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Federal Register / Vol. 86, No. 18 / Friday, January 29, 2021 / Notices
khammond on DSKJM1Z7X2PROD with NOTICES

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:
Rules for which securities could be listed and traded on the BSTX Market,55
including:
rules governing listing on BSTX, such as initial listing standards; 56
rules governing suspension and delisting; 57 and forms to be used by issuers applying to list on BSTX; 58
rules governing the process for and eligibility to become a BSTX
Participant, as well as ongoing obligations, including:
Rules defining BSTX Participant; 59
rules setting forth requirements to participation on BSTX; 60
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
242.600b47. Exchange Act Rule 600b48 then defines NMS stock as any NMS security other than an option. 17 CFR 242.600b48. 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 17000a11.
53 See BSTX Trading Rules Proposal, supra note 16, 85 FR at 51256, 5125862.
54 See BSTX Trading Rules Disapproval, supra note 17.
55 See BSTX Rules, supra note 24, Rule 26000
Series and 27000 Series; BSTX Trading Rules Proposal, supra note 16, 85 FR at 5127781.
56 See BSTX Rules, supra note 24, Rule 26000
Series; BSTX Trading Rules Proposal, supra note 16, 85 FR at 5127780.
57 See BSTX Rules, supra note 24, Rule 27000
Series; BSTX Trading Rules Proposal, supra note 16, 85 FR at 51280.
58 See BSTX Trading Rules Proposal, supra note 16, 85 FR at 5128385. The proposed forms for issuers to list on BSTX were attached as Exhibits 3G through 3M to the 19b4 for SRBOX202014
available on the Commissions website at https
www.sec.gov/rules/sro/box.htmSR-BOX-2020-14.
59 See supra note 52.
60 See BSTX Rules, supra note 24, Rule 18000
Series; BSTX Trading Rules Proposal, supra note 16, 85 FR at 5126465.

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agreements and forms required to become a BSTX Participant; 61 and rules governing business conduct, trading practice, financial responsibility for BSTX Participants; 62
rules for trading on the BSTX
Market and access to the BSTX
System; 63
rules for BSTX Participants and the Exchange requiring reporting of end-ofday balance information of BSTX
Participants in BSTX Securities to the Exchange for recording to the Ethereum blockchain; 64 and 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
III. Discussion and Commission Finding A. Applicable Standard of Review Under Section 19b2C 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 700b3 of the Commissions 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 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 19b4 for SRBOX202014
available on the Commissions website at https
www.sec.gov/rules/sro/box.htmSR-BOX-2020-14.
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 5126568.
63 See BSTX Rules, supra note 24, Rule 25000
Series; BSTX Trading Rules Proposal, supra note 16, 85 FR at 5126875.
64 See BSTX Rules, supra note 24, Rule 17020;
BSTX Trading Rules Proposal, supra note 16, 85 FR
at 5125862.
65 See BSTX Rules, supra note 24, Rule 22040;
BSTX Trading Rules Proposal, supra note 16, 85 FR
at 51267, 5128687.
66 See 15 U.S.C. 78sb2Ci.
67 Rule 700b3, Commission Rules of Practice, 17 CFR 201.700b3.

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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 SROs representations in a proposed rule change is not sufficient to justify Commission approval of a proposed rule change.70
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 Exchanges regulatory operations, and therefore cannot find that the BSTX Governance Proposal is consistent with the Exchange Act, and in particular Section 6b1. 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 6b1, and is therefore unable to find that the proposal is consistent with the Exchange Act.71
B. Whether the Record Supports a Finding That the Proposal is Consistent With Section 6b1 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 68 See
id.
id.
70 Susquehanna Intl Group, LLP v. Securities and Exchange Commission, 866 F.3d 442, 447 D.C. Cir.
2017.
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.
69 See
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