Document ID: SEC-2012-0686-0001
Agency: sec
Document Type: Notice
Title: Findings, Opinions, and Orders of the Commission: Application of BOX Options Exchange LLC for Registration as a National Securities Exchange
Posted Date: 2012-05-03T04:00Z

[Federal Register Volume 77, Number 86 (Thursday, May 3, 2012)]
[Notices]
[Pages 26323-26340]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-10620]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66871; File No.10-206]

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

April 27, 2012.

I. Introduction

    On December 19, 2011, BOX Options Exchange LLC (``BOX Exchange'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``Commission'') an Application for Registration as a National 
Securities Exchange (``Form 1 Application'') \1\ under Section 6 of the 
Securities Exchange Act of 1934 (``Act'').\2\ On December 28, 2011, BOX 
Exchange submitted Amendment No. 1 to its Form 1 Application.\3\ Notice 
of the Form 1 Application, as modified by Amendment No. 1, was 
published for comment in the Federal Register on January 31, 2012.\4\ 
The Commission has not received any comment letters regarding the Form 
1 Application. On April 2, 2012, BOX Exchange submitted Amendment No. 2 
to the Form 1 Application.\5\
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    \1\ On January 26, 2012, the Commission issued an order granting 
BOX Exchange exemptive relief, subject to certain conditions, in 
connection with the filing of its Form 1 Application. See Securities 
Exchange Act Release No. 66241, 77 FR 4845 (January 31, 2012). 
Because BOX Exchange's Form 1 Application was incomplete without the 
exemptive relief, the date of filing of such application is January 
26, 2012.
    \2\ 15 U.S.C. 78f.
    \3\ Amendment No. 1, among other things, provides the 
unconsolidated financial statements for certain affiliates of BOX 
Exchange that are required in Exhibit D to Form 1 but were not 
included in BOX Exchange's initial Form 1 Application. In its 
initial Form 1 Application, BOX Exchange only submitted consolidated 
financials for certain of these affiliates.
    \4\ See Securities Exchange Act Release No. 66242 (January 26, 
2012), 77 FR 4841 (``Notice'').
    \5\ In Amendment No. 2, BOX Exchange, among other things: (1) 
Amends the BOX Exchange Bylaws to provide: (a) That at least one 
public, non-industry director of BOX Exchange will not be associated 
with a broker or dealer, as required by Section 6(b)(3) of the Act; 
(b) that BOX Exchange will have a chief regulatory officer (``CRO'') 
with general day-to-day supervision over BOX Exchange's regulatory 
operations; (c) that a majority of the members of the BOX Exchange 
nominating committee will be non-industry representatives; (d) that 
the CRO will report to the regulatory oversight committee and to the 
President of BOX Exchange; (e) that the compensation committee of 
BOX Exchange will set, among other things, the CRO's compensation, 
taking into consideration any recommendations made by the President 
of BOX Exchange; and (f) that the regulatory oversight committee 
will make hiring and termination decisions with respect to the CRO, 
taking into consideration any recommendations made by the President 
of BOX Exchange; (2) represents that the regulatory oversight 
committee will meet regularly with the CRO to review regulatory 
matters; (3) represents that the only individual entitled to 
observation rights on the BOX Exchange Board to attend board or 
committee meetings if the BOX Holdings Director is unable to attend 
is the person appointed by the BOX Holdings Director (as defined 
below); (4) provides further information regarding BOX Exchange's 
regulatory services agreement (``RSA'') with the Financial Industry 
Regulatory Authority (``FINRA''); (5) states the names of the 
initial BOX Exchange Board and describes the process for selecting 
such initial board; (6) updates Exhibit I to the Form 1 Application; 
and (7) updates the ownership schedule of BOX Exchange in Schedule 1 
to the BOX Exchange LLC Agreement.

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[[Page 26324]]

    BOX Options Exchange Group, LLC (``BOX Group LLC'') currently 
operates the Boston Options Exchange options trading platform (``BOX'') 
as a facility of Nasdaq OMX BX, Inc. (``BX''). In January 2004, the 
Boston Stock Exchange, Inc. (``BSE'') (n/k/a BX) established BOX as its 
options trading facility.\6\ BOX Group LLC was formed to operate BOX. 
Bourse de Montr[eacute]al Inc. (``Bourse''), BSE, and Interactive 
Brokers Group LLC (``IB'') each held more than a 20% interest in BOX 
Group LLC, and none of the remaining owners of BOX Group LLC held more 
than a 5% interest.\7\ Subsequently, the Bourse transferred its 31.37% 
ownership interest in BOX Group LLC to Bourse's wholly-owned 
subsidiary, MX US 2, Inc. (``MX US 2'').\8\ As a result of a merger in 
2008 involving Bourse and a subsidiary of TSX Group, Inc., a company 
incorporated in Ontario, Canada (n/k/a TMX Group, Inc.), MX US 2 became 
an indirect wholly-owned subsidiary of TMX Group, Inc. (``TMX'').
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    \6\ See Securities Exchange Act Release No. 49068 (January 13, 
2004), 69 FR 2775 (January 20, 2004) (establishing, among other 
things, BOX as an options trading facility of BSE).
    \7\ See Securities Exchange Act Release No. 49067 (January 13, 
2004), 69 FR 2761 (January 20, 2004) (approving the operating 
agreement of BOX Group LLC).
    \8\ See Securities Exchange Act Release No. 57713 (April 25, 
2008), 73 FR 24327 (May 2, 2008).
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    In August 2008, The Nasdaq OMX Group, Inc. (``Nasdaq'') acquired 
BSE but did not acquire any interest in BOX Group LLC. As part of that 
acquisition, BSE transferred its ownership interest in BOX Group LLC to 
MX US 2.\9\ MX US 2 thereafter held over 50% ownership interest in BOX 
Group LLC.\10\ Although BX (f/k/a BSE) no longer holds an ownership 
interest in BOX Group LLC, BOX continues to be a facility of BX, and, 
as such, BX is responsible for regulating this facility and ensuring 
that it operates in compliance with the federal securities laws.\11\
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    \9\ See Securities Exchange Act Release No. 58324 (August 7, 
2008), 73 FR 46936 (August 12, 2008) (approving, among other things, 
the acquisition of BSE by Nasdaq and the transfer of BSE's ownership 
interest in Boston Group LLC to MX US 2).
    \10\ See id.
    \11\ BX regulates BOX through its wholly-owned regulatory 
subsidiary, the Boston Options Exchange Regulation, LLC (``BOXR'').
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    BOX Exchange has filed to register as a national securities 
exchange pursuant to the Form 1 Application that is the subject of this 
Order. As a registered national securities exchange, BOX Exchange will 
be a self-regulatory organization (``SRO'') under the Act.\12\ BOX 
Exchange will be responsible for the operation and oversight of BOX as 
its facility \13\ following commencement of operations of BOX Exchange 
as a national securities exchange. In contemplation of this 
registration, the owners of BOX Group LLC formed the following three 
entities: BOX Exchange; BOX Market LLC (``BOX Market''); and BOX 
Holdings Group LLC (``BOX Holdings''). As noted above, BOX Exchange 
will be the registered national securities exchange and SRO. BOX Market 
will be the successor-in-interest to the current BOX Group LLC and will 
own and operate BOX as a facility of BOX Exchange. BOX Holdings will be 
the sole owner of BOX Market.
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    \12\ See 15 U.S.C. 78c(a)(26) (defining a ``self-regulatory 
organization'' to include a national securities exchange).
    \13\ See 15 U.S.C. 78c(a)(2) (defining ``facility'').
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II. Discussion

    Under Sections 6(b) and 19(a) of the Act,\14\ 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.
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    \14\ 15 U.S.C. 78f(b) and 15 U.S.C. 78s(a), respectively.
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    As discussed in greater detail below, the Commission finds that BOX 
Exchange's application for exchange registration meets the requirements 
of the Act and the rules and regulations thereunder. Further, the 
Commission finds that the proposed rules of BOX Exchange 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; \15\ (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; \16\ (3) not permit unfair discrimination between customers, 
issuers, or dealers; \17\ and (4) protect investors and the public 
interest.\18\ Finally, the Commission finds that the proposed rules of 
BOX Exchange do not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act.\19\
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    \15\ See 15 U.S.C. 78f(b)(3).
    \16\ See 15 U.S.C. 78f(b)(5).
    \17\ See id.
    \18\ See id.
    \19\ See 15 U.S.C. 78f(b)(8).
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A. Governance of BOX Exchange

1. BOX Exchange Board of Directors
    The BOX Exchange Board will be the governing body of the Exchange 
and will possess all of the powers necessary for the management of the 
property, business and affairs of BOX Exchange and the governing of BOX 
Exchange as a SRO. The BOX Exchange Board will initially be comprised 
of five directors, and must have at least five, but no more than 
eleven, directors.\20\ Under the BOX Exchange Bylaws, the BOX Exchange 
Board will be required to include:
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    \20\ See BOX Exchange Bylaws Section 4.02.
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     A majority non-industry directors; \21\
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    \21\ See BOX Exchange Bylaws Section 1.01(q). A non-industry 
director is defined as a person who is a public director or is not 
an industry representative. An industry representative is an 
individual who is an officer, director or employee of a broker or 
dealer or who has been employed in any such capacity at any time 
within the prior three years, as well as an individual who has, or 
has had, a consulting or employment relationship with BOX Exchange 
or any affiliate of BOX Exchange, within the prior three years. See 
BOX Exchange Bylaws Section 1.01(m). Because BOX Market is an 
affiliate of BOX Exchange, anyone affiliated with BOX Market will 
not be considered a non-industry director. This definition generally 
is consistent with that approved with regard to other exchanges. See 
e.g., Securities Exchange Act Release Nos. 61698 (March 12, 2010), 
75 FR 13151 (March 18, 2010) (``DirectEdge Exchanges Order'') and 
58375 (August 18, 2008), 73 FR 49498 (August 21, 2008) (``BATS 
Order'').
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     At least one public director; \22\ and
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    \22\ See BOX Exchange Bylaws Section 1.01(v). Public Director 
means a person who has no material business relationship with BOX 
Exchange or any affiliate of BOX Exchange, or any BOX Options 
Participant or any affiliate of any BOX Options Participant; 
provided, however, that an individual who otherwise qualifies as a 
Public Director shall not be disqualified from serving in such 
capacity solely because such individual is a director of BOX 
Exchange and/or the Chairman or Vice Chairman of the Board.

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[[Page 26325]]

     One director appointed by BOX Holdings (``BOX Holdings 
Director''), who will be an officer or director of BOX Holdings, MX US 
2, or an affiliate of MX US 2.\23\
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    \23\ The BOX Holdings Director will be on each committee of the 
BOX Exchange Board except the compensation committee and the 
regulatory oversight committee, unless he or she declines. See BOX 
Exchange Bylaws Section 6.01.
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    In addition, at least 20% of the BOX Exchange Board must be 
officers, directors, or employees of a firm that is a BOX Options 
Participant (each a ``Participant Director'').\24\
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    \24\ A BOX Options Participant cannot have more than one 
officer, director or partner serving as a member of the BOX Exchange 
Board at any time. See BOX Exchange Bylaws Section 4.02.
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    Prior to the commencement of operations as an exchange, BOX 
Exchange will submit the name of its nominee for the Participant 
Director \25\ to all current BOX Options Participants. BOX Options 
Participants will thereafter be allowed the same periods for submitting 
the names of alternative candidates and to vote (14 days and 5 days, 
respectively) that are provided in the BOX Exchange Bylaws.\26\ All 
other interim directors except for the Participant Director will be 
appointed and elected by the owners of BOX Group LLC, which persons 
will be the owners of BOX Exchange, and must meet the BOX Exchange 
board composition requirements as set forth in the BOX Exchange 
Bylaws.\27\ This interim board will serve until BOX Exchange elects a 
new Board pursuant to the full nomination, petition, and voting process 
set forth in the BOX Exchange Bylaws.\28\ BOX Exchange will complete 
such election within 90 days after BOX Exchange's application for 
registration as a national securities exchange is granted.\29\
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    \25\ For the initial interim BOX Exchange Board, the BOX 
Exchange owners will propose James Boyle of UBS Americas Inc. as the 
initial Participant Director nominee.
    \26\ Current BOX Options Participants will be permitted to 
nominate alternative Participant Directors candidates by submitting 
a petition naming an alternative candidate signed by not less than 
10% of all current BOX Options Participants. Each BOX Options 
Participant will then have one vote to elect the Participant 
Director and the Participant Director with the majority of votes 
will be included as a member of the initial BOX Exchange Board 
elected by the owners of BOX Exchange. See Amendment No. 2.
    \27\ See Amendment No. 2.
    \28\ See Amendment No. 2. See also BOX Exchange Bylaws Section 
4.02.
    \29\ See BOX Exchange Bylaws Sections 4.02 and 4.06. See also 
Securities Exchange Act Release No. 61152 (December 10, 2009), 74 FR 
66699 (December 16, 2009) (``C2 Order'') (allowing CBOE to appoint 
the initial board members and to issue a circular to trading permit 
holders identifying a slate of representative directors within 45 
days from the date on which trading commenced on C2).
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    BOX Exchange owners will elect those candidates nominated by the 
nominating committee as BOX Exchange Board directors subsequent to the 
initial Board election process set forth above.\30\ The owners of BOX 
Exchange that together hold a majority of voting percentage interest in 
BOX Exchange will have the right to object to any director nominee, but 
only if the nominee had been disciplined by a securities regulatory 
authority or the nominee would be subject to statutory disqualification 
under the Act.\31\ If there is no objection to the proposed director 
nominees, then they would take office at the annual meeting.\32\
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    \30\ See BOX Exchange Bylaws Section 4.06(d)(iv). See infra 
Section II.A.2. for discussion of the nominating committee.
    \31\ See BOX Exchange Bylaws Section 4.06(e)(iv).
    \32\ Id.
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    The Commission believes that the requirement in the BOX Exchange 
Bylaws that 20% of the directors be Participant Directors and the means 
by which they will be chosen by BOX Options Participants provide for 
the fair representation of members in the selection of directors and 
the administration of BOX Exchange and is consistent with the 
requirement in Section 6(b)(3) of the Act.\33\ As the Commission has 
previously noted, this requirement helps to ensure that members have a 
voice in the use of self-regulatory authority, and that an exchange is 
administered in a way that is equitable to all those who trade on its 
market or through its facilities.\34\
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    \33\ 15 U.S.C. 78f(b)(3).
    \34\ See, e.g., Securities Exchange Act Release No. 53128 
(January 13, 2006), 71 FR 3550 (January 23, 2006 (granting the 
exchange registration of Nasdaq Stock Market, Inc.) (``Nasdaq 
Order''), and BATS Order, supra note 21. See also Securities 
Exchange Act Release No. 53382 (February 27, 2006), 71 FR 11251 
(March 6, 2006) (``NYSE/Archipelago Merger Approval Order'').
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    The Commission has previously stated that the inclusion of public, 
non-industry representatives on exchange oversight bodies is critical 
to an exchange's ability to protect the public interest.\35\ Further, 
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 
unique, unbiased perspectives, which are designed to enhance the 
ability of the BOX Exchange Board to address issues in a non-
discriminatory fashion and foster the integrity of BOX Exchange.\36\ 
The Commission believes that the composition of the BOX Exchange Board 
satisfies the requirements in Section 6(b)(3) of the Act,\37\ which 
requires 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.\38\
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    \35\ See, e.g., Regulation of Exchanges and Alternative Trading 
Systems, Securities Exchange Act Release No. 40760 (December 8, 
1998), 63 FR 70844 (December 22, 1998) (``Regulation ATS Release'').
    \36\ See Nasdaq Order and NYSE/Archipelago Merger Approval 
Order, supra note 34, and BATS Order, supra note 21.
    \37\ 15 U.S.C. 78f(b)(3).
    \38\ See BOX Exchange Bylaws Section 4.02 and Amendment No. 2 
(representing that at least one director will not be associated with 
a member of BOX Exchange or with a broker or dealer, as required by 
Section 6(b)(3) of the Act).
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    The Commission believes that the process for electing the initial 
interim board, as proposed, is consistent with the requirements of the 
Act, including that the rules of the exchange assure fair 
representation of the exchange's members in the selection of its 
directors and administration of its affairs.\39\ The initial members of 
BOX Exchange will likely consist substantially of the current BOX 
Options Participants.\40\ As noted, prior to the commencement of 
operations as an exchange, BOX Exchange will provide all current BOX 
Options Participants the opportunity to participate in the selection of 
a Participant Director consistent with the BOX Exchange Bylaws. 
Further, BOX Exchange represents that it will complete the full 
nomination, petition, and voting process as set forth in the BOX 
Exchange Bylaws, which will provide persons that are approved as BOX 
Options Participants after the effective date of this Order with the 
opportunity to participate in the selection of a Participant 
Director(s), within 90 days of when BOX Exchange's application for 
registration as a national securities exchange is granted. The 
Commission therefore believes BOX Exchange's initial interim board will 
provide member representation sufficient to allow the Exchange to 
commence operations for an interim period prior to going through the 
process to elect a new Board pursuant to the full nomination, petition, 
and

