Proposed Rule2023-08544
Supplemental Information and Reopening of Comment Period for Amendments Regarding the Definition of “Exchange”
Primary source
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Published
May 5, 2023
Effective
March 18, 2022
Issuing agencies
Securities and Exchange Commission
Abstract
The Securities and Exchange Commission ("Commission") is reopening the comment period for its proposal ("Proposed Rules") to amend the rule under the Securities Exchange Act of 1934 ("Exchange Act") that defines certain terms used in the statutory definition of "exchange." The reopening provides supplemental information and economic analysis regarding trading systems that trade crypto asset securities that would be newly included in the definition of "exchange" under the Proposed Rules. The Commission is requesting further information and public comment on certain aspects of the Proposed Rules as applicable to all securities and the compliance dates and other alternatives for the Proposed Rules. The Proposed Rules were set forth in Release No. 34-94062 ("Proposing Release"), and the related comment period, which was reopened in Release No. 34-94868 on May 9, 2022, ended on June 13, 2022. The reopening of this comment period is intended to allow interested persons further opportunity to analyze and comment on the Proposed Rules in light of the supplemental information provided herein ("Reopening Release").
Full Text
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[Federal Register Volume 88, Number 87 (Friday, May 5, 2023)]
[Proposed Rules]
[Pages 29448-29493]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-08544]
[[Page 29447]]
Vol. 88
Friday,
No. 87
May 5, 2023
Part III
Securities and Exchange Commission
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17 CFR Parts 232, 240, 242, et al.
Supplemental Information and Reopening of Comment Period for Amendments
Regarding the Definition of ``Exchange''; Proposed Rule
Federal Register / Vol. 88 , No. 87 / Friday, May 5, 2023 / Proposed
Rules
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 232, 240, 242, and 249
[Release No. 34-97309; File No. S7-02-22]
RIN 3235-AM45
Supplemental Information and Reopening of Comment Period for
Amendments Regarding the Definition of ``Exchange''
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule; reopening of comment period.
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SUMMARY: The Securities and Exchange Commission (``Commission'') is
reopening the comment period for its proposal (``Proposed Rules'') to
amend the rule under the Securities Exchange Act of 1934 (``Exchange
Act'') that defines certain terms used in the statutory definition of
``exchange.'' The reopening provides supplemental information and
economic analysis regarding trading systems that trade crypto asset
securities that would be newly included in the definition of
``exchange'' under the Proposed Rules. The Commission is requesting
further information and public comment on certain aspects of the
Proposed Rules as applicable to all securities and the compliance dates
and other alternatives for the Proposed Rules. The Proposed Rules were
set forth in Release No. 34-94062 (``Proposing Release''), and the
related comment period, which was reopened in Release No. 34-94868 on
May 9, 2022, ended on June 13, 2022. The reopening of this comment
period is intended to allow interested persons further opportunity to
analyze and comment on the Proposed Rules in light of the supplemental
information provided herein (``Reopening Release'').
DATES: The comment period for the proposed amendments published on
March 18, 2022, at 87 FR 15496, which was initially reopened on May 12,
2022, at 87 FR 29059, is again reopened. Comments should be received on
or before June 13, 2023.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/regulatory-actions/how-to-submit-comments">https://www.sec.gov/regulatory-actions/how-to-submit-comments</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#c2b0b7aea7efa1adafafa7acb6b182b1a7a1eca5adb4"><span class="__cf_email__" data-cfemail="6c1e190009410f0301010902181f2c1f090f420b031a">[email protected]</span></a>. Please include
File Number S7-02-22 on the subject line.
Paper Comments
<bullet> Send paper comments to Secretary, Securities and Exchange
Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number S7-02-22. This file number
should be included on the subject line if email is used. To help the
Commission process and review your comments more efficiently, please
use only one method of submission. The Commission will post all
comments on the Commission's website (<a href="https://www.sec.gov/rules/proposed.shtml">https://www.sec.gov/rules/proposed.shtml</a>). Comments are also available for website viewing and
printing in the Commission's Public Reference Room, 100 F Street NE,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Operating conditions may limit access to the
Commission's Public Reference Room. All comments received will be
posted without change. Persons submitting comments are cautioned that
we do not redact or edit personal identifying information from comment
submissions. You should submit only information that you wish to make
available publicly.
Studies, memoranda, or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any materials will
be made available on the Commission's website. To ensure direct
electronic receipt of such notifications, sign up through the ``Stay
Connected'' option at <a href="http://www.sec.gov">www.sec.gov</a> to receive notifications by email.
FOR FURTHER INFORMATION CONTACT: Tyler Raimo, Assistant Director,
Matthew Cursio, David Garcia, Eugene Hsia, Megan Mitchell, Amir Katz,
Special Counsels, and Joanne Kim, Attorney Advisor, at (202) 551-5500,
Office of Market Supervision, Division of Trading and Markets,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549.
SUPPLEMENTARY INFORMATION:
I. Background
A. Exchange Regulatory Framework
Exchange Act section 3(a)(1) states that the term ``exchange''
means any organization, association, or group of persons, whether
incorporated or unincorporated, which constitutes, maintains, or
provides a market place or facilities for bringing together purchasers
and sellers of securities or for otherwise performing with respect to
securities the functions commonly performed by a stock exchange as that
term is generally understood, and includes the market place and the
market facilities maintained by such exchange.\1\
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\1\ See 15 U.S.C. 78c(a)(1).
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Title 17 section 240.3b-16(a) (``Rule 3b-16(a)'') defines certain
terms in the definition of ``exchange'' under section 3(a)(1) of the
Exchange Act to include any organization, association, or group of
persons that: (1) brings together the orders for securities of multiple
buyers and sellers; and (2) uses established, non-discretionary methods
(whether by providing a trading facility or by setting rules) under
which such orders interact with each other, and the buyers and sellers
entering such orders agree to the terms of a trade.\2\ Title 17 section
240.3b-16(b) (``Rule 3b-16(b)'') explicitly excludes certain systems
from the definition of ``exchange.'' \3\ Title 17 section 240.3b-16
(``Rule 3b-16'') provides a functional test to assess whether a trading
platform meets the definition of exchange and, if so, triggers exchange
registration. Section 5 of the Exchange Act \4\ requires an
organization, association, or group of persons that meets the
definition of ``exchange'' under section 3(a)(1) of the Exchange Act,
unless otherwise exempt, to register with the Commission as a national
securities exchange pursuant to section 6 of the Exchange Act.\5\
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\2\ See 17 CFR 240.3b-16(a).
\3\ See Securities Exchange Act Release No. 40760 (Dec. 8,
1998), 63 FR 70844, 70852 (Dec. 22, 1998) (``Regulation ATS Adopting
Release''). Specifically, Rule 3b-16(b) excludes from the definition
of ``exchange'' systems that perform only traditional broker-dealer
activities, including: systems that route orders to a national
securities exchange, a market operated by a national securities
association, or a broker-dealer for execution, or systems that allow
persons to enter orders for execution against the bids and offers of
a single dealer if certain additional conditions are met. 17 CFR
240.3b-16(b).
\4\ 15 U.S.C. 78e. Registered national securities exchanges are
also self-regulatory organizations (``SROs''), and must comply with
regulatory requirements applicable to both national securities
exchanges and SROs.
\5\ 15 U.S.C. 78f.
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Title 17 section 240.3a1-1(a)(2) (``Rule 3a1-1(a)(2)'') exempts
from the Exchange Act section 3(a)(1) definition of ``exchange'' an
organization, association, or group of persons that complies with
Regulation ATS, which requires, among other things, meeting the
definition of an alternative trading system (``ATS'') and registering
as a broker-dealer.\6\ As a result of the exemption, an organization,
association, or group of persons that meets the definition of an
exchange and complies with Regulation ATS is not required by section 5
of the Exchange Act to register
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as a national securities exchange pursuant to section 6 of the Exchange
Act, is not an SRO, and, therefore, is not required to comply with the
regulatory requirements applicable to national securities exchanges and
SROs.\7\
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\6\ ``Regulation ATS'' consists of 17 CFR 242.300 through
242.304 (Rules 300 through 304 under the Exchange Act).
\7\ An ATS that fails to comply with the requirements of
Regulation ATS would no longer qualify for the exemption provided
under Rule 3a1-1(a)(2), and thus, risks operating as an unregistered
exchange in violation of section 5 of the Exchange Act. See
Securities Exchange Act Release No. 83663 (July 18, 2018), 83 FR
38768, 38772 n.36 (Aug. 7, 2018) (``NMS Stock ATS Adopting
Release'').
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B. January 2022 Proposed Amendments to Exchange Act Rule 3b-16
As described more fully in the Proposing Release,\8\ the Commission
proposed to amend Exchange Act Rule 3b-16 to, among other things,
replace ``orders'' with ``trading interest'' and define ``trading
interest''; \9\ remove the term ``multiple'' before ``buyers and
sellers''; \10\ add ``communication protocols'' as an example of an
established, non-discretionary method that an organization,
association, or group of persons can provide to bring together buyers
and sellers of securities; simplify and align the rule text with the
statutory definition of ``exchange'' under section 3(a)(1) of the
Exchange Act; and add an exclusion under Exchange Act Rule 3b-16(b) for
systems that allow an issuer to sell its securities to investors.
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\8\ See Securities Exchange Act Release No. 94062 (Jan. 26,
2022), 87 FR 15496 (Mar. 18, 2022). The Proposed Rules also: (1) re-
proposed amendments to Regulation ATS for ATSs that trade government
securities as defined under section 3(a)(42) of the Exchange Act or
repurchase and reverse repurchase agreements on government
securities (``Government Securities ATSs''); (2) proposed amendments
to Form ATS-N for NMS Stock ATSs and Government Securities ATSs; (3)
proposed amendments to 17 CFR 242.301(b)(5) (``Rule 301(b)(5)'') of
Regulation ATS (``Fair Access Rule'') for ATSs; (4) proposed to
require electronic filing of and to modernize Form ATS and Form ATS-
R; and (5) re-proposed amendments to regulations regarding systems
compliance and integrity to apply to ATSs that meet certain volume
thresholds in U.S. Treasury Securities or in a debt security issued
or guaranteed by a U.S. executive agency, or government-sponsored
enterprise.
\9\ As proposed, ``trading interest'' (defined in proposed Rule
300(q) of Regulation ATS) would include ``orders,'' as the term is
defined under 17 CFR 240.3b-16(c) (``Rule 3b-16(c)''), or any non-
firm indication of a willingness to buy or sell a security that
identifies at least the security and either quantity, direction (buy
or sell), or price. See Proposing Release at 15540.
\10\ The Commission proposed removing the word ``multiple'' from
Exchange Act Rule 3b-16(a)(1) to mitigate confusion as to its
application to non-firm trading interest, including request-for-
quote (``RFQ'') systems, and align the rule more closely with the
statutory definition of ``exchange,'' which does not contain the
word ``multiple'' but includes the plural terms ``purchasers and
sellers.'' See id. at 15506. The Commission also stated in the
Proposing Release that the use of plural terms in ``buyers and
sellers'' in Rule 3b-16(a) and ``purchasers and sellers'' in the
statutory definition of ``exchange'' makes sufficiently clear that
an exchange need only have more than one buyer and more than one
seller participating on the system to meet this prong. See id. at
15506 n.105.
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Specifically, the Commission proposed to amend Exchange Act Rule
3b-16(a) to include within the definition of ``exchange'' an
organization, association, or group of persons that constitutes,
maintains, or provides a market place or facilities for bringing
together buyers and sellers of securities or for otherwise performing
with respect to securities the functions commonly performed by a stock
exchange if it is not subject to an exception under Rule 3b-16(b) and
it: (1) brings together buyers and sellers of securities using trading
interest; and (2) makes available established, non-discretionary
methods (whether by providing a trading facility or communication
protocols, or by setting rules) under which buyers and sellers can
interact and agree to the terms of a trade. For purposes of this
Reopening Release, trading systems that meet the criteria of Exchange
Act Rule 3b-16(a), as proposed to be amended (i.e., offer the use of
non-firm trading interest and provide non-discretionary protocols),\11\
are referred to throughout the release as ``New Rule 3b-16(a)
Systems.'' New Rule 3b-16(a) Systems would be subject to the definition
of ``exchange'' and be required to register as a national securities
exchange or comply with the conditions to an exemption to such
registration, such as Regulation ATS.
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\11\ Such systems were referred to as ``Communication Protocol
Systems'' in the Proposing Release. See id. at 15497 n.5.
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C. Purpose of the Reopening Release
In response to the Proposing Release, the Commission received many
comments.\12\ In particular, the Commission received requests for
information about the application of the Proposed Rules to trading
systems for crypto asset securities \13\ and trading systems that use
distributed ledger or blockchain technology (broadly referred to as
``DLT''),\14\ including systems commenters characterize as
decentralized finance or ``DeFi.'' \15\ Commenters request information
about whether and how such systems can comply with existing federal
securities laws and the Proposed Rules.\16\ Given these comments, the
Commission is issuing this Reopening Release regarding the potential
effects of the proposed amendments to Exchange Act Rule 3b-16 on
trading systems for crypto asset securities and trading systems using
DLT, including systems commenters characterize as various forms of
``DeFi,'' and requesting further information and public comment on
aspects of the Proposed Rules, more generally. This Reopening Release
also supplements the economic analysis in the Proposing Release by
providing additional analysis on the estimated impact of the Proposed
Rules on trading systems for crypto asset securities and those using
DLT, which include various so-called ``DeFi'' trading systems, and
requests further comment.
