[Federal Register Volume 85, Number 90 (Friday, May 8, 2020)]
[Notices]
[Pages 27451-27464]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-09861]



[[Page 27451]]

=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88806; File No. 10-237]


In the Matter of the Application of MEMX LLC for Registration as 
a National Securities Exchange Findings, Opinion, and Order of the 
Commission

May 4, 2020.

I. Introduction and Procedural History

    On September 9, 2019, MEMX LLC (``MEMX'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``Commission'') a Form 1 
application under the Securities Exchange Act of 1934 (``Act''), 
seeking registration as a national securities exchange under Section 6 
of the Act.\1\ On October 23, 2019, MEMX submitted Amendment No. 1 to 
the application.\2\ Notice of the application, as amended, was 
published for comment in the Federal Register on November 6, 2019.\3\ 
In a letter dated January 31, 2020, MEMX consented to an extension of 
time for up to an additional 30 days from the date of publication of 
notice of its Form 1 application.\4\ On February 26, 2020, MEMX 
submitted Amendment No. 2 to the application.\5\ On March 3, 2020, MEMX 
consented to another 30-day extension of time.\6\ The Commission 
received three comments on the application, along with two response 
letters from MEMX.\7\ On March 26, 2020, MEMX consented to another 30-
day extension of time.\8\ On April 27, 2020, MEMX submitted Amendment 
No. 3 to the application.\9\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78f. See also 15 U.S.C. 78s(a)(1) (stating that 
the Commission shall, ``[w]ithin ninety days of the date of 
publication of such notice (or within such longer period as to which 
the applicant consents),'' grant the registration or institute 
proceedings to determine whether the registration should be denied).
    \2\ See Letter to Vanessa Countryman, Secretary, Commission, 
from Anders Franzon, General Counsel, MEMX, dated October 23, 2019. 
In Amendment No. 1, MEMX submitted updated portions of its Form 1, 
including revised Exhibits A-5 (Second Amended and Restated LLC 
Agreement of MEMX LLC), B (Rules of MEMX), C-2 (Third Amended and 
Restated LLC Agreement of MEMX Holdings, LLC), and C-4 (Amended and 
Restated LLC Agreement of MEMX SubCo LLC).
    \3\ See Securities Exchange Act Release No. 87436 (October 31, 
2019), 84 FR 59854 (``Notice'').
    \4\ See Letter to Brett Redfearn, Director, Division of Trading 
and Markets, Commission, from Anders Franzon, General Counsel, MEMX, 
dated January 31, 2020, available at https://www.sec.gov/comments/10-237/10237-6741997-207764.pdf. See also supra note 1 (discussing 
the time for Commission action following publication of notice of an 
application for exchange registration).
    \5\ See Letter to Vanessa Countryman, Secretary, Commission, 
from Anders Franzon, General Counsel, MEMX, dated February 26, 2020, 
available at https://www.sec.gov/rules/other/2019/memx/memx-form-1.htm. In Amendment No. 2, MEMX updated portions of its Form 1, 
including revised Exhibits A-5 (Second Amended and Restated Limited 
Liability Company Agreement of MEMX), B (Rules of MEMX), C, C-2 
(Fourth Amended and Restated Limited Liability Company Agreement of 
MEMX Holdings), C-6 (First Amended and Restated Limited Liability 
Company Agreement of MEMX Technologies LLC), J, and K.
    \6\ See Letter to Brett Redfearn, Director, Division of Trading 
and Markets, Commission, from Anders Franzon, General Counsel, MEMX, 
dated March 3, 2020, available at https://www.sec.gov/comments/10-237/10237-6915230-211271.pdf.
    \7\ Comments received in response to the Notice, and MEMX's 
responses thereto, are available at https://www.sec.gov/comments/10-237/10-237.htm.
    \8\ See Letter to Brett Redfearn, Director, Division of Trading 
and Markets, Commission, from Anders Franzon, General Counsel, MEMX, 
dated March 26, 2020, available at https://www.sec.gov/comments/10-237/10237-7000570-214790.pdf.
    \9\ See Letter to Vanessa Countryman, Secretary, Commission, 
from Anders Franzon, General Counsel, MEMX, dated April 27, 2020, 
available at https://www.sec.gov/rules/other/2019/memx/memx-form-1.htm. In Amendment No. 3, MEMX updated Exhibit A-5 (Second Amended 
and Restated Limited Liability Company Agreement of MEMX).
---------------------------------------------------------------------------

    The Commission has reviewed the Exchange's registration 
application, as amended, together with the comment letters received, in 
order to make a determination whether to grant such registration. For 
the reasons set forth below, and based on the representations set forth 
in MEMX's Form 1, as amended, this order approves MEMX's Form 1 
application, as amended, for registration as a national securities 
exchange.

II. Statutory Standards

    Pursuant to Sections 6(b) and 19(a) of the Act,\10\ the Commission 
shall by order grant an application for registration as a national 
securities exchange if the Commission finds, among other things, that 
the proposed exchange is so organized and has the capacity to carry out 
the purposes of the Act and can comply, and can enforce compliance by 
its members and persons associated with its members, with the 
provisions of the Act, the rules and regulations thereunder, and the 
rules of the exchange.\11\
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78f(b) and 15 U.S.C. 78s(a), respectively.
    \11\ See also supra note 1 (discussing the time for Commission 
action following publication of notice of an application for 
exchange registration).
---------------------------------------------------------------------------

    As discussed in greater detail below, the Commission finds that 
MEMX's application, as amended, for exchange registration meets the 
requirements of the Act and the rules and regulations thereunder. 
Further, the Commission finds that the proposed rules of MEMX are 
consistent with Section 6 of the Act in that, among other things, they 
are designed to: (1) Assure fair representation of the exchange's 
members in the selection of its directors and administration of its 
affairs and provide that, among other things, one or more directors 
shall be representative of investors and not be associated with the 
exchange, or with a broker or dealer; \12\ (2) prevent fraudulent and 
manipulative acts and practices, promote just and equitable principles 
of trade, foster cooperation and coordination with persons engaged in 
regulating, clearing, settling, processing information with respect to, 
and facilitating transactions in securities, and remove impediments to 
and perfect the mechanisms of a free and open market and a national 
market system; \13\ (3) not permit unfair discrimination between 
customers, issuers, or dealers; \14\ and (4) protect investors and the 
public interest.\15\ The Commission also finds that the proposed rules 
of MEMX are consistent with Section 11A of the Act.\16\ Finally, the 
Commission finds that MEMX's proposed rules do not impose any burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Act.\17\
---------------------------------------------------------------------------

    \12\ See U.S.C. 78f(b)(3).
    \13\ See U.S.C. 78f(b)(5).
    \14\ See id.
    \15\ See id.
    \16\ 15 U.S.C. 78k-1.
    \17\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

III. Discussion

A. Governance of MEMX

    MEMX will be owned directly or indirectly by MEMX Holdings LLC 
(``MEMX Holdings''), a Delaware limited liability company. 
Specifically, MEMX Holdings will directly own 99.5% of the equity of 
MEMX and indirectly hold the remaining .5% of the equity of MEMX 
through its 100% ownership of MEMX SubCo LLC (``SubCo''). In turn, MEMX 
Holdings is owned by a group of investors that include broker-dealers 
and banks.
1. MEMX Board of Directors
    The board of directors of MEMX (``Exchange Board'') \18\ will be 
its governing body and will possess all of the powers necessary for the 
management of its business and affairs, including governance of MEMX as 
a self-regulatory organization (``SRO'').\19\ Specifically:
---------------------------------------------------------------------------

    \18\ A Director may not be subject to statutory 
disqualification. See Second Amended and Restated Limited Liability 
Company Agreement of MEMX (``MEMX LLC Agreement''), Article VII, 
Section 7.6(d).
    \19\ See MEMX LLC Agreement, Article VII, Section 7.2. See also 
Form 1, Exhibit J.

---------------------------------------------------------------------------

[[Page 27452]]

     The Exchange Board initially will be composed of 10 
directors; \20\
---------------------------------------------------------------------------

    \20\ See MEMX LLC Agreement, Article VII, Section 7.3(a).
---------------------------------------------------------------------------

     one director will be the Chief Executive Officer of MEMX; 
\21\
---------------------------------------------------------------------------

    \21\ See MEMX LLC Agreement, Article VII, Section 7.3(b)(i).
---------------------------------------------------------------------------

     the number of Non-Industry Directors \22\ will equal or 
exceed the sum of the Industry Directors \23\ and Member Representative 
Directors; \24\
---------------------------------------------------------------------------

    \22\ ``Non-Industry Director'' means a Director who is an 
Independent Director or any other individual who would not be an 
Industry Director. See MEMX LLC Agreement, Article I, Section 1.1.
    \23\ ``Industry Director'' means, among other criteria, a 
Director who is or has been within the prior three years an officer, 
director or employee of a broker or dealer, excluding an outside 
director or a director not engaged in the day-to-day management of a 
broker or dealer. See MEMX LLC Agreement, Article I, Section 1.1., 
for a description of all of the circumstances regarding when a 
Director would be considered an Industry Director.
    \24\ See MEMX LLC Agreement, Article VII, Section 7.3(b)(ii)(A). 
``Member Representative Director'' means a Director who has been 
appointed as such to the initial Exchange Board pursuant to Section 
7.4 of the MEMX LLC Agreement or elected by MEMX Holdings after 
having been nominated by the Member Nominating Committee or by an 
Exchange member pursuant to the MEMX LLC Agreement and confirmed as 
the nominee of Exchange members after majority vote of Exchange 
members, if applicable. A Member Representative Director must be an 
officer, director, employee, or agent of an Exchange member that is 
not a Unitholder Exchange Member. See MEMX LLC Agreement, Article I, 
Section 1.1.
---------------------------------------------------------------------------

     at least two of the Non-Industry Directors shall also 
qualify as Independent Directors; \25\
---------------------------------------------------------------------------

    \25\ ``Independent Director'' means a Director who has no 
material relationship with the Exchange or any affiliate of the 
Exchange or any Exchange Member or any affiliate of any Exchange 
Member; provided, however, that an individual who otherwise 
qualifies as an Independent Director shall not be disqualified from 
serving in such capacity solely because such Director is a Director 
of MEMX or MEMX Holdings. See MEMX LLC Agreement, Article I, Section 
1.1.
---------------------------------------------------------------------------

     at least one of the Non-Industry Directors shall be 
representative of issuers and investors and not associated with an 
Exchange Member, a broker, or a dealer; and
     at least 20% of the directors on the Exchange Board will 
be Member Representative Directors.\26\
---------------------------------------------------------------------------

    \26\ See MEMX LLC Agreement, Article VII, Section 7.3(b)(ii)(B). 
See also Amendment No. 3, supra note 9 (in which MEMX amended 
Section 7.3(b)(ii).
---------------------------------------------------------------------------

    The initial directors of the Exchange Board will be appointed by 
MEMX Holdings and will serve until the first annual meeting of Company 
Members.\27\ The first annual meeting of Company Members will be held 
within 90 days after the Commission grants MEMX's exchange 
registration.\28\
---------------------------------------------------------------------------

    \27\ See MEMX LLC Agreement, Article VII, Section 7.3(f). 
``Company Members'' means MEMX Holdings and SubCo. See MEMX LLC 
Agreement, Article I, Section 1.1.
    \28\ See MEMX LLC Agreement, Article VII, Section 7.3(f).
---------------------------------------------------------------------------

    In addition, MEMX Holdings will appoint the initial Nominating 
Committee and Member Nominating Committee, consistent with each 
committee's compositional requirements, to nominate candidates for 
election to the Exchange Board.\29\ The Nominating Committee and Member 
Nominating Committee, after completion of their respective duties for 
nominating directors for election to the Board for that year, will 
recommend candidates to serve on the succeeding year's Nominating 
Committee or Member Nominating Committee, as applicable.\30\ MEMX 
members will have rights to nominate and elect additional candidates 
for the Member Nominating Committee pursuant to a petition process.\31\
---------------------------------------------------------------------------

    \29\ See MEMX LLC Agreement, Article VIII, Section 8.7(b).
    \30\ See id.
    \31\ See MEMX LLC Agreement, Article VII, Section 7.4
---------------------------------------------------------------------------

    The Nominating Committee will nominate candidates for election to 
the Board.\32\ For Member Representative Director positions, the Member 
Nominating Committee, composed solely of Member Representative 
Committee or Panel Members,\33\ will solicit input from MEMX members 
and members may submit petition candidates.\34\ If no candidates are 
nominated pursuant to a petition process, then the initial nominees 
approved and submitted by the Member Nominating Committee will be 
nominated as Member Representative Directors by the Nominating 
Committee.\35\ If a petition process produces additional candidates, 
then the candidates nominated pursuant to the petition process, 
together with those nominated by the Member Nominating Committee, will 
be presented to MEMX members for election to determine the final 
designees for any open Member Representative Director positions.\36\ In 
the event of a contested election, the candidates who receive the most 
votes will be selected as the Member Representative Director designees 
by the Member Nominating Committee.\37\
---------------------------------------------------------------------------

    \32\ See MEMX LLC Agreement, Article VII, Section 7.4(a).
    \33\ ``Member Representative Committee or Panel Members'' means 
a member of any Committee or hearing panel who is an officer, 
director, employee or agent of an Exchange Member that is not a 
Unitholder Exchange Member. See MEMX LLC Agreement, Article I, 
Section 1.1.
    \34\ See MEMX LLC Agreement, Article VII, Section 7.4(a). See 
also MEMX LLC Agreement, Article VII, Section 8.7(c).
    \35\ See MEMX LLC Agreement, Article VII, Section 7.4(e).
    \36\ See id.
    \37\ See MEMX LLC Agreement, Article VII, Section 7.4(f).
---------------------------------------------------------------------------