[[Page 26326]]

voting process set forth in the BOX Exchange Bylaws.\41\
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    \39\ 15 U.S.C. 78f(b)(3).
    \40\ See Amendment No. 2.
    \41\ See BOX Exchange Bylaws Sections 4.02 and 4.06. See C2 
Order, supra note 29 at 66701 (December 16, 2009) (noting that 
because C2's initial permit holders will likely consist 
substantially of current CBOE members, ``the Commission believes 
C2's initial Board will provide member representation sufficient to 
allow the Exchange to commence operations.'').
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2. Exchange Committees
    In the BOX Exchange Bylaws, BOX Exchange has proposed to establish 
several standing committees of the BOX Exchange Board. The standing 
committees of the BOX Exchange Board will be the audit, compensation, 
and regulatory oversight committees, and if applicable, the executive 
committee. The audit committee will consist of three to five directors, 
a majority of which will be required to be non-industry directors.\42\ 
Each of the compensation and regulatory oversight committees will 
consist of three to five directors, all of which will be required to be 
non-industry directors.\43\ The BOX Exchange Board will have the 
authority to appoint an executive committee, which will be required to 
have a majority of non-industry directors and at least 20% Participant 
Directors.\44\ The BOX Holdings Director will sit on each committee of 
the BOX Exchange Board except the compensation and regulatory oversight 
committees, unless he or she declines.\45\
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    \42\ See BOX Exchange Bylaws Section 6.05.
    \43\ See BOX Exchange Bylaws Section 6.06 and 6.07.
    \44\ See BOX Exchange Bylaws Section 6.04.
    \45\ See BOX Exchange Bylaws Section 6.01.
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    In addition, the BOX Exchange Bylaws provide that a nominating 
committee will be established to select nominees for the BOX Exchange 
Board.\46\ The nominating committee will be a committee of BOX Exchange 
but will not be a committee of the BOX Exchange Board. The nominating 
committee will have at least five members.\47\ The nominating committee 
will nominate candidates for each director position on the BOX Exchange 
Board.\48\ BOX Options Participants also will be able to nominate 
alternate candidates for the Participant Directors through a petition 
process and vote by BOX Options Participants.\49\ If no candidates are 
nominated pursuant to the petition process, then the nominating 
committee will nominate its nominees for the Participant Director 
positions.\50\ If a petition process produces additional candidates, 
then the candidates nominated pursuant to the petition process, 
together with those nominated by the nominating committee, will be 
presented to BOX Options Participants for a vote to determine the final 
list of nominees for the Participant Director positions.\51\
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    \46\ The BOX Exchange owners will appoint the initial nominating 
committee, which will serve until the first annual meeting. 
Thereafter, prior to each annual meeting, the sitting nominating 
committee will select individuals for the next nominating committee. 
BOX Exchange owners will then vote on the full slate of the 
nominating committee at the annual meeting. If the full slate fails 
to obtain the required vote of BOX Exchange owners, then the 
nominating committee will select a new slate and the process will be 
repeated. See BOX Exchange Bylaws Section 4.06.
    \47\ BOX Holdings will have the right to appoint one 
representative to sit on the nominating committee, at least 20% of 
the nominating committee will be composed of representatives of BOX 
Options Participants, and a majority of the members of the BOX 
Exchange nominating committee will be non-industry representative. 
See BOX Exchange Bylaws Section 4.06(a) and Amendment No. 2.
    \48\ See id.
    \49\ See BOX Exchange Bylaws Section 4.06(e). Specifically, the 
Secretary of BOX Exchange must provide to each BOX Options 
Participant the name of the nominating committee's nominees for the 
Participant Director positions. BOX Options Participants may 
nominate alternative candidates for election to the Participant 
Director positions by submitting a petition signed by not less than 
10% of all then-current BOX Options Participants. Id.
    \50\ Id.
    \51\ Id.
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    The Commission believes that BOX Exchange's proposed committees, 
which are similar to the committees maintained by other exchanges,\52\ 
are designed to help enable BOX Exchange to carry out its 
responsibilities under the Act and are consistent with the Act.
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    \52\ See, e.g., BATS Order, supra note 21, and Nasdaq Order, 
supra note 34.
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B. Regulation of BOX Exchange and BOX

    Following BOX Exchange's commencement of operations as a national 
securities exchange, BOX Exchange will have all the attendant 
regulatory obligations under the Act. In particular, BOX Exchange will 
be responsible for the operation and regulation of BOX, its options 
trading facility. Certain provisions in the BOX Exchange, BOX Market, 
and BOX Holdings governance documents are designed to facilitate the 
ability of BOX Exchange and the Commission to fulfill their regulatory 
obligations. The discussion below summarizes some of these key 
provisions.
1. Changes in Control
a. Ownership Structure of BOX Exchange, BOX Holdings, and BOX Market
    BOX Exchange will issue Economic Units, as well as Voting Units, to 
each of its owners, or Members.\53\ Economic Units, comprising all 
interests in the profits and losses of BOX Exchange and all rights to 
receive distributions from BOX Exchange, will not have any voting 
rights.\54\ Voting Units will have voting rights and not include any 
right to, or interest in, any profits and losses of BOX Exchange, 
distributions from BOX Exchange, assets of BOX Exchange or other 
economic value in BOX Exchange.\55\ The total number of Voting Units 
will be equal to the total number of Economic Units. Voting Units 
cannot be transferred separately from their related Economic Units.
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    \53\ BOX Exchange's limited liability company agreement (``BOX 
Exchange LLC Agreement'') refers to the owners of BOX Exchange as 
``Members.''
    \54\ See Article 2.5(a) of the BOX Exchange LLC Agreement.
    \55\ See Article 2.5(b) of the BOX Exchange LLC Agreement.
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    The Members of BOX Exchange and their respective interests are: MX 
US 2 (40.000% of Economic Units and 20.000% of Voting Units); IB 
(20.000% of Economic Units and 20.000% of Voting Units); Citadel 
Securities LLC (6.445% of Economic Units and 12.179% of Voting Units); 
Citigroup Financial Products (6.445% of Economic Units and 12.179% of 
Voting Units); Strategic Investments II Inc. (6.445% of Economic Units 
and 4.990% of Voting Units); UBS Americas Inc. (6.253% of Economic 
Units and 4.990% of Voting Units); CSFB Next Fund Inc. (6.123% of 
Economic Units and 10.00% of Voting Units); LabMorgan Corp. (6.123% of 
Economic Units and 11.570% of Voting Units); and Aragon Solutions Ltd. 
(2.166% of Economic Units and 4.092% of Voting Units).
    As noted above, BOX Holdings will own 100% of BOX Market. Unlike 
BOX Exchange, BOX Holdings will issue one class of units. The Members 
of BOX Holdings \56\ and their respective interests are: MX US 2 
(53.83%); IB (20.09%); Citadel Securities LLC (4.20%); Citigroup 
Financial Products (4.20%); Strategic Investments II Inc. (4.20%); UBS 
Americas Inc. (4.08%); CSFB Next Fund Inc. (3.99%); LabMorgan Corp. 
(3.99%); and Aragon Solutions Ltd. (1.41%).
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    \56\ BOX Holdings' limited liability company agreement (``BOX 
Holdings LLC Agreement'') refers to the owners of BOX Holdings as 
``Members.''
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    As stated above, MX US 2 is a Member in both BOX Exchange (40% of 
Economic Units and 20% of Voting Units) and BOX Holdings (53.83%). 
Further, MX US 2 is a wholly-owned indirect subsidiary of the 
Bourse.\57\ The

[[Page 26327]]

Bourse, a company incorporated in Quebec, Canada, is a wholly-owned 
direct subsidiary of TMX, a company incorporated in Ontario, Canada. 
Therefore, MX US 1, the Bourse, and TMX (collectively, the 
``Controlling Upstream Owners'') will be indirect owners of BOX 
Exchange, BOX Holdings, and BOX Market.
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    \57\ Specifically MX US 2 is a wholly-owned direct subsidiary of 
MX US 1, Inc. (``MX US 1''), a company incorporated in Delaware and 
a wholly-owned direct subsidiary of the Bourse.
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b. BOX Exchange Ownership and Voting Limits
    The BOX Exchange LLC Agreement contains limits on the ownership of 
Economic Units and Voting Units, and on the voting of Voting Units.\58\ 
Specifically, with respect to the limits on the Economic Units, no 
person, either alone or together with any related persons (including 
affiliates) may own, directly or indirectly, of record or beneficially, 
Economic Units representing a percentage interest of more than 40%.\59\ 
In addition, BOX Options Participants, alone or together with any 
related persons (including affiliates) may not own, directly or 
indirectly, of record or beneficially, Economic Units representing a 
percentage interest of more than 20%.\60\ With respect to limits on the 
Voting Units, no person, either alone or together with any related 
person (including affiliates), may own, directly or indirectly, of 
record or beneficially, Voting Units representing a percentage interest 
of more than 20%, have the power to vote, direct the vote or give any 
consent or proxy in excess of the 20% voting limit, or enter into any 
agreement, plan or other arrangement that would result in the Voting 
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 would be to enable any person, either 
alone or together with any related persons (including affiliates), to 
vote, possess the right to vote or cause the voting of, Voting Units in 
excess of the 20% voting limit.\61\
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    \58\ These provisions are consistent with ownership and voting 
limits approved by the Commission for other exchanges. See, e.g., 
DirectEdge Exchanges Order and BATS Order, supra note 21. See also 
C2 Order, supra note 29 and Nasdaq Order, supra note 34.
    \59\ See Article 7.3(f) of the BOX Exchange LLC Agreement.
    \60\ Id.
    \61\ See Article 7.3(g)(i) of the BOX Exchange LLC Agreement. An 
owner of BOX Exchange may also voluntarily impose a lower voting 
restriction on itself. Id. Strategic Investments II Inc. and UBS 
Americas Inc. each have voluntary imposed a lower voting limit of 
4.99%. See Amendment No. 2.
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    Notwithstanding the limits described above, the BOX Exchange Board 
may waive the 40% ownership limit for Economic Units if it makes 
certain determinations.\62\ The BOX Exchange Board also may waive the 
20% ownership limit for Voting Units if it makes certain 
determinations.\63\ However, BOX Options Participants will be subject 
to the 20% ownership limit for Economic Units and the 20% ownership 
limit for Voting Units and will not be eligible for a waiver to exceed 
such thresholds.\64\
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    \62\ See Article 7.3(f) of the BOX Exchange LLC Agreement. The 
required determinations are that (A) such waiver will not impair the 
ability of BOX Exchange to carry out its functions and 
responsibilities under the Act and the rules and regulations 
promulgated thereunder, (B) such waiver is otherwise in the best 
interests of BOX Exchange and its owners, (C) such waiver will not 
impair the ability of the Commission to enforce the Act and (D) if 
applicable, the transferee in such transfer and its related persons 
are not subject to any applicable ``statutory disqualification'' 
(within the meaning of Section 3(a)(39) of the Act). Id. The 
Commission has previously approved the rules of other exchanges that 
provide for the ability of the exchange to waive the ownership and 
voting limitations discussed above for non-members of the exchange. 
See, e.g., DirectEdge Exchanges Order, supra note 21.
    \63\ See Article 7.3(g)(i) of the BOX Exchange LLC Agreement. 
The required determinations for waiving the voting limitation are 
the same as the required determinations for waiving the ownership 
limitation.
    \64\ See Articles 7.3(f) and 7.3(g)(i) of the BOX Exchange LLC 
Agreement.
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    The BOX Exchange LLC Agreement also contains a provision designed 
to ensure that no owner of BOX Exchange will exceed the applicable 
ownership limit on Voting Units. Specifically, if an owner of BOX 
Exchange owns Voting Units in excess of the applicable voting limit, 
then the excess Voting Units will be distributed, pro rata according to 
Economic Units percentage, to the other owners so that the owner does 
not exceed the applicable voting limit.\65\ In addition, the BOX 
Exchange LLC Agreement provides that, if an owner of BOX Exchange 
subsequently becomes a BOX Options Participant, and that owner's 
Economic Units or Voting Units percentage exceeds 20%, then such owner 
will have no voting rights on the Voting Units that exceeds the voting 
limit.\66\
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    \65\ See Article 7.3(g)(ii) of the BOX Exchange LLC Agreement. 
Pursuant to this provision, upon any transfer of Economic Units, 
each owner's Voting Units percentage will be reset to equal its 
percentage of Economic Units. Should any owner, after the Voting 
Units reset, exceed the voting limit, then the excess Voting Units 
will be distributed pro rata according to Economic Units percentage, 
to the other owners so that the owner does not exceed the applicable 
voting limit. Id.
    \66\ See Article 7.3(i) of the BOX Exchange LLC Agreement. Any 
Voting Units that exceed the voting limit will be voted in the same 
proportion as the Voting Units held by the other owners of BOX 
Exchange are voted. Id.
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    The BOX Exchange LLC Agreement contains other provisions that are 
designed to safeguard the Economic Units and Voting Units limits. For 
example, any transfer that would violate the BOX Exchange LLC 
Agreement, such as exceeding the limits, will be void.\67\ Moreover, 
any owner involved in a transaction in which a person, either alone or 
together with any related person (including affiliates), would exceed 
5% ownership in Economic Units or Voting Units will be required to 
provide written notice to BOX Exchange fourteen days before the 
transaction that would exceed the 5% limit.\68\ BOX Exchange will then 
be required to provide written notice to the Commission ten days before 
the transaction.\69\ In addition, each person or entity that acquires 
5% or more in Economic Units or Voting Units will be required to 
immediately notify BOX Exchange in writing and will need to update BOX 
Exchange if the ownership limits applicable to the person or entity are 
exceeded. Further, in addition to these notices, owners of BOX Exchange 
have agreed that any transfer of units that results in the acquisition 
and holding by any person, alone or with its related persons, of a 
percentage interest that meets or crosses the threshold level of 20% or 
any successive 5% percentage interest will be subject to the rule 
filing process of Section 19 of the Act.\70\
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    \67\ See Article 7.3(d) of the BOX Exchange LLC Agreement.
    \68\ See Article 7.3(e) of the BOX Exchange LLC Agreement.
    \69\ Id. This provision is consistent with the current operating 
agreement of BOX Group LLC. See Section 8.4(e) of the Sixth Amended 
and Restated Operating Agreement of BOX Group LLC.
    \70\ Id. The BOX Exchange LLC Agreement also requires a 
``controlling person'' of a BOX Exchange owner to execute an 
amendment to the BOX Exchange LLC Agreement agreeing to be bound by 
that agreement upon establishing a controlling interest in any BOX 
Exchange owner that, alone or together with its related persons, 
holds BOX Exchange Economic Units or Voting Units representing a 
percentage interest equal to or greater than 20%. See Article 7.3(h) 
of the BOX Exchange LLC Agreement. As noted above, MX US 2 is an 
owner of BOX Exchange (40% of Economic Units and 20% of Voting 
Units). In addition, as noted above, MX US 2 (through MX US 1) is a 
wholly-owned indirect subsidiary of the Bourse and the Bourse is a 
wholly-owned direct subsidiary of TMX. Under the BOX Exchange LLC 
Agreement, each of MX US 1, Bourse, and TMX will be required to 
become parties to the BOX Exchange LLC Agreement through such an 
amendment and will have all the rights and responsibilities of the 
owners of BOX Exchange. This will be effectuated pursuant to 
Instruments of Accession. If in the future there is another such 
``controlling person,'' it also will be required to execute an 
Instrument of Accession, which will be an amendment to the BOX 
Exchange LLC Agreement that is required to be filed with the 
Commission. See Article 7.3(h)(iv) of the BOX Exchange LLC 
Agreement. The BOX Exchange LLC Agreement further provides that 
``[t]he rights and privileges, including all voting rights, of the 
Member in whom a controlling interest is held * * * shall be 
suspended until such time as the amendment * * * [to the Agreement] 
has become effective pursuant to Section 19 of the Exchange Act or 
the Controlling Person no longer holds a controlling interest in the 
Member.'' See Section 7.4(h)(iv) of the BOX Exchange LLC Agreement.