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\12\ See infra sections II.A and II.B. Comment letters cited in
this Reopening Release are comment letters received in response to
the Proposing Release, which are available at <a href="https://www.sec.gov/comments/s7-02-22/s70222.htm">https://www.sec.gov/comments/s7-02-22/s70222.htm</a>.
\13\ See infra note 26.
\14\ The terms DLT and blockchain, a type of DLT, generally
refer to databases that maintain information across a network of
computers in a decentralized or distributed manner. Blockchain
networks commonly use cryptographic protocols to ensure data
integrity. See, e.g., World Bank Group, ``Distributed Ledger
Technology (DLT) and Blockchain,'' FinTech Note No. 1 (2017),
available at <a href="https://openknowledge.worldbank.org/bitstream/handle/10986/29053/WP-PUBLIC-Distributed-LedgerTechnology-and-Blockchain-Fintech-Notes.pdf?sequence=1&isAllowed=y">https://openknowledge.worldbank.org/bitstream/handle/10986/29053/WP-PUBLIC-Distributed-LedgerTechnology-and-Blockchain-Fintech-Notes.pdf?sequence=1&isAllowed=y</a>.
\15\ Commenters vary in their definitions of ``DeFi,'' or what
makes a product, service, arrangement or activity ``decentralized.''
See generally The Board of the International Organization of
Securities Commissions, IOSCO Decentralized Finance Report (Mar.
2022) (``IOSCO Decentralized Finance Report''), available at <a href="https://www.iosco.org/library/pubdocs/pdf/IOSCOPD699.pdf">https://www.iosco.org/library/pubdocs/pdf/IOSCOPD699.pdf</a>. Trading systems
for crypto assets that are colloquially referred to as
``decentralized'' typically combine more traditional technology
(such as web-based systems that accept and display orders and
servers that store orders) with distributed ledger technology (such
as ``smart contract'' provisioned blockchains--self-executing code
run on distributed ledgers that carry out ``if/then'' type
computations). See id. at 1. See also infra note 44.
\16\ See, e.g., infra notes 25, 58, 80, 82-84, and 86-87.
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II. Exchange Activity Involving Crypto Asset Securities and DLT Under
the Proposed Rules
A. Crypto Asset Securities
Commenters reflecting a broad range of market participants shared
feedback on the application of the Proposed Rules to all securities,
including crypto assets that are securities. Some commenters agree with
the Commission's view \17\ that the Proposed Rules should apply to
trading in any type of security, regardless of the specific technology
used to issue and/or transfer the security.\18\ Several commenters
request
[[Page 29450]]
that the Commission clarify whether the Proposed Rules apply to crypto
asset securities.\19\ Commenters point to the lack of any explicit
references in the Proposing Release to systems that trade crypto asset
securities, including so-called ``DeFi'' trading systems, with some
suggesting that such systems would be outside the scope of the Proposed
Rules.\20\ One commenter states that the Proposed Rules should not
apply to crypto asset securities.\21\ Some commenters state their view
that there is supposed regulatory uncertainty as to which crypto assets
are securities.\22\ Some commenters state that as a result of such
supposed uncertainty, it is unclear whether the Proposed Rules would
apply to so-called ``DeFi'' protocols.\23\ One commenter states that
the Commission should defer action on any rulemaking impacting crypto
assets until, among things, such supposed uncertainty is
eliminated.\24\ Some commenters state that the existing exchange
regulatory framework is incompatible with systems that trade crypto
asset securities using so-called ``DeFi protocols.'' \25\
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\17\ See Proposing Release at 15503.
\18\ See, e.g., Letters from Marcia E. Asquith, Executive Vice
President, Board and External Relations, FINRA, dated Apr. 19, 2022
(``FINRA Letter'') at 4; Stephen W. Hall, Legal Director and
Securities Specialist, and Scott Farnin, Legal Counsel, Better
Markets, Inc., dated Apr. 18, 2022 (``Better Markets Letter'') at 8;
Tyler Gellasch, Executive Director, Healthy Markets Association,
dated June 13, 2022 (``Healthy Markets Letter'') at 6 n.21 (stating
that the Proposed Rules should apply only to crypto assets that meet
the definition of a security under the Exchange Act ``to avoid
unnecessarily creating regulatory inconsistencies and loopholes, and
fulfill its investor protection mandate'').
\19\ See, e.g., Letters from Jai Ramaswamy, Chief Legal Officer
and Miles Jennings, General Counsel, a16zCrypto, A.H. Capital
Management, LLC, dated Apr. 18, 2022 (``a16z Letter'') at 3; Kristin
Smith, Executive Director and Jake Chervinsky, Head of Policy,
Blockchain Association, dated Apr. 18, 2022 (``Blockchain
Association Letter II'') at 7-8; Brett Kitt, Associate Vice
President, Principal Associate General Counsel, Nasdaq, Inc., dated
Apr. 18, 2022 (``Nasdaq Letter'') at 5; Joanna Mallers, Secretary,
FIA Principal Traders Group, dated Apr. 21, 2022 (``FIA PTG
Letter'') at 2; Sheila Warren, Chief Executive Officer, Crypto
Council for Innovation, dated Apr. 18, 2022 (``Crypto Council
Letter'') at 2; Sasha Hodder, Hodder Law Firm, P.A., dated Feb. 25,
2022; Tim Lau, dated Apr. 4, 2022; Zachary Stinson, dated Apr. 18,
2022 (``Stinson Letter''); Karthik Mahalingam, dated Apr. 19, 2022.
\20\ See, e.g., Letters from Michelle Bond, Chief Executive
Officer, Association for Digital Asset Markets, dated Apr. 18, 2022
(``ADAM Letter II'') at 14; Gus Coldebella and Gregory Xethalis,
dated Apr. 18, 2022 (``Coldebella and Xethalis Letter'') at 1-2;
Crypto Council Letter at 3; a16z Letter at 7.
\21\ See ADAM Letter II at 3, 9-12.
\22\ See, e.g., a16z Letter at 3, 15-16 (stating that the
Commission has not made clear which digital assets it believes are
``securities''); Blockchain Association Letter II at 3, 9 (stating
whether and when a given digital asset may qualify as a security
under federal securities laws remains unclear); Letter from LeXpunK,
dated Apr. 18, 2022 (``LeXpunK Letter'') at 2 n.4 (stating that
given the ``lack of clarity with respect to the Commission's
classification of digital assets and transactions involving digital
assets,'' ``there remains a looming uncertainty as to whether the
same would be regarded as securities and securities transactions,
respectively'').
\23\ See, e.g., a16z Letter at 3, 15-16 (stating that given the
uncertainty on which digital assets are ``securities,'' some so-
called ``DeFi systems or protocols'' that do not clearly meet the
definition of ``Communication Protocol Systems'' or facilitate
transactions in digital assets could endeavor to comply with the
Proposed Rules while other ``DeFi systems or protocols'' might not,
which raises the danger of inconsistency and could create unforeseen
consequences in the market for digital assets); Blockchain
Association Letter II at 3, 9 (stating that given the Commission's
``expansive view of what may be deemed a security, there remains a
risk that certain digital assets that users trade through
Decentralized Protocols may (ex post) be deemed by the [Commission]
to be securities''). See also Damien G. Scott, Deputy General
Counsel, CoinList, dated Apr. 18, 2022 (``CoinList Letter'') at 1-2
(explaining that crypto asset industry needs clarity about how the
rules written for traditional paper securities secured and validated
by intermediaries apply in practice to new digital technology).
\24\ See Letter from Jay H. Knight, Chair of the Federal
Regulation of Securities Committee, Federal Regulation of Securities
Committee of the Business Law Section of the American Bar
Association, dated Apr. 18, 2022 (``ABA Letter'') at 5-6 (suggesting
the Commission defer the application of the Proposed Rules to
digital asset intermediaries and their underlying technology pending
completion of coordination among a broad range of government
agencies to develop an appropriate approach to digital assets,
pursuant to the Executive Order on Ensuring the Responsible
Development of Digital Assets).
\25\ See, e.g., a16z Letter at 9 (``But even casting aside the
practical challenges that DeFi protocols would confront in
attempting to follow Regulation ATS, the Commission seems to
overlook the fact that the purposes behind Regulation ATS would not
be served by imposing its requirements on DeFi protocols.''); Letter
from William C. Hughes, Senior Counsel & Director of Global
Regulatory Matters, ConsenSys Software Inc., dated Apr. 14, 2022
(``ConsenSys Letter'') at 8 (``The '34 Act's requirements, tailored
as they are to the centralized nature of exchanges, make no sense
when applied to decentralized blockchain-based systems.''); Letter
from Delphi Digital, dated Apr. 18, 2022 (``Delphi Digital Letter'')
at 6 (stating that ``systems lacking order-book logic, or which are
sufficiently decentralized (i.e., lacking any particular owner/
operator who could rationally be expected to comply with the SEC's
intermediaries-based regulatory regime)'' have been viewed by
participants in the digital asset marketplace as outside the scope
of securities exchange regulation). One commenter cites a paper
stating that ``[s]ome characteristics of DeFi may be incompatible
with the existing regulatory framework, particularly given that the
current framework is designed for a system that has financial
intermediaries at its core.'' See Letter from Jake Chervinsky, Head
of Policy, Blockchain Association and Miller Whitehouse-Levine,
Policy Director, DeFi Education Fund, dated June 13, 2022
(``Blockchain Association/DeFi Education Fund Letter'') at 4 (citing
Org. for Econ. Cooperation and Dev., Why Decentralised Finance
(DeFi) Matters and the Policy Implications (2022) at 12).
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Crypto assets \26\ generally use DLT as a method to record
ownership and transfers.\27\ Further, a crypto asset that is a security
is not a separate type or category of security (e.g., NMS stock,
corporate bond) for purposes of federal securities laws based solely on
the use of DLT. The definition of ``exchange'' under section 3(a)(1) of
the Exchange Act and existing Rule 3b-16 thereunder, and the
requirement that an exchange register with the Commission pursuant to
section 5 of the Exchange Act, apply to all securities, including
crypto assets that are securities, which include investment contracts
or any other type of security.\28\ The Commission understands that
currently certain trading systems for crypto assets, including so-
called ``DeFi'' systems, operate like an exchange as defined under
federal securities laws--that is, they bring together orders of
multiple buyers and sellers using established, non-discretionary
methods (by providing a trading facility, for example) under which such
orders interact and the buyers and sellers entering such orders agree
upon the terms of a trade.\29\ Because it is unlikely that systems
trading a large number of different crypto assets are not trading any
crypto assets that are securities,\30\ these
[[Page 29451]]
systems likely meet the current criteria of Exchange Act Rule 3b-16(a)
and are subject to the exchange regulatory framework.\31\ Indeed, the
President's Executive Order on Ensuring Responsible Development of
Digital Assets acknowledged that ``many activities involving digital
assets are within the scope of existing domestic laws and regulations''
and systems trading such assets ``should, as appropriate, be subject to
and in compliance with regulatory and supervisory standards that govern
traditional market infrastructures and financial firms.'' \32\ The
proposed amendments to Exchange Act Rule 3b-16 do not change any
existing obligation for these systems to register as a national
securities exchange or comply with the conditions to an exemption to
such registration, such as Regulation ATS.\33\
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\26\ For purposes of this Reopening Release, the Commission does
not distinguish between the terms ``digital asset securities'' and
``crypto asset securities.'' The term ``digital asset'' refers to an
asset that is issued and/or transferred using distributed ledger or
blockchain technology, including, but not limited to, so-called
``virtual currencies,'' ``coins,'' and ``tokens.'' See Securities
Exchange Act Release No. 90788 (Dec. 23, 2020), 86 FR 11627, 11627
n.1 (Feb. 26, 2021) (``Commission Statement on Custody of Digital
Asset Securities by Special Purpose Broker-Dealers''). A digital
asset may or may not meet the definition of a ``security'' under the
federal securities laws. See, e.g., Report of Investigation Pursuant
to Section 21(a) of the Securities Exchange Act of 1934: The DAO,
Securities Exchange Act Release No. 81207 (July 25, 2017) (``DAO
21(a) Report''), available at <a href="https://www.sec.gov/litigation/investreport/34-81207.pdf">https://www.sec.gov/litigation/investreport/34-81207.pdf</a>. See also SEC v. W.J. Howey Co., 328 U.S.
293 (1946). To the extent digital assets rely on cryptographic
protocols, these types of assets also are commonly referred to as
``crypto assets.''
\27\ See Investment Advisers Act Release No. 6240 (Feb. 15,
2023), 88 FR 14672, 14676 n.25 and accompanying text (Mar. 9, 2023);
Securities Exchange Act Release No. 96496 (Dec. 14, 2022), 88 FR
5440, 5448 n.94 and accompanying text (Jan. 27, 2023).
