[Federal Register Volume 86, Number 18 (Friday, January 29, 2021)]
[Notices]
[Pages 7597-7602]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-01943]


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SECURITIES AND EXCHANGE COMMISSION

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


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

January 25, 2021.

I. Introduction

    On May 12, 2020, BOX Exchange LLC (``Exchange'' or ``BOX'') filed 
with the Securities and Exchange Commission (``Commission''), pursuant 
to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Exchange 
Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change in 
connection with the proposed commencement of operations of the Boston 
Security Token Exchange LLC (``BSTX'') as a facility of the Exchange. 
The proposed rule change was published for comment in the Federal 
Register on June 1, 2020.\3\ On July 16, 2020, pursuant to Section 
19(b)(2) of the Exchange Act,\4\ the Commission designated a longer 
period within which to approve the proposed rule change, disapprove the 
proposed rule change, or institute proceedings to determine whether to 
disapprove the proposed rule change.\5\ On August 3, 2020, the Exchange 
filed Amendment No. 1 to the proposed rule change (``Amendment No. 
1'').\6\ On August 12, 2020, the Commission published notice of filing 
of Amendment No. 1, for notice and comment, and instituted proceedings 
to determine whether to approve or disapprove the proposed rule change, 
as modified by Amendment No. 1.\7\ On November 24, 2020, pursuant to 
Section 19(b)(2) of the Exchange Act,\8\ the Commission designated a 
longer period within which to approve the proposed rule change, as 
modified by Amendment No. 1, disapprove the proposed rule change, as 
modified by Amendment No. 1, or institute proceedings to determine 
whether to disapprove the proposed rule change, as modified by 
Amendment No. 1.\9\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 88949 (May 26, 
2020), 85 FR 33258 (June 1, 2020) (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 89329 (July 16, 
2020), 85 FR 44333 (July 22, 2020). The Commission designated August 
30, 2020, as the date by which the Commission shall approve or 
disapprove, or institute proceedings to determine whether to 
disapprove, the proposed rule change.
    \6\ In Amendment No. 1 the Exchange revised the proposal to: (1) 
Modify its description of the market that BSTX would operate, 
including what would be traded on that market; (2) clarify that it 
is proposing to establish BSTX as a facility of the Exchange, but 
that the Exchange would not commence operations of the ``BSTX 
Market'' (as defined below) absent trading rules approved by the 
Commission that are the subject of a separate filing, and that the 
Exchange's regulatory oversight responsibilities with respect to 
BSTX would not be triggered unless SR-BOX-2020-16 is approved by the 
Commission; (3) update a citation to a proposed rule change filed by 
the Exchange to provide flexibility for the Exchange to regulate 
multiple facilities; and (4) include a citation to a separate 
proposed rule change filed by the Exchange to provide trading rules 
for the BSTX Market. Amendment No. 1 was filed as a partial 
amendment. See Form 19b-4 for Amendment No. 1 to SR-BOX-2020-16 
(``Amendment No. 1 Form 19b-4''). When the Exchange filed Amendment 
No. 1 to SR-BOX-2020-16, it also submitted a redline, which the 
Exchange states reflects the text of the partial amendment compared 
to the original filing, as a comment letter to the filing, and which 
the Commission made publicly available at https://www.sec.gov/comments/sr-box-2020-16/srbox202016-7525322-222100.pdf.
    \7\ See Securities Exchange Act Release No. 89537 (August 12, 