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[[Page 26328]]

    The Commission believes that these provisions are consistent with 
the requirements of the Act. These limitations are designed to help 
prevent any owner of BOX Exchange from exercising undue control over 
the operation of BOX Exchange and to help assure that BOX Exchange is 
able to effectively carry out its regulatory obligations under the Act. 
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 interest in an exchange could become so large 
as to cast doubts on whether the exchange may fairly and objectively 
exercise its self-regulatory responsibilities with respect to such 
member.\71\ 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, these requirements are expected to minimize the potential that a 
person or entity can improperly interfere with or restrict the ability 
of BOX Exchange to effectively carry out its regulatory oversight 
responsibilities under the Act.
---------------------------------------------------------------------------

    \71\ See, e.g., DirectEdge Exchanges Order and BATS Order, supra 
note 21.
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c. BOX Holdings and BOX Market
    The BOX Holdings limited liability company agreement (``BOX 
Holdings LLC Agreement'') and the BOX Market limited liability company 
agreement (``BOX Market LLC Agreement'') also contain provisions 
related to direct and indirect changes in control.
    Specifically, any owner involved in a transaction in which the 
owner's percentage interest in BOX Holdings, either alone or together 
with any related person (including affiliates), will meet or cross the 
threshold level of 5% or the successive 5% percentage levels of 10% and 
15% will be required to provide written notice to BOX Holdings fourteen 
days before the transaction.\72\ BOX Holdings will then be required to 
provide written notice to BOX Exchange and the Commission ten days 
before the transaction.\73\ In addition any person that, either alone 
or together with any related person \74\ (including affiliates) owns, 
directly or indirectly, of record or beneficially, 5% or more of BOX 
Holdings will be required to immediately notify in writing BOX Holdings 
upon acquiring knowledge of such ownership.\75\ In addition to these 
notices, owners of BOX Holdings have agreed that any transfer of units 
that results in the acquisition and holding by any person, alone or 
with its related persons, of a percentage interest that meets or 
crosses the threshold level of 20% or any successive 5% percentage 
interest will be subject to the rule filing process of Section 19 of 
the Act.\76\ Further, any transfer that would be in contravention of 
these notification and filing provisions will be void.\77\
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    \72\ See Article 7.4(e) of the BOX Holdings LLC Agreement.
    \73\ Id. This provision is consistent with the current operating 
agreement of BOX Group LLC. See Section 8.4(e) of the Sixth Amended 
and Restated Operating Agreement of BOX Group LLC.
    \74\ See Article 1.1 of the BOX Holdings LLC Agreement for a 
definition of ``related person.''
    \75\ See id. The notice will require the person's full legal 
name; the number of units owned, directly or indirectly, of record 
or beneficially, by the person together with any related person; and 
whether the person has power, directly or indirectly, to direct the 
management or policies of BOX Holdings.
    \76\ See Article 7.4(f) of the BOX Holdings LLC Agreement.
    \77\ See Article 7.4(d) of the BOX Holdings LLC Agreement.
---------------------------------------------------------------------------

    In addition, if an owner of BOX Holdings or any of its related 
persons is approved as a BOX Options Participant, and if such owner, 
alone or together with the related persons, own more than 20% of BOX 
Holdings, then such owner and any director of BOX Holdings designated 
by such owner will not have any voting rights with respect to any units 
owned in excess of 20%.\78\ Further, the owner will not be entitled to 
give any proxy with respect to any units owned in excess of 20%.\79\ 
IB, however, will have an exemption until January 1, 2014, from the 
voting limitation described in this paragraph, but only with respect to 
any votes regarding a merger, consolidation or dissolution of BOX 
Holdings or a sale of all or substantially all of the assets of BOX 
Holdings.\80\
---------------------------------------------------------------------------

    \78\ See Article 7.4(h) of the BOX Holdings LLC Agreement.
    \79\ Id.
    \80\ Id.
---------------------------------------------------------------------------

    The BOX Holdings LLC Agreement also provides that a ``controlling 
person'' \81\ of a BOX Holdings owner is required to execute an 
amendment to the BOX Holdings LLC Agreement agreeing to be bound by the 
BOX Holdings LLC Agreement upon establishing a controlling interest in 
any BOX Holdings owner \82\ that, alone or together with its related 
persons, holds BOX Holdings units representing a percentage interest 
equal to or greater than 20%.\83\ As noted above, MX US 2 is an owner 
of BOX Holdings (53.83%). In addition, as noted above, MX US 2 (through 
MX US 1) is a wholly-owned indirect subsidiary of the Bourse and the 
Bourse is a wholly-owned direct subsidiary of TMX. Under the BOX 
Holdings LLC Agreement, each of MX US 1, Bourse, and TMX will be 
required to become a party to the BOX Holdings LLC Agreement through 
such an amendment and will have all the rights and responsibilities of 
the owners of BOX Holdings.\84\ The BOX Holdings LLC Agreement further 
provides that ``[t]he rights and privileges, including all voting 
rights, of the Member in whom a controlling interest is held * * * 
shall be suspended until such time as the amendment * * * [to the 
Agreement] has become effective pursuant to Section 19 of the Exchange 
Act or the Controlling Person no longer holds a controlling interest in 
the Member.'' \85\
---------------------------------------------------------------------------

    \81\ A ``controlling person'' is defined as a Person who, alone 
or together with any related persons of such person, holds a 
controlling interest in an owner of BOX Holdings. See Article 
7.4(g)(v) of the BOX Holdings LLC Agreement.
    \82\ A ``controlling interest'' is defined as the direct or 
indirect ownership of 25% or more of the total voting power of all 
equity securities of an owner of BOX Holdings (other than voting 
rights solely with respect to matters affecting the rights, 
preferences, or privileges of a particular class of equity 
securities), by any person, alone or together with any related 
persons of such person. See Article 7.4(g)(v) of the BOX Holdings 
LLC Agreement.
    \83\ See Article 7.4(g) of the BOX Holdings LLC Agreement.
    \84\ This will be effectuated pursuant to Instruments of 
Accession included in the Form 1. If in the future there is another 
such ``controlling person,'' it too will be required to execute an 
Instruments of Accession, which will be an amendment to the BOX 
Holdings LLC Agreement that is required to be filed with the 
Commission. See Article 7.4(g)(iv) of the BOX Holdings LLC 
Agreement.
    \85\ See Section 7.4(g)(iv) of the BOX Holdings LLC Agreement.
---------------------------------------------------------------------------

    The BOX Market LLC Agreement does not explicitly include change of 
control provisions that are similar to those in the BOX Holdings LLC 
Agreement. However, the BOX Market LLC Agreement explicitly provides 
that BOX Holdings is the sole Member of BOX Market.\86\ Thus, if BOX 
Holdings were no longer the sole Member of BOX Market, BOX Market will 
be required to amend the BOX Market LLC Agreement, which will be 
required to be filed with

[[Page 26329]]

and approved by the Commission before such amendment may be 
effective.\87\
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    \86\ See Article 1.1 of the BOX Market LLC Agreement.
    \87\ See Article 14.1 of the BOX Market LLC Agreement. A 
proposed rule change can also become effective by operation of law. 
See 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

    Although BOX Holdings and BOX Market are not independently 
responsible for regulation, their activities with respect to the 
operation of BOX must be consistent with, and not interfere with, the 
self-regulatory obligations of BOX Exchange. The Commission believes 
that the requirements in the BOX Holdings LLC Agreement and the BOX 
Market LLC Agreement applicable to direct and indirect changes in 
control of BOX Holdings and BOX Market described above, as well as the 
voting limitation imposed on owners of BOX Holdings who also are BOX 
Options Participants described above, are appropriate to help ensure 
that BOX Exchange is able to effectively carry out its self-regulatory 
responsibilities, including over BOX, and are consistent with the 
requirements of the Act. In addition, the Commission believes that the 
exemption from the BOX Options Participant voting limitation granted to 
IB is appropriate and is not expected to limit BOX Exchange's ability 
to effectively carry out its self-regulatory responsibilities. The 
Commission also notes that IB was provided with a similar exemption 
with respect to its current ownership of BOX Group LLC.\88\
---------------------------------------------------------------------------

    \88\ See Securities Exchange Act Release No. 49607 (January 13, 
2004), 69 FR 2761, 2767 (January 20, 2004) (approving a limited 
temporary exemption for IB from the voting limitation provisions in 
the limited liability company agreement of BOX Group LLC and noting 
that the exemption is designed to afford IB some ability to protect 
its investment but also to limit the possibility that BSE's ability 
to carry out its self-regulatory responsibilities would be 
impaired). This exemption is substantially similar to an exemption 
granted to founder members of the International Securities Exchange 
(``ISE''). See Securities Exchange Act Release Nos. 45803 (April 23, 
2002), 67 FR 21306, 21307 (April 30, 2002) (approval of SR-ISE-2002-
01) (conversion of ISE from an LLC to a corporation); and 42455 
(February 24, 2000), 65 FR 11388, 11391-92 (March 2, 2000) (File No. 
10-127) (approval of registration of ISE as a national securities 
exchange) (``ISE Order'').
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2. Regulatory Independence
    BOX Exchange, BOX Market, and BOX Holdings propose to adopt certain 
provisions in their respective governing documents designed to help 
maintain the independence of the regulatory functions of BOX Exchange. 
These proposed provisions are substantially similar to those included 
in the governing documents of exchanges that recently have been granted 
registration.\89\ Specifically:
---------------------------------------------------------------------------

    \89\ See e.g., DirectEdge Exchanges Order and BATS Order, supra 
note 21, and C2 Order, supra note 29.
---------------------------------------------------------------------------

     The owners, directors, officers, employees, and agents of 
BOX Exchange, BOX Market, and BOX Holdings must give due regard to the 
preservation of the independence of the self-regulatory function of BOX 
Exchange and must not take actions that would interfere with the 
effectuation of decisions by the BOX Exchange Board relating to its 
regulatory functions or that would interfere with BOX Exchange's 
ability to carry out its responsibilities under the Act.\90\
---------------------------------------------------------------------------

    \90\ See Article 4.6(a) of the BOX Exchange LLC Agreement, 
Article 4.12(a) of the BOX Market LLC Agreement, and Article 4.12(a) 
of the BOX Holdings LLC Agreement.
---------------------------------------------------------------------------

     Each of BOX Exchange, BOX Market, and BOX Holdings and 
their respective owners must comply with federal securities laws and 
the rules and regulations promulgated thereunder and agree to cooperate 
with the Commission and BOX Exchange pursuant to and to the extent of 
their respective regulatory authority.\91\
---------------------------------------------------------------------------

    \91\ See Article 4.6(b) of the BOX Exchange LLC Agreement, 
Article 4.12(b) of the BOX Market LLC Agreement, and Article 4.12(b) 
of the BOX Holdings LLC Agreement.
---------------------------------------------------------------------------

     BOX Exchange, BOX Market, and BOX Holdings, and the 
owners, officers, directors, employees and agents of each, must submit 
to the jurisdiction of the U.S. federal courts and the Commission for 
any action, suit or proceeding arising out of or related to BOX 
Exchange activities.\92\
---------------------------------------------------------------------------

    \92\ See Article 18.6(b) of the BOX Exchange LLC Agreement, 
Article 14.6(b) of the BOX Market LLC Agreement, and Article 18.6(a) 
of the BOX Holdings LLC Agreement.
---------------------------------------------------------------------------

     All books and records of BOX Exchange reflecting 
confidential information pertaining to the self-regulatory function of 
BOX Exchange (including but not limited to disciplinary matters, 
trading data, trading practices, and audit information) shall be 
retained in confidence by BOX Exchange and its personnel, including any 
individuals entitled to information pursuant to Board observation 
rights, and will not be used by BOX Exchange for any non-regulatory 
purpose and shall not be made available to persons (including, without 
limitation, any owners of BOX Exchange) other than to those personnel 
of BOX Exchange, to members of the BOX Exchange Board and any observer, 
to the extent necessary or appropriate to properly discharge the self-
regulatory function of BOX Exchange, or unless required by court order 
or applicable law.\93\
---------------------------------------------------------------------------

    \93\ See BOX Exchange Bylaws Section 5.02. The Commission notes 
that the BOX Exchange LLC Agreement, the BOX Market LLC Agreement 
and the BOX Holdings LLC Agreement also provide that confidential 
information pertaining to regulatory matters related to BOX 
Exchange, BOX Market and BOX Holdings will be subject to 
confidentiality restrictions. See Article 15.5 of the BOX Exchange 
LLC Agreement, Article 12.6 of the BOX Market LLC Agreement, and 
Article 15.6 of the BOX Holdings LLC Agreement.
---------------------------------------------------------------------------

     The books and records of BOX Exchange and BOX Market and, 
to the extent related to the operation or administration of BOX 
Exchange and BOX Market, the books and records of BOX Holdings, must be 
maintained in the United States and will be subject at all times to 
inspection and copying by the Commission.\94\
---------------------------------------------------------------------------

    \94\ See Article 11.1 and 18.6(a) of the BOX Exchange LLC 
Agreement, Article 9.1 of the BOX Market LLC Agreement, and Article 
11.1 of the BOX Holdings LLC Agreement.
---------------------------------------------------------------------------

     Furthermore, for so long BOX Holdings directly or 
indirectly controls BOX Market, and to the extent related to the 
operation or administration of BOX Exchange or the BOX Market, the 
books, records, premises, officers, directors, employees and agents of 
BOX Holdings and its owners will be deemed to be the books, records, 
premises, officers, directors, employees and agents of BOX 
Exchange.\95\
---------------------------------------------------------------------------

    \95\ See Article 11.1 of the BOX Holdings LLC Agreement.
---------------------------------------------------------------------------

     BOX Exchange, BOX Market, and BOX Holdings will take such 
action as is necessary to ensure that their officers, directors and 
employees, and each owner's officers, directors, and employees, consent 
to the applicability of provisions regarding books and records, 
confidentiality, jurisdiction, and regulatory obligations, to the 
extent related to the operation or administration of BOX Exchange.\96\
---------------------------------------------------------------------------

    \96\ See Article 18.6(c) of the BOX Exchange LLC Agreement, 
Article 14.6(c) of the BOX Market LLC Agreement, and Article 18.6(b) 
of the BOX Holdings LLC Agreement.
---------------------------------------------------------------------------

    As noted above, each of the Controlling Upstream Owners will be 
required to become a party to the BOX Exchange LLC Agreement and the 
BOX Holdings LLC Agreement and will have all the rights and obligations 
of the owners of BOX Exchange and BOX Holdings. Thus, for example, as a 
party to the BOX Exchange LLC Agreement and the BOX Holdings LLC 
Agreement, each Controlling Upstream Owner will be required to comply 
with the U.S. federal securities laws and the rules and regulations 
thereunder and cooperate with the Commission and BOX

[[Page 26330]]