\28\ Section 3(a)(1) of the Exchange Act and Rule 3b-16
thereunder do not apply to market places or facilities that do not
trade securities. This would also remain unchanged under Exchange
Act Rule 3b-16, as proposed to be amended.
\29\ In addition to its exchange obligations, depending on the
facts and circumstances, an organization, association, or group of
persons engaging in crypto asset securities business may also have
legal and regulatory obligations under the federal securities laws
for broker-dealer, custodial, clearing, or lending activities, among
others. See U.S. Securities and Exchange Commission v. Beaxy
Digital, Ltd., et al., No. 23-cv-1962 (N.D. Ill. Mar. 29, 2023)
(Docket Entries 1, 4) (final judgment entered on consent enjoining
crypto asset trading platform from operating an unregistered
exchange, broker, and clearing agency).
\30\ See Fin. Stability Oversight Council, Report on Digital
Asset Financial Stability Risks and Regulation 119 (2022) (``FSOC
Report'') at 97, available at <a href="https://home.treasury.gov/system/files/261/FSOC-Digital-Assets-Report-2022.pdf">https://home.treasury.gov/system/files/261/FSOC-Digital-Assets-Report-2022.pdf</a>. Each system should
analyze whether the crypto assets that it offers for trading meet
the definition of a security under the federal securities laws and
prior Commission statements. See supra note 26. The Commission will
continue to evaluate whether currently operating systems are acting
consistent with federal securities laws and the rules thereunder.
\31\ See, e.g., DAO 21(a) Report at 17 (``The Platforms that
traded DAO Tokens appear to have satisfied the criteria of Rule 3b-
16(a) and do not appear to have been excluded from Rule 3b-
16(b).''); In the Matter of Zachary Coburn, Securities Exchange Act
Release No. 84553 (Nov. 8, 2018) (settled cease-and-desist order);
In the Matter of Poloniex, LLC, Securities Exchange Act Release No.
92607 (Aug. 9, 2021) (settled cease-and-desist order).
\32\ See President's Executive Order on Ensuring Responsible
Development of Digital Assets, dated Mar. 9, 2022, available at
<a href="https://www.whitehouse.gov/briefing-room/presidential-actions/2022/03/09/executive-order-on-ensuring-responsible-development-of-digital-assets/">https://www.whitehouse.gov/briefing-room/presidential-actions/2022/03/09/executive-order-on-ensuring-responsible-development-of-digital-assets/</a>.
\33\ 17 CFR 242.300 through 242.304.
---------------------------------------------------------------------------
The Commission preliminarily believes that some amount of crypto
asset securities trade on New Rule 3b-16(a) Systems, and that such
systems may use DLT or be ``DeFi'' trading systems, as described by
some commenters. Depending on facts and circumstances, systems that
offer the use of non-firm trading interest and provide non-
discretionary protocols to bring together buyers and sellers of crypto
assets securities \34\ can perform a market place function like that of
an exchange--that is, they allow participants to discover prices, find
liquidity, locate counterparties, and agree upon terms of a trade for
securities. The exchange regulatory framework would provide market
participants that use New Rule 3b-16(a) Systems for crypto asset
securities with transparency, fair and orderly markets, and investor
protections that apply to today's registered exchanges or ATSs.\35\
These benefits, in turn, promote capital formation, competition, and
market efficiencies.\36\ An organization, association, or group of
persons that constitutes, maintains, or provides a market place or
facilities for bringing together purchasers and sellers of crypto asset
securities or performs with respect to crypto asset securities the
functions commonly performed by a stock exchange as that term is
generally understood under the criteria of Exchange Act Rule 3b-16(a),
as proposed to be amended, would be an exchange under section 3(a)(1)
of the Exchange Act and would be required to register as a national
securities exchange or comply with the conditions of Regulation ATS.
---------------------------------------------------------------------------
\34\ See Proposing Release at 15503.
\35\ See Regulation ATS Adopting Release at 70847.
\36\ See 15 U.S.C. 78c(f).
---------------------------------------------------------------------------
Some commenters question the application of the proposed amendments
to Exchange Act Rule 3b-16 to assets that may not be securities.\37\ In
addition, commenters indicate that many crypto asset trading systems
offer pairs trading,\38\ which typically involves two crypto assets
(which may or may not be securities) that can be exchanged directly for
each other using their relative price (``trading pair'').\39\ Trading
pairs consist of both a base and quote asset; the base asset is the
asset quoted in terms of the value of the other (i.e., quote) asset in
the trading pair.\40\ Today, trading pairs can include a combination of
securities and non-securities and frequently include so-called
stablecoins, bitcoin, or ether as the base asset, quote asset, or
both.\41\ Users entering a trading pair on a system can exchange one
crypto asset for another without exchanging the crypto asset for U.S.
dollars (or other fiat currency) by simultaneously selling one asset
while buying another on the system without exchanging either crypto
asset for U.S. dollars first.
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\37\ See ADAM Letter II at 9 (stating that ``it is premature of
the SEC to include digital assets within the scope of the exchange
regulatory framework until such time as there is a better
understanding regarding the appropriate regulatory approach for such
assets''); LeXpunK Letter at 2 n.4 (stating ``where digital asset
transactions do not involve securities, U.S. securities laws (and
the instant proposed rulemaking) would be inapplicable'' and that
``in light of the lack of clarity with respect to the Commission's
classification of digital assets and transactions involving digital
assets, however, there remains a looming uncertainty as to whether
the same would be regarded as securities and securities
transactions, respectively''); a16z Letter at 15-16 (stating that
the Proposing Release ``does not mention `digital asset securities'
or `investment contracts,' two of the terms the Commission uses to
describe digital assets believed to be securities'' and that the
``omissions will further compound the uncertainty over whether the
Proposal was meant to cover digital assets'').
\38\ See LeXpunK Letter at 4 and 4 n.19; Delphi Digital Letter
at 7 (stating that, in the context of systems that use ``technology
in DeFi,'' automated market makers (``AMMs'') use ``liquidity
pools,'' which ``represents assets in (and a market for) a single
token pair'' that are `` `locked' within smart contracts'').
\39\ See Fan Fang, Carmine Ventre, Michail Basios et al.,
Cryptocurrency Trading: A Comprehensive Survey, 8 Fin. Innovation 13
(2022), available at <a href="https://doi.org/10.1186/s40854-021-00321-6">https://doi.org/10.1186/s40854-021-00321-6</a>
(stating that in general, pairs trading involves two similar assets
with a stable long-run relationship and slightly different spreads,
and if the spread widens, investors short the high-priced crypto
asset and buy the low-priced crypto asset).
\40\ See A Review of Cryptoasset Market Structure and Regulation
in the United States, Feb. 2023, Program on International Financial
Systems, available at <a href="https://www.pifsinternational.org/cryptoasset-market-structure-and-regulation-in-the-u-s/">https://www.pifsinternational.org/cryptoasset-market-structure-and-regulation-in-the-u-s/</a> (``PIFS Crypto
Review'').
\41\ Crypto asset trading pairs offered by trading systems today
also include other combinations (e.g., crypto asset (security or
non-security) for another crypto asset (security or non-security)).
While some of the major crypto asset trading systems available in
the U.S. allow trading in U.S. dollars, others only allow trading
between different crypto assets and not fiat currencies. The main
base asset used on certain of these other systems is Tether (USDT).
See Igor Makarov & Antoinette Schoar, Trading and Arbitrage in
Cryptocurrency Markets, 135 J. Fin. Econ. 293 (2020). See also PIFS
Crypto Review at 10-11 (stating that most global bitcoin trading is
conducted with stablecoins rather than fiat currency).
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Section 3(a)(1) of the Exchange Act and Rule 3b-16 state that an
exchange is any organization, association, or group of persons which
constitutes, maintains, or provides a market place or facilities for
bringing together purchasers and sellers of securities or for otherwise
performing with respect to securities the functions commonly performed
by a stock exchange as that term is generally understood.\42\ An
organization, association, or group of persons that meets the criteria
of existing Exchange Act Rule 3b-16(a), and Rule 3b-16(a), as proposed
to be amended, and makes available for trading a security and a non-
security would meet the definition of ``exchange'' notwithstanding the
fact that the entity traded non-securities. For its securities
activities, the organization, association, or group of person must
register as a national securities exchange or comply with the
conditions of Regulation ATS.\43\ Market places or facilities of, and
the functions performed by, national securities exchanges and ATSs
trade only securities quoted in and paid for in U.S. dollars.
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\42\ See 15 U.S.C. 78c(a)(1).
\43\ Section 5 of the Exchange Act states that ``[i]t shall be
unlawful for any . . . exchange, directly or indirectly, to make use
of the mails or any means or instrumentality of interstate commerce
for the purpose of using any facility of an exchange within or
subject to the jurisdiction of the United States to effect any
transaction in a security, or to report any such transaction, unless
such exchange (1) is registered as national securities exchange
under [section 6 of the Exchange Act], or (2) is exempted from such
registration . . . .'' See 15 U.S.C. 78e.
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The Commission is soliciting additional comment on Rule 3b-16, as
proposed to be amended, and in
[[Page 29452]]
particular responses to the following questions:
1. Should a New Rule 3b-16(a) System that trades crypto asset
securities have the choice of registering as a national securities
exchange or complying with the conditions of Regulation ATS? Why or why
not?
2. Please describe any trading systems that currently offer the use
of non-firm trading interest and provide non-discretionary protocols to
bring together buyers and sellers of crypto asset securities, including
a description of trading interest used, functionalities or protocols,
requirements, limitations, types of market participants that use the
systems, transaction volume, crypto asset securities offered for
trading, and any other services offered by the system. Please provide
any data, literature, or other information that you consider relevant
to the Commission's analysis of New Rule 3b-16(a) Systems for crypto
asset securities, including but not limited to, the types of systems,
the amount of trading volume on such systems, the number of
participants on such systems (as well as the participant types, such as
institutional and retail), and the types of crypto asset securities
they trade.
3. Do organizations, associations, or groups of persons that meet
the criteria of New Rule 3b-16(a) Systems and trade crypto asset
securities quote a security in an asset other than in U.S. dollars,
such as a non-security crypto asset, and provide for the purchase or
sale of that asset on the system or off-system? How do investors and
trading systems use pairs trading involving non-security crypto assets
and crypto asset securities? Are there significant differences between
investors' use of pairs trading on centralized trading systems versus
trading systems that commenters describe as ``DeFi''? Please explain.
For example, approximately how much trading volume for crypto asset
securities is executed using trading pairs on various types of
platforms discussed above? What percentage of trading in crypto asset
securities, in terms of volume executed, is in exchange for U.S.
dollars? Please provide any data, literature, or other information that
you consider relevant to the Commission's analysis.
B. Exchange Activity Using DLT, Including ``DeFi'' Systems
1. Technology Neutral and Functional Test of the ``Exchange''
Definition
The Commission received comments regarding whether the proposed
amendments to Exchange Act Rule 3b-16 were intended to apply to what
commenters characterize as ``DeFi,'' and comments stating that the
Proposed Rules could be interpreted to cover a broad range of
technologies, including technologies used by so-called ``DeFi'' trading
systems.\44\ Some commenters state that so-called ``DeFi'' trading
systems should be excluded from Exchange Act Rule 3b-16(a), as proposed
to be amended.\45\
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\44\ See, e.g., ConsenSys Letter at 8-9 (requesting that any
final rule make clear that ``blockchain-based systems'' would not be
exchanges); a16z Letter at 1, 2, 28 (stating, among other things,
that the Proposed Rules could be interpreted as applying to a broad
array of technologies, including ``DeFi systems and protocols'');
Crypto Council Letter at 2, 4 (stating, in part, that the Proposed
Rules could apply to the ``crypto and decentralized finance
markets''); LeXpunK Letter at 3 (stating, in part, its belief that
many ``DeFi protocols and applications'' would meet the definition
of a ``communication protocol system'' under the Proposed Rules);
Global Digital Asset & Cryptocurrency Association, dated Apr. 18,
2022 (``GDCA Letter II'') at 11 (questioning whether ``decentralized
exchanges'' would fall under the definition of ``exchange''); Letter
from Miller Whitehouse-Levine, Policy Director, DeFi Education Fund,
dated Apr. 18, 2022 (``DeFi Education Fund Letter'') at 3, 15
(stating, in part, that, without clarification, the Proposed Rules
could be interpreted to regulate certain ``DeFi protocols''); Letter
from Dante Disparte, Chief Strategy Officer and Head of Global
Policy, Circle internet Financial, LLC, dated Apr. 18, 2022
(``Circle Letter'') at 3; Letter from Michelle Bond, Chief Executive
Officer, Association for Digital Asset Markets, dated Feb. 2, 2022
(``ADAM Letter I'') at 1-2 (stating that the Proposed Rules could
expand Commission authority over ``spot digital asset markets and
peer-to-peer decentralized networks'' in ways not discussed in the
Proposing Release); Letter from Kimberly Unger, The Security Traders
Association of New York, dated Feb. 3, 2022 (``STANY Letter'') at 2;
Letter from Andrew Vollmer, Mercatus Center at George Mason
University, dated Mar. 11, 2022 (``Vollmer Letter'') at 2. Two
commenters also state their belief that there is a lack of clarity
as to the application of the Proposed Rules to ``decentralized
finance'' or ``DeFi protocols'' that raises administrative due
process concerns for industry participants. See ConsenSys Letter at
18; DeFi Education Fund Letter at 19. The foregoing commenters
describe systems that use DLT with varying definitions and
terminology (some of which the commenters do not define). As
discussed above, there is no generally agreed upon definition of
``DeFi'' or decentralization. See IOSCO Decentralized Finance Report
at 1, 9. Nonetheless, as discussed below, the Proposed Rules, like
the existing exchange framework, regulate exchange activity, and not
the technology underlying such activity.