2020), 85 FR 50850 (August 18, 2020) (Notice of Filing of Amendment 
No. 1 and Order Instituting Proceedings).
    \8\ 15 U.S.C. 78s(b)(2).
    \9\ See Securities Exchange Act Release No. 90513 (November 24, 
2020), 85 FR 77334 (December 1, 2020). The Commission designated 
January 27, 2021, as the date by which the Commission shall approve 
or disapprove, or institute proceedings to determine whether to 
disapprove, the proposed rule change.
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    The proposed rule change is substantially similar to a proposed 
rule change previously filed with the Commission by the Exchange as SR-
BOX-2019-37.\10\ SR-BOX-2019-37 was published for comment in the 
Federal Register on January 3, 2020.\11\ The Commission received 
comments on the substance of SR-BOX-2019-37.\12\ BOX withdrew proposed 
rule change SR-BOX-2019-37 on May 12, 2020.\13\
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    \10\ See Securities Exchange Act Release No. 87868 (December 30, 
2019), 85 FR 345 (January 3, 2020) (Notice of Filing of Proposed 
Rule Change).
    \11\ See id. See also Securities Exchange Act Release No. 88536 
(April 1, 2020), 85 FR 19537 (April 7, 2020) (Order Instituting 
Proceedings) (instituting proceedings to determine whether to 
disapprove the proposed rule change). The only differences between 
SR-BOX-2019-37 and SR-BOX-2020-16 relate to: (1) Reclassifying 
ownership interests in BSTX from a single class with voting rights 
into two classes--one with voting rights and one without voting 
rights, and related changes; (2) providing an updated Second Amended 
and Restated LLC Agreement, dated as of December 24, 2019; (3) 
removing the list of BSTX LLC Members and their initial capital 
contributions; and (4) modifying the Second Amended and Restated LLC 
Agreement to reflect that a ``Membership Record'' would be 
maintained by the Secretary of BSTX and updated from time to time as 
necessary and as provided in the Second Amended and Restated LLC 
Agreement, which shall include the name, address, and number of 
units of each class of ownership interests held by each BSTX LLC 
Member; (5) updating certain upstream ownership information; (6) 
updating references to other proposed rule changes of the Exchange; 
and (7) the modifications made by Amendment No. 1.
    \12\ Comments on SR-BOX-2019-37 can be found at: https://www.sec.gov/comments/sr-box-2019-37/srbox201937.htm. While the 
Commission considered the comments received on SR-BOX-2019-37, they 
are not germane to the basis for disapproval and are not discussed 
herein.
    \13\ See Securities Exchange Act Release No. 89017 (June 4, 
2020), 85 FR 35473 (June 10, 2020) (Notice of Withdrawal of a 
Proposed Rule Change).
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    This order disapproves the proposed rule change, as modified by 
Amendment No. 1 (``BSTX Governance Proposal''). The Exchange proposes 
to establish BSTX as a facility of the Exchange, as that term is 
defined in Section 3(a)(2) of the Exchange Act, that would operate a 
market for the trading of securities (``BSTX Market'') and be jointly 
owned and controlled by BOX Digital Markets LLC (``BOX Digital''), a 
Delaware limited liability company and a subsidiary of BOX Holdings 
Group LLC (``BOX Holdings,'' which is also the parent company of the 
Exchange's existing facility BOX Options Market LLC, ``BOX Options'') 
and tZERO Group, Inc. (``tZERO''), a Delaware limited liability company 
and a subsidiary of Overstock.com Inc. (``Overstock''). According to 
the Exchange, it is proposing the Boston Security Token Exchange LLC, 
Second Amended and Restated Limited Liability Company Agreement, dated 
as of December 24, 2019 (``BSTX LLC Agreement'') \14\ as the