    The Commission believes that the MEMX governance provisions are 
consistent with the Act. In particular, the Commission believes that 
the requirement that the number of Member Representative Directors must 
be at least 20% of the Board and the means by which they will be chosen 
by MEMX members provides for the fair representation of members in the 
selection of directors and the administration of MEMX and therefore are 
consistent with Section 6(b)(3) of the Act.\38\ As the Commission has 
previously noted, this requirement helps to ensure that members have a 
voice in an exchange's self-regulatory program, and that an exchange is 
administered in a way that is equitable to all those who trade on its 
market or through its facilities.\39\
---------------------------------------------------------------------------

    \38\ 15 U.S.C. 78f(b)(3).
    \39\ See, e.g., Securities Exchange Act Release Nos. 85828 (May 
10, 2019), 84 FR 21841 (May 15, 2019) (File No. 10-234) (order 
granting registration of Long Term Stock Exchange, Inc.) (``LTSE 
Order''); 79543 (December 13, 2016), 81 FR 92901, 92903 (December 
20, 2016) (File No. 10-227) (order granting registration of MIAX 
PEARL, LLC) (``MIAX PEARL Order''); 68341 (December 3, 2012), 77 FR 
73065, 73067 (December 7, 2012) (File No. 10-207) (order granting 
the registration of Miami International Securities Exchange, LLC 
(``MIAX Exchange'')) (``MIAX Order''); 58375 (August 18, 2008), 73 
FR 49498, 49501 (August 21, 2008) (File No. 10-182) (order granting 
the registration of BATS Exchange, Inc.) (``BATS Order''); and 53128 
(January 13, 2006), 71 FR 3550, 3553 (January 23, 2006) (File No. 
10-131) (granting the exchange registration of Nasdaq Stock Market, 
Inc.) (``Nasdaq Order'').
---------------------------------------------------------------------------

    In addition, with respect to the requirements that the number of 
Non-Industry Directors equal or exceed the sum of the number of 
Industry Directors and Member Representative Directors, that at least 
two Non-Industry Directors shall also qualify as Independent Directors, 
and that at least one of the Non-Industry Directors shall be 
representative of issuers and investors and not associated with an 
Exchange Member, a broker, or a dealer, the Commission believes that 
the proposed composition of the Exchange Board satisfies the 
requirements in Section 6(b)(3) of the Act,\40\ which require in part 
that one or more directors be representative of issuers and investors 
and not be associated with a member of the exchange, or with a broker 
or dealer. The Commission previously has stated that the inclusion of 
public, non-industry representatives on exchange oversight bodies is an 
important mechanism to support an exchange's ability to protect the 
public interest.\41\

[[Page 27453]]

Further, the presence of public, non-industry representatives can help 
to ensure that no single group of market participants has the ability 
to systematically disadvantage other market participants through the 
exchange governance process. The Commission believes that public 
directors can provide unbiased perspectives, which may enhance the 
ability of the Exchange Board to address issues in a non-discriminatory 
fashion and foster the integrity of the Exchange.
---------------------------------------------------------------------------

    \40\ 15 U.S.C. 78f(b)(3).
    \41\ See, e.g., LTSE Order, supra note 39, at 21843; MIAX PEARL 
Order, supra note 39, at 92903; MIAX Order, supra note 39, at 73067; 
BATS Order, supra note 39, at 49501; and Nasdaq Order, supra note 
39, at 3553.
---------------------------------------------------------------------------

2. Interim Board
    MEMX Holdings will hold a special meeting to appoint Interim 
Directors of the Board (``Interim Board''), which will include Interim 
Member Representative Directors.\42\ Upon appointment of the Interim 
Directors, the Interim Board will meet the Board composition 
requirements set forth in the MEMX LLC Agreement.\43\ The Interim Board 
members will serve only until the first annual meeting of Company 
Members, which will be held within 90 days after the Commission grants 
the Exchange's registration as a national securities exchange.\44\ The 
Exchange represents that it will complete the full nomination, 
petition, and voting process set forth in the MEMX LLC Agreement, which 
will provide persons that are approved as MEMX members after the date 
that the Commission grants the Exchange's registration as a national 
securities exchange with the opportunity to participate in the 
selection of Member Representative Directors as promptly as possible 
after the effective date of the MEMX LLC Agreement.\45\
---------------------------------------------------------------------------

    \42\ See Form 1, Exhibit J.
    \43\ See id. See also MEMX LLC Agreement, Article VII, Section 
7.3.
    \44\ See MEMX LLC Agreement, Article VII, Section 7.3(f).
    \45\ See Form 1, Exhibit J.
---------------------------------------------------------------------------

3. Exchange Committees
    MEMX has proposed to establish several named committees of the 
Exchange Board, including: An Appeals Committee \46\ and a Regulatory 
Oversight Committee,\47\ as well as the Nominating Committee and Member 
Nominating Committee, discussed above.\48\
---------------------------------------------------------------------------

    \46\ See MEMX LLC Agreement, Article VIII, Section 8.1. The 
Appeals Committee will preside over all appeals related to 
disciplinary and adverse action determinations in accordance with 
MEMX rules. See MEMX LLC Agreement, Article VIII, Section 8.6.
    \47\ See MEMX LLC Agreement, Article VIII, Section 8.1. The 
Regulatory Oversight Committee will be responsible for establishing 
the goals, assessing the performance, and fixing the compensation of 
the Chief Regulatory Officer and for recommending personnel actions 
involving the Chief Regulatory Officer and senior regulatory 
personnel. See MEMX LLC Agreement, Article VIII, Section 8.8(c).
    \48\ The Exchange Board could also establish additional 
committees. See MEMX LLC Agreement, Article VIII, Section 8.1. All 
committees of the Board will be subject to the control and 
supervision of the Board. See id.
---------------------------------------------------------------------------

    The Appeals Committee will consist of two Independent Directors, 
and one Member Representative Director.\49\ Each member of the 
Regulatory Oversight Committee must be an Independent Director.\50\
---------------------------------------------------------------------------

    \49\ See MEMX LLC Agreement, Article VIII, Section 8.6.
    \50\ See MEMX LLC Agreement, Article VIII, Section 8.8(e).
---------------------------------------------------------------------------

    The Commission believes that the MEMX proposed named committees, 
which are similar to the named committees maintained by other 
exchanges,\51\ are designed to help enable the Exchange to carry out 
its responsibilities under the Act and are consistent with the Act, 
including Section 6(b)(1), which requires, in part, an exchange to be 
so organized and have the capacity to carry out the purposes of the 
Act.\52\
---------------------------------------------------------------------------

    \51\ See, e.g., Securities Exchange Act Release No. 78101 (June 
17, 2016), 81 FR 41142 (June 23, 2016) (File No. 10-222) (order 
granting the registration of Investors' Exchange, LLC) (``IEX 
Order''); Article IV, Section 4.1 of the Eleventh Amended and 
Restated Bylaws of Cboe Exchange, Inc.
    \52\ 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------

B. MEMX Holdings and Regulation of the Exchange

    When MEMX commences operations as a national securities exchange, 
it will have all of the attendant regulatory obligations under the Act. 
In particular, MEMX will be responsible for the operation and 
regulation of its trading system and the regulation of its members. The 
Commission believes that certain provisions in both the MEMX and MEMX 
Holdings governing documents are designed to facilitate the ability of 
MEMX to fulfill its regulatory obligations and to help facilitate 
Commission oversight of MEMX. The discussion below summarizes some of 
these key provisions.
1. Ownership Structure; Ownership and Voting Limitations
    As stated above, MEMX will be owned directly or indirectly by MEMX 
Holdings. The proposed Fourth Amended and Restated Limited Liability 
Company Agreement of MEMX Holdings (``MEMX Holdings LLC Agreement'') 
includes restrictions on the ability to own and vote units representing 
a fractional part of the interest in MEMX Holdings (``Units'').\53\ 
These limitations are designed to prevent any party to the MEMX 
Holdings LLC Agreement from exercising undue control over the operation 
of the Exchange and to ensure that the Exchange and the Commission are 
able to carry out their regulatory obligations under the Act.
---------------------------------------------------------------------------

    \53\ ``Unit'' is defined in Article I, Section 1.1 of the MEMX 
Holdings LLC Agreement. These provisions are consistent with 
ownership and voting limits approved by the Commission for other 
SROs. See, e.g., IEX Order, supra note 51, and LTSE Order, MIAX 
PEARL Order, MIAX Order, and BATS Order, supra note 39; see also 
Securities Exchange Release Nos. 6068 (February 4, 2016) (File No. 
10-221) (order granting exchange registration of ISE Mercury, LLC) 
(``ISE Mercury Order''); 70050 (July 26, 2013), 78 FR 46622, 46624 
(August 1, 2013) (File No. 10-209) (order granting the exchange 
registration of ISE Gemini, LLC) (``ISE Gemini Order''); 62158 (May 
24, 2010), 75 FR 30082 (May 28, 2010) (CBOE-2008-88) (Cboe 
demutualization order); 53963 (June 8, 2006), 71 FR 34660 (June 15, 
2006) (SR-NSX-2006-03) (NSX demutualization order); 51149 (February 
8, 2005), 70 FR 7531 (February 14, 2005) (SR-CHX-2004-26) (CHX 
demutualization order); and 49098 (January 16, 2004), 69 FR 3974 
(January 27, 2004) (SR-Phlx-2003-73) (Phlx demutualization order).
---------------------------------------------------------------------------

    In particular, for so long as MEMX Holdings shall control, directly 
or indirectly, MEMX, no person,\54\ either alone or together with its 
related persons,\55\ will be permitted to beneficially own, directly or 
indirectly, of record or beneficially, shares constituting more than 
40% of any class of Units.\56\ A more restrictive condition will apply 
to the broker-dealer members of the Exchange, who will be prohibited 
from beneficially owning, directly or indirectly, either alone or 
together with their related persons, more than 20% of any class of 
Units.\57\ If any party to the MEMX Holdings LLC Agreement purports to 
transfer \58\ any Units or Unit Equivalents \59\ in violation of these 
ownership limits, MEMX Holdings will be required (to the extent funds 
are legally available) to redeem the Units in excess of the applicable 
ownership limit.\60\
---------------------------------------------------------------------------

    \54\ See MEMX Holdings LLC Agreement, Article I, Section 1.1 
(defining ``Person'').
    \55\ See id. (defining ``Related Persons'').
    \56\ See MEMX Holdings LLC Agreement, Article III, Section 
3.5(a)(i). There are limited exceptions to these prohibitions. See 
infra notes 64-66 and accompanying text.
    \57\ See MEMX Holdings LLC Agreement, Article III, Section 
3.5(a)(ii). This restriction, unlike others discussed below (see 
infra note 64 and accompanying text), cannot be waived. See MEMX 
Holdings LLC Agreement, Article III, Section 3.5(b)(ii).
    \58\ See MEMX Holdings LLC Agreement, Article I, Section 1.1 
(defining ``transfer'' in this context).
    \59\ See id. (defining ``Unit Equivalents'').
    \60\ See MEMX Holdings LLC Agreement, Article III, Section 
3.7(c). The price of the redeemed Units or Unit Equivalents is also 
prescribed in the MEMX Holdings LLC Agreement. See id. The number of 
Units or Unit Equivalents to be redeemed is to be calculated after 
taking into account that the redeemed Units or Unit Equivalents will 
become treasury shares and will no longer be deemed to be 
outstanding. See id. It is further provided in the MEMX Holdings LLC 
Agreement that any Units or Unit Equivalents that have been called 
for redemption may not be deemed outstanding Units or Unit 
Equivalents if a sum sufficient to redeem the Units or Unit 
Equivalents has been irrevocably deposited or set aside to pay the 
redemption price. From and after the redemption date (unless MEMX 
Holdings defaults in providing funds for the payment of the 
redemption price), the redeemed Units or Unit Equivalents that have 
been redeemed will become treasury shares, and all rights of the 
holder of the redeemed Units or Unit Equivalents in MEMX Holdings 
(except the right to receive from MEMX Holdings the redemption price 
against delivery to MEMX Holdings of evidence of ownership of the 
shares) will cease. See id. In addition, in the event that any 
redemption has resulted in any person owning such number of Units or 
Unit Equivalents that is in violation of the ownership limits, MEMX 
Holdings will be required to redeem those Units or Unit Equivalents 
pursuant to the limitation provisions. See id.