\45\ See, e.g., a16z Letter at 3 (stating that ``DeFi protocols
eliminate the need for a central operator that could implement
regulatory requirements applicable to traditional securities
exchanges or broker-dealers'' and therefore the Commission should
``clarify that the [p]roposal does not apply to DeFi systems by
explicitly excluding them''); LeXpunK Letter at 2 (stating that the
Proposed Rules would improperly expand the Commission's authority to
regulate ``technologists with neither the resources nor the
reasonable expectation of being so regulated, who `make available'
peer-to-peer `communication protocols' used in DeFi''); ConsenSys
Letter at 8-12 (stating its belief that the term ``communication
protocols'' does not cover ``blockchain-based systems''); Delphi
Digital Letter at 6 (stating that, unless ``decentralized-in-
actuality software systems--including `automatic market-making'
smart contract systems'' are carved out of the term ``communication
protocols,'' the Proposed Rules would impose ``impossible compliance
obligations on persons who may merely write open-source
`communications protocol' code or publish information about the
contents of communications systems which they do not control'');
Blockchain Association Letter II at 3 (stating that application of
the Proposed Rules to ``decentralized exchange protocols through
which digital assets may be traded, [and] operate[d] autonomously
and automatically through smart contracts and the participation of
their users'' would exceed the Commission's statutory authority
under the Exchange Act); Letter from Spence Purnell, Director of
Technology Policy, Reason Foundation, dated Feb. 23, 2022 at 2
(stating that the Proposed Rules should not apply to ``technologies
such as decentralized finance and smart-contracts'' because they
were not explicitly considered in the Proposing Release); Letter
from Bryant Eisenbach, dated Feb. 2, 2022 (``Eisenbach Letter'').
See also Letter from Rep. Patrick McHenry, Ranking Member, and Rep.
Bill Huizenga, Ranking Member Subcommittee on Investor Protection,
Entrepreneurship and Capital Markets, House Committee on Financial
Services, dated Apr. 18, 2022 (``McHenry/Huizenga Letter'')
(expressing concern that the Proposed Rules ``can be interpreted to
expand the SEC's jurisdiction beyond its existing statutory
authority to regulate market participants in the digital asset
ecosystem, including in decentralized finance'').
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When adopting Exchange Act Rule 3b-16, the Commission stated that
the exchange framework is based on the functions performed by a trading
system, not on its use of technology.\46\ Notwithstanding how an entity
may characterize itself or the technology it uses, a functional
approach (taking into account the relevant facts and circumstances)
will be applied when assessing whether the activities of a trading
system meet the definition of an exchange. These principles continue to
apply today under existing Rule 3b-16 and would equally apply under
Rule 3b-16, as proposed to be amended.\47\ Accordingly, an
organization, association, or group of persons that uses any form or
forms of technology (e.g., DLT, including technologies used by so-
called ``DeFi'' trading systems, computers, networks, the internet,
cloud, telephones, algorithms, a
[[Page 29453]]
physical trading floor) that constitutes, maintains, or provides a
market place for bringing together purchasers and sellers of
securities, including crypto asset securities, or for otherwise
performing with respect to securities the functions commonly performed
by a stock exchange under the current criteria of Exchange Act Rule 3b-
16(a), or Exchange Act Rule 3b-16(a), as proposed to be amended, would
be an exchange and would be required to register as a national
securities exchange or comply with the conditions of Regulation ATS.
---------------------------------------------------------------------------
\46\ See Regulation ATS Adopting Release at 70902.
\47\ See, e.g., DAO 21(a) Report (stating that ``any entity or
person engaging in the activities of an exchange, such as bringing
together the orders for securities of multiple buyers and sellers
using established non-discretionary methods under which such orders
interact with each other and buyers and sellers entering such orders
agree upon the terms of the trade, must register as a national
securities exchange or operate pursuant to an exemption from such
registration,'' ``the automation of certain functions through this
technology, `smart contracts,' or computer code, does not remove
conduct from the purview of the U.S. federal securities laws,'' and
that the requirements of the U.S. federal securities laws ``apply to
those who offer and sell securities in the United States, regardless
whether the issuing entity is a traditional company or a
decentralized autonomous organization, regardless whether those
securities are purchased using U.S. dollars or virtual currencies,
and regardless whether they are distributed in certificated form or
through distributed ledger technology'').
---------------------------------------------------------------------------
2. So-Called ``DeFi'' Systems and Exchange Act Rule 3b-16
Several commenters state their belief that the Proposed Rules could
cause what they describe as ``DeFi'' trading systems to meet the
criteria of Exchange Act Rule 3b-16(a), as proposed to be amended.\48\
So-called ``DeFi'' trading systems can be used to allow investors to
discover prices, find liquidity, locate counterparties, and agree upon
terms of a trade for securities, including crypto asset securities,
thereby performing market place activities or functions commonly
performed by a stock exchange. Today, many systems, some of which are
described as ``DeFi'' by commenters, bring together buyers and sellers
of securities, including crypto asset securities, and could meet the
existing criteria of Exchange Act Rule 3b-16(a). The Commission
understands that so-called ``DeFi'' trading systems often rely on
electronic messages that are exchanged between buyers and sellers so
that they can agree upon the terms of a trade without negotiations.\49\
If these electronic messages constitute a firm willingness to buy or
sell a security, including a crypto asset security, the messages would
meet the definition of orders under existing Rule 3b-16(c).\50\ And if
established, non-discretionary method(s) under which orders of multiple
buyers and sellers interact with each other are provided, such as
through the provision of certain smart contract functionality, the
activities would be covered under existing Rule 3b-16(a). Accordingly,
depending on the facts and circumstances, activities performed today
using so-called ``DeFi'' trading systems could meet the criteria of
existing Rule 3b-16 and thus constitute exchange activity. The proposed
amendments to Rule 3b-16(a) would not, in any way, change whether such
activities constitute exchange activity under section 3(a)(1) and Rule
3b-16(a).
---------------------------------------------------------------------------
\48\ See DeFi Education Fund Letter at 15; Circle Letter at 3;
ADAM Letter I at 1-2; STANY Letter at 2; Vollmer Letter at 2; Crypto
Council Letter at 2; LeXpunK Letter at 7-8.
\49\ For example, AMM is a mechanism designed to create
liquidity for others seeking to effectuate trades. See President's
Working Group on Financial Markets, Federal Deposit Insurance
Corporation, and Office of the Comptroller of the Currency, Report
on Stablecoins (Nov. 2021), available at <a href="https://home.treasury.gov/system/files/136/StableCoinReport_Nov1_508.pdf">https://home.treasury.gov/system/files/136/StableCoinReport_Nov1_508.pdf</a>. Liquidity pools of
so-called ``DeFi'' trading systems rely on AMM protocols which
typically use preset mathematical equations (e.g., x*y=k, where x
and y represent the values of tokens in a liquidity pair and k is a
constant) to ensure the ratio of assets in the liquidity pools
remains balanced and determine prices based on trading volumes. See
U.S. Department of the Treasury, Crypto-Assets: Implications for
Consumers, Investors, and Businesses (Sept. 2022) (``Crypto-Assets
Treasury Report''), available at <a href="https://home.treasury.gov/system/files/136/CryptoAsset_EO5.pdf">https://home.treasury.gov/system/files/136/CryptoAsset_EO5.pdf</a>. Some commenters argue that systems
that use AMMs do not use trading interest as described in the
Proposed Rules. See LeXpunK Letter at 12-13; Delphi Digital Letter
at 9-10. One commenter states that AMM users do not interact with
each other but with a pool of liquidity resting in a smart contract.
See LeXpunK Letter at 12-13. This commenter states that forms of
non-firm trading interest--conditional orders and indications of
interest--discussed in the Proposing Release, ``do not align with
AMMs provision of automated liquidity through the smart contract-
based deterministic mechanisms,'' where no party imposes such
conditions or communicates such interest. See id. One commenter
states that there are no ``orders'' on an AMM because, in contrast
to a ``centralized'' platform which permits makers and takers to
agree upon a price, an AMM sets the price. See Delphi Digital Letter
at 9-10.
\50\ See 17 CFR 240.3b-16(c).
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As discussed above, the Commission preliminarily believes that New
Rule 3b-16(a) Systems, including some so-called ``DeFi'' systems, trade
some amount of crypto asset securities, and would, under the proposed
amendments to Exchange Act Rule 3b-16(a), be required to register as a
national securities exchange or comply with the conditions of
Regulation ATS.
3. Custodial Services Is Generally Not Relevant to Exchange Analysis
Some commenters state that because so-called ``DeFi'' trading
systems do not custody assets, they should not be subject to exchange
regulation.\51\ One commenter states that trading conducted using
``DeFi'' trading systems does not involve users depositing assets with
a central authority.\52\ Another commenter states that ``custody'' with
reference to ``DeFi'' means self-custody, which the commenter states
does not fit ``the Commission's model, under which all exchanges are
centralized.'' \53\ Neither existing Exchange Act Rule 3b-16 nor Rule
3b-16, as proposed to be amended, requires an organization,
association, or group of persons to provide custodial services to be
considered an exchange under section 3(a)(1) of the Exchange Act and
Rule 3b-16 thereunder.\54\ Thus, custodial services generally is not a
relevant factor to the exchange analysis.
---------------------------------------------------------------------------
\51\ See a16z Letter at 8-9; GDCA Letter II at 11; DeFi
Education Fund Letter at 6. See also LeXpunK Letter at 4 n.18
(stating that no `` `custody' or `transfer' actually occurs'' in the
context of a ``smart contract-based platform'').
\52\ See a16z Letter at 8-9. The commenter cites a paper stating
``one of the main advantages of decentralized exchanges over
centralized exchanges is the ability for users to keep control of
their private keys.'' See id. at 8 n.41 (citing Igor Makarov &
Antoinette Schoar, Cryptocurrencies and Decentralized Finance (DeFi)
23 (Brookings Paper on Econ. Activity, Conference Draft, 2022)).
\53\ See GDCA Letter II at 11. See also DeFi Education Fund
Letter at 6 (stating ``DeFi protocols'' present ``no financial risk
for users from broker activity or custody''). One commenter also
states that the Commission has provided no public guidance regarding
how a digital asset communication protocol system could arrange for
custody and settlement to the Commission's satisfaction, in order to
operate as an exchange. See GDCA Letter II at 10. Further, some
commenters question how exchange regulation will apply to trading
activities that use ``DeFi'' and do not involve an intermediary for
trading or to custody securities. See supra note 52 and infra note
56.
\54\ The Customer Protection Rule requires a broker-dealer to
promptly obtain and thereafter maintain physical possession or
control of all fully-paid and excess margin securities it carries
for the account of customers. See 17 CFR 240.15c3-3(b). In 2020, the
Commission issued a statement describing its position that, for a
period of five years, special purpose broker-dealers operating under
the circumstances set forth in the statement will not be subject to
a Commission enforcement action on the basis that the broker-dealer
deems itself to have obtained and maintained physical possession or
control of customer fully-paid and excess margin crypto asset
securities for purposes of 17 CFR 240.15c3-3(b)(1) (``Rule 15c3-
3(b)(1)'') under the Exchange Act. See Commission Statement on
Custody of Digital Asset Securities by Special Purpose Broker-
Dealers. To date, no person has been approved to act as a special
purpose broker-dealer custodying crypto asset securities.
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4. Group of Persons as the Exchange
Some commenters ask that the Commission explain which actor or
group of actors would be responsible for compliance and how so-called
``DeFi'' trading systems should comply with exchange regulatory
requirements.\55\ Some commenters express concerns that the proposed
amendments to Exchange Act Rule 3b-16(a) would inappropriately apply to
systems that purport not to involve intermediaries.\56\ One commenter
states that providers of rule sets on how messages should be formed,
stored, and relayed on a network are not like ``intermediaries of the
traditional financial system'' because ``all they are doing is
[[Page 29454]]
publishing particular arrangements of 0s and 1s.'' \57\ In addition,
some commenters state that ``DeFi'' trading systems may be unable to
comply with exchange regulatory requirements because they lack a
central operator.\58\ Some commenters interpret Exchange Act Rule 3b-
16(a), as proposed to be amended, to mean that each entity that
performs any exchange function would need to register as a national
securities exchange or comply with the conditions of Regulation
ATS.\59\ For example, some commenters state that, under the proposed
amendments to Exchange Act Rule 3b-16(a), exchange regulation could
extend to persons including open source developers who contribute code
to the software repositories where software for so-called ``DeFi''
trading systems is first published, persons who republish and share
this information, and persons who connect to the peer-to-peer networks
on which ``DeFi'' activities takes place.\60\ One commenter states that
the group of persons involved in a ``DeFi'' trading system--including
developers, AMMs, and miners--could all comprise essential components
of the market infrastructure.\61\ This commenter further states that
the fact that these roles might be ``decentralized'' does not change
that they would be considered a group of persons who constitutes,
maintains, or provides facilities for bringing together purchasers and
sellers of securities.\62\
---------------------------------------------------------------------------
\55\ See Letter from Paul Grewal, Chief Legal Officer, Coinbase
Global, Inc., dated Apr. 18, 2022 (``Coinbase Letter'') at 7; a16z
Letter at 3; Blockchain Association Letter II at 8.