Exchange \97\ and will be required to take such action as is necessary 
to ensure that its directors, officers and employees consent to 
complying with the U.S. federal securities laws and the rules and 
regulations thereunder and cooperating with the Commission and BOX 
Exchange to the extent related to the operation or administration of 
the BOX Exchange or BOX Market.\98\ Moreover, each Controlling Upstream 
Owner, its officers, directors, employees and agents will irrevocably 
submit to the jurisdiction of the U.S. federal courts and the 
Commission for purposes of any action arising out of, or relating to, 
activities of BOX Exchange and/or BOX Market.\99\ Further, TMX, Bourse, 
and MX US 1 (and any future controlling upstream owner of BOX Market), 
by becoming parties to the BOX Holdings LLC Agreement and having the 
responsibilities of BOX Holdings' owners, will agree (to the extent 
related to the operation or administration of BOX Exchange or the BOX 
Market) that their books and records must be maintained within the 
United States and shall be subject at all times to inspection and 
copying by the Commission and BOX Exchange; and that their books, 
records, premises, directors, officers, employees and agents shall be 
deemed to be those of the Exchange for the purposes of, and subject to 
oversight pursuant to, the Act.
---------------------------------------------------------------------------

    \97\ See Article 4.6(b) of the BOX Exchange LLC Agreement and 
Article 4.12(b) of the BOX Holdings LLC Agreement.
    \98\ See Articles 4.6(b) and 18.6(c) of the BOX Exchange LLC 
Agreement and Articles 4.12(b) and 18.6(b) of the BOX Holdings LLC 
Agreement.
    \99\ See Article 18.6(b) of the BOX Exchange LLC Agreement and 
Article 18.6(a) of the BOX Holdings LLC Agreement.
---------------------------------------------------------------------------

    In addition, each Controlling Upstream Owner must give due regard 
to the preservation of the independence of the self-regulatory function 
of BOX Exchange and must not take any action that would interfere with 
the effectuation of decisions by the BOX Exchange Board or interfere 
with BOX Exchange's ability to carry out its responsibilities under the 
Act.\100\ Each Controlling Upstream Owner also is required to take such 
action as is necessary to ensure that its directors, officers and 
employees consent to giving due regard to the preservation of the 
independence of the self-regulatory function of BOX Exchange and to not 
taking any action that would interfere with the effectuation of 
decisions by the BOX Exchange Board or interfere with BOX Exchange's 
ability to carry out its responsibilities under the Act to the extent 
related to the operation or administration of the BOX Exchange or BOX 
Market.\101\
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    \100\ See Article 4.6(a) of the BOX Exchange LLC Agreement and 
Article 4.12(a) of the BOX Holdings LLC Agreement.
    \101\ See Articles 4.6(a) and 18.6(c) of the BOX Exchange LLC 
Agreement and Articles 4.12(a) and 18.6(b) of the BOX Holdings LLC 
Agreement.
---------------------------------------------------------------------------

    The Commission believes that the provisions discussed in this 
section, which are designed to help maintain the independence of BOX 
Exchange's regulatory function, 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.\102\ The Commission notes that, 
even in the absence of these provisions, Section 20(a) of the Act (as 
applied to the BOX entities) provides that any person with a 
controlling interest in BOX Exchange or BOX Market would be jointly and 
severally liable with and to the same extent that BOX Exchange or BOX 
Market, as the case may be, 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 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 
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 all entities' dealings with BOX Exchange and BOX Market, 
including the Controlling Upstream Owners.
---------------------------------------------------------------------------

    \102\ 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------

3. Regulation of BOX
    As a prerequisite for the Commission's granting of an exchange's 
application for registration, an exchange must be organized and have 
the capacity to carry out the purposes of the Act.\103\ Specifically, 
an exchange must be able to enforce compliance by its members, and 
persons associated with its members, with the federal securities laws 
and the rules of the exchange.\104\ The discussion below summarizes how 
BOX Exchange proposes to conduct and structure its regulatory 
operations.
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    \103\ See Section 6(b)(1) of the Act, 15 U.S.C. 78f(b)(1).
    \104\ Id. See also Section 19(g) of the Act, 15 U.S.C. 78s(g).
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a. Regulatory Oversight Committee
    The regulatory operations of BOX Exchange will be monitored by the 
regulatory oversight committee of the BOX Exchange Board. The 
regulatory oversight committee will consist of at least three 
directors, all of whom will be non-industry directors. The regulatory 
oversight committee generally will be responsible for overseeing the 
adequacy and effectiveness of BOX Exchange's regulatory and SRO 
responsibilities, assessing BOX Exchange's regulatory performance, and 
assisting the BOX Exchange Board (and committees of the BOX Exchange 
Board) in reviewing BOX Exchange's regulatory plan and the overall 
effectiveness of BOX Exchange's regulatory functions.\105\ Further, a 
CRO of BOX Exchange will have general day-to-day supervision over BOX 
Exchange's regulatory operations.\106\ The regulatory oversight 
committee will be charged with all hiring and termination decisions 
over the CRO, taking into account the recommendation of the President 
of BOX Exchange.\107\ The CRO will report to both the regulatory 
oversight committee and the President of BOX Exchange.\108\
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    \105\ See BOX Exchange Bylaws Section 6.07.
    \106\ See BOX Exchange Bylaws Section 7.01. See also Amendment 
No. 2.
    \107\ See BOX Exchange Bylaws Section 6.07. See also Amendment 
No. 2.
    \108\ See BOX Exchange Bylaws Section 7.01. See also Amendment 
No. 2.
---------------------------------------------------------------------------

    To help assure the Commission that it has and will continue to have 
adequate funding to be able to meet its responsibilities under the Act, 
BOX Exchange represented that, upon the granting of its application as 
a national securities exchange and prior to commencing operations as 
such, BOX Group LLC will contribute sufficient operational assets to 
the Exchange, including furnishings, equipment and servers previously 
used in connection with the regulation of BOX, and industry and 
regulatory memberships. In addition, BOX Exchange stated that it has 
received from BOX Group LLC a loan of $1,000,000.\109\ In addition, 
because BOX Exchange would be the registered national securities 
exchange, BOX Exchange would be entitled to receive all fees, including 
regulatory fees and trading fees, payable by BOX Option Participants, 
as well as any

[[Page 26331]]

funds received from any applicable market data fees and Options Price 
Reporting Authority tape revenue.\110\ Any excess funds, as determined 
solely by BOX Exchange, will be remitted to BOX Market.\111\ To the 
extent BOX Exchange's assets were not sufficient, BOX Market (and BOX 
Holdings, to the extent it holds BOX Market funds) will reimburse BOX 
Exchange.\112\ Further, any revenues received by BOX Exchange from fees 
derived from its regulatory function or regulatory penalties will not 
be used for non-regulatory purposes.\113\
---------------------------------------------------------------------------

    \109\ See Amendment No. 2. In addition, BOX Exchange represents 
that the $1,000,000 loan it received from BOX Group LLC will be 
sufficient to cover the expenses of BOX Exchange until BOX Exchange 
begins receiving revenues from transaction fees, market data fees 
and regulatory fees. See letter from Lisa Fall, President, BOX 
Exchange, to Heather Seidel, Associate Director, Division, 
Commission, dated April 2, 2012 (``April 2 Letter'').
    \110\ BOX Exchange acknowledged this fact in Amendment No. 2.
    \111\ See Form 1 Application, Exhibit I. BOX Exchange represents 
that, in determining the excess funds to remit to BOX Market, it 
will exercise prudent financial management (including cash flow 
management) and may retain funds for anticipated and unanticipated 
expenses. See April 2 Letter, supra note 109.
    \112\ See Form 1 Application, Exhibit I.
    \113\ Article 8.1 of the BOX Exchange LLC Agreement.
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b. Rule 17d-2 Agreements and Regulatory Contract
    Rule 17d-2 of the Act \114\ permits SROs to propose joint plans 
allocating regulatory responsibilities concerning members, as such term 
is defined in Section 3(a)(3) of the Act, of more than one SRO 
(``Common Members'').\115\ These agreements, which must be filed with 
and approved by the Commission, generally cover such regulatory 
functions as personnel registration and sales practices. Commission 
approval of a Rule 17d-2 plan relieves the specified SRO of those 
regulatory responsibilities allocated by the plan to another SRO.\116\ 
Many SROs have entered into Rule 17d-2 agreements.\117\ BOX Exchange 
has represented to the Commission that it intends to become a party to 
the existing multiparty options Rule 17d-2 plans concerns sales 
practice regulation and market surveillance.\118\ Under these 
agreements, the examining SROs examine firms that are common members of 
BOX Exchange and the particular examining SRO for compliance with 
certain provisions of the Act, certain rules and regulations adopted 
thereunder, and certain BOX Exchange Rules.
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    \114\ See Section 17(d)(1) of the Act and Rule 17d-2 thereunder, 
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. 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.
    \115\ 17 CFR 240.17d-2. Section 19(g)(1) of the Act requires 
every SRO to examine its members and persons associated with its 
members and to enforce compliance with the federal securities laws 
and the SRO's own rules, unless the SRO is relieved of this 
responsibility pursuant to Section 17(d) of the Act. Section 17(d) 
was intended, in part, to eliminate unnecessary multiple 
examinations and regulatory duplication with respect to Common 
Members. See Securities Exchange Act Release No. 12935 (October 28, 
1976), 41 FR 49091 (November 8, 1976) (``Rule 17d-2 Adopting 
Release'').
    \116\ See id.
    \117\ See, e.g., Securities Exchange Act Release Nos. 59218 
(January 8, 2009), 74 FR 2143 (January 14, 2009) (File No. 4-575) 
(FINRA/Boston Stock Exchange, Inc.); 58818 (October 20, 2008), 73 FR 
63752 (October 27, 2008) (File No. 4-569) (FINRA/BATS Exchange, 
Inc.); 55755 (May 14, 2007), 72 FR 28057 (May 18, 2007) (File No. 4-
536) (National Association of Securities Dealers, Inc. (``NASD'') n/
k/a FINRA and CBOE concerning the CBOE Stock Exchange); 55367 
(February 27, 2007), 72 FR 9983 (March 6, 2007) (File No. 4-529) 
(NASD/ISE); and 54136 (July 12, 2006), 71 FR 40759 (July 18, 2006) 
(File No. 4-517) (NASD/Nasdaq).
    \118\ See Securities Exchange Act Release Nos. 61589 (February 
25, 2010), 75 FR 9976 (March 4, 2010) (File No. S7-966) (notice of 
filing and order approving and declaring effective an amendment to 
the multiparty 17d-2 plan concerning options-related sales practice 
matters); 61588 (February 25, 2010), 75 FR 9970 (March 4, 2010) 
(File No. 4-551) (notice of filing and order approving and declaring 
effective an amendment to the multiparty 17d-2 plan concerning 
options-related market surveillance).
---------------------------------------------------------------------------

    In addition, BOX Exchange has entered into an RSA with FINRA, under 
which FINRA will perform certain regulatory functions on behalf of BOX 
Exchange.\119\ Specifically, BOX Exchange states that FINRA will: 
assist BOX Exchange in conducting investigations of potential 
violations of BOX Exchange rules and/or federal securities laws related 
to activity on the Exchange; conduct examinations related to BOX Option 
Participants' conduct on BOX Exchange; assist BOX Exchange with 
disciplinary proceedings pursuant to BOX Exchange rules, including 
issuing charges and conducting hearings; and provide dispute resolution 
services to BOX Option Participants on behalf of BOX Exchange, 
including operation of the BOX Exchange's arbitration program.\120\ 
Notwithstanding the RSA, BOX Exchange acknowledges it will retain 
ultimate legal responsibility for the regulation of its members and its 
market.\121\
---------------------------------------------------------------------------

    \119\ See Form 1 Application, Exhibit L.
    \120\ See BOX Exchange IM-12150-1 and Amendment No. 2, supra 
note 5.
    \121\ See Amendment No. 2, supra note 5.
---------------------------------------------------------------------------

    The Commission believes that it is consistent with the Act for BOX 
Exchange to contract with FINRA to perform certain examination, 
enforcement, and disciplinary functions.\122\ 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 on behalf of BOX 
Exchange.\123\
---------------------------------------------------------------------------

    \122\ See, e.g., Regulation ATS Release, supra note 35. See also 
Securities Exchange Act Release Nos. 50122 (July 29, 2004), 69 FR 
47962 (August 6, 2004) (SR-Amex-2004-32) (order approving rule that 
allowed Amex to contract with another SRO for regulatory services) 
(``Amex Regulatory Services Approval Order''); 57478 (March 12, 
2008), 73 FR 14521 (March 18, 2008) (SR-NASDAQ-2007-004) (``NOM 
Approval Order''); Nasdaq Order, supra note 34; and BATS Order, 
supra note 21.
    \123\ See, e.g., Amex Regulatory Services Approval Order, supra 
note 122; NOM Approval Order, supra note 122; and Nasdaq Order, 
supra note 34. The Commission notes that the RSA is not before the 
Commission and, therefore, the Commission is not acting on it.
---------------------------------------------------------------------------

    BOX Exchange, unless relieved by the Commission of its 
responsibility,\124\ bears the ultimate responsibility for self-
regulatory responsibilities and primary liability for self-regulatory 
failures, not the SRO retained to perform regulatory functions on the 
Exchange's behalf. In performing these regulatory functions, however, 
the SRO retained to perform regulatory functions may nonetheless bear 
liability for causing or aiding and abetting the failure of BOX 
Exchange to perform its regulatory functions.\125\ Accordingly, 
although FINRA will not act on its own behalf under its SRO 
responsibilities in carrying out these regulatory services for BOX 
Exchange, as the SRO retained to perform regulatory functions, 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 by BOX Exchange.\126\
---------------------------------------------------------------------------

    \124\ See supra note 114.
    \125\ For example, if failings by the SRO retained to perform 
regulatory functions have the effect of leaving an Exchange in 
violation of any aspect of the exchange's self-regulatory 
obligations, the exchange will bear direct liability for the 
violation, while the SRO retained to perform regulatory functions 
may bear liability for causing or aiding and abetting the violation. 
See, e.g., Nasdaq Order, supra note 34; BATS Order, supra note 21; 
and ISE Order, supra note 88.
    \126\ Id.
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4. Regulatory Oversight Over BOX Market
    There is an inherent tension between a national securities 
exchange's role as a regulator and as the operator of a market, and 
between its role as a regulator and as a membership organization.\127\ 
The existence of a shareholder class separate from membership adds yet 
another constituency with interests potentially in conflict with the 
regulatory

[[Page 26332]]

responsibilities of the SRO.\128\ An exchange should have in place a 
structure and be operated in a manner designed to mitigate any 
potential conflicts between its commercial interests and its regulatory 
responsibilities so as to assure that it is able to carry out its 
responsibilities in compliance with the Act.\129\
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    \127\ See Securities Exchange Act Release No. 50699, 69 FR 
71126, 71141 (December 8, 2004) (File No. S7-39-04).
    \128\ Id.
    \129\ See id at 71141-2 (stating that national securities 
exchanges and associations should have policies and procedures that 
provide for the independence of their regulatory programs from the 
operation or administration of their trading facilities and other 
businesses; that the proposals should require that the exchange's or 
association's regulatory program be either structurally separated 
from the exchange's or association's market operations and other 
commercial interests, by means of separate legal entities or 
functionally separated within the same legal entity from the 
exchange's or association's market operations and other commercial 
interests; and that, in Commission's view, such separation must be 
designed to permit the regulatory program to function independently 
from the market operations and other commercial interests of the 
exchange or association).
---------------------------------------------------------------------------

    As noted above, BOX Exchange and BOX Market will be separate 
corporate entities, and BOX Market will not be a wholly-owned 
subsidiary of BOX Exchange.\130\ The structural separation of the 
entity responsible for regulation from the entity that operates the 
trading platform may serve to mitigate to some degree the influence of 
commercial interests on regulation. However, although BOX Exchange will 
be structurally separate from BOX Market as the entity that operates 
the trading platform, the ultimate owners of such entities are the 
same, albeit in different percentages.\131\ In particular, as outlined 
above, in addition to being owners of BOX Exchange, MX US 2 directly 
owns (and TMX, Bourse and MX US 1 indirectly own) 53.83% of BOX 
Holdings. BOX Holdings has certain rights with respect to BOX Exchange 
that, in conjunction with this overlapping ownership structure, raise 
questions regarding the ability of BOX Holdings and its controlling 
owner to exert undue influence over BOX Exchange's regulatory 
functions. Specifically, the BOX Exchange Bylaws provides that BOX 
Holdings may appoint one director on the BOX Exchange Board and each 
board committee (including the nominating committee but excluding the 
regulatory oversight committee and the compensation committee).\132\
---------------------------------------------------------------------------