---------------------------------------------------------------------------

[[Page 27454]]

    In addition, no person, alone or together with its related persons, 
may, directly, indirectly, or pursuant to any agreement, vote or cause 
the voting of Units or give any consent or proxy with respect to Units 
representing more than 20% of the voting power of the then issued and 
outstanding Units (``Voting Limitation'').\61\ Further, no person, 
either alone or together with its related persons, under circumstances 
that would result in the Units that are subject to such agreement, 
plan, or other arrangement not being voted on any matter or matters or 
any proxy relating thereto being withheld, where the effect of such 
agreement, plan, or other arrangement would be to enable any person, 
either alone or together with its related persons, to vote, possess the 
right to vote, or cause the voting of Units that would represent more 
than 20% of the voting power of the then issued and outstanding 
Units.\62\
---------------------------------------------------------------------------

    \61\ See MEMX Holdings LLC Agreement, Article III, Section 
3.5(a)(iii).
    \62\ See id. In addition, the quorum requirements of the MEMX 
Holdings board of directors (``MEMX Holdings Board'') will require 
the presence of (1) a Market Maker Director, (2) a Bank Director, 
and (3) a Retail Broker Director. See MEMX Holdings LLC Agreement, 
Article VIII, Section 8.6(a)(i). See also MEMX Holdings LLC 
Agreement, Article I, Section 1.1 (defining Market Maker Director, 
Bank Director, and Retail Broker Director). The Commission believes 
that this quorum provision will guard against undue influence over 
the affairs of MEMX Holdings by any particular category of MEMX 
Holdings investor.
---------------------------------------------------------------------------

    The MEMX Holdings Board will be permitted to waive the 40% 
ownership limitation and the 20% Voting Limitation pursuant to a 
resolution duly adopted by the MEMX Holdings Board by Supermajority 
Board Vote,\63\ if it makes certain determinations.\64\ Any such waiver 
will not be effective unless and until approved by the Commission.\65\
---------------------------------------------------------------------------

    \63\ See MEMX Holdings LLC Agreement, Article I, Section 1.1 
(defining ``Supermajority Board Vote'').
    \64\ See MEMX Holdings LLC Agreement, Article III, Section 
3.5(b)(ii). See also supra note 57 (concerning the inability to 
waive restrictions for broker-dealer members of the Exchange.) The 
required determinations are that such waiver will not impair the 
ability of the Exchange to carry out its functions and 
responsibilities as an ``exchange'' under the Act and the rules and 
regulations promulgated thereunder; that such waiver is otherwise in 
the best interests of MEMX Holdings, its stockholders, and the 
Exchange; that such waiver will not impair the ability of the 
Commission to enforce the Act and the rules and regulations 
promulgated thereunder; and that such Person and its Related Persons 
are not subject to any applicable ``statutory disqualification'' 
within the meaning of Section 3(a)(39) of the Act. See id. See also 
MEMX Holdings LLC Agreement, Article III, Section 3.5(c). These 
provisions are consistent with ownership and voting limits approved 
by the Commission for other SROs. See, e.g., IEX Order, supra note 
51, ISE Mercury Order and ISE Gemini Order, supra note 53; LTSE 
Order, MIAX PEARL Order, MIAX Order, and BATS Order, supra note 39; 
and Securities Exchange Act Release No. 61698 (March 12, 2010), 75 
FR 13151 (March 18, 2010) (File Nos. 10-194 and 10-196) (order 
approving DirectEdge exchanges) (``DirectEdge Exchanges Order'').
    \65\ See MEMX Holdings LLC Agreement, Article III, Section 
3.5(b)(ii).
---------------------------------------------------------------------------

    Any person that proposes to own Units in excess of the 40% 
ownership limitation, or to vote or grant any proxies or consents with 
respect to Units constituting more than 20% of the voting power of the 
then outstanding Units, will be required to deliver written notice to 
the MEMX Holdings Board of its intention.\66\ The notice must be 
delivered to the MEMX Holdings Board not less than 45 days (or any 
shorter period to which the Board expressly consents) before the 
proposed ownership of such Units or the proposed vote.\67\
---------------------------------------------------------------------------

    \66\ See MEMX Holdings LLC Agreement, Article III, Section 
3.5(d).
    \67\ See id.
---------------------------------------------------------------------------

    The MEMX Holdings LLC Agreement also contains provisions that are 
designed to further safeguard the ownership and voting limitations 
described above, or are otherwise related to direct and indirect 
changes in control. Specifically, any person that, either alone or 
together with its related persons beneficially owns, directly or 
indirectly (whether by acquisition or a change in the number of Units 
outstanding), of record or beneficially 5% or more of the then 
outstanding Units will be required to notify the MEMX Holdings Board in 
writing of such ownership.\68\ Thereafter, such persons will be 
required to update MEMX Holdings of any increase or decrease of 1% or 
more in their previously reported ownership percentage.\69\ Further, in 
the event of a merger or affiliation between MEMX Holdings members, the 
surviving member or surviving affiliated group will (1) if both such 
members had nominated a director that is serving on the MEMX Holdings 
Board at the time of their merger or affiliation, remove or cause the 
removal of one of such directors effective upon the consummation of 
such merger or affiliation, and (2) thereafter have the right to 
nominate only one director and the number of directors shall be reduced 
accordingly.\70\
---------------------------------------------------------------------------

    \68\ See MEMX Holdings LLC Agreement, Article III, Section 
3.6(a). The notice will require the Person's full legal name; the 
Person's title or status and the date on which such title or status 
was acquired; the Person's and its Related Person's) approximate 
ownership interest in MEMX Holdings; and whether the person has 
power, directly or indirectly, to direct the management or policies 
of MEMX Holdings, whether through ownership of securities, by 
contract or otherwise. See id.
    \69\ See MEMX Holdings LLC Agreement, Article III, Section 
3.6(b). Changes of less than 1% must also be reported to MEMX 
Holdings if they result in such Person crossing a 20% or 40% 
ownership threshold. See id. In addition, the Exchange's rules also 
impose limits on affiliation between the Exchange and a member of 
the Exchange. See MEMX Rule 2.10 (No Affiliation between Exchange 
and any Member).
    \70\ See MEMX Holdings LLC Agreement, Article VIII, Section 
8.17(a). See also MEMX LLC Agreement, Article VII, Section 
7.3(c)(v); and supra note 5 (concerning Amendment No. 2).
---------------------------------------------------------------------------

    The Exchange's LLC Agreement does not include the same change of 
control provisions that are present in the MEMX Holdings LLC Agreement 
because the MEMX LLC Agreement instead explicitly identifies its owners 
(MEMX Holdings and SubCo) by name as the Company Members of MEMX.\71\ 
Thus, any changes in the ownership of MEMX would require the MEMX LLC 
Agreement to be amended. Any amendment to the MEMX LLC Agreement, 
including to ownership of the Exchange, would constitute a proposed 
rule change under Section 19(b) of the Act \72\ and Rule 19b-4 \73\ 
thereunder that will be required to be filed with, or filed with and 
approved by, the Commission.\74\ Moreover, pursuant to the MEMX LLC 
Agreement itself, any transfer of limited liability company interests 
of MEMX will be subject to prior approval by the Commission pursuant to 
the rule filing procedure under Section 19 of the Act.\75\
---------------------------------------------------------------------------

    \71\ See MEMX LLC Agreement, Schedule 1.
    \72\ 15 U.S.C. 78s(b).
    \73\ 17 CFR 240.19b-4.
    \74\ See MEMX LLC Agreement, Article XIX, Section 19.2.
    \75\ See MEMX LLC Agreement, Article XV, Section 15.1(a).
---------------------------------------------------------------------------

    Although MEMX Holdings is not directly responsible for regulation, 
its activities with respect to the operation of MEMX must be consistent 
with, and must not interfere with, the self-regulatory obligations of 
MEMX.\76\ As described above, the provisions applicable to direct and 
indirect

[[Page 27455]]

changes in control of MEMX Holdings and MEMX, as well as the voting 
limitation imposed on owners of MEMX Holdings who also are MEMX 
members, are designed to help prevent any owner of MEMX Holdings from 
exercising undue influence or control over the operation of the 
Exchange and to help ensure that the Exchange retains a sufficient 
degree of independence to effectively carry out its regulatory 
obligations under the Act.
---------------------------------------------------------------------------

    \76\ See, e.g., IEX Order, supra note 51.
---------------------------------------------------------------------------

    In addition, these limitations are designed to address the 
conflicts of interests that might result from a member of a national 
securities exchange owning interests in the exchange. As the Commission 
has noted in the past, a member's ownership interest in an entity that 
controls an exchange could become so large as to cast doubt on whether 
the exchange may fairly and objectively exercise its self-regulatory 
responsibilities with respect to such member.\77\ A member that is a 
controlling shareholder of an exchange could seek to exercise that 
controlling influence by directing the exchange to refrain from, or the 
exchange may hesitate to, diligently monitor and conduct surveillance 
of the member's conduct or diligently enforce the exchange's rules and 
the federal securities laws with respect to conduct by the member that 
violates such provisions. As such, the Commission believes that these 
requirements are designed to minimize the potential that a person or 
entity can improperly interfere with or restrict the ability of the 
Exchange to effectively carry out its regulatory oversight 
responsibilities under the Act.
---------------------------------------------------------------------------

    \77\ See, e.g., ISE Mercury Order, supra note 53, and IEX Order, 
supra note 51; LTSE Order, MIAX PEARL Order, MIAX Order, and BATS 
Order, supra note 39; and DirectEdge Exchanges Order, supra note 64.
---------------------------------------------------------------------------

    As noted above, the Commission received two comment letters on 
MEMX's Form 1 application, one of which addressed the regulatory 
independence of MEMX. The commenter ``welcomes the prospect of MEMX's 
entry'' but expressed that it ``hopes and expects that MEMX will [serve 
the interests of its member-owners] without compromising the broader 
interest of market participants and, ultimately, of investors.'' \78\ 
The commenter said that it expects the Commission ``will hold the 
`Members' Exchange' to the same regulatory standard to which is holds 
other SROs--which is to act for the benefit of all market participants 
and investors--rather than for the primary or exclusive benefit of its 
members.'' \79\ In response, MEMX explained that it ``is committing 
significant resources to its regulatory program by investing in 
experienced personnel and proven surveillance technology'' and that it 
``fully expects that the Commission will regulate MEMX consistent with 
other SROs and in accordance with the federal securities laws.'' \80\
---------------------------------------------------------------------------

    \78\ Letter to Vanessa Countryman, Secretary, Commission, from 
John A. Zecca, Executive Vice President, Chief Legal Officer, and 
Chief Regulatory Officer, Nasdaq, Inc., dated December 19, 2019, 
available at https://www.sec.gov/comments/10-237/10237-6571115-201079.pdf (``Nasdaq Letter''), at 1-2.
    \79\ Id. at 2.
    \80\ Letter to Vanessa Countryman, Secretary, Commission, from 
Anders Franzon, General Counsel, MEMX, dated January 16, 2020 
(``MEMX Letter 1''), at 1-2, available at https://www.sec.gov/comments/10-237/10237-6668083-203948.pdf. MEMX noted that while ``it 
does intend to provide cost savings to the industry,'' the benefit 
of those savings ``will not be limited to its member-owners or come 
at the expense of investment into regulatory oversight.'' Id. at 1.
---------------------------------------------------------------------------

    Potential conflicts of interest arise across different types of 
exchange ownership structures. Broker-dealer ownership and control of 
an exchange, which is not novel, presents inherent conflicts of 
interest when exchanges both regulate their members and serve the 
commercial interests of their member-owners.\81\
---------------------------------------------------------------------------

    \81\ See Securities Exchange Act Release No. 50700 (November 18, 
2004), 69 FR 71256 (December 8, 2004) (Concept Release Concerning 
Self-Regulation). Despite these inherent conflicts of interest, the 
federal securities laws reflect Congress' determination to rely on 
``self-regulation'' as a fundamental component of U.S. market and 
broker-dealer regulation in which all broker-dealers are required to 
be members of an SRO that sets standards, conducts examinations, and 
enforces rules regarding its members. See id. at 71256. Among other 
benefits, self-regulation reduces costs while leveraging the 
expertise of those most familiar with the nuances of securities 
industry operations and also allows SROs to set prescriptive 
standards, including standards that exceed those imposed by the 
Commission, like business conduct standards. See id.
---------------------------------------------------------------------------

    The Commission has recognized that ``to be effective, an SRO must 
be structured in such a way that regulatory staff is unencumbered by 
inappropriate business pressure'' that could ``inhibit effective 
regulation and discourage vigorous enforcement against members.'' \82\ 
To help ensure independent and empowered SRO regulatory operations, 
MEMX has, among other things, adopted a governance structure designed 
to mitigate the inherent conflict. Specifically, MEMX has an 
independent Chief Regulatory Officer that oversees the exchange's 
regulatory operations and that reports to an independent Regulatory 
Oversight Committee of the exchange board of directors. In addition, 
MEMX has a majority independent board of directors with other key 
independent board committees, such as the Regulatory Oversight 
Committee.\83\
---------------------------------------------------------------------------

    \82\ Id. Nevertheless, the federal securities laws require 
member involvement in the overall governance and administration of 
an exchange. See, e.g., 15 U.S.C. 78f(b)(3) (requiring an exchange, 
among other things, to provide to its broker-dealer members ``a fair 
representation of its members in the selection of its directors and 
administration of its affairs'').
    \83\ Each member of the Regulatory Oversight Committee will be 
an Independent Director. See Article VIII, Section 8.8(e) of the 
MEMX LLC Agreement.
---------------------------------------------------------------------------

    Ownership and voting limits in the governing documents of the 
exchange and/or its holding company further protects the status of SRO 
independence. The provisions that MEMX has proposed, which are 
consistent with those in place across all exchanges today, are designed 
to prevent any direct or indirect owner from exercising control over 
the operation of the exchange as well as to ensure that the exchange 
and the Commission are able to carry out their regulatory obligations 
under the Act. These provisions impose limits on voting and ownership 
of exchange holding companies, with more stringent ownership limits 
imposed on member owners.\84\
---------------------------------------------------------------------------

    \84\ See supra notes 54-75 and accompanying text.
---------------------------------------------------------------------------

    As a registered exchange, MEMX will be subject to the same 
regulatory standards applicable to any other exchange regardless of the 
identity of the ultimate owners of that exchange. As discussed above 
and further below, MEMX has proposed to adopt industry-standard 
protections in a governance structure for itself and its holding 
company that is designed to preserve MEMX's self-regulatory 
independence by protecting MEMX from inappropriate business pressures, 
and the Commission believes these protections address the concerns 
raised by the commenter.
    Finally, one commenter urged the Commission to consider whether it 
is ``incongruous'' for the Commission ``to freely permit'' large banks 
and broker-dealers, which, the commenter says, ``control much of the 
order flow . . . and which in many cases own or operate their own 
alternative trading systems,'' to own and operate an exchange without 
also permitting exchanges to own or operate broker-dealer venues on the 
same terms as banks and broker-dealers.\85\ In response, MEMX noted 
that it has not proposed to own or operate an alternative trading 
system.\86\ And whether exchanges should be permitted to own or operate 
broker-dealer venues on the same terms as banks and broker-dealers is 
beyond