\56\ See a16z Letter at 10; ConsenSys Letter at 8; DeFi
Education Fund Letter at 3, 11; Blockchain Association Letter II at
3, 5; CoinList Letter at 2; Eisenbach Letter at 2. For example, one
commenter states that what it calls ``decentralized'' systems allow
anyone to participate rather than rely on gatekeepers. See ConsenSys
Letter at 8.
\57\ See Letter from Coin Center, dated Apr. 14, 2022 (``Coin
Center Letter'') at 13. Another commenter states that developers of
``DeFi protocols'' would not qualify as a ``group of persons''
because they ``merely make tools available for parties to
communicate.'' See DeFi Education Fund Letter at 15.
\58\ See, e.g., a16z Letter at 3; Coin Center Letter at 12;
CoinList Letter at 2; GDCA Letter II at 11; Blockchain Association/
DeFi Education Fund Letter at 5.
\59\ See, e.g., Letter from Robert Toomey, Managing Director and
Associate General Counsel, Securities Industry and Financial Markets
Association, dated June 13, 2022 (``SIFMA Letter II'') at 8.
\60\ See Coin Center Letter at 25. See also Delphi Digital
Letter at 9 (stating that participants could ``number in the
hundreds or thousands and be distributed all over the world'').
\61\ See Letter from James F. Tierney, Assistant Professor of
Law, University of Nebraska College of Law, dated June 13, 2022
(``Tierney Letter'') at 2 (stating that these participants in
``blockchain and other DeFi applications'' all ``might play
analogous roles to in-house counsel, market makers, and back-office
clearance roles in a traditional exchange setup'').
\62\ See id.
---------------------------------------------------------------------------
The existence of smart contracts on a blockchain does not
materialize in the absence of human activity or a machine (or code)
controlled or deployed by humans. The Commission understands that,
typically, including for so-called ``DeFi'' trading systems, a single
organization constitutes, maintains, or provides the market place or
facilities for bringing together buyers and sellers of securities or
otherwise performs with respect to securities the functions commonly
performed by a stock exchange under section 3(a)(1) and Exchange Act
Rule 3b-16 thereunder.\63\
---------------------------------------------------------------------------
\63\ See IOSCO Decentralization Finance Report at 8 n.13
(stating that ``claims about decentralization for many projects may
not hold up to scrutiny of the technical reality of what can be
changed in the system, who can be involved in the decisions, and who
actually is involved'').
---------------------------------------------------------------------------
While it is common today for a single organization to provide a
market place or facilities to bring together buyers and sellers of
securities and meet the definition of an exchange, an exchange can also
exist where a market place or facilities are provided by a group of
persons, rather than a single organization.\64\ Under section 3(a)(1),
and Exchange Act Rule 3b-16(a), the term exchange ``means any
organization, association, or group of persons, whether incorporated or
unincorporated, which constitutes, maintains, or provides a market
place or facilities for bringing together buyers and sellers of
securities or perform with respect to securities the functions commonly
performed by a stock exchange.'' \65\ Thus, a group of persons, whether
incorporated or unincorporated, can together constitute, maintain, or
provide a market place or facilities or perform with respect to
securities the functions commonly performed by a stock exchange. In
determining which persons would be included in the group of persons
that constitutes, maintains, or provides an exchange or performs with
respect to securities the functions commonly performed by a stock
exchange, important factors would generally include whether the persons
act in concert in establishing, maintaining, or providing a market
place or facilities for bringing together buyers and sellers of
securities or in performing with respect to securities the functions
commonly performed by a stock exchange, or exercise control, or share
control, over aspects of such market place or facilities or the
performance of functions commonly performed by a stock exchange. In
particular, when a group of persons exercises control, or shares
control, over the organizational, financial, or operational aspects of
a market place or facilities for bringing together buyers and sellers
of securities, they are a group of persons that can be deemed to
constitute, maintain, or provide the market place or facilities.\66\
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\64\ The term ``person'' means a natural person, company,
government, or political subdivision, agency, or instrumentality of
a government. 15 U.S.C. 78c(a)(9).
\65\ In a recent decision, the United States Court of Appeals
for the District of Columbia Circuit held that the term ``group of
persons'' ``certainly includes closely connected corporate
affiliates'' and noted that ``[w]hether two or more persons are or
may be acting in concert is likely the key consideration'' in
determining whether two or more entities may constitute a ``group of
persons'' for purposes of the statute. Intercontinental Exch., Inc.
v. SEC, 23 F.4th 1013, 1024 (D.C. Cir. 2022). In addition, the court
stated that it was ``not suggest[ing] the term `group of persons' is
synonymous with corporate affiliation'' and that ``one corporation
that is affiliated with but not controlled by another may or may
not, depending upon the circumstances, be considered a `group of
persons' '' for the purposes of section 3(a)(1) of the Exchange Act.
See id.
\66\ In the Proposing Release, the Commission explained that,
depending on the activities of the persons involved with the market
place or facilities, a group of persons, who may each perform a
function of the market place that meets the criteria of Exchange Act
Rule 3b-16, can together provide, constitute, or maintain a market
place or facilities for bringing together buyers and sellers of
securities and together meet the definition of exchange. See
Proposing Release at 15506 n.109. See also Regulation ATS Adopting
Release at 70891 (``. . . any subsidiary or affiliate of a
registered exchange could not integrate, or otherwise link the
alternative trading system with the exchange, including using the
premises or property of such exchange for effecting or reporting a
transaction, without being considered a `facility of the exchange.'
''). In determining whether affiliated persons would be a ``group of
persons'' for the purposes of section 3(a)(1) of the Exchange Act
and Rule 3b-16 thereunder, an important factor is whether the
operations and management of the affiliated persons are separate.
For example, an affiliated entity of an exchange might not be
considered a group of persons with that exchange if there is
independent governance, management, and oversight between affiliated
entities; prevention of strategic coordination or information
sharing between the affiliated entities by way of information
barriers and other procedures; separation of functions relating to
technology, operations and infrastructure, sales and marketing,
branding, and staffing; and avoidance of business links, such as
routing, fees, billing, and membership.
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Whether persons act in concert or exercise control, or share
control, requires an analysis of the activities of each person and the
totality of facts and circumstances. In assessing whether a person
would be acting in concert with a group of persons, one factor to
consider, depending on other facts and circumstances, would be the
extent to which a person acts with an agreement (formal or informal) to
constitute, maintain, or provide a market place or facilities for
bringing together buyers and sellers of securities or to perform with
respect to securities a function commonly performed by a stock
exchange. For example, if one entity agrees with another entity to
combine aspects of each other's market places or facilities (e.g.,
order books, display functionalities, or matching engines) to bring
together buyers and sellers of securities, both entities could be
considered part of the group and thus an exchange.
[[Page 29455]]
Control could occur through several means, including, among other
things, ownership interest, corporate organizational structure and
management, significant financial interest, or the ability to determine
or modify participant access, securities traded, operations or trading
policies, or non-discretionary methods of the market place or
facilities. For example, a person that can determine or modify, either
individually or with others, the entering, storing, matching, or
display of trading interest (e.g., a matching engine, a smart contract)
would be exercising control over the operations of the market place or
facilities. In addition, a person that can determine or modify, or
grant or limit access to, for example, either individually or with
others, the market or other data about the securities and securities
transactions available on the market place or facility, order types,
order interaction procedures (e.g., counterparty selection,
segmentation), the priority or price at which trading interest will
execute, or protocols for negotiation, would have the ability to
determine trading policies or methods and exercise control over the
market place or facilities.
The ability to exercise control over a market place or facilities
is not limited solely to the operational control.\67\ Also, a person
that, for example, either individually or with others, can determine or
modify, with respect to the market place or facilities, the securities
made available for trading or the access requirements and conditions
for participation would be exercising control. In addition, a person
could exercise control by determining who can, and in what amount,
share in profits or revenues derived from the market place or
facilities, or by having the ability to enter into legal or financial
agreements or arrangements on behalf of or in the name of the market
place or facilities. Depending on the facts and circumstances,
significant holders of governance or other tokens, for example, could
also be considered part of the group of persons and thus an exchange if
they can control certain aspects of it.\68\
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\67\ See, e.g., Regulation ATS Adopting Release at 78052
(stating that a system that standardizes the material terms of
instruments traded on the system will be considered to use
established, non-discretionary methods).
\68\ This analysis would depend on facts and circumstances.
Whether a token holder can exercise control over a market place or
facilities and be considered part of a ``group of persons'' would
depend, for example, on the number of total token holders, or, if a
holder's votes are weighted proportionally to the size of their
holdings of tokens, the size of their holdings, as well as what
parameters the governance tokens are set to control (e.g.,
fundamental operational decisions, strategic direction of the
company, budgetary decisions, and ability to change the underlying
code), among other things.
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Generally, an entity that engages a service provider or vendor to
operate a market place or facilities for bringing together buyers and
sellers of securities directs, manages, and oversees the activities of
the service provider or vendor. In this instance, the entity, not the
service provider or vendor, controls the market place or facilities,
and the entity is responsible for compliance with federal securities
laws. In certain circumstances, however, a service provider or vendor
could exercise control, or share control, over aspects of the market
place or facilities along with the entity that procured the service
provider or vendor. In that case, the service provider or vendor would
be considered a person within a group of persons that constitutes,
maintains, or provides the market place or facilities for bringing
together buyers and sellers of securities.\69\
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\69\ See Proposing Release at 15548. This would not encompass
purely administrative items, such as human resources support, or
basic overhead items, such as phone services, electricity, and other
utilities. In the Proposing Release, the Commission recognized that
an ATS may engage an entity other than the broker-dealer operator to
perform an operation or function of the ATS or a subscriber may be
directed to use an entity to access a service of the ATS, such as
order entry, disseminating market data, or display, for example. See
Proposing Release at 15548. In such instances, the ATS must ensure
that the entity performing the ATS function complies with Regulation
ATS with respect to the ATS activities performed. See id.
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The group of persons that constitutes, maintains, or provides a
market place or facilities for bringing together buyers and sellers of
securities or performs with respect to securities the functions
commonly performed by a stock exchange, and is thus an exchange, would
collectively have the responsibility for compliance with federal
securities laws. A group of persons must consider how they will comply
with the Exchange Act registration requirements given their activities,
which can include, but are not limited to, designating a member of the
group,\70\ to register the group or forming an organization to register
as an exchange or, to operate as an ATS, registering as a broker-dealer
and becoming a member of Financial Industry Regulatory Authority
(``FINRA'') to ensure compliance with the requirements of the Exchange
Act, Commission rules, and FINRA rules.\71\
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\70\ The group of persons would be collectively responsible for
ensuring that the designated member of the group fulfills its
regulatory responsibilities.
\71\ An ATS that complies with Regulation ATS and registers as a
broker-dealer would be required to, among other things, comply with
the anti-money laundering and countering the financing of terrorism
(AML/CFT) obligations under the Bank Secrecy Act. 31 CFR 1023.210;
31 CFR 1023.320. The Bank Secrecy Act is codified at 31 U.S.C. 5311-
5314; 5316-5332 and 12 U.S.C. 1829b, 1951-1959. Additionally,
sections 5(a) and 5(c) of the Securities Act of 1933 (``Securities
Act'') generally prohibit any person, including broker-dealers, from
selling a security unless a registration statement is in effect or
has been filed with the Commission as to the offer and sale of such
security. See 15 U.S.C. 77e(a) and (c). A New Rule 3b-16(a) System
that operates as an ATS, which is a registered broker-dealer, could
be subject to liability under section 5 of the Securities Act for
facilitating the sale of a security by its customer on the ATS if
the sale of such security is not registered or an exemption from the
registration provisions does not apply. Section 4(a)(4) of the
Securities Act provides an exemption for ``brokers' transactions,
executed upon customers' orders on any exchange or in the over-the-
counter market but not the solicitation of such orders.'' See 15
U.S.C. 77d(a)(4). To rely on this exemption, a broker-dealer is
required to conduct a ``reasonable inquiry'' into the facts
surrounding a proposed unregistered sale of securities before
selling the securities to form reasonable grounds for believing that
a selling customer's part of the transaction is exempt from section
5 of the Securities Act. The Commission has stated that broker-
dealers ``have a responsibility to be aware of the requirements
necessary to establish an exemption from the registration
requirements of the Securities Act and should be reasonably certain
such an exemption is available.'' In the Matter of World Trade
Financial Corp., Securities Exchange Act Release No. 66114, 13 (Jan.