[[Page 7598]]

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

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

[[Page 7599]]

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

[[Page 7600]]

be NMS stock, and members approved for trading on BSTX (i.e., BSTX 
Participants),\52\ and issuers of BSTX Securities, would be required to 
comply with a protocol to enable BSTX to record and publicly 
disseminate digital representations of end-of-day ownership balances to 
the Ethereum blockchain.\53\ Specifically, in the BSTX Trading Rules 
Proposal, which the Commission disapproved,\54\ the Exchange proposed:
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    \50\ See supra note 25 and accompanying text.
    \51\ See BSTX Trading Rules Proposal, supra note 16, 85 FR 
51251. The BSTX Rules would have defined the ``Securities'' that 
would be traded on BSTX as a facility of the Exchange as ``NMS 
stock, as defined in Rule 600(b)(47) of the Exchange Act, trading on 
the BSTX System and for which ancillary Ethereum blockchain records 
are maintained under [the BSTX Rules]''; and the BSTX System as the 
``the automated trading system used by BSTX for the trading of 
Securities.'' See BSTX Rules, supra note 24, Rules 17000(a)(30) and 
(14), respectively. Exchange Act Rule 600(b)(47) defines ``NMS 
security'' as ``any security or class of securities for which 
transaction reports are collected, processed, and made available 
pursuant to an effective transaction reporting plan, or an effective 
national market system plan for reporting transactions in listed 
options.'' 17 CFR 242.600(b)(47). Exchange Act Rule 600(b)(48) then 
defines ``NMS stock'' as ``any NMS security other than an option.'' 
17 CFR 242.600(b)(48). The BSTX LLC Agreement defines ``System'' as 
``the technology, know-how, software, equipment, communication lines 
or services, services and other deliverables or materials of any 
kind as may be necessary or desirable for the operation of the BSTX 
Market.'' See BSTX LLC Agreement, supra note 14, Section 1.1.
    \52\ The BSTX LLC Agreement defines ``BSTX Participant'' as ``a 
firm or organization that is registered with the Exchange pursuant 
to Exchange Rules for purposes of participating in Trading on the 
BSTX Market.'' See BSTX LLC Agreement, supra note 14, Section 1.1. 
The proposed trading rules would have defined ``BSTX Participant'' 
as ``a Participant or Options Participant (as defined in [Exchange] 
Rule 100 Series) that is authorized to trade Securities on the 
Exchange.'' See BSTX Rules, supra note 24, Rule 17000(a)(11).
    \53\ See BSTX Trading Rules Proposal, supra note 16, 85 FR at 
51256, 51258-62.
    \54\ See BSTX Trading Rules Disapproval, supra note 17.
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     Rules for which securities could be listed and traded on 
the BSTX Market,\55\ including:
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    \55\ See BSTX Rules, supra note 24, Rule 26000 Series and 27000 
Series; BSTX Trading Rules Proposal, supra note 16, 85 FR at 51277-
81.
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     rules governing listing on BSTX, such as initial listing 
standards; \56\
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    \56\ See BSTX Rules, supra note 24, Rule 26000 Series; BSTX 
Trading Rules Proposal, supra note 16, 85 FR at 51277-80.
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     rules governing suspension and delisting; \57\ and
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    \57\ See BSTX Rules, supra note 24, Rule 27000 Series; BSTX 
Trading Rules Proposal, supra note 16, 85 FR at 51280.
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     forms to be used by issuers applying to list on BSTX; \58\
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    \58\ See BSTX Trading Rules Proposal, supra note 16, 85 FR at 
51283-85. The proposed forms for issuers to list on BSTX were 
attached as Exhibits 3G through 3M to the 19b-4 for SR-BOX-2020-14 
(available on the Commission's website at https://www.sec.gov/rules/sro/box.htm#SR-BOX-2020-14).
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     rules governing the process for and eligibility to become 
a BSTX Participant, as well as ongoing obligations, including:
     Rules defining BSTX Participant; \59\
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    \59\ See supra note 52.
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     rules setting forth requirements to participation on BSTX; 
\60\
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    \60\ See BSTX Rules, supra note 24, Rule 18000 Series; BSTX 
Trading Rules Proposal, supra note 16, 85 FR at 51264-65.
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     agreements and forms required to become a BSTX 
Participant; \61\ and
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    \61\ See BSTX Trading Rules Proposal, supra note 16, 85 FR at 
51283. The proposed forms for issuers to list on BSTX were attached 
as Exhibits 3A through 3F to the 19b-4 for SR-BOX-2020-14 (available 
on the Commission's website at https://www.sec.gov/rules/sro/box.htm#SR-BOX-2020-14).
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     rules governing business conduct, trading practice, 
financial responsibility for BSTX Participants; \62\
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    \62\ See BSTX Rules, supra note 24, Rule 19000 Series, 20000 
Series, and 23000 Series; BSTX Trading Rules Proposal, supra note 
16, 85 FR at 51265-68.
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     rules for trading on the BSTX Market and access to the 
BSTX System; \63\
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    \63\ See BSTX Rules, supra note 24, Rule 25000 Series; BSTX 
Trading Rules Proposal, supra note 16, 85 FR at 51268-75.
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     rules for BSTX Participants and the Exchange requiring 
reporting of end-of-day balance information of BSTX Participants in 
BSTX Securities to the Exchange for recording to the Ethereum 
blockchain; \64\ and
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    \64\ See BSTX Rules, supra note 24, Rule 17020; BSTX Trading 
Rules Proposal, supra note 16, 85 FR at 51258-62.
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     rules for how the Exchange would satisfy its regulatory 
obligations (including by extending its existing Regulatory Services 
Agreement (``RSA'') with the Financial Industry Regulatory Authority 
(``FINRA'') to cover BSTX Participants).\65\
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    \65\ See BSTX Rules, supra note 24, Rule 22040; BSTX Trading 
Rules Proposal, supra note 16, 85 FR at 51267, 51286-87.
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III. Discussion and Commission Finding