[[Page 27456]]

the scope of this order, which concerns MEMX's Form 1 application.
---------------------------------------------------------------------------

    \85\ See Nasdaq Letter, supra note 78, at 2.
    \86\ See MEMX Letter 1, supra note 80, at 1.
---------------------------------------------------------------------------

    The Commission believes that MEMX's and MEMX Holdings' proposed 
governance provisions are consistent with the Act, including Section 
6(b)(1), which requires, in part, an exchange to be so organized and 
have the capacity to carry out the purposes of the Act.\87\ In 
particular, these requirements are designed to minimize the potential 
that a person could improperly interfere with or restrict the ability 
of the Commission or the Exchange to effectively carry out their 
regulatory oversight responsibilities under the Act.
---------------------------------------------------------------------------

    \87\ 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------

2. Regulatory Independence and Oversight
    Although MEMX Holdings will not itself carry out regulatory 
functions, its activities with respect to the operation of MEMX must be 
consistent with, and must not interfere with, MEMX's self-regulatory 
obligations. In this regard, MEMX and MEMX Holdings propose to adopt 
certain provisions in their respective governing documents that are 
designed to help maintain the independence of the regulatory functions 
of MEMX. These proposed provisions are substantially similar to those 
included in the governing documents of other exchanges that recently 
have been granted registration.\88\ Specifically:
---------------------------------------------------------------------------

    \88\ See, e.g., IEX Order, supra note 51; LTSE Order and MIAX 
Order, supra note 39; and DirectEdge Exchanges Order, supra note 64.
---------------------------------------------------------------------------

     The directors, officers, employees, and agents of MEMX 
Holdings must give due regard to the preservation of the independence 
of the self-regulatory function of MEMX and to its obligations to 
investors and the general public and must not take actions which would 
interfere with the effectuation of decisions by the Exchange Board 
relating to its regulatory functions (including disciplinary matters) 
or which would interfere with MEMX's ability to carry out its 
responsibilities under the Act.\89\
---------------------------------------------------------------------------

    \89\ See MEMX Holdings LLC Agreement, Article VIII, Section 
8.18(b). Similarly, Article VII, Section 7.2(b) of the MEMX LLC 
Agreement requires the Exchange Board and each Director, when 
managing the business and affairs of MEMX, to consider the 
requirements of Section 6(b) of the Act and requires each Director, 
officer, or employee of MEMX to comply with the federal securities 
laws and regulations thereunder and cooperate with the Commission, 
and MEMX pursuant to its regulatory authority. Article VII, Section 
7.2(c) of the MEMX LLC Agreement also requires the Exchange Board, 
when evaluating any proposal to take into account all factors that 
the Exchange Board deems relevant, to the extent deemed relevant: 
the potential impact on the integrity, continuity and stability of 
the national securities exchange operated by MEMX and the other 
operations of MEMX, on the ability to prevent fraudulent and 
manipulative acts and practices, and on investors and the public, 
and whether such proposal would promote just and equitable 
principles of trade, foster cooperation and coordination with 
Persons engaged in regulating, clearing, settling, processing 
information with respect to and facilitating transactions in 
securities or assist in the removal of impediments to or perfection 
of the mechanisms for a free and open market and a national market 
system.
---------------------------------------------------------------------------

     MEMX Holdings must comply with the federal securities laws 
and the rules and regulations promulgated thereunder, and must 
cooperate with the Commission, MEMX, Financial Industry Regulatory 
Authority, Inc. (``FINRA''), and any other SROs of which MEMX Execution 
Services LLC (``MEMX ES'') is a member, pursuant to and to the extent 
of their respective regulatory authority.\90\ In addition, MEMX 
Holdings' officers, directors, employees, and agents must comply with 
the federal securities laws and the rules and regulations promulgated 
thereunder and are deemed to agree to cooperate with: (1) The 
Commission and MEMX in respect of the Commission's oversight 
responsibilities regarding MEMX and the self-regulatory functions and 
responsibilities of MEMX; and (2) FINRA, any other SROs of which MEMX 
ES is a member, and MEMX ES in respect of FINRA's and any such other 
SRO's oversight responsibilities regarding MEMX ES.\91\ MEMX Holdings 
must take reasonable steps necessary to cause its officers, directors, 
employees and agents to so cooperate.\92\
---------------------------------------------------------------------------

    \90\ See MEMX Holdings LLC Agreement, Article XI, Section 
11.3(h). MEMX ES is a subsidiary of MEMX Holdings that intends to 
register with the Commission as a broker-dealer and become a member 
of FINRA. See id.
    \91\ See id.
    \92\ See id.
---------------------------------------------------------------------------

     MEMX Holdings, and its officers, directors, employees, and 
agents must submit to the jurisdiction of the U.S. federal courts, the 
Commission, and MEMX, for purposes of any suit, action or proceeding 
pursuant to the U.S. federal securities laws, and the rules and 
regulations thereunder, arising out of, or relating to, MEMX 
activities.\93\
---------------------------------------------------------------------------

    \93\ See MEMX Holdings LLC Agreement, Article XV, Section 
15.12(b).
---------------------------------------------------------------------------

     All books and records of MEMX reflecting confidential 
information pertaining to the self-regulatory function of MEMX 
(including but not limited to disciplinary matters, trading data, 
trading practices, and audit information) must be retained in 
confidence by MEMX and its personnel, directors, officers, employees, 
and agents, and will not be used by MEMX for any non-regulatory 
purposes and shall not be made available to any person (including, 
without limitation, any MEMX member) other than to personnel of the 
Commission, personnel of another self-regulatory organization 
performing regulatory services on behalf of MEMX, the processor 
operating pursuant to an effective national market system plan (i.e., 
the Consolidated Audit Trail processor), and those personnel of MEMX, 
members of committees of the Exchange Board, members of the Exchange 
Board, or hearing officers and other agents of MEMX, to the extent 
necessary or appropriate to properly discharge the self-regulatory 
responsibilities of MEMX.\94\ Similar provisions apply to MEMX Holdings 
and its directors, officers, employees, and agents.\95\
---------------------------------------------------------------------------

    \94\ See MEMX LLC Agreement, Article XIII, Section 13.1.
    \95\ The MEMX Holdings LLC Agreement provides that all books and 
records of MEMX reflecting confidential information pertaining to 
the self-regulatory function of MEMX that come into the possession 
of MEMX Holdings, and the information contained in those books and 
records, will be subject to confidentiality restrictions and will 
not be used for any non-regulatory purposes. See MEMX Holdings LLC 
Agreement, Article XII, Section 12.2(c). The MEMX and MEMX Holdings 
governing documents acknowledge that requirements to keep such 
information confidential shall not limit or impede the rights of the 
Commission to access and examine such information or limit the 
ability of officers, directors, employees, or agents of MEMX or MEMX 
Holdings to disclose such information to the Commission or MEMX. See 
MEMX LLC Agreement, Article XIII, Section 13.1 and MEMX Holdings LLC 
Agreement, Article XII, Section 12.2(c).
---------------------------------------------------------------------------

     The books and records of MEMX and MEMX Holdings must be 
maintained in the United States \96\ and, to the extent they are 
related to the operation or administration of MEMX, MEMX Holdings' 
books and records will be subject at all times to inspection and 
copying by the Commission and MEMX.\97\
---------------------------------------------------------------------------

    \96\ See MEMX LLC Agreement, Article XIII, Section 13.1(a); and 
MEMX Holdings LLC Agreement, Article XII, Section 12.2(a).
    \97\ See MEMX Holdings LLC Agreement, Article XII, Section 
12.2(b).
---------------------------------------------------------------------------

     Furthermore, to the extent they are related to the 
operation or administration of MEMX, the books, records, premises, 
officers, directors, employees, and agents of MEMX Holdings will be 
deemed to be the books, records, premises, officers, directors, 
employees, and agents of MEMX, for purposes of, and subject to 
oversight pursuant to, the Act.\98\
---------------------------------------------------------------------------

    \98\ See id.
---------------------------------------------------------------------------

     MEMX Holdings will take reasonable steps necessary to 
cause its officers, directors, employees, and agents, prior to 
accepting a position as an officer, director, employee or agent (as 
applicable) with MEMX Holdings to consent in writing to the 
applicability of

[[Page 27457]]

provisions regarding non-interference, confidentiality, books and 
records, compliance and cooperation, jurisdiction, and regulatory 
obligations, with respect to their activities related to MEMX.\99\
---------------------------------------------------------------------------

    \99\ See MEMX Holdings LLC Agreement, Article VIII, Section 
8.18(b).
---------------------------------------------------------------------------

     The MEMX Holdings LLC Agreement requires that, so long as 
MEMX Holdings controls MEMX, any changes to that document must be 
submitted to the Exchange Board for approval, and, if such change is 
required to be filed with the Commission pursuant to Section 19(b) of 
the Act and the rules and regulations thereunder, such change shall not 
be effective until filed with and effective by operation of law, or 
filed with, and approved by, the Commission.\100\
---------------------------------------------------------------------------

    \100\ See MEMX Holdings LLC Agreement, Article XV, Section 
15.9(a).
---------------------------------------------------------------------------

    The Commission believes that the provisions discussed in this 
section, which are designed to help ensure the independence of MEMX's 
regulatory function and facilitate the ability of MEMX to carry out its 
regulatory responsibilities under, and operate in a manner consistent 
with, the Act, are appropriate and consistent with the requirements of 
the Act, particularly with Section 6(b)(1), which requires, in part, an 
exchange to be so organized and have the capacity to carry out the 
purposes of the Act.\101\
---------------------------------------------------------------------------

    \101\ 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------

    One commenter questioned whether the indirect owners of MEMX would 
be able to access the trading and regulatory records of MEMX.\102\ The 
commenter asserted that access by such member-owners to such records 
could pose ``significant conflicts of interest'' because they 
``directly compete with other exchange members.''\103\ In response, 
MEMX stated that Section 13.1 of the MEMX LLC Agreement expressly 
provides that confidential information pertaining to the self-
regulatory function of MEMX ``shall not be made available to any person 
(including, without limitation, any Exchange Member) . . . .'' \104\ 
MEMX stated that this language means that ``no member of the Exchange, 
including members that indirectly own the Exchange, will have access to 
regulatory and trading records of the Exchange.'' \105\ Further, MEMX 
noted that other exchanges have identical confidentiality language in 
their governing documents.\106\ The Commission believes that MEMX has 
appropriately addressed the commenter's concern, as the proposed 
governing documents will prohibit MEMX's ultimate owners from accessing 
the trading and regulatory records of MEMX.
---------------------------------------------------------------------------

    \102\ See Letter to Vanessa Countryman, Secretary, Commission, 
from Elizabeth K. King. General Counsel and Corporate Secretary, 
NYSE Group, Inc., dated January 15, 2020, available at https://www.sec.gov/comments/10-237/10237-6668143-203793.pdf (``NYSE 
Letter''), at 1-2. The commenter cited to Section 13.3(a) of the 
Second Amended and Restated Limited Liability Agreement of MEMX LLC, 
which would permit MEMX Company Members to access, inspect, and copy 
books and records and to inspect facilities, subject to the 
confidentiality provisions of Section 13.1. The commenter stated 
that MEMX Company Members included MEMX Holdings and SubCo, both of 
which were owned by MEMX's member-owners.
    \103\ Id. at 1-2.
    \104\ Letter to Vanessa Countryman, Secretary, Commission, from 
Anders Franzon, General Counsel, MEMX, dated February 11, 2020 
(``MEMX Letter 2''), available at https://www.sec.gov/comments/10-237/10237-6795399-208386.pdf, at 2.
    \105\ See id.
    \106\ See id. at 3.
---------------------------------------------------------------------------

    Further, Section 19(h)(1) of the Act \107\ provides the Commission 
with the authority ``to suspend for a period not exceeding twelve 
months or revoke the registration of [an SRO], or to censure or impose 
limitations upon the activities, functions, and operations of [an SRO], 
if [the Commission] finds, on the record after notice and opportunity 
for hearing, that [the SRO] has violated or is unable to comply with 
any provision of the Act, the rules or regulations thereunder, or its 
own rules or without reasonable justification or excuse has failed to 
enforce compliance . . . '' with any such provision by its members 
(including associated persons thereof). If the Commission were to find, 
or become aware of, through staff review and inspection or otherwise, 
facts indicating any violations of the Act, including without 
limitation Sections 6(b)(1) and 19(g)(1),\108\ these matters could 
provide the basis for a disciplinary proceeding under Section 19(h)(1) 
of the Act.
---------------------------------------------------------------------------

    \107\ See 15 U.S.C. 78s(h)(1).
    \108\ 15 U.S.C. 78f(b)(1); 15 U.S.C. 78s(g)(1).
---------------------------------------------------------------------------

    Even in the absence of the governance provisions described above, 
under Section 20(a) of the Act,\109\ any person with a controlling 
interest in MEMX would be jointly and severally liable with and to the 
same extent that MEMX is liable under any provision of the Act, unless 
the controlling person acted in good faith and did not directly or 
indirectly induce the act or acts constituting the violation or cause 
of action. In addition, Section 20(e) of the Act \110\ creates aiding 
and abetting liability for any person who knowingly provides 
substantial assistance to another person in violation of any provision 
of the Act or rule thereunder. Further, Section 21C of the Act \111\ 
authorizes the Commission to enter a cease-and-desist order against any 
person who has been ``a cause of'' a violation of any provision of the 
Act through an act or omission that the person knew or should have 
known would contribute to the violation. These provisions are 
applicable to MEMX Holdings.
---------------------------------------------------------------------------

    \109\ 15 U.S.C. 78t(a).
    \110\ 15 U.S.C. 78t(e).
    \111\ 15 U.S.C. 78u-3.
---------------------------------------------------------------------------