6, 2012) (quoting Stone Summers & Co., Securities Exchange Act
Release No. 9839, 3 (Nov. 3, 1972)).
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5. Group of Persons and So-Called ``DeFi'' Systems
One commenter states users of what it characterizes as ``DeFi''
protocols should not be considered part of a group of persons as they
act independently of each other.\72\ The commenter states that
developers and users of ``DeFi'' protocols would not qualify as a
``group of persons'' because the developers have no ongoing
relationship with either market participants or other financial
providers and merely make tools available for parties to communicate,
and users are acting independently of each other.\73\ Another commenter
describes that the ``DeFi protocols'' deploying AMM functionality rely
on many distinct groups or participants, which may not be ``affiliated
or extrinsically coordinated'' with one another.\74\
---------------------------------------------------------------------------
\72\ See DeFi Education Fund Letter at 15.
\73\ See id.
\74\ See Delphi Digital Letter at 9 (describing that ``[t]hey do
not co-own assets or operate a single enterprise for profit, do not
know each other's identities, and have diverse (and often competing)
motivations'').
---------------------------------------------------------------------------
Trading on so-called ``DeFi'' systems can involve multiple actors.
These actors can include, for example, the provider(s) of the DeFi
application or user interface, developers of AMMs or other DLT code,
decentralized autonomous organizations (``DAO''),
[[Page 29456]]
validators or miners,\75\ and issuers or holders of governance or other
tokens. Often, a single organization constitutes, maintains, or
provides a DLT-based market place or facilities for bringing together
buyers and sellers of securities or performs with respect to securities
the functions commonly performed by a stock exchange; however, a group
of persons can likewise do so. As indicated above, one possible avenue
for determining which persons comprise a group of persons can include
whether such persons act in concert to establish, provide, or maintain
a market place or facilities for securities or to perform with respect
to securities the functions commonly performed by a stock exchange, or
exercise control, or share control, over aspects of the market place or
facilities or the performance of functions commonly performed by a
stock exchange.\76\ These actors can form a group of persons if they
act in concert to perform, or exercise control or share control over,
different functions of a market place or facilities for bringing
together buyers and sellers of securities that, taken together, satisfy
the elements of existing Exchange Act Rule 3b-16(a) or Rule 3b-16(a),
as proposed to be amended.
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\75\ Validators and miners verify transactions on the underlying
blockchain and the function they perform is not only with respect to
a particular trading system. Validators and miners use a consensus
mechanism (e.g., proof-of-stake or proof-of-work) to verify and add
transactions to a distributed ledger in exchange for crypto assets.
See Crypto-Assets Treasury Report at 11-12.
\76\ See supra note 66.
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As discussed above, in assessing whether a person would be acting
in concert with a group of persons, one factor to consider, depending
on other facts and circumstances, would be the extent to which a person
acts with an agreement (formal or informal) to perform a function of a
market place or facilities for bringing together buyers and sellers of
securities.\77\ A software developer who, acting independently and
separate from an organization, publishes or republishes code without
any agreement (formal or informal) with any person for that code to be
used for a function of a market place or facilities for bringing
together buyers and sellers of securities may be less likely to be
acting in concert to provide a market place or facilities for bringing
together buyers and sellers.\78\ This could be the case even if the
software developer's code is subsequently adopted and implemented into
a market place or facilities for securities by an unrelated person.
Whether the activities of actors amount to a group of persons requires
an analysis of the totality of facts and circumstances and the
activities of each actor. If the activities of any combination of
actors constitute, maintain, or provide, together, a market place or
facilities for bringing together buyers and sellers for securities or
perform with respect to securities a function commonly performed by a
stock exchange, they could today be considered a group of persons and
thus an exchange under section 3(a)(1) of the Exchange Act and Rule 3b-
16 thereunder and therefore be required to register as an exchange
under section 5 of the Exchange Act.\79\
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\77\ See supra section II.B.4.
\78\ See, e.g., LeXpunK Letter at 15 (requesting that the
Commission clarify that persons who ``write and publish smart
contract code as a hobby or business, whether to an open-source
repository otherwise, and may not otherwise be subject to the
jurisdiction of the U.S.'' are not intended to be captured by the
Proposed Rules). If a software developer receives compensation for
publishing, independently from an organization, code for a trading
facility to match orders or a protocol for buyers and sellers to
negotiate a trade, the software developer could be acting in concert
with a group of persons to provide a market place or facilities for
bringing together buyers and sellers.
\79\ See, e.g., Regulation ATS Adopting Release at 70852 (``[I]f
an organization arranges for separate entities to provide different
pieces of a trading system, which together meet the definition
contained in paragraph (a) of Rule 3b-16, the organization
responsible for arranging the collective efforts will be deemed to
have established a trading facility.''). See also Proposing Release
at 15506 (stating the proposed change to use the phrase ``makes
available'' is intended to make clear that, in the event that a
party other than the organization, association, or group of persons
performs a function of the exchange, the function performed by that
party would still be captured for purposes of determining the scope
of the exchange under Exchange Act Rule 3b-16). The Proposing
Release also stated that, ``[d]epending on the activities of the
persons involved with the market place, a group of persons, who may
each perform a part of the 3b-16 system, can together provide,
constitute, or maintain a market place or facilities for bringing
together purchasers and sellers of securities and together meet the
definition of exchange. In such a case, the group of persons would
have the regulatory responsibility for the exchange.'' See id. at
15506 n.109. See also infra notes 101-103 and accompanying text.
---------------------------------------------------------------------------
One commenter states that attributing the function of constituting,
maintaining, or providing an exchange to persons who initially created
or deployed the system's code may not be practicable or advance the
Commission's policy objectives because according to the commenter, the
system, once deployed, typically cannot be significantly altered or
controlled by any such persons.\80\ A smart contract deployed to, and
run on, a blockchain is typically accompanied by other functionality to
bring together buyers and sellers of securities (e.g., a user interface
or website), and these functionalities can be provided and maintained
by more than one party. If, for example, an organization deploys a
smart contract that the organization cannot significantly alter or
control but constitutes a market place for securities under existing
Exchange Act Rule 3b-16 or Rule 3b-16, as proposed to be amended, then
that organization would be an exchange and would be responsible for
compliance with federal securities laws for that market place.\81\
Given that such a market place could be publicly available to bring
together buyers and sellers of securities, requiring the organization
to be responsible in this case would advance the Commission's policy
objectives by ensuring the exchange complies with federal securities
laws and regulations, including, among other things, the oversight,
investor protection, and fair and orderly market principles applicable
to registered exchanges and ATSs.
---------------------------------------------------------------------------
\80\ See Coinbase Letter at 6. Likewise, some commenters state
that software developers cannot modify or control the code they have
developed after it is launched. See Delphi Digital Letter at 8-9;
Blockchain Association/DeFi Education Fund Letter at 5; DeFi
Education Fund Letter at 11; Stinson Letter; Letter from Roman
Scher, dated Apr. 18, 2022.
\81\ See also supra 78 and accompanying text (discussing ``group
of persons'' involving a software developer acting independently and
separate from an organization).
---------------------------------------------------------------------------
6. Feasibility of Compliance With Exchange Regulatory Requirements
Some commenters state that so-called ``DeFi'' trading systems may
have difficulty complying with certain exchange regulatory
requirements.\82\ For example, one commenter states it is unclear that
any party would have the necessary information to comply with
Regulation ATS.\83\ In addition, some commenters question how DeFi
trading systems would comply with broker-dealer requirements.\84\
---------------------------------------------------------------------------
\82\ See, e.g., a16z Letter at 3; CoinList Letter at 2; GDCA
Letter II at 8, 10.
\83\ See a16z Letter at 15 (stating that there is no central
operator of a DeFi exchange that could complete Form ATS or comply
with periodic reporting requirements and that those who make
available AMMs cannot identify, track the orders of, or report to
the Commission information about users).
\84\ See, e.g., GDCA Letter II at 8; Blockchain Association
Letter II at 8; Letter from Lilya Tessler, Founder and Co-Chair,
Digital Asset Regulatory & Legal Alliance, Kristin Boggiano, Founder
and Co-Chair, Digital Asset Regulatory & Legal Alliance, Lee
Schneider, Co-Founder, Global Blockchain Convergence, Cathy Yoon,
Co-Founder, Global Blockchain Convergence, Renata Szkoda,
Chairwoman, Global Digital Asset & Cryptocurrency Association, dated
Apr. 14, 2022 (``DARLA, GBC, and Global DCA Letter'') at 9.
---------------------------------------------------------------------------
The investor protection, fair and orderly markets, transparency,
and oversight benefits of the federal securities laws are just as
relevant to a system that uses DLT and meets the existing criteria of
Exchange Act Rule
[[Page 29457]]
3b-16 and Rule 3b-16, as proposed to be amended, as to any other system
that meets the criteria under the exchange definition. From the
Commission's experience, systems that currently are registered as
national securities exchanges or comply with the conditions of
Regulation ATS differ with respect to structure, participants, and
established, non-discretionary methods and apply many assorted
technologies to bring together buyers and sellers of various types of
securities. The federal securities laws apply equally to systems that
trade securities, use DLT, and meet the criteria of Rule 3b-16 as to
any other exchange. The federal securities laws are flexible and the
use of DLT, or any other technology, does not make compliance
incompatible with the federal securities laws.\85\
---------------------------------------------------------------------------
\85\ See DAO 21(a) Report (stating that ``the automation of
certain functions through [distributed ledger or blockchain]
technology `smart contracts,' or computer code, does not remove
conduct from the purview of the U.S. federal securities laws'' and
that the requirements of the U.S. federal securities laws ``apply to
those who offer and sell securities in the United States, regardless
whether the issuing entity is a traditional company or a
decentralized autonomous organization, regardless whether those
securities are purchased using U.S. dollars or virtual currencies
and regardless whether they are distributed in certificated form or
through distributed ledger technology'').
---------------------------------------------------------------------------
One commenter states that ``many Communication Protocol Systems are
neither `brokers' nor `dealers' as defined by the Exchange Act because
they do not effect securities transactions,'' which the commenter
equates to ``order execution,'' and ``do not engage in the business of
buying and selling securities.'' \86\ The commenter states accordingly
that the option to qualify as an ATS is not available for Communication
Protocol Systems under current law, as only a registered broker-dealer
may qualify as an ATS.\87\
---------------------------------------------------------------------------
\86\ See GDCA Letter II at 11-13.
\87\ See id.
---------------------------------------------------------------------------
Regulation ATS establishes a regulatory framework for ATSs. An ATS
meets the definition of ``exchange'' under existing Exchange Act Rule
3b-16(a) and Exchange Act Rule 3b-16(a), as proposed to be amended, but
is not required to register as a national securities exchange if the
ATS complies with the conditions of Regulation ATS, which include
registering as a broker-dealer. Section 3(a)(4)(A) of the Exchange Act
defines ``broker'' as ``any person engaged in the business of effecting
transactions in securities for the accounts of others.'' \88\ The
question of whether a person is a broker within the meaning of section
3(a)(4) turns on the facts and circumstances of the matter. Under
section 3(a)(4)(A), the terms ``engaged in the business'' and
``effecting transactions'' are not defined by statute; however,
effecting transactions in securities includes more than just executing
trades or forwarding securities orders to a broker-dealer for
execution.\89\ In particular, the Commission stated that effecting
securities transactions can include participating in the transactions
through routing or matching orders, or facilitating the execution of a
securities transaction.\90\ In addition, courts have stated that a
person may be found to be acting as a ``broker'' if the person
participates in securities transactions ``at key points in the chain of
distribution.'' \91\ Accordingly, the Commission believes that a New
Rule 3b-16(a) System that seeks to operate as an ATS could register as
a broker-dealer.
---------------------------------------------------------------------------
\88\ 15 U.S.C. 78c(a)(4)(A). Section 3(a)(5)(A) defines
``dealer'' as any person engaged in the business of buying and
selling securities, with certain exceptions, for such person's own
account through a broker or otherwise. 15 U.S.C. 78c(a)(5)(A).
\89\ See Securities Exchange Act Release No. 44291 (May 11,
2001), 66 FR 27760, 27772-73 (May 18, 2001) (stating that effecting
securities transactions can include participating in the
transactions through (1) identifying potential purchasers of
securities; (2) screening potential participants in a transaction
for creditworthiness; (3) soliciting securities transactions; (4)
routing or matching orders, or facilitating the execution of a
securities transaction; (5) handling customer funds and securities;
and (6) preparing and sending transaction confirmations (other than
on behalf of a broker-dealer that executes the trades). Further, the
Commission stated in the Regulation ATS Adopting Release that a
trading system that falls within the Commission's interpretation of
``exchange'' in Rule 3b-16 will still be considered an ``exchange''
even if it matches two trades and routes them to another system or
exchange for execution and that whether or not the actual execution
of the order takes place on the system is not a determining factor
of whether the system falls under Exchange Act Rule 3b-16. See
Regulation ATS Adopting Release at 70852.