    \130\ There is precedent for this type of structure in the 
current structure of BOX, with BOX being a facility of BX, as well 
as a prior structure when Archipelago Exchange was operated as the 
equity trading facility of the Pacific Exchange (``PCX''). See 
Securities Exchange Act Release Nos. 49068, supra note 6 
(establishing, among other things, BOX as an options trading 
facility of BSE), and 44983 (October 25, 2001), 66 FR 55225 
(November 1, 2001) (approving PCX's use of the Archipelago Exchange 
as its equity trading facility).
    \131\ The owners of BOX Holdings are indirect owners of BOX 
Market because BOX Market is a wholly-owned subsidiary of BOX 
Holdings.
    \132\ See BOX Exchange Bylaws Section 4.02.
---------------------------------------------------------------------------

    The Commission believes that this right potentially increases the 
likelihood that the owners of BOX Holdings, particularly MX US 2 (and 
its controlling owners, TMX, Bourse and MX US 1), can exercise undue 
influence over BOX Exchange's regulatory functions through the BOX 
Holdings Director. However, the following provisions in the BOX 
Exchange governing documents are designed to mitigate such concern: (1) 
BOX Holdings is permitted to appoint only one director to the BOX 
Exchange Board; \133\ (2) because a majority of the BOX Exchange Board 
will be non-industry directors and 20% will be representative of BOX 
Options Participants,\134\ there will at most be one other director 
that can potentially be selected by MX US 2; \135\ (3) the BOX Holdings 
Director can not constitute more than 20% of the nominating committee; 
\136\ and (4) the compensation committee and the regulatory oversight 
committee will not include the BOX Holdings Director.\137\
---------------------------------------------------------------------------

    \133\ Id.
    \134\ Id.
    \135\ Id.
    \136\ See BOX Exchange Bylaws Section 4.06.
    \137\ See BOX Exchange Bylaws Sections 6.06 and 6.07.
---------------------------------------------------------------------------

    The separation of BOX Exchange and BOX Market also raises questions 
as to how effectively BOX Exchange will be kept informed about BOX 
Market's commercial operations that might be of regulatory concern, and 
whether BOX Exchange will be sufficiently empowered, and have the 
ability, to assure that the trading platform and related services are 
operated in accordance with the Act. To help address these concerns, 
the BOX Market LLC Agreement includes several provisions that are 
specifically designed to help facilitate the ability of BOX Exchange to 
oversee the BOX options trading facility and BOX Market as the operator 
of the BOX facility. Specifically:
     BOX Exchange must receive notice of, and will be required 
to affirmatively approve, any planned or proposed changes of BOX Market 
including, but not limited to, any planned or proposed changes to BOX, 
the sale by BOX Market of any material portion of its assets, and any 
action to effect a voluntary, or which would precipitate an 
involuntary, dissolution or winding up of BOX Market; \138\
---------------------------------------------------------------------------

    \138\ Changes relating solely to one or more of the following 
will not be subject to this notice requirement: marketing; 
administrative matters; personnel matters; social or team-building 
events; meetings of the owner of BOX Market; communication with the 
owner of BOX Market; finance; location and timing of board meetings; 
market research; real property; equipment; furnishings; personal 
property; intellectual property; insurance; contracts unrelated to 
the operation of the BOX Market; and de minimis items. See Article 
3.2(a)(ii) of the BOX Market LLC Agreement.
---------------------------------------------------------------------------

     BOX Market is prohibited from implementing any such 
changes until they are approved by the BOX Exchange Board; \139\
---------------------------------------------------------------------------

    \139\ See id.
---------------------------------------------------------------------------

     BOX Exchange has the right to direct BOX Market to make 
any modifications to prevent or eliminate a regulatory deficiency; 
\140\ and
---------------------------------------------------------------------------

    \140\ See Articles 3.2(a)(iii) and (iv) of the BOX Market LLC 
Agreement. A ``regulatory deficiency'' means the operation of BOX or 
the BOX Market in a manner that is not consistent with the rules of 
BOX Exchange and/or the rules of the Commission governing the BOX 
Market or BOX Options Participants, or that otherwise impedes the 
ability of BOX Exchange to regulate the BOX Market or BOX Options 
Participants or to fulfill its obligations under the Act as an SRO. 
See Article 1.1 of the BOX Market LLC Agreement.
---------------------------------------------------------------------------

     BOX Exchange will have the right to designate a non-voting 
director to serve on the BOX Market board of directors, as long as BOX 
remains a facility of BOX Exchange (``regulatory director'').\141\
---------------------------------------------------------------------------

    \141\ This regulatory director will have not the right to vote 
or to serve on a committee, but will have the right to attend all 
meetings of the BOX Market board of directors, receive equivalent 
notice of such meetings, and receive a copy of all meeting materials 
provided to the other directors. See Article 4.1(a) of the BOX 
Market LLC Agreement.
---------------------------------------------------------------------------

    The Commission believes that the provisions discussed above, which 
are designed to facilitate the ability of BOX Exchange to oversee BOX 
Market and BOX, 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.\142\ As noted, the BOX Market LLC Agreement will 
require BOX Market to notify and receive prior approval from BOX 
Exchange of planned or proposed changes related to BOX Market or the 
BOX options trading facility.\143\ In addition, BOX Exchange has full 
discretion to direct BOX Market to modify any proposed or planned 
changes to BOX to prevent or eliminate a regulatory deficiency.\144\ 
Further, the

[[Page 26333]]

inclusion of the regulatory director on the BOX Market board of 
directors is designed to help facilitate the ability of BOX Exchange to 
become informed about the operations of the BOX trading platform and 
any proposed changes thereto.
---------------------------------------------------------------------------

    \142\ 15 U.S.C. 78f(b)(1).
    \143\ See Article 3.2(a)(ii) of the BOX Market LLC Agreement.
    \144\ See Article 3.2(a)(iii) and (iv) of the BOX Market LLC 
Agreement.
---------------------------------------------------------------------------

    Section 6(b)(1) of the Act \145\ requires an exchange--including 
BOX Exchange--to be so organized and have the capacity to be able to 
carry out the purposes of the Act. In addition, Section 19(g)(1) of the 
Act \146\ requires an exchange--including BOX Exchange--to comply with 
the provisions of the Act, the rules and regulations thereunder, and 
its own rules, and, absent reasonable justification or excuse, to 
enforce compliance by its members with such provisions. At this time, 
the Division believes that the overall corporate and governance 
structure proposed by BOX Exchange is designed to help facilitate the 
ability of BOX Exchange to carry out its responsibility and operate in 
a manner consistent with the Exchange Act.\147\ Whether BOX Exchange 
operates in compliance with the Act, however, depends on how BOX 
Exchange and BOX Market in practice implement the governance and other 
provisions that are the subject of this Order.\148\
---------------------------------------------------------------------------

    \145\ 15 U.S.C. 78f(b)(1).
    \146\ 15 U.S.C. 78s(g)(1).
    \147\ The Commission notes that it is reviewing the various 
standards and processes it uses to facilitate the registration of 
national securities exchanges and other entities required to 
register with the Commission and plans to issue a concept release 
designed to collect information and evaluate different aspects of 
these registration standards and processes, including the policy 
objectives of registration, how best to achieve those policy 
objectives through registration and other means, and the relative 
benefits and costs of the various means available. See Securities 
Exchange Act Release No. 65543 (October 12, 2011), 76 FR 65784, 
65786 fn. 13 (October 24, 2011).
    \148\ According to Amendment No. 2, the person that will 
initially be the Chief Executive Officer of BOX Exchange also will 
be the Chief Executive Officer of BOX Market, and the person that 
will initially be the President of BOX Exchange also will be the 
Executive Vice President, Chief Legal Officer and Company Secretary 
of BOX Market. See Amendment No. 2. Thus, senior executives of BOX 
Exchange also will hold senior executive positions at BOX Market. 
Further, BOX Exchange's CRO will, in addition to reporting to BOX 
Exchange's regulatory oversight committee, report to the President 
of BOX Exchange. See BOX Exchange Bylaws Section 7.01. The CRO will 
have general day-to-day supervision over BOX Exchange's regulatory 
operations. See id. The compensation committee of BOX Exchange will 
set the CRO's compensation and the regulatory oversight committee, 
in its sole discretion, will make hiring and termination decisions 
with respect to the CRO, in each case taking into consideration any 
recommendations made by the President of BOX Exchange. See BOX 
Exchange Bylaws Sections 6.06 and 6.07.
---------------------------------------------------------------------------

    Section 19(h)(1) of the Act \149\ 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).\150\ If Commission staff 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), these matters could provide 
the basis for a disciplinary proceeding under Section 19(h)(1) of the 
Act.
---------------------------------------------------------------------------

    \149\ See 15 U.S.C. 78s(h)(1).
    \150\ Id.
---------------------------------------------------------------------------

C. Trading Host

1. Order Display, Execution, and Priority
    As noted above, BOX Market will operate the automated trading 
system used for the trading of options contracts (the ``Trading 
Host'').\151\ The Trading Host includes a fully automated electronic 
order book (``BOX Book'') for orders to buy or sell securities. BOX 
Options Participants are entitled to enter orders into and receive 
executions through the electronic order book. Liquidity is derived from 
orders to buy and sell submitted electronically by BOX Options 
Participants in remote locations. There will be no physical trading 
floor.
---------------------------------------------------------------------------

    \151\ BOX Exchange's proposed trading rules are substantially 
similar to the current rules of BOX, which rules have been subject 
to the rule filing process under Section 19(b) of the Act.
---------------------------------------------------------------------------

    BOX Options Participants' Limit Orders submitted to the Trading 
Host will be ranked and maintained in the BOX Book according to price/
time priority, such that within each price level, all orders will be 
organized by the time of entry.\152\ No distinction is made to this 
priority with regard to account designation (Public Customer, Broker-
Dealer or Market Maker). The number of orders and the total quantity at 
each of the five best price levels in the BOX Book will be displayed to 
all BOX Options Participants on an anonymous basis.\153\
---------------------------------------------------------------------------

    \152\ See BOX Exchange Rule 7130(a).
    \153\ See BOX Exchange Rule 7130(a)(2).
---------------------------------------------------------------------------

    BOX Options Participants may submit the following types of orders: 
Limit; BOX-Top; \154\ Market-on-Opening; Market; and Intermarket Sweep 
Order (``ISO'').\155\ Options Participants can add the designation of 
Good 'Til Cancelled, Fill and Kill, or Session Order \156\ to each of 
the above mentioned order types.\157\ These order types and 
designations are substantially similar to the order types currently 
offered by BOX.\158\
---------------------------------------------------------------------------

    \154\ BOX-Top orders that are entered into the BOX Book are 
executed at the best price available in the market for the total 
quantity available from any contra bid (offer). Any residual volume 
left after part of a BOX-Top Order has been executed is 
automatically converted to a limit order at the price at which the 
original BOX-Top Order was executed. See BOX Exchange Rule 
7110(c)(2).
    \155\ See BOX Exchange Rule 7110(c).
    \156\ An order with a Session Order designation will remain 
active in the BOX trading system until certain triggering events 
occur (e.g., disconnection of the connection between the BOX Options 
Participant and BOX). See BOX Exchange Rule 7110(e)(iii).
    \157\ See BOX Exchange Rule 7110(e).
    \158\ See Chapter V, Section 14 of the current BOX Rules.
---------------------------------------------------------------------------

    BOX Exchange also permits Order Flow Providers (``OFPs'') \159\ to 
utilize Directed Orders.\160\ A ``Directed Order'' refers to a Customer 
Order that an OFP directs to a particular BOX market maker. Unlike all 
other orders submitted to the Trading Host, Directed Orders are not 
anonymous. A market maker who wishes to accept Directed Orders must 
systemically indicate that it wishes to receive Directed Orders, must 
be willing to accept Directed Orders from all OFPs, may receive 
Directed Orders only through the Trading Host, and may not reject 
Directed Orders.\161\
---------------------------------------------------------------------------

    \159\ An OFP means those BOX Options Participants representing 
as agent customer orders on the Trading Host and those non-market-
maker BOX Options Participants conducting proprietary trading. See 
BOX Exchange Rule 100(a)(45).
    \160\ See BOX Exchange Rule 8040. This rule is substantially 
similar to Chapter VI, Section 5(c) of the current BOX Rules.
    \161\ See BOX Exchange Rule 8040(d).
---------------------------------------------------------------------------

    Trades will execute when orders or quotations on the BOX Book match 
one another. The priority of orders at the same price will be 
determined by time of order entry. An order entered into the Trading 
Host that matches an order in the Trading Host will trade at the price 
of the order in the Trading Host up to the available size.\162\
---------------------------------------------------------------------------

    \162\ See BOX Exchange Rule 7130(a)(4).
---------------------------------------------------------------------------

    With the exception of Improvement Orders and Primary Improvement 
Orders submitted during a Price Improvement Period (``PIP'') 
auction,\163\ Directed Orders,\164\ and ISOs,\165\ all

[[Page 26334]]

orders submitted to the Trading Host will be filtered by the Trading 
Host prior to entry on the BOX Book, which is designed to ensure that 
such orders will not execute at a price outside of the current 
NBBO.\166\
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    \163\ These orders will be processed in accordance with BOX 
Exchange Rule 7150.
    \164\ Directed Orders will be processed in accordance with BOX 
Exchange Rule 8040.
    \165\ See BOX Exchange Rule 7110(c)(5).
    \166\ See BOX Exchange Rule 7130(b) (noting that BOX will 
``filter'' or check to ensure that the order will not: (i) in the 
case of a sell order, execute at a price below the NBBO bid price or 
(ii) in the case of a buy order, the execute at a price above the 
NBBO offer execute at a price above the NBBO offer price). This rule 
is substantially similar to Chapter V, Section 16(b) of the current 
BOX Rules.
---------------------------------------------------------------------------

    BOX Exchange will limit an OFP's ability to trade as principal with 
an order it represents as agent, unless the agency order is first given 
the opportunity to interact with other trading interest on the 
Exchange. Specifically, an OFP may not execute as principal an order it 
represents as agent unless: (i) The agency order is first exposed to 
the BOX Book for at least one second; (ii) the OFP has been bidding or 
offering on the BOX Book for a least one second prior to receiving an 
agency order that is executable against such bid or offer; (iii) the 
OFP sends the agency order to the PIP; or (iv) the OFP sends the agency 
order to the Facilitation Auction.\167\
---------------------------------------------------------------------------

    \167\ See BOX Exchange IM-7140-3.
---------------------------------------------------------------------------

    BOX Exchange Rules also will prohibit the disclosure of information 
about agency orders to third parties. Specifically, prior to submitting 
an order to the PIP, the Facilitation Auction, or the Solicitation 
Auction, a BOX Options Participant cannot inform another BOX Options 
Participant or any other third party of any of the terms of the order, 
except as provided for in the rules regarding Directed Orders.\168\
---------------------------------------------------------------------------

    \168\ See BOX Exchange IM-7140-4.
---------------------------------------------------------------------------

    The PIP process may be used by BOX Options Participants seeking to 
execute their agency orders as principal. BOX Exchange's PIP rule is 
the same as BOX Group LLC's current PIP rule.\169\ Under the PIP rule, 
Customer Orders designated for the PIP (``PIP Orders'') will be 
submitted to BOX with a matching contra order (``Primary Improvement 
Order'') equal to the full size of the PIP Order. The Primary 
Improvement Order must be on the opposite side of the market than that 
of the PIP Order and represent either: (1) A single price that is equal 
to or better than that of the NBBO at the time of the commencement of 
the PIP; or (2) an auto-match submission that will automatically match 
both the price and size of all competing quotes and orders at any price 
level achieved during the PIP or only up to a limit price. The Primary 
Improvement Order will designate the PIP auction start price, which 
must be equal to or better than the NBBO at the time of commencement of 
the PIP. BOX Exchange will commence a PIP by broadcasting a message to 
Options Participants, and the exposure period will last for one hundred 
milliseconds. At the conclusion of the auction, the PIP Order will be 
matched on price/time priority with orders on the opposite side (with 
the Initiating Participant retaining priority for 40% of the 
order),\170\ subject to certain conditions.\171\
---------------------------------------------------------------------------