3. Regulatory Oversight Committee
    The regulatory operations of MEMX will be monitored by the 
Regulatory Oversight Committee of the Exchange Board. As mentioned 
above, the Regulatory Oversight Committee will consist only of 
Independent Directors.\112\ The Regulatory Oversight Committee will be 
responsible for overseeing the adequacy and effectiveness of MEMX's 
regulatory and SRO responsibilities, assessing MEMX's regulatory 
performance, and assisting the Exchange Board (and committees of the 
Exchange Board) in reviewing MEMX's regulatory plan and the overall 
effectiveness of MEMX's regulatory functions.\113\
---------------------------------------------------------------------------

    \112\ See supra note 50 and accompanying text.
    \113\ See MEMX LLC Agreement, Article VIII, Section 8.8(a).
---------------------------------------------------------------------------

    Further, the Chief Regulatory Officer (``CRO'') of MEMX will have 
general supervision over MEMX's regulatory operations, including 
responsibility for overseeing MEMX's surveillance, examination, and 
enforcement functions and for administering any regulatory services 
agreements with another SRO to which MEMX is a party.\114\ The 
Regulatory Oversight Committee, in consultation with the Chief 
Executive Officer of MEMX, will be responsible for establishing the 
goals, assessing the performance, and fixing the compensation of the 
CRO and for recommending personnel actions involving the CRO and senior 
regulatory personnel.\115\
---------------------------------------------------------------------------

    \114\ See MEMX LLC Agreement, Article IX, Section 9.3.
    \115\ See MEMX LLC Agreement, Article VIII, Section 8.8(c). To 
the extent that the Chief Executive Officer of MEMX has any indirect 
supervisory responsibility for the role or function of the CRO, 
including but not limited to, implementation of the budget for the 
regulatory function or regulatory personnel matters, the Regulatory 
Oversight Committee will take all steps reasonably necessary to 
ensure that the Chief Executive Officer does not compromise the 
regulatory autonomy and independence of the CRO or the regulatory 
function. See MEMX LLC Agreement, Article VIII, Section 8.8(d).
---------------------------------------------------------------------------

4. Regulatory Funding and Services
    As a prerequisite for the Commission's granting of an exchange's

[[Page 27458]]

application for registration, an exchange must be organized and have 
the capacity to carry out the purposes of the Act.\116\ Specifically, 
an exchange must be able to enforce compliance by its members, and 
persons associated with its members, with the federal securities laws 
and rules thereunder and the rules of the exchange.\117\ The discussion 
below summarizes how MEMX proposes to conduct and structure its 
regulatory operations.
---------------------------------------------------------------------------

    \116\ See 15 U.S.C. 78f(b)(1).
    \117\ See id. See also Section 19(g) of the Act, 15 U.S.C. 
78s(g).
---------------------------------------------------------------------------

a. Regulatory Funding
    To help ensure that MEMX has and will continue to have adequate 
funding to be able to meet its responsibilities under the Act, MEMX 
represents that, if the Commission approves MEMX's application for 
registration as a national securities exchange, MEMX Holdings will 
allocate sufficient assets to MEMX to enable the Exchange's 
operation.\118\ Specifically, MEMX represents that MEMX Holdings will 
make a cash contribution to MEMX of $5,000,000, ``in addition to any 
previously-provided in-kind contributions, such as legal, regulatory, 
and infrastructure-related services.'' \119\
---------------------------------------------------------------------------

    \118\ See Form 1, Exhibit I.
    \119\ See id.
---------------------------------------------------------------------------

    MEMX also represents that such cash and in-kind contributions from 
MEMX Holdings will be adequate to operate MEMX, including the 
regulation of the Exchange, and that MEMX Holdings and MEMX will enter 
into an agreement that requires MEMX Holdings to provide adequate 
funding for the Exchange's operations, including the regulation of the 
Exchange.\120\
---------------------------------------------------------------------------

    \120\ See id. MEMX represents that this agreement will provide 
that MEMX will receive all fees, including regulatory fees and 
trading fees, payable by MEMX's members, as well as any funds 
received from any applicable market data fees and tape revenue, and 
will further provide that MEMX Holdings will reimburse MEMX for its 
costs and expenses to the extent that the Exchange's assets are 
insufficient to meet its costs and expenses. See id.
---------------------------------------------------------------------------

    Further, any ``Regulatory Funds'' received by MEMX will not be used 
for non-regulatory purposes or distributed to MEMX Holdings, but rather 
will be applied to fund the regulatory operations of MEMX, or, as 
applicable, used to pay restitution and disgorgement to customers.\121\ 
Any excess non-regulatory funds, as solely determined by MEMX, will be 
remitted to MEMX Holdings in accordance with the MEMX LLC 
Agreement.\122\
---------------------------------------------------------------------------

    \121\ See MEMX LLC Agreement, Article XVII, Section 17.4(b). 
Article I, Section 1.1 of the MEMX LLC Agreement defines 
``Regulatory Funds'' as ``fees, fines, or penalties derived from the 
regulatory operations of [MEMX],'' but such term does not include 
``revenues derived from listing fees, market data revenues, 
transaction revenues, or any other aspect of the commercial 
operations of [MEMX], even if a portion of such revenues are used to 
pay costs associated with the regulatory operations of [MEMX].'' 
This definition is consistent with the rules of other SROs. See, 
e.g., LTSE Bylaws, Article I(bb); Amended and Restated By-Laws of 
MIAX Exchange, Article 1(ll); By-Laws of NASDAQ PHLX LLC, Article 
I(ii); and By-Laws of NASDAQ BX, Inc., Article I(ii).
    \122\ See Form 1, Exhibit I.
---------------------------------------------------------------------------

b. Regulatory Contract with FINRA
    Although MEMX will be an SRO with all of the attendant regulatory 
obligations under the Act, it has represented to the Commission that it 
intends to enter into a regulatory services agreement (``RSA'') with 
FINRA, under which FINRA as a regulatory services provider will perform 
certain regulatory functions on MEMX's behalf.\123\ Specifically, MEMX 
expects that such services will include performance of investigation, 
disciplinary, and hearing services.\124\ Notwithstanding the RSA, MEMX 
will retain legal responsibility for the regulation of its members and 
its market and the performance of FINRA as its regulatory services 
provider. Because MEMX anticipates entering into an RSA with FINRA, it 
has not made provisions to fulfill the regulatory services that will be 
undertaken by FINRA. Accordingly, the Commission is conditioning the 
operation of MEMX on a final RSA that specifies the services that will 
be provided to MEMX.
---------------------------------------------------------------------------

    \123\ See Form 1, Exhibit L. See also MEMX Rule 9.8.
    \124\ See Form 1, Exhibit L.
---------------------------------------------------------------------------

    The Commission believes that it is consistent with the Act for MEMX 
to contract with FINRA to perform certain examination, enforcement, and 
disciplinary functions.\125\ These functions are fundamental elements 
of a regulatory program, and constitute core self-regulatory functions. 
The Commission believes that FINRA has the expertise and experience to 
perform these functions for MEMX.\126\ However, MEMX, unless relieved 
by the Commission of its responsibility, bears the self-regulatory 
responsibilities and primary liability for self-regulatory failures, 
not the SRO retained to perform regulatory functions on MEMX's 
behalf.\127\ In performing these regulatory functions, however, FINRA 
may nonetheless bear liability for causing or aiding and abetting the 
failure of MEMX to perform its regulatory functions.\128\ Accordingly, 
although FINRA will not act on its own behalf under its SRO 
responsibilities in carrying out these regulatory services for MEMX, 
FINRA may have secondary liability if, for example, the Commission 
finds that the contracted functions are being performed so inadequately 
as to cause a violation of the federal securities laws or rules 
thereunder by MEMX.\129\
---------------------------------------------------------------------------

    \125\ For example, LTSE, IEX, MIAX Exchange, MIAX PEARL, LLC, 
Nasdaq MRX, LLC, Cboe EDGA Exchange, Inc., Cboe EDGX Exchange, Inc. 
(``Cboe EDGX''), and Cboe BZX Exchange, Inc. (``Cboe BZX'') have 
entered into RSAs with FINRA.
    \126\ See, e.g., LTSE Order, supra note 39; IEX Order, supra 
note 51; DirectEdge Exchanges Order, supra note 64; and Nasdaq 
Order, supra note 39. The Commission is not approving the RSA or any 
of its specific terms.
    \127\ See 15 U.S.C. 78s(g)(1).
    \128\ For example, if failings by FINRA have the effect of 
leaving MEMX in violation of any aspect of MEMX's self-regulatory 
obligations, MEMX would bear direct liability for the violation, 
while FINRA may bear liability for causing or aiding and abetting 
the violation. See, e.g., LTSE Order, supra note 39; IEX Order, 
supra note 51; Nasdaq Order and BATS Order, supra note 39; and 
DirectEdge Exchanges Order, supra note 64.
    \129\ See, e.g., LTSE Order, supra note 39; IEX Order, supra 
note 51; and Nasdaq Order, supra note 39.
---------------------------------------------------------------------------

c. Rule 17d-2 Agreements
    Section 19(g)(1) of the Act,\130\ among other things, requires 
every SRO registered as either a national securities exchange or 
national securities association to comply with the Act, the rules and 
regulations thereunder, and the SRO's own rules, and, absent reasonable 
justification or excuse, enforce compliance by its members and persons 
associated with its members.\131\ Rule 17d-2 of the Act permits SROs to 
propose joint plans to allocate regulatory responsibilities amongst 
themselves for their common rules with respect to their common 
members.\132\ These agreements, which must be filed with and declared 
effective by the Commission, generally cover areas where each SRO's 
rules substantively overlap, including such regulatory functions as 
personnel registration and sales practices. For example, the Commission 
recently declared effective a plan to allocate regulatory 
responsibilities between FINRA and the Long-Term Stock Exchange, Inc. 
(``LTSE'') pursuant to which FINRA assumes examination and enforcement

[[Page 27459]]

responsibility for broker-dealers that are members of both FINRA and 
LTSE with respect to the rules of LTSE that are substantially similar 
to the applicable rules of FINRA, as well as certain specified 
provisions of the federal securities laws.\133\
---------------------------------------------------------------------------

    \130\ 15 U.S.C. 78s(g)(1).
    \131\ 15 U.S.C. 78q(d) and 15 U.S.C. 78s(g)(2), respectively.
    \132\ See 15 U.S.C. 78q(d)(1) and 17 CFR 240.17d-2. Section 
17(d)(1) of the Act allows the Commission to relieve an SRO of 
certain responsibilities with respect to members of the SRO who are 
also members of another SRO (``common members''). Specifically, 
Section 17(d)(1) allows the Commission to relieve an SRO of its 
responsibilities to: (i) Receive regulatory reports from such 
members; (ii) examine such members for compliance with the Act and 
the rules and regulations thereunder, and the rules of the SRO; or 
(iii) carry out other specified regulatory responsibilities with 
respect to such members.
    \133\ See Securities Exchange Act Release No. 86587 (August 7, 
2019), 84 FR 39883 (August 12, 2019) (File No. 4-747). See also, 
e.g., Securities Exchange Act Release Nos. 83696 (July 24, 2018), 83 
FR 35682 (July 27, 2018) (FINRA/MIAX Exchange/MIAX PEARL); 77321 
(March 8, 2016), 81 FR 13434 (March 14, 2016) (File No. 4-697) 
(FINRA/ISE Mercury, LLC); 73641 (November 19, 2014), 79 FR 70230 
(November 25, 2014) (File No. 4-678) (FINRA/MIAX Exchange); 70053 
(July 26, 2013), 78 FR 46656 (August 1, 2013) (File No. 4-663) 
(FINRA/Topaz Exchange n/k/a ISE Gemini, LLC); 59218 (January 8, 
2009), 74 FR 2143 (January 14, 2009) (File No. 4-575) (FINRA/Boston 
Stock Exchange, Inc. (``BSE'')); 58818 (October 20, 2008), 73 FR 
63752 (October 27, 2008) (File No. 4-569) (FINRA/BATS Exchange, 
Inc.); 55755 (May 14, 2007), 72 FR 28087 (May 18, 2007) (File No. 4-
536) (National Association of Securities Dealers, Inc. (``NASD'') n/
k/a FINRA) and Chicago Board of Options Exchange, Inc. concerning 
the CBOE Stock Exchange, LLC); 55367 (February 27, 2007), 72 FR 9983 
(March 6, 2007) (File No. 4-529) (NASD/International Securities 
Exchange, LLC); and 54136 (July 12, 2006), 71 FR 40759 (July 18, 
2006) (File No. 4-517) (NASD/Nasdaq).
---------------------------------------------------------------------------

    A Rule 17d-2 plan that is declared effective by the Commission 
relieves the specified SRO of those regulatory responsibilities 
allocated by the plan to another SRO.\134\ MEMX has represented to the 
Commission that it will join all applicable plans, including Rule 17d-2 
plans for the allocation of regulatory responsibilities.\135\ Similar 
to other exchanges, the Commission understands from MEMX that it will 
enter into a bilateral Rule 17d-2 agreement covering common members of 
MEMX and FINRA. This agreement will allocate to FINRA regulatory 
responsibility, with respect to common members, for specified 
regulatory and enforcement matters arising out of specified common 
rules and specified provisions of the Act and the rules and regulations 
thereunder. In addition, the Commission is conditioning operation of 
MEMX as an exchange on MEMX first joining the applicable multilateral 
Rule 17d-2 plans, including the multi-party Rule 17d-2 plan for the 
allocation of regulatory responsibilities with respect to certain 
Regulation NMS and Consolidated Audit Trail Rules and the multi-party 
Rule 17d-2 plan for the surveillance, investigation, and enforcement of 
common insider trading rules.\136\
---------------------------------------------------------------------------