\90\ See Securities Exchange Act Release No. 44291 (May 11,
2001), 66 FR 27760, 27772-73 (May 18, 2001).
\91\ See Mass. Fin. Serv., Inc. v. Sec. Inv. Prot. Corp., 411 F.
Supp. 411, 415 (D. Mass. 1976), aff'd 545 F.2d 754 (1st Cir. 1976).
See also SEC v. Nat'l Exec. Planners, Ltd., 503 F. Supp. 1066, 1073
(M.D.N.C. 1980). Courts have also stated that in determining whether
a person has acted as a broker, several factors are considered,
including ``whether the person: (1) actively solicited investors;
(2) advised investors as to the merits of an investment; (3) acted
with a `certain regularity of participation in securities
transactions;' and (4) received commissions or transaction-based
remuneration.'' See, e.g., SEC v. U.S. Pension Trust Corp., 2010 WL
3894082, *20-21 (S.D. Fla. 2010).
---------------------------------------------------------------------------
Given that the Proposing Release applies to New Rule 3b-16(a)
Systems that use DLT, the Commission seeks responses to the following
questions:
4. Which, if any, activities performed on so-called ``DeFi''
trading systems meet the criteria of Rule 3b-16(a), as proposed to be
amended? For example, does the use of AMMs alone bring together
multiple buyers and sellers of securities through the use of non-firm
trading interest? Please explain. Please identify any relevant data,
literature, or other information that could assist the Commission in
analyzing this issue.
5. Please give examples of New Rule 3b-16(a) Systems for crypto
asset securities that use DLT or are so-called ``DeFi'' systems.
Approximately how many such systems exist? Please identify the types of
non-firm trading interest used and how participants use non-firm
trading interest on such systems. Please explain what these systems
trade (crypto asset securities or crypto assets) and the type of
participants (e.g., retail or institutional). How do participants on a
New Rule 3b-16(a) System for crypto asset securities that use ``DeFi''
systems, as characterized by commenters, negotiate trades for crypto
asset securities? Please identify any relevant data, literature, or
other information that could assist the Commission in analyzing these
issues.
6. Would an organization, association, or group of persons that is
a New Rule 3b-16(a) System and uses DLT to trade crypto asset
securities likely elect to register as a national securities exchange
or comply with the conditions of Regulation ATS? Please explain.
7. What are common characteristics of New Rule 3b-16(a) Systems for
crypto asset securities that use DLT? Further, what are common
characteristics of New Rule 3b-16(a) Systems for crypto asset
securities described as ``DeFi'' trading systems? Are there any
characteristics that heighten the need for investor protection and
market integrity under the exchange regulatory framework?
8. What are the various governance structures (e.g., the role of
governance token issuers or holders or of DAOs) of trading systems that
use DLT and how can such structures administer regulatory programs or
respond to regulatory oversight regarding activities on the system?
What activities do governance token issuers or holders or DAOs
undertake regarding the governance and operation of trading systems
that use DLT? Is there any concentration in voting and if so, how does
that arise? Are voting rights of governance tokens or DAOs capable of
being assigned or delegated and, if so, how is that done? How are
changes to trading systems that use DLT effected and how are changes
proposed to holders of voting rights under governance tokens or DAOs?
Under what circumstances should governance or other token issuers or
holders or DAOs be responsible for an exchange's regulatory compliance?
9. As noted in the above requests for comment in this section, the
[[Page 29458]]
Commission seeks additional data and other information about the use of
DLT as it relates to New Rule 3b-16(a) Systems. Please provide any such
data, literature, or other information about the topics noted above or
any other issue that would be relevant to the Commission's analysis of
the Proposed Rules.
III. Proposed Amendments to Exchange Act Rule 3b-16 Generally
A. Performs Functions Commonly Performed by a Stock Exchange
Some commenters state that the Proposing Release did not
demonstrate that systems that offer the use of non-firm trading
interest and provide non-discretionary protocols ``perform[] with
respect to securities the functions commonly performed by a stock
exchange as that term is generally understood,'' and assert that such a
finding is required under the statutory definition of ``exchange''
under section 3(a)(1) of the Exchange Act.\92\ In addition, some
commenters state that systems that offer the use of non-firm trading
interest and provide non-discretionary protocols to bring together
buyers and sellers of securities do not perform functions commonly
performed by a stock exchange, as that term is generally
understood.\93\
---------------------------------------------------------------------------
\92\ See, e.g., ConsenSys Letter at 14-15; DeFi Education Letter
at 13; Coinbase Letter at 3 n.9. One of the commenters also states
that in the Regulation ATS Adopting Release, the Commission assumed
that to meet the statutory definition, the system must be
``generally understood'' to be performing stock exchange functions
and ``anchored'' that rulemaking explicitly within the statutory
definition. See Coinbase Letter at 3 n.10. In addition, a commenter
opines that ``[m]erely indicating a possible interest in buying or
selling a security without mentioning the quantity or pricing terms
that would otherwise characterize an order would allow the
Commission to deem a platform an exchange despite it not `performing
with respect to securities the functions commonly performed by a
stock exchange.''' Blockchain Association Letter II at 4.
\93\ See, e.g., Coinbase Letter at 3; ConsenSys Letter at 13-14;
DARLA, GBC, and Global DCA Letter at 3-6; Letter from Gregory
Babyak, Global Head of Regulatory Affairs and Gary Stone, Regulatory
Analyst and Market Structure Strategist, Bloomberg L.P., dated Apr.
18, 2022 (``Bloomberg Letter I'') at 22.
---------------------------------------------------------------------------
The statutory definition of ``exchange'' is written in the
disjunctive: ``a market place or facilities for bringing together
purchasers and sellers of securities or for otherwise performing with
respect to securities the functions commonly performed by a stock
exchange as that term is generally understood'' (emphasis added).\94\
Thus, if an organization, association, or group of persons constitutes,
maintains, or provides a market place or facilities for bringing
together purchasers and sellers of securities, it would be an
``exchange''; it need not be demonstrated that the organization,
association, or group of persons also performs functions commonly
performed by a stock exchange as that term is generally understood. As
discussed in the Proposing Release, systems today that offer the use of
non-firm trading interest and provide non-discretionary protocols can
constitute, maintain, or provide a market place or facilities for
bringing together buyers and sellers of securities and meet the
criteria of Exchange Act 3b-16 as proposed to be amended.\95\
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\94\ See 15 U.S.C. 78c(a)(1); Regulation ATS Adopting Release at
70900 n.544 (stating ``the statutory definition of `exchange' is
written in the disjunctive''). Section 3(a)(1) of the Exchange Act
states that an ``exchange'' includes any organization, association,
or group of persons that constitutes, maintains, or provides a
market place or facilities for bringing together purchasers and
sellers of securities or for otherwise performing with respect to
securities the functions commonly performed by a stock exchange as
that term is generally understood. Functions commonly performed by a
stock exchange as that term is generally understood include, among
other things, SRO functions and the listing of securities, by, for
example, establishing or enforcing qualitative or quantitative
listing standards. See Regulation ATS Adopting Release at 70880
(stating that ``[r]egistered exchanges are able to establish listing
standards, which may promote investor confidence in the quality of
the securities traded on the exchange'').
\95\ See Proposing Release at section II.C.
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B. Makes Available Non-Discretionary Methods
In the Proposing Release, the Commission proposed to amend Exchange
Act Rule 3b-16(a) to provide that an organization, association, or
group of persons would be considered to constitute, maintain, or
provide an exchange if it: brings together buyers and sellers of
securities using trading interest; and makes available established,
non-discretionary methods (whether by providing a trading facility or
communication protocols, or by setting rules) under which buyers and
sellers can interact and agree to the terms of a trade. The Commission
proposed, among other changes, to replace the term ``uses'' with the
term ``makes available'' in 17 CFR 240.3b-16(a)(2) (``Rule 3b-
16(a)(2)''),\96\ and to add ``communication protocols'' as an example
of an established, non-discretionary method that an organization,
association, or group of persons can provide to bring together buyers
and sellers of securities.\97\ The Commission received comment on the
application of these proposed changes to all securities, including
comments requesting the Commission to provide further consideration and
opportunity for comments before adopting the proposed changes.\98\ The
Commission is now soliciting further comment on certain Proposed Rules.
---------------------------------------------------------------------------
\96\ See id. at 15506.
\97\ See id. at 15506-07.
\98\ See Bloomberg Letter I at 13-15; SIFMA Letter II at 7.
---------------------------------------------------------------------------
In the Proposing Release, the Commission discussed two reasons it
proposed to replace ``uses established, non-discretionary methods''
with the phrase ``makes available established, non-discretionary
methods.'' First, the Commission stated that the proposed change to use
the term ``makes available'' rather than ``uses'' is designed to
capture established, non-discretionary methods that an organization,
association, or group of persons may provide, whether directly or
indirectly, for buyers and sellers to interact and agree upon terms of
a trade.\99\ Unlike systems that ``use'' established non-discretionary
methods to match buyers and sellers, communication protocols systems
offer a different method for bringing together buyers and sellers by
providing protocols that allow participants to interact, negotiate, and
come to an agreement.\100\
---------------------------------------------------------------------------
\99\ See Proposing Release at 15506.
\100\ See id.
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Second, the term ``makes available'' was intended to make clear
that, in the event that a party other than the organization,
association, or group of persons performs a function of the exchange,
the function performed by that party would still be captured for
purposes of determining the scope of the exchange under Exchange Act
Rule 3b-16.\101\ The Commission has previously stated that it will
attribute the activities of a trading facility to a system if that
facility is offered by the system directly or indirectly (such as where
a system arranges for a third party or parties to offer the trading
facility).\102\ The Commission also recognized how a system may consist
of various functionalities, mechanisms, or protocols that operate
collectively to bring together the orders for securities of multiple
buyers and sellers using non-discretionary methods under the criteria
of Rule 3b-16(a), and how, in some circumstances, these various
functionalities, mechanisms, or protocols may be offered or performed
by another business unit of the broker-dealer operator or by a separate
entity.\103\ The Commission stated that these principles apply equally
to an organization, association, or group of persons that arranged with
another
[[Page 29459]]
party to provide, for example, a trading facility or communication
protocols, or parts thereof, to bring together buyers and sellers and
perform a function of a system under Rule 3b-16.\104\ Consistent with
the principles in the Regulation ATS Adopting Release, the term ``makes
available'' would help ensure that the investor protection and fair and
orderly markets provisions of the exchange regulatory framework apply
to the activities performed through all functionalities, mechanisms, or
protocols of a market place that meet the criteria of Rule 3b-16(a),
notwithstanding whether those activities are performed by a party other
than the organization that provides the market place.\105\
---------------------------------------------------------------------------
\101\ See id.
\102\ See id. (citing Regulation ATS Adopting Release at 70852).
\103\ See id.
\104\ See id.
\105\ See id. See also Regulation ATS Adopting Release at 70851-
52.
---------------------------------------------------------------------------
Commenters state that the proposed use of the term ``makes
available'' would extend the scope of the exchange definition to a
broad set of entities that provide services to a system and its
participants and potentially create uncertainty and ambiguity.\106\ One
commenter states that the Proposing Release opens up the possibility
that systems interacting with the ATS are themselves separate exchanges
and questions when two or more unrelated entities might be viewed as
collectively providing the services of an exchange.\107\ One commenter
expresses concern that the Proposed Rules would broaden the definition
of ``exchange'' to include entities that do not themselves take an
active role in matching orders but instead contribute in some manner to
the efforts of buyers and sellers to identify each other and arrange
trades, and that anyone who contributes to the existence of trading
protocols could be considered to make them available.\108\ Another
commenter states that the Proposed Rules do not address ``open-
architecture platforms that integrate with or embed in a third-party
application'' and asks whether such activity would constitute making
available communication protocols.\109\ One commenter states that the
proposed term ``makes available'' would expand the groups of persons
subject to the Exchange Act to include those who expressly do not fall
under the statutory language of section 3(a)(1)--``a party other than
the organization, association, or group of persons'' that performs a
function on the exchange.\110\ In addition, one commenter states the
definition should only include entities that make available systems
``with the intent to profit from trades to which they are not a party''
and exclude those that integrate software available in the public
domain and perform the role without a profit motive.\111\
---------------------------------------------------------------------------
\106\ See, e.g., Letter from Gregory Babyak and Gary Stone,
Regulatory Affairs, Bloomberg L.P., dated Sept. 16, 2022
(``Bloomberg Letter II'') at 2; Letter from Elisabeth Kirby, Head of
U.S. Market Structure, Tradeweb Markets, Inc., dated Apr. 18, 2022
(``Tradeweb Letter'') at 5; Letter from Ken McGuire, President,
Aditum Alternatives & Aditum Asset Management, dated Feb. 21, 2022
(``Aditum Letter'') at 2; Letter from Gene Hoffman, President &
Chief Operating Officer, Chia Network, dated Apr. 16, 2022 (``Chia
Network Letter'') at 4-7; DARLA, GBC, and Global DCA Letter at 6-7;
ConsenSys Letter at 13, 16-17; Blockchain Association Letter II at
8-9; ADAM Letter II at 8, 16; Eisenbach Letter at 2.
\107\ See SIFMA Letter II at 9 n.23.