A. Applicable Standard of Review

    Under Section 19(b)(2)(C) of the Exchange Act, the Commission must 
approve the proposed rule change of a self-regulatory organization 
(``SRO'') if the Commission finds that the proposed rule change is 
consistent with the requirements of the Exchange Act and the applicable 
rules and regulations thereunder; if it does not make such a finding, 
the Commission must disapprove the proposed rule change.\66\ 
Additionally, under Rule 700(b)(3) of the Commission's Rules of 
Practice, the ``burden to demonstrate that a proposed rule change is 
consistent with the Exchange Act and the rules and regulations issued 
thereunder . . . is on the self-regulatory organization that proposed 
the rule change.'' \67\ The description of a proposed rule change, its 
purpose and operation, its effect, and a legal analysis of its 
consistency with applicable requirements must be sufficiently detailed 
and specific to support an affirmative Commission finding.\68\ Any 
failure of an SRO to provide this information may result in the 
Commission not having a sufficient basis to make an affirmative finding 
that a proposed rule change is consistent with the Exchange Act and the 
applicable rules and regulations issued thereunder that are applicable 
to the SRO.\69\ Moreover, ``unquestioning reliance'' on an SRO's 
representations in a proposed rule change is not sufficient to justify 
Commission approval of a proposed rule change.\70\
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    \66\ See 15 U.S.C. 78s(b)(2)(C)(i).
    \67\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
    \68\ See id.
    \69\ See id.
    \70\ Susquehanna Int'l Group, LLP v. Securities and Exchange 
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017).
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    As discussed throughout, the rules for operation of the BSTX Market 
proposed in the BSTX Trading Rules Proposal undergird the operation and 
governance of BSTX as a facility of the Exchange. Those listing and 
trading rules, which are cited and relied upon by the Exchange in the 
BSTX Governance Proposal, were disapproved by the Commission and, as a 
result, the BSTX Governance Proposal, standing alone, does not reflect 
the proposed operations of the BSTX facility. Given that the rules for 
the BSTX facility were not approved, and BOX relied on those rules in 
the BSTX Governance Proposal with respect to how BSTX would operate the 
BSTX market and the Exchange would provide regulatory oversight of 
BSTX, the Commission is unable to assess the scope of the Exchange's 
regulatory operations, and therefore cannot find that the BSTX 
Governance Proposal is consistent with the Exchange Act, and in 
particular Section 6(b)(1). For these reasons, the Commission is unable 
to find that the Exchange has met its burden to show that the proposed 
rule change is consistent with the Exchange Act and the applicable 
rules and regulations thereunder, and in particular Exchange Act 
Section 6(b)(1), and is therefore unable to find that the proposal is 
consistent with the Exchange Act.\71\
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    \71\ Other than as discussed below, this Order makes no findings 
with respect to whether other aspects of the proposed rule change 
are consistent with the Exchange Act.
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B. Whether the Record Supports a Finding That the Proposal is 
Consistent With Section 6(b)(1) of the Exchange Act