    \134\ See Rule 17d-2 Adopting Release, supra note Error! 
Bookmark not defined.
    \135\ See Form 1, Exhibit E, at 15.
    \136\ See Securities Exchange Act Release Nos. 88366 (March 12, 
2020), 85 FR 15238 (March 17, 2020) (File No. 4-618); and 86542 
(August 1, 2019), 84 FR 38679 (August 7, 2019) (File No, 4-566).
---------------------------------------------------------------------------

    Because MEMX anticipates entering into these Rule 17d-2 agreements, 
it has not made provision to fulfill the regulatory obligations that 
will be undertaken by FINRA and other SROs under these agreements with 
respect to common members.\137\ Accordingly, the Commission is 
conditioning the operation of MEMX on approval by the Commission of a 
Rule 17d-2 agreement that allocates the above specified matters to 
FINRA, and the approval of an amendment to the existing multi-party 
Rule 17d-2 plans specified above to add MEMX as a party.
---------------------------------------------------------------------------

    \137\ For common members, the regulatory obligations will be 
covered by the Rule 17d-2 agreements, and for MEMX members that are 
not also members of FINRA, the regulatory obligations will be 
covered by the RSA.
---------------------------------------------------------------------------

C. MEMX Trading System

    MEMX will operate a fully automated electronic order book, and will 
not maintain or operate a physical trading floor. Only broker-dealer 
members of MEMX and entities that enter into market access arrangements 
with members (collectively, ``Users'') will have access to the MEMX 
system.\138\ Users will be able to electronically submit orders to buy 
or sell securities traded on the Exchange through a variety of 
systems.\139\ MEMX will allow firms to register as market makers with 
affirmative and negative market making obligations.\140\
---------------------------------------------------------------------------

    \138\ To obtain authorized access to the MEMX system, each User 
must enter into a User Agreement with MEMX. See MEMX Rule 11.3(a).
    \139\ For a discussion of the means of access to MEMX, see MEMX 
Form 1, Exhibit E, Section 1.
    \140\ See MEMX Rules 11.17 through 11.20. MEMX's rules relating 
to market makers are similar to the rules of other national 
securities exchanges. See, e.g., Cboe EDGX Rules 11.17 through 
11.20.
---------------------------------------------------------------------------

    Users may submit orders to the Exchange as Limit Orders, Market 
Orders, or Pegged Orders.\141\ Orders may be submitted with the 
following time-in-force instructions, as applicable: Immediate-or-
Cancel; Day; Fill-or-Kill; Good `til Time, and Regular Hours Only.\142\ 
Users may submit orders with the display instructions of Displayed or 
Non-Displayed, but all orders eligible for display will be 
automatically defaulted to Displayed unless a User elects 
otherwise.\143\ A Limit Order with a Displayed instruction also may 
include a Reserve Quantity.\144\ Displayed orders will be displayed on 
an anonymous basis at a specified price.\145\ Orders may be entered as 
a Round Lot, Odd Lot, or Mixed Lot.\146\ In addition, a User may attach 
a Minimum Execution Quantity instruction to the order.\147\ Users also 
may choose to designate orders as Book Only or Post Only.\148\ MEMX's 
proposed order types and instructions are similar to order types and 
instructions approved by the Commission and currently available on 
other national securities exchanges.\149\
---------------------------------------------------------------------------

    \141\ See MEMX Rule 11.8(a)-(c). Limit Orders may be designated 
as Intermarket Sweep Orders. See MEMX Rule 11.8(b)(5). Pegged Orders 
may be designated as either a Primary Peg or a Midpoint Peg. See 
MEMX Rules 11.6(h) and 11.8(c).
    \142\ See MEMX Rules 11.6(o) and 11.8.
    \143\ See MEMX Rules 11.6(c) and 11.8(a)-(c). Market Orders and 
Pegged Orders are not eligible for display. See MEMX Rules 
11.8(a)(3) and 11.8(c)(3).
    \144\ See MEMX Rules 11.6(k), and 11.8(b)(4).
    \145\ See MEMX Rule 11.10(b).
    \146\ See MEMX Form 1, Exhibit E, Section 2, and MEMX Rules 
11.6(q) and 11.8(a)-(c).
    \147\ See MEMX Rules 11.6(f) and 11.8(a)-(c).
    \148\ See id.
    \149\ See, e.g., Cboe EDGX Rules 11.6 and 11.8. While MEMX Rule 
11.10, Interp .02(b), which offers batch cancel functionality, is 
similar to Cboe EDGX Rule 11.10, Interp .02(b), MEMX uses the term 
``batch cancel functionality,'' while Cboe EDGX uses the term 
``purge port'' and Cboe EDGX specifies that a user can 
``simultaneously cancel all or a subset of its orders in one or more 
symbols across multiple logical ports,'' while MEMX's provision 
specifies that a user can ``simultaneously cancel all or a subset of 
its orders in one or more symbols.''
---------------------------------------------------------------------------

    One of MEMX's proposed order instructions is novel and not based on 
the existing rules of other exchanges. Specifically, in connection with 
a Limit Order submitted with a Reserve Quantity instruction, a member 
may attach a Random Replenishment instruction.\150\ In addition to 
randomizing the size of the refreshed displayed portion, this 
instruction will allow the User to elect to have the MEMX system 
randomly replenish the displayed replenishment quantity at different 
time intervals ranging up to one millisecond following each execution 
that triggers replenishment.\151\
---------------------------------------------------------------------------

    \150\ See MEMX Form 1, Exhibit E, Section 2(a), and MEMX Rule 
11.6(k)(1)(A).
    \151\ See id.
---------------------------------------------------------------------------

    The MEMX system will continuously and automatically match orders 
pursuant to price/time priority. For equally-priced trading interest in 
time priority, MEMX will give first priority to the portion of a Limit 
Order with a displayed instruction over Limit Orders with a non-
displayed instruction, Pegged Orders, and Reserve Quantity of Limit 
Orders.\152\ With respect to the price of executions that would occur 
on MEMX, the MEMX system is designed to comply with the order 
protection requirements of Rule 611 of Regulation NMS \153\ by 
requiring that, for any

[[Page 27460]]

execution to occur on MEMX during regular trading hours, the price must 
be equal to, or better than, the Protected NBBO unless an exception to 
Rule 611 applies.\154\ Orders may be executed on the Exchange during 
the Market Session or during Pre- and Post-Market Sessions; \155\ 
however, some order types and functionality are available only during 
the Market Session.\156\ Orders also may be entered during the Early 
Order Entry Session, but are not eligible for execution until the start 
of the Pre-Market Session or Market Session, depending on the time-in-
force instructions.\157\ MEMX will conduct an opening process at the 
start of its Market Session, and Users who wish to participate in the 
opening process may enter designated orders for queuing in the 
system.\158\
---------------------------------------------------------------------------

    \152\ See MEMX Rule 11.9(a)(2). The highest-priced order to buy 
(lowest-priced order to sell) will have priority over all other 
orders to buy (sell) in all cases. Rule 11.9 describes how orders 
will be ranked based on time when orders to buy (sell) are entered 
into the MEMX system at the same price.
    \153\ 17 CFR 242.611.
    \154\ See MEMX Rules 1.5(y) (defining ``Protected NBBO'') and 
11.10(a)(2).
    \155\ MEMX's Market Session will run from 9:30 a.m. ET to 4:00 
p.m. ET, its Pre-Market Session will run from 7:00 a.m. ET to 9:30 
a.m. ET, and its Post-Market Session will run from 4:00 p.m. ET to 
8:00 p.m. ET. See MEMX Rules 1.5(o), (w), and (x), respectively.
    \156\ See MEMX Rules 11.8(a)-(c). MEMX's Early Order Entry 
Session will run from 6:00 a.m. ET to 7:00 a.m. ET. See MEMX Rule 
1.5(i).
    \157\ See MEMX Rule 11.1(a).
    \158\ See MEMX Rule 11.7.
---------------------------------------------------------------------------

    In addition, MEMX's rules are designed to address locked and 
crossed markets, as required by Rule 610(d) of Regulation NMS,\159\ in 
that they are designed not to disseminate interest that would lock or 
cross a protected quote, require Users to reasonably avoid displaying 
interest that locks or crosses any protected quotation, and are 
reasonably designed to assure the reconciliation of locked or crossed 
interest.\160\ One commenter questioned whether MEMX's proposed rules 
adequately specify how resting orders would be processed when locked or 
crossed by an away market quote and whether resting depth-of-book 
orders that have been locked or crossed by an away market and then 
become the best-ranked orders on MEMX would be transmitted to the 
securities information processor (``SIP'') at their original 
price.\161\ In response, MEMX disagreed that its proposed rules are 
unclear in these regards and noted that its applicable rules are based 
on the rules of other exchanges.\162\ The Commission believes that MEMX 
addressed the commenter's first question by stating that, under MEMX 
Rule 11.6(j)(1)(A)(ii), it ``is clear that an order displayed by MEMX 
would not be re-priced if another market locked or crossed an order 
displayed by MEMX, as a locking or crossing quote would not allow MEMX 
to re-rank and display such an order at a more aggressive price.'' 
\163\ In respect of the commenter's second point, the Commission 
believes that MEMX addressed the commenter's concern, as MEMX stated 
that its proposed rules ``are clear regarding its dissemination of 
quotations to the SIP'' and noted that it ``searched the rules of NYSE 
and other exchanges for additional language describing such an example 
or details regarding special handling in such a scenario, but such 
search has been fruitless.'' \164\
---------------------------------------------------------------------------

    \159\ 17 CFR 242.610(d).
    \160\ See MEMX Rule 11.10(f). See also MEMX Rule 11.6(a) 
(allowing Users to attach a Cancel Back instruction to immediately 
cancel an order when, if displayed, it would create a violation of 
Rule 610(d) of Regulation NMS, 17 CFR 242.610(d)), and MEMX Rules 
11.6(j) and 11.8(b)(8) (relating to price sliding functionality to 
avoid violations of Rule 610(d) of Regulation NMS, 17 CFR 
242.610(d)).
    \161\ See NYSE Letter, supra note 102, at 2-3 and Letter to 
Vanessa Countryman, Secretary, Commission, from Elizabeth K. King. 
General Counsel and Corporate Secretary, NYSE Group, Inc., dated 
April 7, 2020 (repeating its question about how MEMX handles depth-
of-book orders that become the best-ranked orders on MEMX in a 
specific scenario described by NYSE).
    \162\ See MEMX Letter 2, supra note 104, at 3.
    \163\ Id. at 4.
    \164\ Id.
---------------------------------------------------------------------------

    In addition, MEMX will offer outbound routing functionality though 
its affiliated routing broker-dealer, MEMX ES.\165\ A member's use of 
the order routing functionality provided by the Exchange's affiliated 
routing broker-dealer is entirely optional and members may use other 
broker-dealers to route out to other market centers.\166\
---------------------------------------------------------------------------

    \165\ See MEMX Rule 2.11.
    \166\ See id.
---------------------------------------------------------------------------

    The Commission finds that MEMX's trading rules are consistent with 
the Act and, in particular, the Section 6(b)(5) requirement that an 
exchange's rules be designed to promote just and equitable principles 
of trade, remove impediments to and perfect the mechanisms of a free 
and open market and a national market system, and protect investors and 
the public interest.\167\
---------------------------------------------------------------------------

    \167\ See 15 U.S.C. 78f(b)(5). MEMX's trading rules, including 
its rules relating to market makers, order types and instructions, 
priority, execution, and opening processes, are similar to existing 
exchanges' trading rules. See, e.g., Chapter XI of the Cboe EDGX 
rule book.
---------------------------------------------------------------------------

    With regard to MEMX's proposed Random Replenishment feature, the 
rule is largely based on similar functionality offered by other 
exchanges with the addition of one unique feature.\168\ Specifically, 
in addition to randomizing the displayed replenishment size, a User 
also may elect to have the MEMX system replenish the displayed 
replenishment quantity at different time intervals ranging up to one 
millisecond following the execution that triggered replenishment. The 
Commission believes that this feature is consistent with the Act 
because it is designed to protect investors consistent with the general 
purpose of Reserve Quantity orders and Random Replenishment 
functionality, which the Commission has previously approved for use on 
other exchanges.\169\ Specifically, replenishing the display quantity 
at random time intervals may make reserve interest harder to detect, 
which could incentivize investors to rest larger-size reserve interest 
on the Exchange. Importantly, the non-displayed portion of an order 
subject to the time interval Random Replenishment will remain fully 
executable prior to the replenishment of a User's displayed 
quantity.\170\ Accordingly, to the extent this feature encourages 
investors to provide more liquidity, other market participants could 
correspondingly benefit from having access to that additional 
liquidity.
---------------------------------------------------------------------------

    \168\ See, e.g., Cboe EDGX Rule 11.6(m)(1)(A).
    \169\ See id.
    \170\ See MEMX Form 1, Exhibit E, Section 2(a), and MEMX Rule 
11.6(k)(1)(A).
---------------------------------------------------------------------------

    As noted above, MEMX proposes to offer routing services to its 
Users through its affiliated broker-dealer, MEMX ES.\171\ The 
Commission previously has stated that an exchange-affiliated outbound 
router, as a ``facility'' of the exchange, will be subject to the 
exchange's and the Commission's regulatory oversight, and that the 
exchange will be responsible for ensuring that the affiliated outbound 
routing function is operated consistent with Section 6 of the Act and 
the exchange's rules.\172\ For example, in approving an exchange with 
an affiliated outbound routing broker, the Commission previously noted 
that ``[a] conflict of interest would arise if the national securities 
exchange (or an affiliate) provided advantages to its broker-dealer 
that are not available to other members.'' \173\ The Commission further 
explained that ``advantages, such as greater access to information, 
improved speed of execution, or enhanced operational capabilities in 
dealing with the exchange, might constitute unfair discrimination under 
the Act.'' \174\
---------------------------------------------------------------------------

    \171\ See MEMX Rule 2.11.
    \172\ See, e.g., Securities Exchange Act Release No. 62716 (Aug. 
13, 2010), 75 FR 51295 (August 19, 2010) (granting BATS Y Exchange's 
request to register as a national securities exchange).
    \173\ Securities Exchange Act Release No. 44983 (October 25, 
2001), 66 FR 55225, 55233 (November 1, 2001) (PCX-00-25) (order 
approving Archipelago Exchange (``ArcaEx'') as the equities trading 
facility of PCX Equities, Inc.) (``ArcaEx Order'').
    \174\ Id.

