., acquiring a wallet 
address and end-of-day security token balance reporting pursuant to 
proposed Rule 17020) that are not required of non-BSTX Participants 
trading security tokens. The Exchange believes that these additional 
requirements impose only a minimal burden on BSTX Participants and 
should not have any material or undue burden or impact on competition 
between BSTX Participants and non-BSTX Participants. Acquiring a wallet 
address is a one-time burden that can be readily addressed by 
contacting the Exchange, and the end-of-day security token balance 
reporting requests only that the BSTX Participant, either directly or 
through its carrying firm, report information that it (or its carrying 
firm) already has available to it from DTC on a daily basis regarding 
the balance of security tokens held.
    Finally, with respect to consideration (5) noted above regarding 
other exchanges extending unlisted trading privileges to security 
tokens, the Exchange does not believe that the proposed Rules would 
impose a burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Exchange Act. Security tokens would 
trade, clear, and settle in the same manner as other NMS stock. 
Accordingly, other exchanges would be able to extend unlisted trading 
privileges to security tokens in accordance with Commission rules.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange has neither solicited nor received comments on the 
proposed rule change.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as modified by Amendment No. 2, is consistent with the Act. In 
particular, the Commission seeks comment on the questions posed in the 
Order Instituting Proceedings previously issued by the Commission with 
respect to this proposed rule

[[Page 13280]]

change.\355\ Comments may be submitted by any of the following methods:
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    \355\ See Order Instituting Proceedings, supra note 8, 85 FR at 
4043.
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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-BOX-2019-19 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-BOX-2019-19. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-BOX-2019-19 and should be submitted on 
or before March 27, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\356\
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    \356\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-04470 Filed 3-5-20; 8:45 am]
 BILLING CODE 8011-01-P