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

[[Page 7601]]

of the Exchange's obligations as an SRO with respect to BSTX as a 
facility of the Exchange, were the subject of a separate proposed rule 
change--the BSTX Trading Rules Proposal--that the Commission 
disapproved.\72\ In the BSTX Governance Proposal, the Exchange cites 
the BSTX Trading Rules Proposal and states that it would not commence 
operations of the BSTX Market until the BSTX Trading Rules Proposal is 
approved by the Commission.\73\ Many aspects of the BSTX Governance 
Proposal and many provisions of the BSTX LLC Agreement, however, are 
substantively relevant only in the context of the existence and 
operation of the BSTX Market, and in the absence of the BSTX Trading 
Rules Proposal, the Commission is unable to assess these provisions and 
determine that the Exchange would be organized and have the capacity to 
carry out the purposes of the Exchange Act, consistent with Section 
6(b)(1) of the Exchange Act.
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    \72\ See supra note 17 and accompanying text.
    \73\ See supra notes 24-25 and accompanying text.
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    For example, in the BSTX LLC Agreement the Exchange defines the 
BSTX Market as ``the market operated by BSTX pursuant to Section 3.1 
[of the BSTX LLC Agreement],'' \74\ and Section 3.1 of the BSTX LLC 
Agreement states that the purpose of BSTX is to ``develop the System, 
to own and operate the BSTX Market for the Trading of BSTX 
Products,\75\ and to engage in all related activities arising therefrom 
or relating thereto or necessary, desirable, advisable, convenient, or 
appropriate in connection therewith as the [BSTX] LLC Members may 
determine.'' \76\ And while the BSTX LLC Agreement generally defines 
the terms System,\77\ BSTX Market,\78\ Trading,\79\ and BSTX 
Products,\80\ the BSTX Governance Proposal and the BSTX LLC Agreement 
do not describe the proposed operation of the BSTX Market, how trading 
would occur on the BSTX Market, or the products proposed to be traded 
on the BSTX Market. Instead, the proposed rules for, and the 
description of, these aspects of the proposed facility were the subject 
of the BSTX Trading Rules Proposal.\81\
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    \74\ See BSTX LLC Agreement, supra note 14, Section 1.1.
    \75\ The BSTX LLC Agreement defines ``BSTX Products'' as 
``security tokens (emphasis added) authorized for trading on the 
BSTX Market.'' See id. at Section 1.1.
    \76\ See BSTX LLC Agreement, supra note 14, Section 3.
    \77\ See supra note 51 and accompanying text.
    \78\ See supra note 74 and accompanying text.
    \79\ The proposed BSTX LLC Agreement defines ``Trading'' as 
``availability of the System to authorized users for entering, 
modifying and canceling orders in BSTX Products.'' See BSTX LLC 
Agreement, supra note 14, Section 1.1.
    \80\ See supra note 75 and accompanying text.
    \81\ See supra notes 55-65 and accompanying text.
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    In particular, the securities that are proposed to be traded on 
BSTX are described in the BSTX Governance Proposal only as 
``securities,'' but are defined in the BSTX LLC Agreement as ``BSTX 
Products,'' which are ``security tokens'' authorized for trading on the 
BSTX Market. And the Exchange does not further explain BSTX Products. 
The BSTX Trading Rules Proposal, however, proposed rules governing what 
securities could be listed and traded on BSTX,\82\ and explained how 
securities listed and traded on BSTX would be represented on the 
Ethereum blockchain as ``tokenized assets,'' a characteristic which 
would distinguish them from other NMS stocks.\83\ In the absence of the 
BSTX Trading Rules Proposal, the BSTX Governance Proposal does not 