---------------------------------------------------------------------------

[[Page 27461]]

    MEMX's proposed outbound routing rule is similar to rules the 
Commission has approved for other exchanges that utilize affiliated 
routing brokers.\175\ In particular, MEMX's affiliated broker-dealer 
does not have any structural or informational advantages in its 
provision of routing services as compared to a third-party broker-
dealer member of MEMX performing a similar function for itself or 
others.\176\ Accordingly, the Commission believes that the outbound 
routing functionality of MEMX is consistent with the Act and, in 
particular, the Section 6(b)(5) requirement that an exchange's rules be 
designed to 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, protect investors and the public interest, 
and not permit unfair discrimination between customer, issuers, brokers 
or dealers.\177\
---------------------------------------------------------------------------

    \175\ See, e.g., Cboe EDGX Rule 2.11.
    \176\ See MEMX Rule 2.11. For example, MEMX's rule provides that 
the Exchange shall have procedures and controls to adequately 
restrict the flow of confidential and proprietary information 
between the Exchange and its facilities, including MEMX ES. See MEMX 
Rule 2.11(a)(5).
    \177\ See 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    As a national securities exchange, MEMX will be a trading center 
whose quotations can be ``automated quotations'' under Rule 
600(b)(3).\178\ MEMX has designed itself to qualify by being an 
``automated trading center'' under Rule 600(b)(4) whose best-priced, 
displayed quotation will be a ``protected quotation'' under Rules 
600(b)(57) and 600(b)(58), and for purposes of Rule 611.\179\ One 
commenter requested that MEMX clarify the calculation of its 
consolidated quote, which would be disseminated by the SIP.\180\ 
Specifically, the commenter asked whether displayed odd-lot orders at 
more than one price point on MEMX would be aggregated in the MEMX quote 
provided to the SIP for dissemination.\181\ In response, MEMX noted 
that its proposed rule is based on rules of other exchanges, but agreed 
that additional clarity in the rules could be beneficial and so 
submitted clarifying rule text in Amendment No. 2.\182\ MEMX will 
aggregate displayed odd-lot orders on the MEMX order book across price 
levels for transmission to the SIPs as the MEMX best ranked bid or 
offer, when applicable.\183\ Specifically, MEMX added paragraph (b)(2) 
to Rule 11.9 which provides that, pursuant to Rule 602 of Regulation 
NMS, the Exchange will transmit to the appropriate SIP the highest 
(lowest) price to buy (sell) wherein the aggregate size of all 
displayed buy (sell) interest in the MEMX system greater (less) than or 
equal to that price is one round lot or greater, and that the aggregate 
size of all displayed buy (sell) interest in the MEMX system greater 
(less) than or equal to that price will be transmitted rounded down to 
the nearest round lot.\184\ The Commission believes that MEMX's 
proposed rule, as revised in Amendment No. 2, is clear and 
substantially similar to the rules of other exchanges governing 
aggregation and display of odd-lot orders.\185\
---------------------------------------------------------------------------

    \178\ See MEMX Rule 11.10(b).
    \179\ See 17 CFR 242.600(b)(57)-(58) and 17 CFR 242.611.
    \180\ See NYSE Letter, supra note 102, at 2.
    \181\ See id.
    \182\ See MEMX Letter 2, supra note 104, at 2, n.8 and 
accompanying text.
    \183\ See id. at 3. MEMX further stated that it ``believes this 
is the same process now used by most exchanges and the proposed MEMX 
rule will be based on rules of other exchanges.'' Id.
    \184\ See MEMX Rule 11.9(b)(2).
    \185\ See, e.g., Nasdaq Rule 4756(c)(2) and NYSE Arca Rule 7.36-
E(b)(3).
---------------------------------------------------------------------------

    To meet their regulatory responsibilities under Rule 611(a) of 
Regulation NMS, other trading centers will be required to have 
sufficient notice of new protected quotations, as well as all necessary 
information and technical specifications.\186\ The Commission believes 
that it would be a reasonable policy and procedure under Rule 611(a) to 
require that industry participants begin treating MEMX's best bid and 
best offer as a protected quotation as soon as possible but no later 
than 90 days after the date of this order, or such later date as MEMX 
begins operation as a national securities exchange. The Commission has 
taken the same position with other new equities exchanges.\187\
---------------------------------------------------------------------------

    \186\ See Securities Exchange Act Release No. 53829 (May 18, 
2006), 71 FR 30038, 30041 (May 24, 2006) (File No. S7-10-04) 
(extending the compliance dates for Rule 610 and Rule 611 of 
Regulation NMS under the Act).
    \187\ See, e.g., BATS Order at 49505, supra note 39, and 
DirectEdge Exchanges Order at 13163, supra note 64.
---------------------------------------------------------------------------

D. Discipline and Oversight of Members

    As noted above, one prerequisite for the Commission's grant of an 
exchange's application for registration is that a proposed exchange 
must be so organized and have the capacity to be able to carry out the 
purposes of the Act.\188\ Specifically, an exchange must be able to 
enforce compliance by its members and persons associated with its 
members with the federal securities laws and rules thereunder and the 
rules of the exchange.\189\ As also noted above, pursuant to an RSA 
with FINRA, FINRA will perform many of the initial disciplinary 
processes on behalf of MEMX.\190\ For example, FINRA will investigate 
potential securities laws violations, issue complaints, and conduct 
hearings pursuant to MEMX rules. Appeals from disciplinary decisions 
will be heard by the MEMX Appeals Committee,\191\ and the MEMX Appeals 
Committee's decision shall be final.\192\ In addition, the Exchange 
Board on its own initiative may order review of a disciplinary 
decision.\193\
---------------------------------------------------------------------------

    \188\ See 15 U.S.C. 78f(b)(1).
    \189\ See id.
    \190\ See supra notes 123-124 and accompanying text. See also 
MEMX Rule 9.8 (noting that MEMX and FINRA are parties to a 
regulatory contract, pursuant to which FINRA will perform certain 
functions described in Chapter 9 on behalf of MEMX).
    \191\ See MEMX Rule 8.10(b).
    \192\ See id.
    \193\ See MEMX Rule 8.10(c).
---------------------------------------------------------------------------

    The MEMX LLC Agreement and MEMX rules provide that the Exchange has 
disciplinary jurisdiction over its members so that it can enforce its 
members' compliance with its rules and the federal securities laws and 
rules.\194\ The Exchange's rules also permit MEMX to sanction members 
for violations of its rules and violations of the federal securities 
laws and rules by, among other things, expelling or suspending members, 
limiting members' activities, functions, or operations, fining or 
censuring members, or suspending or barring a person from being 
associated with a member, or any other fitting sanction.\195\ MEMX's 
rules also provide for the imposition of fines for certain minor rule 
violations in lieu of commencing disciplinary proceedings.\196\ 
Accordingly, as a condition to the operation of MEMX, a Minor Rule 
Violation Plan (``MRVP'') filed by MEMX under Act Rule 19d-1(c)(2) must 
be declared effective by the Commission.\197\
---------------------------------------------------------------------------

    \194\ See generally MEMX LLC Agreement, Article XVII and MEMX 
Rules Chapters 7 and 8.
    \195\ See MEMX Rule 8.1(a).
    \196\ See MEMX Rule 8.15.
    \197\ 17 CFR 240.19d-1(c)(2).
---------------------------------------------------------------------------

    The Commission finds that the MEMX LLC Agreement and rules 
concerning its disciplinary and oversight programs are consistent with 
the requirements of Sections 6(b)(6) and 6(b)(7) of the Act \198\ in 
that they provide fair procedures for the disciplining of members and 
persons associated with members. The Commission further finds that the 
rules of MEMX provide it with the ability to comply, and with the 
ability to enforce compliance by its members and persons associated 
with its members, with the provisions of the Act, the rules and

[[Page 27462]]

regulations thereunder, and the rules of MEMX.\199\
---------------------------------------------------------------------------

    \198\ 15 U.S.C. 78f(b)(6) and (b)(7).
    \199\ See 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------

E. Trading on MEMX Pursuant to Unlisted Trading Privileges

    MEMX does not intend to be a primary listing market for securities. 
Accordingly, MEMX has not proposed rules that would allow it to 
primarily list any securities at this time. Instead, MEMX has proposed 
to trade securities pursuant to unlisted trading privileges (``UTP''). 
MEMX Rule 14.1 establishes the Exchange's authority to trade securities 
on a UTP basis. MEMX Rule 14.1(a) provides that MEMX may extend UTP to 
any security that is an NMS stock that is listed on another national 
securities exchange or with respect to which UTP may otherwise be 
extended in accordance with Section 12(f) of the Act.\200\ MEMX Rule 
14.1(a) further provides that any such security would be subject to all 
MEMX rules applicable to trading on MEMX, unless otherwise noted.
---------------------------------------------------------------------------

    \200\ 15 U.S.C. 78l(f).
---------------------------------------------------------------------------

    MEMX Rule 14.1(b) establishes additional rules for trading of UTP 
Exchange Traded Products, which are defined in MEMX Rule 1.1. MEMX Rule 
14.1(b) provides that MEMX will distribute an information circular 
prior to the commencement of trading in a UTP Exchange Traded Product 
that generally would include the same information as the information 
circular provided by the listing exchange, including (a) the special 
risks of trading the Exchange Traded Product, (b) the Exchange's rules 
that would apply to the Exchange Traded Product and (c) information 
about the dissemination of value of the underlying assets or indices. 
MEMX Rule 14.1(b)(2) establishes certain requirements for members that 
have customers that trade UTP Exchange Traded Products.\201\ MEMX Rule 
14.1(b)(4) also establishes certain requirements for any member 
registered as a market maker in an UTP Exchange Traded Product that 
derives its value from one or more currencies, commodities, or 
derivatives based on one or more currencies or commodities, or is based 
on a basket or index composed of currencies or commodities. MEMX Rule 
14.1(b)(5) provides that the Exchange's surveillance procedures for 
Exchange Traded Products traded on the Exchange pursuant to UTP would 
be similar to the procedures used for equity securities traded on the 
Exchange and would incorporate and rely upon existing Exchange 
surveillance systems.
---------------------------------------------------------------------------

    \201\ MEMX Rule 14.1(b)(2)(A) states that MEMX Rule 14.1(b)(2) 
applies to UTP Exchange Traded Products that are the subject of an 
order by the Commission exempting the series from certain prospectus 
delivery requirements under Section 24(d) of the 1940 Act, and are 
not otherwise subject to prospectus delivery requirements under the 
Securities Act. MEMX Rule 14.1(b)(2)(B) requires members to provide 
a written description of the terms and characteristics of UTP 
Exchange Traded Products to purchasers of such securities, not later 
than the time of confirmation of the first transaction, and with any 
sales materials relating to UTP Exchange Traded Products. MEMX Rule 
14.1(b)(2)(C) requires members to provide a prospectus to a customer 
requesting a prospectus.
---------------------------------------------------------------------------

    The Commission finds that the Exchange's proposed approach to the 
trading of securities on a UTP basis, as set forth in MEMX Rule 14.1, 
is consistent with Section 12(f) of the Act and Rule 12f-5 
thereunder.\202\ Rule 12f-5 under the Act requires an exchange that 
extends unlisted trading privileges to securities to have in effect a 
rule or rules providing for transactions in the class or type of 
security to which the exchange extends unlisted trading 
privileges.\203\ MEMX Rule 14.1 includes a provision that any security 
traded UTP on the Exchange ``shall be subject to all Exchange rules 
applicable to trading on the Exchange, unless otherwise noted.'' The 
provisions in MEMX Rule 14.1 are substantively the same as the existing 
rules of NYSE National, Inc.\204\ Accordingly, pursuant to Section 
12(f) of the Act and Rule 12f-5 thereunder, MEMX will be permitted to 
extend unlisted trading privileges to securities of the same class, 
subject to the trading rules of the Exchange.
---------------------------------------------------------------------------

    \202\ 15 U.S.C. 78l(f); 17 CFR 240.12f-5.
    \203\ See 17 CFR 240.12f-5. See also Securities Exchange Act 
Release No. 35737 (April 21, 1995), 60 FR 20891 (April 28, 1995) 
(File No. S7-4-95) (adopting Rule 12f-5 under the Act).
    \204\ See NYSE National Rule 5.1.
---------------------------------------------------------------------------

F. Section 11(a) of the Act

    Section 11(a)(1) of the Act \205\ prohibits a member of a national 
securities exchange from effecting transactions on that exchange for 
its own account, the account of an associated person, or an account 
over which it or its associated person exercises investment discretion 
(collectively, ``covered accounts'') unless an exception applies. Rule 
11a2-2(T) under the Act,\206\ known as the ``effect versus execute'' 
rule, provides exchange members with an exemption from the Section 
11(a)(1) prohibition. Rule 11a2-2(T) permits an exchange member, 
subject to certain conditions, to effect transactions for covered 
accounts by arranging for an unaffiliated member to execute 
transactions on the exchange. To comply with Rule 11a2-2(T)'s 
conditions, a member: (i) Must transmit the order from off the exchange 
floor; (ii) may not participate in the execution of the transaction 
once it has been transmitted to the member performing the execution; 
\207\ (iii) may not be affiliated with the executing member; and (iv) 
with respect to an account over which the member or an associated 
person has investment discretion, neither the member nor its associated 
person may retain any compensation in connection with effecting the 
transaction except as provided in the Rule.
---------------------------------------------------------------------------