    \169\ See Chapter V, Section 18 of the current BOX Rules.
    \170\ See BOX Exchange Rule 7150(g). At its option, the 
Initiating Participant may designate a lower amount for which it 
retains certain priority and trade allocation privileges upon the 
conclusion of the PIP than the forty percent (40%) of the PIP Order 
to which it is entitled. See Rule 7150(g)(5).
    \171\ See BOX Exchange Rule 7150.
---------------------------------------------------------------------------

    BOX Exchange will have no minimum size requirement for orders 
entered into the PIP, for a pilot period to expire July 18, 2012.\172\ 
During the pilot period, BOX Exchange will submit certain data, 
periodically as required by the Commission, to help evaluate whether, 
among other things: (1) There is meaningful competition for all size 
PIP orders; and (2) there is significant price improvement for all 
orders executed through the PIP.\173\ This data is expected to aid the 
Commission in evaluating the PIP during the pilot period to determine 
whether it would be beneficial to customers and to the options market 
as a whole to approve any proposal requesting permanent approval to 
permit orders of fewer than 50 contracts to be submitted to the PIP.
---------------------------------------------------------------------------

    \172\ See BOX Exchange IM-7150-1.
    \173\ See Form 1 Application, Exhibit B. This data is 
substantially the same data currently provided to the Commission by 
BOX Group LLC. See Securities and Exchange Commission Release Nos. 
61805 (March 31, 2010), 75 FR 17454 (April 6, 2010); 60337 (July 17, 
2009), 74 FR 36805 (July 24, 2009); 51821 (June 10, 2005), 70 FR 
35143 (June 16, 2005); and 49068, supra note 6.
---------------------------------------------------------------------------

    BOX Exchange's proposed Facilitation Auction is the same as BOX 
Group LLC's current Facilitation Auction.\174\ The Facilitation Auction 
is a process by which an OFP seeks either to facilitate a block-size 
order it represents as agent, or to execute an order it solicited to 
execute against the agency order. OFPs must be willing to execute the 
entire size of agency orders entered into the Facilitation Auction 
through the submission of a contra ``Facilitation Order.'' \175\ BOX 
Exchange also is proposing to have a Solicitation Auction, which is the 
same as BOX Group LLC's current Solicitation Auction.\176\ The 
Solicitation Auction allows an OFP to seek to execute orders of 500 or 
more contracts it represents as agent against contra orders that it has 
solicited (``Solicited Order'').\177\
---------------------------------------------------------------------------

    \174\ See Chapter V, Section 31(a) of the current BOX Rules.
    \175\ Upon the entry of an agency order and Facilitation Order 
into the Facilitation Auction, a broadcast message will be sent and 
Options Participants will be given an opportunity to enter responses 
with the prices and sizes at which they will be willing to 
participate in the facilitation of the agency order. At the end of 
the one second period for the entry of responses, the agency order 
will be automatically executed. Unless there is sufficient size to 
execute the entire Agency Order at a price better than the 
facilitation price, Public Customer bids (offers) and Public 
Customer responses on BOX at the time the agency order is executed 
that are price higher (lower) than the facilitation price will be 
executed at the facilitation price. Non-Public Customer and Market 
Maker bids (offers) and Non-Public Customer and Market Maker 
Response on BOX at the time the Agency Order is executed that are 
priced higher (lower) than the facilitation price will be executed 
against the agency order at their stated price. The facilitating OFP 
will execute at least forty percent (40%) of the original size of 
the Facilitation Order, but only after better-priced bids (offers) 
and auction responses on BOX, as well as Public Customer bids 
(offers) and responses at the facilitation price, are executed in 
full, based upon price/time priority. Thereafter, Non-Public 
Customer and Market Maker bids (Offers) and Non-Public Customer and 
Market Maker responses on BOX at the facilitation price will 
participate in the execution of the agency order based upon price/
time priority. See BOX Exchange Rule 7270(a).
    \176\ See Chapter V, Section 31(b) of the current BOX Rules.
    \177\ Each agency order entered into the Solicitation Auction 
must be all-or-none. When a proposed solicited cross is entered into 
the Solicitation Auction, a broadcast message will be sent and 
Options Participants will be given an opportunity to enter responses 
with the prices and sizes at which they will be willing to 
participate in the execution of the agency order. At the end of the 
one second period for the entry of responses, the agency order will 
be automatically executed in full or cancelled. The agency order 
will be executed against the solicited order at the proposed 
execution price unless (1) there is sufficient size to execute the 
entire agency order at a better price or prices, or (2) there is a 
Public Customer order resting on the BOX Book at a price equal to or 
better than the proposed execution price within the depth of the BOX 
Book that would have traded with the agency order if the agency 
order had been submitted to the BOX Book instead of to the 
Solicitation Mechanism (``Book Priority Public Customer Order''). If 
there is sufficient size to execute the entire agency order at a 
better price or prices, the agency order will be executed at the 
improved price(s) and the Solicited Order will be cancelled. If 
there is not sufficient size to execute the entire agency order at a 
better price or prices, whether the agency order will be executed 
against the Solicited Order at the proposed execution price depends 
on whether there is one or more Book Priority Public Customer 
Order(s) on the BOX Book at the time of execution. If no such Book 
Priority public customer Orders are on the BOX Book at the time of 
execution, the agency order will be executed against the Solicited 
Order at the proposed execution price. However, if there is one or 
more Book Priority Public Customer Orders on the Book, then BOX will 
calculate whether sufficient size exists to execute the agency order 
at its proposed price. If there is sufficient size available on the 
BOX Book to execute the entire agency order at the proposed price, 
the agency order will be executed against the BOX Book. If there is 
not sufficient size available on the BOX Book to execute the entire 
agency order at the proposed price, the agency order and the 
solicited order will be cancelled and no executions will occur. See 
BOX Exchange Rule 7270(b)(2).

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[[Page 26335]]

    It will be a violation of an Option Participant's duty of best 
execution to its customer if it were to cancel a Facilitation Order to 
avoid execution of the customer order at a better price that may be 
available on BOX.\178\ Additionally, Options Participants may not use 
the Solicitation Auction to circumvent the limitations in Rule 7140 
regarding Participants trading as principal with their customer 
orders.\179\
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    \178\ See BOX Exchange IM-7270-1
    \179\ See BOX Exchange IM-7270-5. This may include, but is not 
limited to, Options Participants entering Solicitation Orders that 
are solicited from: (1) affiliated broker-dealers; or (2) broker-
dealers with which the BOX Options Participant has an arrangement 
that allows the Options Participant to realize similar economic 
benefits from the solicited transaction as it would achieve by 
executing the customer order in whole or in part as principal. 
Further, any Solicited Orders entered by Options Participants to 
trade against Agency Orders may not be for the account of a BOX 
Market Maker that is assigned to the options class.
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    The Commission believes that BOX Exchange's proposed display, 
execution, and priority rules are consistent with the Act. In 
particular, the Commission finds that the proposed rules are consistent 
with Section 6(b)(5) of the Act,\180\ which, among other things, 
requires that the rules of a national securities exchange be designed 
to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in regulating 
transactions in securities, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system and, 
in general, to protect investors and the public interest, and to not 
permit unfair discrimination between customers, issuers, or dealers. 
The Commission also finds that the proposed rules are consistent with 
Section 6(b)(8) of the Act,\181\ which requires that the rules of an 
exchange not impose any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. The Commission 
notes that the trading rules of BOX Exchange are substantially similar 
to the current BOX trading rules, which were filed with and approved by 
the Commission (or otherwise became effective) pursuant to Section 
19(b) of the Act. Thus, the Commission is making its findings regarding 
BOX Exchange's trading rules for the reasons set forth in the 
Commission approval orders relating to the current BOX trading rules.
---------------------------------------------------------------------------

    \180\ 15 U.S.C. 78f(b)(5).
    \181\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

2. Section 11 of the Act
    Section 11(a)(1) of the Act \182\ 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 discretion 
(collectively, ``covered accounts''), unless an exception applies. The 
Exchange has represented that it has analyzed its rules proposed 
hereunder, and believes that they are consistent with Section 11(a) of 
the Act and rules thereunder. For the reasons set forth below, the 
Commission believes that BOX Option Participants entering orders into 
the Trading Host, excluding those transactions effected through the PIP 
process, will satisfy the conditions of Rule 11a2-2(T). The Commission 
further believes that BOX Option Participants effecting transactions 
through the PIP process will satisfy the requirements of Section 
11(a)(1)(G) of the Act, provided that BOX Option Participants comply 
with the requirements set forth in Rule 11a1-1(T) thereunder.
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    \182\ 15 U.S.C. 78k(a)(1).
---------------------------------------------------------------------------

a. Rule 11a2-2(T)
    Rule 11a2-2(T) under the Act,\183\ 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 the 
transactions on the exchange. To comply with Rule 11a2-2(T)'s 
conditions, a member: (1) May not be affiliated with the executing 
member; (2) must transmit the order from off the exchange floor; (3) 
may not participate in the execution of the transaction once it has 
been transmitted to the member performing the execution; \184\ and (4) 
with respect to an account over which the member 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.
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    \183\ 17 CFR 240.11a2-2(T).
    \184\ The member may, however, participate in clearing and 
settling the transaction. See Securities Exchange Act Release No. 
14563 (March 14, 1978), 43 FR 11542 (March 17, 1978) (regarding the 
NYSE's Designated Order Turnaround System (``1978 Release'')).
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    In a letter to the Commission,\185\ BOX Exchange requested that the 
Commission concur with its conclusion that BOX Options Participants 
that enter orders into the Trading Host, excluding those transactions 
effected through the PIP process, satisfy the requirements of Rule 
11a2-2(T). For the reasons set forth below, the Commission believes 
that BOX Option Participants entering orders into the Trading Host, 
excluding those transactions effected through the PIP process, will 
satisfy the conditions of Rule 11a2-2(T).
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    \185\ See letter from Lisa Fall, President, BOX Exchange, to 
Elizabeth Murphy, Secretary, Commission, dated March 30, 2012 
(``Exchange 11(a) Request Letter'').
---------------------------------------------------------------------------

    Rule 11a2-2(T)'s first condition is that the order be executed by 
an exchange member who is unaffiliated with the member initiating the 
order. The Commission has stated that the requirement is satisfied when 
automated exchange facilities, such as the Trading Host, are used, as 
long as the design of these systems ensures that members do not possess 
any special or unique trading advantages over non-members in handling 
their orders after transmitting them to the Exchange.\186\ BOX Exchange 
has represented that the design of the trading platform ensures that no 
member has any special or unique trading advantage in the handling of 
its orders after transmitting its orders to BOX Exchange.\187\ Based on 
the Exchange's representation, the Commission believes that the Trading 
Host satisfies this requirement.
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    \186\ In considering the operation of automated execution 
systems operated by an exchange, the Commission noted that while 
there is no independent executing exchange member, the execution of 
an order is automatic once it has been transmitted into each 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 requirement of Rule 11a2-2(T). See Securities 
Exchange Act Release No. 15533 (January 29, 1979), 44 FR 6084 
(January 31, 1979) (regarding the American Stock Exchange (``Amex'') 
Post Execution Reporting System, the Amex Switching System, the 
Intermarket Trading System, the Multiple Dealer Trading Facility of 
the Cincinnati Stock Exchange, the PCX Communications and Execution 
System, and the Philadelphia Stock Exchange (``Phlx'') Automated 
Communications and Execution System (``1979 Release'')).
    \187\ See Exchange 11(a) Request Letter, supra note 185.
---------------------------------------------------------------------------

    Second, Rule 11a2-2(T) requires orders for covered accounts be 
transmitted from off the exchange floor. The Trading Host receives 
orders electronically through remote terminals or computer-to-computer 
interfaces. In the context of other automated trading systems, the 
Commission has found that the off-floor transmission requirement is met 
if a covered account order is transmitted from a remote location 
directly to an exchange's floor by

[[Page 26336]]

electronic means.\188\ Since the Trading Host receives all orders 
electronically through remote terminals or computer-to-computer 
interfaces, the Commission believes that the trading platform satisfies 
the off-floor transmission requirement.
---------------------------------------------------------------------------

    \188\ See, e.g., Securities Exchange Act Release Nos. 59154 
(December 23, 2008) 73 FR 80468 (December 31, 2008) (SR-BSE-2008-48) 
(order approving proposed rules of BX); 49068, supra note 6 
(establishing, among other things, BOX as an options trading 
facility of BSE); 44983, supra note 130 (approving the PCX's use of 
the Archipelago Exchange as its equity trading facility); 29237 (May 
24, 1991), 56 FR 24853 (May 31, 1991) (regarding NYSE's Off-Hours 
Trading Facility). See 1978 Release, supra note 184. See 1979 
Release, supra note 186.
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    Third, Rule 11a2-2(T) requires that the member not participate in 
the execution of its order once it has been transmitted to the member 
performing the execution. BOX Exchange represented that at no time 
following the submission of an order is a member able to acquire 
control or influence over the result or timing of an order's 
execution.\189\ According to BOX Exchange, the execution of a member's 
order is determined solely by what orders, bids, or offers are present 
in the Trading Host and where the order is ranked based on an 
established price-time priority matching algorithm at the time the BOX 
Options Participant submits the order and on the priority of those 
orders, bids and offers.\190\ Accordingly, the Commission believes that 
a BOX Options Participant does not participate in the execution of an 
order submitted into the trading platform.
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    \189\ See Exchange 11(a) Request Letter, supra note 185. The 
member may only cancel or modify the order, or modify the 
instructions for executing the order, but only from off the Exchange 
floor. The Commission has stated that the non-participation 
requirement is satisfied under such circumstances so long as such 
modifications or cancellations are also transmitted from off the 
floor. See 1978 Release, supra note 184 (stating that the ``non-
participation requirement does not prevent initiating members from 
canceling of 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'').
    \190\ See Exchange 11(a) Request Letter, supra note 185.
---------------------------------------------------------------------------

    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).\191\ BOX Options Participants trading for covered accounts over 
which they exercise investment discretion must comply with this 
condition in order to rely on the rule's exemption.\192\
---------------------------------------------------------------------------

    \191\ 17 CFR 240.11a2-2(T)(a)(2)(iv). 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 person 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 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 184 (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'').
    \192\ See Exchange 11(a) Request Letter, supra note 185.
---------------------------------------------------------------------------

b. Section 11(a)(1)(G) and Rule 11a1-1(T)
    Section 11(a)(1)(G) of the Act provides an additional exemption 
from the general prohibition set forth in Section 11(a)(1) for any 
transaction for a member's own account, provided that: (i) Such member 
is primarily engaged in certain underwriting, distribution, and other 
activities generally associated with broker-dealers and whose gross 
income is derived principally from such business and related 
activities; and (ii) the transaction is effected in compliance with the 
rules of the Commission, which, as a minimum, assure that the 
transaction is not inconsistent with the maintenance of fair and 
orderly markets and yields priority, parity, and precedence in 
execution to orders for the account of persons who are not members or 
associated with members of the exchange.\193\ In addition, Rule 11a1-
1(T) under the Act specifies that a transaction effected on a national 
securities exchange for the account of a member which meets the 
requirements of Section 11(a)(1)(G)(i) of the Act is deemed, in 
accordance with the requirements of Section 11(a)(1)(G)(ii), to be not 
inconsistent with the maintenance of fair and orderly markets and to 
yield priority, parity, and precedence in execution to orders for the 
account of non-members or persons associated with non-members of the 
exchange, if such transaction is effected in compliance with certain 
requirements.\194\
---------------------------------------------------------------------------