sufficiently explain what kinds of securities would be listed and 
traded on BSTX, including what the Exchange intends by the term 
``security tokens.'' Furthermore, the Exchange states in the BSTX 
Governance Proposal that BSTX will be a ``facility of the Exchange that 
operates a market for the trading of securities'' \84\ and the BSTX LLC 
Agreement defines the products to be traded on the facility as 
``authorized for Trading on the BSTX Market.'' \85\ As noted above, the 
Commission disapproved the rules that would have established this 
authority.
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    \82\ See supra note 55 and accompanying text.
    \83\ See e.g., BSTX Trading Rules Proposal, supra note 16, 85 FR 
at 51257; BSTX Rules, supra note 24, proposed BSTX Rule 17020(d).
    \84\ See supra note 23 and accompanying text.
    \85\ See supra note 75.
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    Similarly, the BSTX Governance Proposal does not sufficiently 
explain who would be a member of the Exchange that is eligible to trade 
on BSTX and qualify as a BSTX Participant. The BSTX LLC Agreement 
defines BSTX Participant as ``a firm or organization that is registered 
with the Exchange pursuant to Exchange Rules for purposes of 
participating in Trading on the BSTX Market,'' \86\ and ``Exchange 
Rules'' as ``the rules of the Exchange that constitute the `rules of an 
exchange' within the meaning of Section 3 of the Exchange Act, and that 
pertain to the BSTX Market.'' \87\ However, the BSTX Governance 
Proposal does not provide the rules for and eligibility to become a 
BSTX Participant, as well as ongoing obligations. Those were proposed 
in the BSTX Trading Rules Proposal.\88\ The BSTX Governance Proposal 
does not sufficiently establish what the ``Exchange Rules'' referred to 
in that proposal are, the extent of their application, and what they 
would require of BSTX members.
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    \86\ See BSTX LLC Agreement, supra note 14, Section 1.1.
    \87\ See id.
    \88\ See supra notes 59-62 and accompanying text.
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    In addition, the BSTX LLC Agreement states that the Exchange will 
have regulatory responsibility for the activities of the BSTX Market. 
But the Exchange also states that it will only commence operations of 
the BSTX Market if the BSTX Trading Rules Proposal is approved. 
Additionally, as described above, the BSTX Governance Proposal does not 
provide information about the proposed operations of BSTX as a 
facility. As a result, it is not clear what the activities of the BSTX 
Market would be, over which the Exchange would exercise regulatory 
responsibility. For example, Section 3.2 of the BSTX LLC Agreement 
provides that the Exchange will (a) act as the Commission approved SRO 
for the BSTX Market, (b) have regulatory responsibility for the 
activities of the BSTX Market, and (c) provide regulatory services to 
BSTX pursuant to the Facility Agreement.\89\ The BSTX LLC Agreement 
also states that the Exchange will become a party to the BSTX LLC 
Agreement and the Commission and the Exchange shall have ``appropriate 
regulatory oversight responsibilities with respect to BSTX'' upon the 
Commission's approval of the Exchange's proposal to operate the BSTX 
Market as a facility of the Exchange.\90\ Because the BSTX Governance 
Proposal does not explain how the BSTX Market would operate, the 
Commission is unable to assess what the Exchange's regulatory 
responsibilities would be and thus whether the Exchange would be 
organized and have the capacity to carry out the purposes of the 
Exchange Act with respect to BSTX as a facility of the Exchange.
---------------------------------------------------------------------------