    \205\ 15 U.S.C. 78k(a)(1).
    \206\ 17 CFR 240.11a2-2(T).
    \207\ This prohibition also applies to associated persons. The 
member may, however, participate in clearing and settling the 
transaction.
---------------------------------------------------------------------------

    In a letter to the Commission, MEMX requested that the Commission 
concur with MEMX's conclusion that MEMX members that enter orders into 
the MEMX trading system satisfy the conditions of Rule 11a2-2(T).\208\ 
For the reasons set forth below, the Commission believes that MEMX 
members entering orders into the MEMX trading system could satisfy the 
requirements of Rule 11a2-2(T).
---------------------------------------------------------------------------

    \208\ See Letter from Anders Franzon, General Counsel, MEMX, to 
Vanessa Countryman, Secretary, Commission, dated January 31, 2020 
(``MEMX 11(a) Letter'').
---------------------------------------------------------------------------

    The Rule's first condition is that orders for covered accounts be 
transmitted from off the exchange floor. In the context of automated 
trading systems, the Commission has found that the off-floor 
transmission condition is met if a covered account order is transmitted 
from a remote location directly to an exchange's floor by electronic 
means.\209\ MEMX has represented that MEMX does not have a physical 
trading floor, and the MEMX trading system will receive orders from 
members electronically through remote terminals or computer-to-computer 
interfaces.\210\ The Commission believes that the MEMX trading system 
satisfies this off-floor transmission condition.
---------------------------------------------------------------------------

    \209\ See, e.g., Nasdaq Order, supra note 39; ArcaEx Order, 
supra note 173; Securities Exchange Act Release Nos. 61419 (January 
26, 2010), 75 FR 5157 (February 1, 2010) (SR-BATS-2009-031) 
(approving BATS options trading); 59154 (December 23, 2008), 73 FR 
80468 (December 31, 2008) (SR-BSE-2008-48) (approving equity 
securities listing and trading on BSE); 57478 (March 12, 2008), 73 
FR 14521 (March 18, 2008) (SR-NASDAQ-2007-004 and SR-NASDAQ-2007-
080) (approving Nasdaq Options Market options trading); 29237 (May 
24, 1991), 56 FR 24853 (May 31, 1991) (SR-NYSE-90-52 and SR-NYSE-90-
53) (approving NYSE's Off-Hours Trading Facility); and 15533 
(January 29, 1979), 44 FR 6084 (January 31, 1979) (``1979 
Release'').
    \210\ See MEMX 11(a) Letter, supra note 208.
---------------------------------------------------------------------------

    The second condition states that the member and any associated 
person not participate in the execution of its order after the order 
has been transmitted. MEMX represented that at no time following the 
submission of an order is

[[Page 27463]]

a member or an associated person of the member able to acquire control 
or influence over the result or timing of the order's execution.\211\ 
According to MEMX, the execution of a member's order is determined 
solely by what quotes and orders are present in the system at the time 
the member submits the order, and the order priority based on the MEMX 
rules.\212\ Accordingly, the Commission believes that a MEMX member and 
its associated persons do not participate in the execution of an order 
submitted to the MEMX trading system.\213\
---------------------------------------------------------------------------

    \211\ See id. MEMX notes that a member may cancel or modify the 
order, or modify the instructions for executing the order, after the 
order has been transmitted, provided that such cancellations or 
modifications are transmitted from off an exchange floor. The 
Commission has stated that the non-participation condition is 
satisfied under such circumstances so long as such modifications or 
cancellations are also transmitted from off the floor. See 
Securities Exchange Act Release No. 14563 (March 14, 1978), 43 FR 
11542 (March 17, 1978) (``1978 Release'') (stating that the ``non-
participation requirement does not prevent initiating members from 
canceling or modifying orders (or the instructions pursuant to which 
the initiating member wishes orders to be executed) after the orders 
have been transmitted to the executing member, provided that any 
such instructions are also transmitted from off the floor'').
    \212\ See MEMX 11(a) Letter, supra note 208.
    \213\ See, e.g., BATS Order at 49505, supra note 39, and 
DirectEdge Exchanges Order at 13164, supra note 64.
---------------------------------------------------------------------------

    The third condition states that the order be executed by an 
exchange member who is unaffiliated with the member initiating the 
order. The Commission has stated that this condition is satisfied when 
automated exchange facilities, such as the MEMX trading system, are 
used, as long as the design of these systems ensures that members do 
not possess any special or unique trading advantages in handling their 
orders after transmitting them to the exchange.\214\ MEMX has 
represented that the design of the MEMX trading system ensures that no 
member has any special or unique trading advantage in the handling of 
its orders after transmitting its orders to MEMX.\215\ Based on MEMX's 
representation, the Commission believes that the MEMX trading system 
satisfies this condition.
---------------------------------------------------------------------------

    \214\ See, e.g., BATS Order at 49505, supra note 39, and 
DirectEdge Exchanges Order at 13164, supra note 64. In considering 
the operation of automated execution systems operated by an 
exchange, the Commission noted that, while there is not an 
independent executing exchange member, the execution of an order is 
automatic once it has been transmitted into the system. Because the 
design of these systems ensures that members do not possess any 
special or unique trading advantages in handling their orders after 
transmitting them to the exchange, the Commission has stated that 
executions obtained through these systems satisfy the independent 
execution condition of Rule 11a2-2(T). See 1979 Release, supra note 
209.
    \215\ See MEMX 11(a) Letter, supra note 208.
---------------------------------------------------------------------------

    Fourth, in the case of a transaction effected for an account with 
respect to which the initiating member or an associated person thereof 
exercises investment discretion, neither the initiating member nor any 
associated person thereof may retain any compensation in connection 
with effecting the transaction, unless the person authorized to 
transact business for the account has expressly provided otherwise by 
written contract referring to Section 11(a) of the Act and Rule 11a2-
2(T) thereunder.\216\ MEMX members trading for covered accounts over 
which they exercise investment discretion must comply with this 
condition in order to rely on the rule's exemption.\217\
---------------------------------------------------------------------------

    \216\ See, e.g., BATS Order at 49505, supra note 39 and 
DirectEdge Exchanges Order at 13164, supra note 64. In addition, 
Rule 11a2-2(T)(d) requires a member or associated person authorized 
by written contract to retain compensation, in connection with 
effecting transactions for covered accounts over which such member 
or associated persons thereof exercises investment discretion, to 
furnish at least annually to the person authorized to transact 
business for the account a statement setting forth the total amount 
of compensation retained by the member or any associated person 
thereof in connection with effecting transactions for the account 
during the period covered by the statement. See 17 CFR 240.11a2-
2(T)(d). See also 1978 Release, supra note 211 (stating ``[t]he 
contractual and disclosure requirements are designed to assure that 
accounts electing to permit transaction-related compensation do so 
only after deciding that such arrangements are suitable to their 
interests'').
    \217\ MEMX represented that it will advise its membership 
through the issuance of an Information Circular that those members 
trading for covered accounts over which they exercise investment 
discretion must comply with this condition in order to rely on the 
rule's exemption. See MEMX 11(a) Letter, supra note 208.
---------------------------------------------------------------------------

G. Exemption From Section 19(b) of the Act With Regard to FINRA Rules 
Incorporated by Reference

    MEMX proposes to incorporate by reference certain FINRA rules as 
MEMX rules.\218\ Thus, for those MEMX rules, Exchange members will 
comply with the MEMX rule by complying with the FINRA rule referenced 
therein. In connection with its proposal to incorporate FINRA rules by 
reference, MEMX requested, pursuant to Rule 240.0-12,\219\ an exemption 
under Section 36 of the Act from the rule filing requirements of 
Section 19(b) of the Act for changes to those MEMX rules that are 
effected solely by virtue of a change to a cross-referenced FINRA 
rule.\220\ MEMX represents in its letter that, as a condition to the 
exemption, it will provide written notice to its members whenever a 
proposed rule change to a FINRA rule that is incorporated by reference 
is proposed and whenever any such proposed change is approved by the 
Commission or otherwise becomes effective.\221\
---------------------------------------------------------------------------

    \218\ See Letter from Anders Franzon, General Counsel, MEMX, to 
Vanessa Countryman, Secretary, Commission, dated September 9, 2019 
(``Exemption Request Letter''). MEMX proposes to incorporate by 
reference the following FINRA rules: (1) FINRA Rule 2210 
(Communications with the Public) via MEMX Rule 3.5 (Communications 
with the Public); (2) the definition of a research report in FINRA 
Rule 2241, via MEMX Rule 3.l3(b)(3); (3) the 12000 and 13000 Series 
of the FINRA Manual (Code of Arbitration Procedures for Customer 
Disputes and Code of Arbitration Procedures for Industry Disputes) 
via MEMX Rules 9.1, 9.2, 9.4, 9.5 and 9.8; (4) FINRA Rule 2268 
(Requirements When Using Predispute Arbitration Agreements for 
Customer Accounts) via MEMX Rule 9.3 (Predispute Arbitration 
Agreements); (5) the 14000 Series of the FINRA Manual (Code of 
Mediation Procedures) via MEMX Rule 9.7 (Mediation); and (6) FINRA 
Rule 5270 (Frontrunning of Block Transactions), via MEMX Rule 12.14 
(Frontrunning of Block Transactions).
    \219\ See 17 CFR 240.0-12.
    \220\ See Exemption Request Letter, supra note 218.
    \221\ See Exemption Request Letter, supra note 218. MEMX will 
provide such notice through a posting on the same website location 
where MEMX posts its own rule filings pursuant to Rule 19b-4 under 
the Act, within the required time frame. The website posting will 
include a link to the location on the FINRA website where FINRA's 
proposed rule change is posted. See id.
---------------------------------------------------------------------------

    Using its authority under Section 36 of the Act,\222\ the 
Commission is hereby granting MEMX's request for an exemption, pursuant 
to Section 36 of the Act, from the rule filing requirements of Section 
19(b) of the Act with respect to the rules that MEMX proposes to 
incorporate by reference.\223\ This exemption is conditioned upon MEMX 
providing written notice to its members whenever FINRA proposes to 
change a rule that MEMX has incorporated by reference. The Commission 
believes that this exemption is appropriate in the public interest and 
consistent with the protection of investors because it will promote 
more efficient use of Commission and SRO resources by avoiding 
duplicative rule filings based on simultaneous changes to identical 
rules of more than one SRO.
---------------------------------------------------------------------------

    \222\ 15 U.S.C. 78mm.
    \223\ The Commission previously exempted other exchanges from 
the requirement to file proposed rule changes under Section 19(b) of 
the Act. See, e.g., IEX Order, supra note 51; ISE Mercury Order, 
supra note 53; MIAX Order, MIAX Pearl Order, and BATS Order, supra 
note 39; DirectEdge Exchanges Order, supra note 64.
---------------------------------------------------------------------------

H. Conclusion

    It is ordered that the application of MEMX for registration as a 
national securities exchange be, and it hereby is, granted.
    It is furthered ordered that operation of MEMX is conditioned on 
the satisfaction of the requirements below:

[[Page 27464]]

    A. Participation in National Market System Plans. MEMX must join 
the Consolidated Tape Association Plan, the Consolidated Quotation 
Plan, and the Nasdaq UTP Plan (or any successors thereto); the National 
Market System Plan Establishing Procedures Under Rule 605 of Regulation 
NMS; the Regulation NMS Plan to Address Extraordinary Market 
Volatility; the Plan for the Selection and Reservation of Securities 
Symbols; and the National Market System Plan Governing the Consolidated 
Audit Trail.
    B. Intermarket Surveillance Group. MEMX must join the Intermarket 
Surveillance Group.
    C. Minor Rule Violation Plan. A MRVP filed by MEMX under Rule 19d-
1(c)(2) must be declared effective by the Commission.\224\
---------------------------------------------------------------------------

    \224\ 17 CFR 240.19d-1(c)(2).
---------------------------------------------------------------------------

    D. Rule 17d-2 Agreement. An agreement pursuant to Rule 17d-2 \225\ 
that allocates regulatory responsibility for those matters specified 
above \226\ must be declared effective by the Commission, or MEMX must 
demonstrate that it independently has the ability to fulfill all of its 
regulatory obligations.
---------------------------------------------------------------------------

    \225\ 17 CFR 240.17d-2.
    \226\ See supra notes 135-136 and accompanying text.
---------------------------------------------------------------------------

    E. Participation in Multi-Party Rule 17d-2 Plans. MEMX must become 
a party to the multi-party Rule 17d-2 agreement concerning the 
surveillance, investigation, and enforcement of common insider trading 
rules and the agreement concerning certain Regulation NMS and 
Consolidated Audit Trail Rules.
    F. RSA. MEMX must finalize the provisions of the RSA with its 
regulatory services provider, as described above, that will specify the 
MEMX and Commission rules for which the regulatory services provider 
will provide certain regulatory functions, or MEMX must demonstrate 
that it independently has the ability to fulfill all of its regulatory 
obligations.
    It is further ordered, pursuant to Section 36 of the Act,\227\ that 
MEMX shall be exempted from the rule filing requirements of Section 
19(b) of the Act with respect to the FINRA rules that MEMX proposes to 
incorporate by reference into MEMX's rules, subject to the conditions 
specified in this Order.
---------------------------------------------------------------------------

    \227\ 15 U.S.C. 78mm.

    By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-09861 Filed 5-7-20; 8:45 am]
 BILLING CODE 8011-01-P