    \193\ See 15 U.S.C. 78k(a)(1)(G).
    \194\ Rule 11a1-1(T)(a)(1)-(3) provides that each of the 
following requirements must be met: (1) A member must disclose that 
a bid or offer for its account is for its account to any member with 
whom such bid or offer is placed or to whom it is communicated, and 
any member through whom that bid or offer is communicated must 
disclose to others participating in effecting the order that it is 
for the account of a member; (2) immediately before executing the 
order, a member (other than the specialist in such security) 
presenting any order for the account of a member on the exchange 
must clearly announce or otherwise indicate to the specialist and to 
other members then present for the trading in such security on the 
exchange that he is presenting an order for the account of a member; 
and (3) notwithstanding rules of priority, parity, and precedence 
otherwise applicable, any member presenting for execution a bid or 
offer for its own account or for the account of another member must 
grant priority to any bid or offer at the same price for the account 
of a person who is not, or is not associated with, a member, 
irrespective of the size of any such bid or offer or the time when 
entered. See 17 CFR 240.11a1-1(T)(a)(1)-(3).
---------------------------------------------------------------------------

    The rules relating to the PIP process of the Trading Host prohibit 
any orders for the accounts of non-Marker Maker BOX Options 
Participants to be executed prior to the execution of Public Customer 
Orders, both CPO and unrelated Customer Orders, and non-BOX Options 
Participant broker-dealer orders at the same price.\195\ Because the 
rules will require BOX Options Participants that are not market makers 
\196\ to yield priority in the PIP to all non-member orders, the 
Commission believes that the proposal with respect to transactions 
effected through the PIP process is consistent with the requirements in 
Section 11(a) of the Act and Rule 11a1-1(T) thereunder.\197\ The 
Commission also reminds exchanges and their members, however, that, in 
addition to yielding priority to non-member orders at the same price, 
members must also meet the other requirements under Section 11(a)(1)(G) 
of the Act and Rule 11a1-1(T) thereunder (or satisfy the requirements 
of another exception) to effect transactions for their own accounts.
---------------------------------------------------------------------------

    \195\ See BOX Rules, 7150(f)(4) and (g)(3)(i).
    \196\ Section 11(a)(1)(A) of the Act provides an exception to 
the general prohibition in Section 11(a) on an exchange member 
effecting transactions for its own account if such member is a 
dealer acting in the capacity of a market maker. See 15 U.S.C. 
78k(a)(1)(A).
    \197\ See also Securities Exchange Act Release No. 49068, supra 
note 6.
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D. Other BOX Exchange Rules

1. BOX Options Participant Access
    Membership on BOX Exchange will be available to any broker or 
dealer registered under Section 15 of the Act that meets the standards 
for membership set forth in the Rule 2000 Series of BOX Exchange's 
rules.\198\

[[Page 26337]]

Access to the Trading Host will be available to persons that have 
applied and been approved by BOX Exchange as BOX Options 
Participants.\199\ BOX Exchange will have two classes of BOX Options 
Participants: (1) OFPs, who can represent customer orders as agents 
and/or conduct proprietary trading; and (2) market makers. OFPs can 
transact business with public customers only if the OFPs are members of 
another registered national securities exchange or association.\200\
---------------------------------------------------------------------------

    \198\ See BOX Exchange Rule 2020(a); Form 1 Application, Exhibit 
L. To become or continue as a BOX Options Participant, a firm must: 
(1) Have as the principal purpose of being a Participant the conduct 
of a securities business; (2) be a Clearing Participant or establish 
a clearing arrangement with a Clearing Participant; (3) meet the 
capital requirements of BOX Exchange or Rule 15c3-1 of the Act, 
whichever is greater; (4) demonstrate an ability to adhere to all 
applicable Exchange, Commission, Options Clearing Corporation and 
Federal Reserve Board policies, rules and regulations, including 
those concerning record-keeping, reporting, finance and trading 
procedures; and (5) be able to satisfactorily demonstrate reasonably 
adequate systems capability and capacity. See also BOX Exchange 
Rules 2000, 2010, 2020 and 10000 Series.
    \199\ See BOX Exchange Rule 2010. See also Form 1 Application, 
Exhibit L.
    \200\ See BOX Exchange Rule 4000.
---------------------------------------------------------------------------

    For a temporary 90-day period after the Commission's approval of 
BOX Exchange's Form 1 Application, an applicant that is an active 
member of FINRA or a registered national securities exchange and is a 
current or former BOX Options Participant of BOX trading facility will 
not be required to submit a full application for membership on the 
Exchange, but rather will only need to complete a short-form waive-in 
membership application form.\201\ This waive-in process is similar to 
arrangements that were in place temporarily at other SROs.\202\ All 
other applicants (and after the 90-day period has ended, those that 
could have waived in through the expedited process) may apply for 
membership on the Exchange by submitting a full membership application 
to the Exchange.\203\ Applications for association with a BOX Options 
Participant shall be submitted to the Exchange on Form U-4 and such 
other forms as BOX Exchange may prescribe.\204\
---------------------------------------------------------------------------

    \201\ See BOX Exchange Rules 2030. See also Form 1 Application, 
Exhibit L.
    \202\ See, e.g., Nasdaq Rule 1013(a)(5)(C) (containing a similar 
expedited waive-in membership process for members of FINRA).
    \203\ See BOX Exchange Rule 2030.
    \204\ See BOX Exchange IM-2040-6.
---------------------------------------------------------------------------

    A prospective BOX Options Participant must enter into a Participant 
Agreement, whereby it will, among other things, agree to abide by the 
Agreement, the Exchange Rules, and by all circulars, notices, 
directives or decisions adopted pursuant to or made in accordance with 
the Rules. Pursuant to BOX Exchange's rules, every applicant must have 
and maintain membership in another options exchange that is registered 
under the Act and that is not registered solely under Section 6(g) of 
the Act.\205\
---------------------------------------------------------------------------

    \205\ See BOX Exchange Rule 2010.
---------------------------------------------------------------------------

    The Exchange will receive and review all membership applications, 
and will provide to the applicant written notice of the Exchange's 
determination within 30 days after completion of its consideration of 
an application, specifying in the case of disapproval of an application 
the grounds thereof.\206\ The Exchange also will qualify associated 
persons of BOX Options Participants.\207\ Once an applicant becomes a 
BOX Options Participant or a person associated with a BOX Options 
Participant, it must continue to satisfy all of the qualifications to 
be an options participant set forth in the BOX Exchange rules.\208\ 
When BOX Exchange has reason to believe that a BOX Options Participant 
or associated person fails to meet such qualifications, the Exchange 
may suspend or terminate such person's membership or association.\209\
---------------------------------------------------------------------------

    \206\ See BOX Exchange Rule 2000(b).
    \207\ Id. See also BOX Exchange Rule 2030.
    \208\ See BOX Exchange Rule 2040.
    \209\ See BOX Exchange Rule 2040.
---------------------------------------------------------------------------

    The Commission finds that BOX Exchange's membership rules are 
consistent with Section 6 of the Act,\210\ including Section 6(b)(2) of 
the Act \211\ in particular, which requires that a national securities 
exchange have rules that provide that any registered broker or dealer 
or natural person associated with such broker or dealer may become a 
member and any person may become associated with an exchange member. 
The Commission notes that pursuant to Section 6(c) of the Act,\212\ an 
exchange must deny membership to any person, other than a natural 
person, that is not a registered broker or dealer, any natural person 
that is not, or is not associated with, a registered broker or dealer, 
and registered broker-dealers that do not satisfy certain standards, 
such as financial responsibility or operational capacity. As a 
registered exchange, BOX Exchange must independently determine if an 
applicant satisfies the standards set forth in the Act, regardless of 
whether an applicant is a member of another SRO.\213\
---------------------------------------------------------------------------

    \210\ 15 U.S.C. 78f.
    \211\ 15 U.S.C. 78f(b)(2).
    \212\ 15 U.S.C. 78f(c).
    \213\ See, e.g., BATS Order, supra note 21, at 73 FR 49502; and 
Nasdaq Order, supra note 34, at 71 FR 3555.
---------------------------------------------------------------------------

2. Linkage
    The Exchange plans to become a participant in the Plan Relating to 
Options Order Protection and Locked/Crossed Markets or any successor 
plan (``Linkage Plan'').\214\ If admitted as a participant to the Plan, 
other plan participants would be able to send orders to the Trading 
Host in accordance with the terms of the plan as applied to the 
Exchange.
---------------------------------------------------------------------------

    \214\ See Form 1 Application, Exhibit E, Response 6. See also 
Securities Exchange Act Release No. 60405 (July 30, 2009), 74 FR 
39362 (August 6, 2009) (File No. 4-546) (order approving the 
national market system Plan Relating to Options Order Protection and 
Locked/Crossed Markets Submitted by the Chicago Board Options 
Exchange, Incorporated (``CBOE''), ISE, The NASDAQ Stock Market LLC, 
NASDAQ OMX BX, Inc., NASDAQ OMX PHLX, Inc., NYSE Amex LLC, and NYSE 
Arca, Inc.).
---------------------------------------------------------------------------

    BOX Exchange rules include relevant definitions, establish the 
conditions pursuant to which members may enter orders in accordance 
with the Linkage Plan, impose obligations on the Exchange regarding how 
it must process incoming orders, establish a general standard that 
members and the Exchange should avoid trade-throughs, establish 
potential regulatory liability for members that engage in a pattern or 
practice of trading through other exchanges, and establish obligations 
with respect to locked and crossed markets.
    The Commission believes that BOX Exchange has proposed rules that 
are designed to comply with the requirements of the Linkage Plan.\215\ 
Further, before BOX Exchange can commence operations as an exchange, 
BOX Exchange must become a participant in the Linkage Plan.
---------------------------------------------------------------------------

    \215\ See BOX Exchange Rule 15000 Series.
---------------------------------------------------------------------------

3. Market Makers
a. Registration of Market Makers
    A BOX Options Participant may register with BOX Exchange as a 
market maker by filing a written application with the Exchange, which 
will consider an applicant's market making ability and other factors it 
deems appropriate in determining whether to approve an applicant's 
registration.\216\ To qualify for registration as a market maker, a BOX 
Options Participant must meet the requirements established in Rule 
15c3-1(a)(6)(i) under the Act and the general requirements set forth in 
BOX Exchange Rule 8000.\217\ All market makers will be designated as 
specialists on the Exchange for all purposes under the Act and rules 
thereunder.\218\ BOX Exchange will not limit the number of qualifying 
entities that may become market makers.\219\ The registration of a 
market

[[Page 26338]]

maker may be suspended or terminated by the Exchange upon a 
determination that such market maker failed to properly perform as a 
market maker, comply with BOX Exchange rules, or acted in a manner 
inconsistent with the best interest of fair and orderly markets.\220\
---------------------------------------------------------------------------

    \216\ See BOX Exchange Rule 8000(b) and (c).
    \217\ See BOX Exchange Rule 8010.
    \218\ See BOX Exchange Rule 8000(a).
    \219\ See BOX Exchange Rule 8000(e). However, BOX Exchange may 
limit access to the System based on System constraints, capacity 
restrictions, or other factors relevant to protecting the integrity 
of the System, pending action required to address the issue of 
concern. To the extent that BOX Exchange places limitations on any 
Participant's access to the System, such limits shall be objectively 
determined and submitted to the Commission for approval pursuant to 
a rule change filed under Section 19(b) of the Act.
    \220\ See BOX Exchange Rule 8000(d).
---------------------------------------------------------------------------

    The Commission finds that BOX Exchange's proposed market maker 
qualifications requirements are consistent with the Act. In particular, 
BOX Exchange's rules provide an objective process by which a BOX 
Options Participant can become a market maker on the BOX and provide 
for appropriate oversight by the Exchange to monitor for continued 
compliance by market makers with the terms of their application for 
such status and the BOX Exchange Rules. The Commission notes that BOX 
Exchange's proposed market maker registration requirements are similar 
to those of other options exchanges.\221\
---------------------------------------------------------------------------

    \221\ See, e.g., Nasdaq Rules, Chapter VII, Sections 2 and 4; 
Chapter VI, Section 2 of the current BOX Rules; and ISE Rule 804.
---------------------------------------------------------------------------

b. Market Maker Obligations
    Pursuant to BOX Exchange rules, the transactions of a market maker 
in its market making capacity must constitute a course of dealings 
reasonably calculated to contribute to the maintenance of a fair and 
orderly market.\222\ Among other things, a market maker must: (1) 
Maintain a two-sided market on a continuous basis for options classes 
to which it is appointed at least 60% of the time that the classes are 
open for trading; \223\ (2) engage in dealings for its own account when 
there is a lack of price continuity, a temporary disparity between the 
supply of and demand for a particular option contract, or a temporary 
distortion of the price relationships between options contracts of the 
same class; (3) compete with other market makers; (4) update quotations 
in response to changed market conditions; (5) maintain active markets; 
and (6) make markets that will be honored for the number of contacts 
entered.\224\ In addition, market makers must maintain minimum net 
capital in accordance with Commission and BOX Exchange rules.\225\ 
Market makers also must maintain information barriers that are 
reasonably designed to prevent the misuse of material, non-public 
information.\226\
---------------------------------------------------------------------------

    \222\ See BOX Exchange Rule 8040.
    \223\ See BOX Exchange Rule 8050(e). These obligations will 
apply to all of the Market Maker's appointed classes collectively, 
rather than on a class-by-class basis.
    \224\ See BOX Exchange Rule 8040.
    \225\ See BOX Exchange Rule 8080.
    \226\ See BOX Exchange Rule 8090.
---------------------------------------------------------------------------

    If BOX Exchange finds any substantial or continued failure by a 
market maker to engage in a course of dealings as specified in Exchange 
Rule 8040, then such market maker will be subject to disciplinary 
action, suspension, or revocation of registration in one or more of the 
securities in which the market maker is registered.\227\
---------------------------------------------------------------------------

    \227\ See BOX Exchange Rule 8040(f).
---------------------------------------------------------------------------

    Market makers receive certain benefits for carrying out their 
responsibilities.\228\ For example, a broker-dealer or other lender may 
extend ``good faith'' credit to a member of a national securities 
exchange or registered broker-dealer to finance its activities as a 
market maker or specialist.\229\ In addition, market makers are 
excepted from the prohibition in Section 11(a) of the Act.\230\ The 
Commission believes that a market maker must have sufficient 
affirmative obligations, including the obligation to hold itself out as 
willing to buy and sell options for its own account on a regular or 
continuous basis, to justify this favorable treatment.\231\
---------------------------------------------------------------------------

    \228\ See, e.g., NOM Approval Order, supra note 122 (discussing 
the benefits and obligations of market makers).
    \229\ See 12 CFR 221.5 and 12 CFR 220.7; see also 17 CFR 
240.15c3-1(a)(6) (capital requirements for market makers).
    \230\ 15 U.S.C. 78k(a).
    \231\ See NOM Approval Order, supra note 122, at 73 FR 14526.
---------------------------------------------------------------------------