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

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

[[Page 7602]]

in connection with the operation of BSTX, the Exchange planned to 
leverage many of the structures it previously established to operate a 
national securities exchange in compliance with Section 6 of the 
Exchange Act. The Exchange stated, among other things, its intent to 
extend its RSA with FINRA to cover BSTX Participants and trading on the 
BSTX System; that the RSA would govern many aspects of the regulation 
and discipline of BSTX Participants; and that the Exchange would 
perform Security listing regulation, authorize BSTX Participants to 
trade on the BSTX System, and conduct surveillance of Security trading 
on the BSTX System.\91\ The BSTX Trading Rules Proposal was 
disapproved, and this information, which is supportive of how the 
Exchange would be organized and have the capacity to carry out the 
purposes of the Exchange Act, is not part of the BSTX Governance 
Proposal. Because the BSTX Governance Proposal, standing alone, does 
not reflect these aspects of the operation of the BSTX facility or how 
the Exchange would provide regulatory oversight of BSTX, the Commission 
is unable to assess whether the BSTX Governance Proposal is consistent 
with Section 6(b)(1) of the Exchange Act.
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    \91\ See BSTX Trading Rules Proposal, supra note 16, 85 FR at 
51286. See also supra note 65 and accompanying text. The Exchange 
also proposed that it would perform automated surveillance of 
trading on BSTX for the purpose of maintaining a fair and orderly 
market at all times and monitor BSTX to identify unusual trading 
patterns and determine whether particular trading activity requires 
further regulatory investigation by FINRA. See BSTX Trading Rules 
Proposal, supra note 16, 85 FR at 51286-87.
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    In other regards, the BSTX LLC Agreement also refers to the 
Exchange's regulatory authority with respect to BSTX.\92\ For example, 
the BSTX LLC Agreement gives the Exchange the authority and discretion 
to take actions to limit or prevent a ``Regulatory Deficiency,'' which 
the BSTX LLC Agreement defines as the operation of BSTX or the BSTX 
Market in a manner that is not consistent with Exchange Rules or the 
Exchange Act, or rules and regulations thereunder, governing the BSTX 
Market or BSTX Participants, or that otherwise impedes the Exchange's 
ability to regulate the BSTX Market or BSTX Participants or to fulfill 
its obligations under the Exchange Act as an SRO.\93\ The Exchange 
states that such provisions ensure the Exchange maintains full 
regulatory control and authority over BSTX while it operates as a 
facility of the Exchange and help guarantee the Exchange's ability to 
fulfill its regulatory responsibilities and operate in a manner 
consistent with the Exchange Act, and in particular with Section 
6(b)(1).\94\ However, the BSTX Governance Proposal does not provide 
sufficient detail about how the BSTX Market would operate, and the 
Commission concludes that the information in the BSTX Governance 
Proposal on its own cannot support a finding that the Exchange will be 
organized and have the capacity to comply with the purposes of the 
Exchange Act, consistent with Section 6(b)(1) of the Exchange Act.
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    \92\ See, e.g., supra notes 41 and 43 and accompanying text.
    \93\ See BSTX LLC Agreement, supra note 14, Section 1.1. See 
also supra notes 45-46 and accompanying text.
    \94\ See Notice, supra note 3, 85 FR at 33264.
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IV. Conclusion

    For the reasons set forth above, the Commission does not find, 
pursuant to Section 19(b)(2) of the Exchange Act, that the proposed 
rule change, as modified by Amendment No. 1, is consistent with the 
requirements of the Exchange Act and the rules and regulations 
thereunder applicable to a national securities exchange, and, in 
particular, with Section 6(b)(1) of the Exchange Act.\95\
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    \95\ 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\96\ that the proposed rule change (SR-BOX-2020-16), as 
modified by Amendment No. 1, be, and hereby is, disapproved.
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    \96\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\97\
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    \97\ 17 CFR 200.30-3(a)(57).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-01943 Filed 1-28-21; 8:45 am]
BILLING CODE 8011-01-P