    The Commission further believes that the rules of all U.S. options 
markets need not provide the same standards for market maker 
participation, so long as they impose affirmative obligations that are 
consistent with the Act.\232\ The Commission believes that BOX 
Exchange's market maker participation requirements impose sufficient 
affirmative obligations on the Exchange's market makers and, 
accordingly, that BOX Exchange's requirements are consistent with the 
Act. In particular, the Act does not mandate a particular market model 
for exchanges, and while market makers may become an important source 
of liquidity on BOX Exchange, they will likely not be the only source 
as BOX is designed to match buying and selling interest of all BOX 
Options Participants.
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    \232\ See e.g., C2 Order, supra note 29 and NOM Approval Order, 
supra note 122.
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4. Discipline and Oversight of Members
    As noted above, one prerequisite for Commission granting an 
exchange's application for registration is that a proposed exchange 
must be so organized and have the capacity to carry out the purposes of 
the Act. Specifically, an exchange must be able to enforce compliance 
by its members and persons associated with its members with federal 
securities laws and the rules of the exchange.\233\
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    \233\ See 15 U.S.C. 78f(b)(1).
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    BOX Exchange rules codify BOX Exchange's disciplinary jurisdiction 
over its members, thereby facilitating its ability to enforce its 
members' compliance with its rules and the federal securities 
laws.\234\ BOX Exchange's rules permit it to sanction members for 
violations of its rules and violations of the federal securities laws 
by, among other things, expelling or suspending members; limiting 
members' activities, functions, or operations; fining or censuring 
members; suspending or barring a person from being associated with a 
member; or any other appropriate sanction.\235\
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    \234\ See BOX Exchange Rule 12000 Series.
    \235\ Id.
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    BOX Exchange's disciplinary and oversight functions will be 
administered in accordance with Rule 12000 Series, which governs 
disciplinary actions. BOX Exchange regulatory staff will, among other 
things, investigate potential securities laws violations and initiate 
charges pursuant to BOX Exchange rules.\236\
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    \236\ See BOX Exchange Rule 12000 Series. As noted above, BOX 
Exchange has entered into a RSA with FINRA under which FINRA will 
perform certain regulatory functions on behalf of BOX Exchange. 
FINRA may perform some or all of the functions specified in the Rule 
12000 Series. See also BOX Exchange Rule 12150 and IM-12150-1. FINRA 
will: Assist BOX Exchange in conducting investigations of potential 
violations of BOX Exchange rules and/or federal securities laws 
related to activity on the Exchange; conduct examinations related to 
BOX Option Participants' conduct on BOX Exchange; assist BOX 
Exchange with disciplinary proceedings pursuant to BOX Exchange 
rules, including issuing charges and conducting hearings; and 
provide dispute resolution services to BOX Option Participants on 
behalf of BOX Exchange, including operation of the BOX Exchange's 
arbitration program. See supra notes 236 to 243 and accompanying 
text.
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    Upon a finding by BOX Exchange's regulatory staff (and approved by 
the CRO) of probable cause of a violation within the disciplinary 
jurisdiction of the Exchange and that further proceedings are 
warranted,\237\ BOX

[[Page 26339]]

Exchange will conduct a hearing on disciplinary matters before a 
professional hearing officer \238\ and two members of the Hearing 
Committee \239\ (the ``Panel'').\240\ The BOX Options Participant (or 
associated person) or the Exchange regulatory staff may petition for 
review of the decision of the Panel by the BOX Exchange Board.\241\ The 
review will be conducted by the BOX Exchange Board or a committee 
thereof composed of at least three Directors of the BOX Exchange Board 
(whose decision must be ratified by a majority of the BOX Exchange 
Board) and such decision will be final.\242\ In addition, the BOX 
Exchange Board on its own motion may order review of a disciplinary 
decision.\243\
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    \237\ See BOX Exchange Rule 12040. If there is probable cause 
for finding a violation, the Exchange regulatory staff will prepare 
a statement of charges including the allegations and specifying the 
provisions of the Act and/or Exchange rules, regulations or policies 
thereunder alleged to have been violated by the BOX Options 
Participant or associated person. The CRO must approve the statement 
of charges.
    \238\ See BOX Exchange Rule IM-12150-1. As noted above, BOX 
Exchange has entered into a RSA with FINRA to provide certain 
regulatory functions, including providing professional hearing 
officers. Under BOX Exchange Rule 12060(a), the professional hearing 
officer is designated as the Chairman of the Panel. Under BOX 
Exchange Rule 12060(e), the Panel Chairman has the sole 
responsibility to determine the time and place of all meetings of 
the Panel, and make all determinations with regard to procedural or 
evidentiary matters, as well as prescribe the time within which all 
documents, exhibits, briefs, stipulations, notices or other written 
materials must be filed where such is not specified in Exchange 
rules.
    \239\ See BOX Exchange Bylaws Section 6.08. The Hearing 
Committee is not a BOX Exchange Board committee but is a separate 
committee of BOX Exchange. Promptly after the annual meeting of the 
BOX Exchange owners, the Chairman of the BOX Exchange Board will 
appoint a Hearing Committee composed of such number of BOX Options 
Participants and individuals who are not BOX Options Participants, 
as determined by the Chairman, none of whom shall be Directors. The 
Hearing Committee or any panel thereof shall include at least one 
officer, director or employee of a BOX Options Participant. The 
Hearing Committee shall have exclusive jurisdiction to conduct 
hearings on disciplinary proceedings brought by the Exchange against 
any BOX Options Participant, or any person employed by or associated 
with any BOX Options Participant for any alleged violation of the 
Act, the rules and regulations thereunder, the BOX Exchange Bylaws 
or the rules, or the interpretations and stated policies of the BOX 
Exchange Board.
    \240\ See BOX Exchange Rule 12060. A Panel may make a 
determination without a hearing and may impose a penalty as to 
violations that the BOX Options Participant or associated person has 
admitted or has failed to answer or that otherwise do not appear to 
be in dispute. See BOX Exchange Rule 12080. A BOX Options 
Participant or associated person alleged to have committed a 
disciplinary violation may submit a written offer of settlement to 
the Panel, or CRO if a Panel is not yet been appointed, which the 
Panel or CRO may accept or reject. If the second offer of settlement 
is rejected (such decision is not subject to review), a hearing will 
proceed in accordance with BOX Exchange Rule 12060. See BOX Exchange 
Rule 12090.
    \241\ See BOX Exchange Rule 12100.
    \242\ See BOX Exchange Rule 12100.
    \243\ Id.
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    Appeals from any termination or suspension with regard to access to 
the Exchange will be instituted under, and governed by, the provisions 
in the Rule 13000 Series of the Exchange Rules. BOX Exchange Rule 
Series 13000 applies to persons economically aggrieved by any of the 
following Exchange actions including, but not limited to: (a) Denial of 
an application to become a BOX Options Participant; (b) prohibiting a 
person from becoming associated with a BOX Options Participant; (c) 
limiting, suspending, or prohibiting a BOX Options Participant's 
activities, functions or operations on BOX Exchange; or (d) limiting or 
denial of access to services provided to a BOX Options Participant 
pursuant to BOX Exchange rules.\244\
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    \244\ See BOX Exchange Rule 13000. As noted above, BOX Exchange 
has entered into a RSA with FINRA under which FINRA will perform 
certain regulatory functions on behalf of BOX Exchange. FINRA may 
perform some or all of the functions specified in the Rule 13000 
Series. See supra note 236. See also BOX Exchange Rule 13060.
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    Any person aggrieved by an action of the Exchange within the scope 
of the 13000 Rule Series may file a written application to be heard 
within thirty days \245\ after such action has been taken.\246\ 
Applications for hearing and review will be referred to the Hearing 
Committee, which will appoint a hearing panel of no less than three 
members of such committee.\247\ The decision of the hearing panel shall 
be made in writing and sent to the parties to the proceedings.\248\ The 
decision of the hearing panel made pursuant to the 13000 Rule Series 
becomes final thirty calendar days after issuance unless the applicant, 
the Chief Executive Officer of BOX Exchange or his designee, or the BOX 
Exchange Board on its own motion, petitions for review of the 
decision.\249\ The BOX Exchange Board, or a committee of the BOX 
Exchange Board, will have sole discretion to grant or deny either 
request.\250\ The review shall be conducted by the BOX Exchange Board 
or a committee of the BOX Exchange board composed of at least three 
directors.\251\ The BOX Exchange Board or its designated committee may 
affirm, reverse or modify in whole or in part, the decision of the 
hearing panel.\252\
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    \245\ An applicant may file for an extension of time as allowed 
by the Chairman of the Hearing Committee within thirty days of the 
Exchange action. An application for an extension will be ruled upon 
by the Chairman of the Hearing Committee, and his ruling will be 
given in writing. Rulings on applications for extensions of time are 
not subject to appeal. See BOX Exchange Rule 13000.
    \246\ The application must include: (1) The action for which 
review is sought; (2) the specific reasons for the applicant's 
exception to such action; (3) the relief sought; and (4) whether the 
applicant intends to submit any documents, statements, arguments or 
other material in support of the application, with a description of 
any such materials. See BOX Exchange Rule 13010.
    \247\ See BOX Exchange Rule 13020.
    \248\ See BOX Exchange Rule 13030.
    \249\ See BOX Exchange Rule 13040(a).
    \250\ Id.
    \251\ See BOX Exchange Rule 13040(b).
    \252\ The decision of the BOX Exchange Board or its designated 
committee shall be in writing, shall be sent to the parties to the 
proceeding, and shall be final. See BOX Exchange Rule 13040(c).
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    The Commission finds that BOX Exchange's proposed disciplinary and 
oversight rules and structure, as well as its proposed process for 
persons economically aggrieved by certain BOX Exchange actions, are 
consistent with the requirements of Sections 6(b)(6) and 6(b)(7) of the 
Act \253\ in that they provide fair procedures for the disciplining of 
members and persons associated with members. The Commission further 
finds that the proposed BOX Exchange rules are designed to provide the 
Exchange with the ability to comply, and with the authority to 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 BOX Exchange.\254\
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    \253\ 15 U.S.C. 78f(b)(6) and (b)(7), respectively.
    \254\ See Section 6(b)(1) of the Act, 15 U.S.C. 78f(b)(1).
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5. Listing Requirements
    BOX Exchange does not intend to offer original listings. Instead, 
BOX Exchange will list and trade only equity and index options that are 
listed on other national securities exchanges and cleared by the 
Options Clearing Corporation.\255\ The Commission finds that BOX 
Exchange's proposed initial and continued listing rules are consistent 
with the Act, including Section 6(b)(5), in that they are designed to 
protect investors and the public interest and to promote just and 
equitable principles of trade. The Commission notes that, before 
beginning operation, BOX Exchange will need to become a participant in 
the Plan for the Purpose of Developing and Implementing Procedures 
Designed to Facilitate the Listing and Trading of Standardized Options 
Submitted Pursuant to Section 11A(a)(3)(B) of the Act (``OLPP''). In 
addition, before beginning operation, BOX Exchange will need to become 
a participant in the Options Clearing Corporation.
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    \255\ BOX Exchange's listing rules for the underlying securities 
and indices of the options to be traded are substantially similar to 
the rules of another exchange. See BOX Exchange Rule 5020 and ISE 
Rule 502.

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[[Page 26340]]

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

    BOX Exchange proposes to incorporate by reference certain FINRA 
rules.\256\ Thus, for certain BOX Exchange rules, BOX Options 
Participants will comply with a BOX Exchange rule by complying with the 
referenced FINRA rule.
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    \256\ Specifically, BOX Exchange proposes to incorporate by 
reference the following FINRA rules: Series 12000 (Code of 
Arbitration for Customer Disputes) and 13000 (Code of Arbitration 
Procedure for Industry Disputes), referenced in Exchange Rule 14000.
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    In connection with the proposal to incorporate the FINRA rules by 
reference, BOX Exchange requested, pursuant to Rule 240.0-12 under the 
Act,\257\ an exemption under Section 36 of the Act from the rule filing 
requirements of Section 19(b) of the Act for changes to the BOX 
Exchange rules that are effected solely by virtue of a change to a 
cross-referenced FINRA rule.\258\ BOX Exchange proposes to incorporate 
by reference categories of rules, rather than individual rules within a 
category, that are not trading rules. BOX Exchange agrees to provide 
written notice to BOX Options Participants whenever FINRA proposes a 
change to a cross-referenced rule \259\ and whenever any such proposed 
changes are approved by the Commission or otherwise become 
effective.\260\
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    \257\ 17 CFR 240.0-12.
    \258\ See letter from Lisa J. Fall, President, BOX Exchange, to 
Elizabeth M. Murphy, Secretary, Commission, dated March 30, 2012 
(``Section 19(b) Exemption Request'').
    \259\ See id.
    \260\ BOX Exchange will provide such notice through a posting on 
the same Web site location where BOX Exchange posts its own rule 
filings pursuant to Rule 19b-4 under the Act, within the required 
time frame. The Web site posting will include a link to the location 
on the FINRA Web site where FINRA's proposed rule change is posted. 
See id.
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    Using the authority under Section 36 of the Act, the Commission 
previously exempted certain SROs from the requirement to file proposed 
rule changes under Section 19(b) of the Act.\261\ Each exempt SRO 
agreed to be governed by the incorporated rules, as amended from time 
to time, but is not required to file a separate proposed rule change 
with the Commission each time the SRO whose rules are incorporated by 
reference seeks to modify such rules. In addition, each exempt SRO 
incorporated by reference only regulatory rules, for example, margin, 
suitability, and arbitration rules, and not trading rules, and 
incorporated by reference whole categories of rules. Each exempt SRO 
had reasonable procedures in place to provide written notice to its 
members each time a change is proposed to the incorporated rules of 
another SRO in order to provide such members with notice of a proposed 
rule change that affects the members' interests, so that the members 
will have an opportunity to comment.
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    \261\ See e.g., DirectEdge Exchanges Order and BATS Order, supra 
note 21, C2 Order, supra note 29, Nasdaq Order, supra note 34 and 
NOM Approval Order, supra note 122.
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    The Commission is granting BOX Exchange's request for 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 BOX Exchange 
proposes to incorporate by reference. The exemption is conditioned upon 
BOX Exchange providing written notice to BOX Options Participants 
whenever FINRA proposes to change an incorporated by reference rule. 
The Commission believes that the exemption is appropriate in the public 
interest and consistent, with the protection of investors because it 
will promote more efficient use of Commission and SROs resources by 
avoiding duplicative rule filings based on simultaneous changes to 
identical rule text sought by more than one SRO.

IV. Conclusion

    It is ordered that the application of BOX Exchange for registration 
as a national securities exchange be, and it hereby is, granted.
    It is furthered ordered that operation of BOX Exchange is 
conditioned on the satisfaction of the requirements below:
    A. Participation in National Market System Plans Relating to 
Options Trading. BOX Exchange must join: (1) The Plan for the Reporting 
of Consolidated Options Last Sale Reports and Quotation Information 
(Options Price Reporting Authority); (2) the OLPP; (3) the Linkage 
Plan; and (4) the Plan of the Options Regulatory Surveillance 
Authority.
    B. Participation in Multiparty Rule 17d-2 Plans. BOX Exchange must 
become a party to the multiparty Rule 17d-2 agreements concerning 
options sales practice regulation and market surveillance.
    C. Participation in the Options Clearing Corporation. BOX Exchange 
must become an Options Clearing Corporation participant exchange.
    D. Participation in the Intermarket Surveillance Group. BOX 
Exchange must join the Intermarket Surveillance Group.
    E. Effective Regulation. BOX Exchange must have, and represent in a 
letter to the staff in the Commission's Office of Compliance 
Inspections and Examinations that it has, adequate procedures and 
programs in place to effectively regulate the BOX options trading 
facility.
    F. Trade Processing and Exchange Systems. BOX Exchange must have, 
and represent in a letter to the staff in the Commission's Division of 
Trading and Markets that it has, adequate procedures and programs in 
place, as detailed in Commission Automation Policy Review guidelines, 
to effectively process trades and maintain the confidentiality, 
integrity, and availability of BOX Exchange's systems.\262\
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    \262\ On November 16, 1989, the Commission published its first 
Automation Review Policy (``ARP I''), in which the Commission 
created a voluntary framework for SROs to establish comprehensive 
planning and assessment programs to determine systems capacity and 
vulnerability. On May 9, 1991, the Commission published its second 
Automation Review Policy (``ARP II'') to clarify the types of review 
and reports expected from SROs. See Securities Exchange Act Release 
Nos. 27445 (November 16, 1989), 54 FR 48703 (November 24, 1989) and 
29185 (May 9, 1991), 56 FR 22490 (May 15, 1991).
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    It is further ordered, pursuant to Section 36 of the Act,\263\ that 
BOX Exchange shall be exempted from the rule filing requirements of 
Section 19(b) of the Act with respect to the FINRA rules that BOX 
Exchange proposes to incorporate by reference, subject to the 
conditions specified in this Order.
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    \263\ 15 U.S.C. 78mm.

    By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012-10620 Filed 5-2-12; 8:45 am]
BILLING CODE 8011-01-P