\108\ See ConsenSys Letter at 16-17. See also DeFi Education
Fund Letter at 9-10 (stating that ``systems providing communication
and other financial technology adjacent to trading, such as bespoke
direct messaging or market information services, could be captured
under the overbroad `makes available' standard'').
\109\ See Letter from Corinna Mitchell, General Counsel,
Symphony Communication Services, dated Apr. 18, 2022 at 4. See also
DeFi Education Fund Letter at 9-10 (stating the ``makes available''
language could subject software developers to exchange regulation
``solely on the basis of having lines of their code subsequently
used by unrelated parties''); Tradeweb Letter at 5 (stating that the
proposed language might affect various forms of software tools
widely used in the securities industry).
\110\ See Blockchain Association Letter II at 4-5 (quoting the
Proposing Release at 15506).
\111\ See Aditum Letter at 2.
---------------------------------------------------------------------------
Request for Comment
10. In the Regulation ATS Adopting Release, the Commission stated
that it would ``attribute the activities of a trading facility to a
system if that facility is offered by the system directly or indirectly
(such as where a system arranges for a third party or parties to offer
the trading facility).'' \112\ In explaining the term ``makes
available'' in the Proposing Release, the Commission stated that it was
``designed to capture established, non-discretionary methods that an
organization, association or groups of person may provide, whether
directly or indirectly.'' \113\ To ensure that an exchange function
performed by a party is appropriately captured under Exchange Act Rule
3b-16, should the Commission adopt alternative language to ``makes
available''? Please explain. For example, should the Commission adopt
``Uses established, non-discretionary methods (whether by providing,
directly or indirectly, a trading facility. . .)''? Would the addition
of the phrase ``directly or indirectly'' align Rule 3b-16 more closely
with prior Commission statements in the Regulation ATS Adopting Release
\114\ and focus the rule text on a function that a party performs in
the provision of an established, non-discretionary method to bring
together buyers and sellers? Would the phrase ``directly or
indirectly'' reduce commenters' concerns about the proposed ``makes
available'' language being overbroad? Why or why not? What, if any,
limiting principles should be applied to determining when a person
provides ``directly or indirectly'' a trading facility or communication
protocols (or ``negotiation protocols'')? \115\ Please explain.
---------------------------------------------------------------------------
\112\ See Regulation ATS Adopting Release at 70852.
\113\ See Proposing Release at 15506.
\114\ See id. (citing Regulation ATS Adopting Release at 70852).
\115\ See infra Request for Comment #13.
---------------------------------------------------------------------------
11. The Commission proposed to remove the term ``uses'' and insert
the term ``makes available'' before ``established, non-discretionary
methods'' because the Commission proposed to include as an established,
non-discretionary method communication protocols under which buyers and
sellers can interact and agree to the terms of a trade. Communication
protocols would be in addition to a trading facility, which is an
existing established, non-discretionary method under existing Exchange
Act Rule 3b-16(a)(2) and is used by the provider of the exchange to
match buyers and sellers. Instead of the terms ``uses'' and ``makes
available,'' should the Commission adopt amendments to Exchange Act
Rule 3b-16(a)(2) that state ``[E]stablishes non-discretionary methods
(whether by providing, directly or indirectly, a trading facility or .
. .)''? The addition of the term ``establishes'' would adhere to the
concept of ``established'' in existing Exchange Act Rule 3b-16(a)(2)
and be consistent with the Commission's explanation in the Regulation
ATS Adopting Release that the person who establishes non-discretionary
methods is dictating the terms of trading among buyers and sellers on
the system.\116\ For example, an organization that establishes a non-
discretionary method would be providing a trading facility or providing
communication protocols (or ``negotiation protocols'' \117\) or setting
rules for buyers and sellers to interact and agree upon the terms of a
trade.
---------------------------------------------------------------------------
\116\ See Regulation ATS Adopting Release at 70850.
\117\ See infra Request for Comment #13.
---------------------------------------------------------------------------
C. Non-Discretionary Method: Communication Protocols
In the Proposed Rules, the Commission proposed to add
``communication protocols'' to Exchange Act Rule 3b-16(a) as a non-
discretionary method that an
[[Page 29460]]
organization, association, or group of persons could provide for buyers
and sellers to interact and agree upon the terms of a trade.\118\ In
the Proposing Release, the Commission explained that communication
protocols, which can be applied to various technologies and
connectivity, are provided along with the use of non-firm trading
interest (as opposed to firm orders) to prompt and guide buyers and
sellers to communicate, negotiate, and agree to the terms of the
trade.\119\ The Commission also provided examples of trading systems
that function as market places or facilities for securities by
providing communication protocols.\120\ The Commission provided an
example of an entity making available a chat feature that has the
additional requirement that certain information be included in a chat
message (e.g., price, quantity) and also setting parameters and
structure designed for participants to communicate about buying or
selling securities as a system that would have established
communication protocols.\121\ The Commission also explained what would
not be a communication protocol system for purposes of the Proposed
Rules.\122\
---------------------------------------------------------------------------
\118\ See Proposing Release at 15507.
\119\ Id.
\120\ See id. at 15500-01. These trading systems could include,
among others, RFQ systems, stream axes, conditional order systems,
and bilateral negotiation systems.
\121\ See id. at 15507.
\122\ See, e.g., id. For example, the Commission stated that it
did not intend for communication protocols to include systems that
only provide the connectivity or technology that allows buyers and
sellers to communicate (such as utilities or providers of stand-
alone electronic web chat) without also establishing non-
discretionary methods that govern how the communications are allowed
to proceed as participants agree to the terms of a trade. See id.
---------------------------------------------------------------------------
The Commission received comment that the term ``communication
protocol'' is too broad and vague and that it is unclear what
activities or entities would be classified as communication protocol
systems.\123\ Commenters suggest that the Commission should define the
term ``communication protocol system'' to avoid uncertainty as to who
is included or not included under its scope.\124\ Commenters state that
the broad concept of a communication protocol system could capture
various types of technologies used by market places for securities,
including, for example, front-end graphical user interfaces (``GUIs''),
web chat providers,\125\ primary market communication systems,\126\
software solutions,\127\ or trading desks of a broker-dealer.\128\
Commenters state that the uncertainty could give the impression that
employing the term expands the scope of exchange regulation to all
communication methods.\129\
---------------------------------------------------------------------------
\123\ See, e.g., Letter from Lindsey Weber Keljo, Head of Asset
Management Group, William C. Thum, Managing Director and Assistant
General Counsel, Securities Industry and Financial Market
Association, dated Apr. 18, 2022 (``SIFMA AMG Letter'') at 6; Letter
from Charles V. Callan, Broadridge Financial Solutions, Inc., dated
Apr. 18, 2022 (``Broadridge Letter'') at 2; Letter from Douglas A.
Cifu, Chief Executive Officer, Virtu Financial, Inc., dated Apr. 18,
2022 (``Virtu Letter'') at 11; Letter from Jennifer W. Han, Managed
Funds Association, dated Apr. 18, 2022 (``MFA Letter'') at 7-10;
Letter from David R. Burton, Senior Fellow in Economic Policy, The
Heritage Foundation, dated Apr. 18, 2022 (``Burton Letter'') at 2.
\124\ See, e.g., Healthy Markets Letter at 6; Letter from Scott
Pintoff, General Counsel, MarketAxess, dated Apr. 18, 2022
(``MarketAxess Letter'') at 5; Broadridge Letter at 2; Virtu Letter
at 11. Another commenter, in expressing concern about the scope of
the Proposed Rules, describes that the Proposed Rules did not define
``communication protocol system.'' See McHenry/Huizenga Letter at 2.
\125\ See, e.g., GDCA Letter II at 9; Coin Center Letter at 19-
20.
\126\ See Letter from Scott Eisenberg, Head of Legal,
DirectBooks LLC, dated Apr. 18, 2022.
\127\ See SIFMA Letter II at 9.
\128\ See Letter from Christopher A. Iacovella, Chief Executive
Officer, American Securities Association, dated Apr. 18, 2022 (``ASA
Letter'') at 3.
\129\ See, e.g., Bloomberg Letter I at 19; Chia Network Letter
at 2 (stating that ``the Commission's proposed amendments [put] the
entire internet and connectivity businesses in jeopardy of tripping
over the [Exchange Act]'').
---------------------------------------------------------------------------
Request for Comment
12. In existing Exchange Act Rule 3b-16(a)(2), non-discretionary
methods include providing a trading facility or setting rules governing
the interaction of orders. ``Trading facility'' and ``setting rules''
are not defined in the rule text but are explained in the Regulation
ATS Adopting Release and the Commission provided examples of each.\130\
The Commission proposed ``communication protocols'' as another non-
discretionary method for trading interest in the Proposing Release.
Should the Commission adopt Exchange Act Rule 3b-16(a)(2), as proposed
to be amended, to include ``communication protocols'' as an example of
a non-discretionary method under which buyers and sellers can interact
and agree to the terms of a trade? Why or why not? In addition to the
guidance provided in the Regulation ATS Adopting Release, should the
Commission provide guidance on what ``non-discretionary methods'' means
under Exchange Act Rule 3b-16?
---------------------------------------------------------------------------
\130\ See Regulation ATS Adopting Release at 70851-52. The
Regulation ATS Adopting Release stated that the Commission intended
for `` `established, non-discretionary methods' to include any
methods that dictate the terms of trading among the multiple buyers
and sellers entering orders into the system.'' Id. at 70850.
---------------------------------------------------------------------------
13. To reflect systems that provide non-discretionary methods under
which buyers and sellers negotiate terms of a trade, should the
Commission adopt amendments to Exchange Act Rule 3b-16(a)(2) that
replace the proposed term ``communication protocols'' with the term
``negotiation protocols'' and adopt the following definition under a
new Rule 3b-16(f):
For purposes of this section, the term ``negotiation protocols''
means a non-discretionary method that sets requirements or limitations
designed for multiple buyers and sellers of securities using trading
interest to interact and negotiate terms of a trade.
14. As discussed above, some commenters state that the term
``communication protocol'' is too broad and vague and that it is
unclear what activities or entities would be classified as
communication protocol systems.\131\ The term ``negotiation protocols''
could better focus the non-discretionary methods that the Commission
intended to capture in the proposed amendments to Exchange Act 3b-
16(a)(2) than the term ``communication protocols.'' The term
``negotiation protocols'' would be another example, in addition to
directly or indirectly providing a trading facility or setting rules,
of a non-discretionary method established by an exchange under which
buyers and sellers can negotiate and agree to the terms of a trade.
What are commenters' views of the term ``negotiation protocols''? Are
there any terms that should be added, deleted, or modified in the
definition of ``negotiation protocol'' to make the definition more
precise or appropriate? Are there other non-discretionary methods under
which buyers and sellers can interact and agree to the terms of a trade
that the Commission should add to Rule 3b-16(a)(2)? If so, please
explain. What other types of protocols under which buyers and sellers
can interact and agree to the terms of a trade exist or can be
provided?
---------------------------------------------------------------------------
\131\ See supra note 123.
---------------------------------------------------------------------------
15. The definition of ``negotiation protocols'' described above
would set requirements or limitations designed to govern how the
trading interest is used by participants to interact and negotiate a
trade. Should a definition of ``negotiation protocols'' specify both
requirements and limitations that would constitute a non-discretionary
method? Why or why not?
16. As an alternative to adopting a definition of ``negotiation
protocols'' in the rule text, should the Commission provide an
explanation and examples of what negotiation protocols are and are not
in any adopting release, similar to what the Commission did in the
Regulation ATS Adopting Release when
[[Page 29461]]
analyzing the application of Rule 3b-16 to hypothetical Systems A
through T? \132\ In the Proposing Release, the Commission provided
examples of trading systems that offer the use of non-firm trading
interest and established protocols that would meet the criteria of
Exchange Act 3b-16, as proposed to be amended (e.g., RFQ, conditional
order systems, indication of interest systems).\133\ Should the
Commission adopt those examples as hypotheticals that would meet the
criteria of Rule 3b-16 similar to the hypotheticals in the Regulation
ATS Adopting Release? Please explain. Should the examples that the
Commission provided in the Proposing Release change in any way? Are
there any other examples that the Commission should adopt to describe
New Rule 3b-16(a) Systems? Please describe any such examples.
---------------------------------------------------------------------------
\132\ See Regulation ATS Adopting Release at 70854-56.
\133\ See Proposing Release at 15500-01.
---------------------------------------------------------------------------
17. As discussed above, whether an organization, association, or
group of persons meets the definition of an exchange depends on the
activities performed and not the technology used. The Commission
received comments requesting the Commission clarify that order
management systems, order execution systems, and order execution
management systems (collectively referred to as ``OEMS'' technology) do
not meet the criteria of Rule 3b-16, as proposed to be amended.\134\
The Commission understands that brokers, dealers, and investment
advisers use OEMS technology to carry out their respective Commission-
regulated activities. The proposed amendments to Rule 3b-16 were not
designed to capture within the definition of exchange the activities of
brokers, dealers, and investment advisers who use an OEMS to carry out
their functions (e.g., organizing and routing trading interest). The
use of OEMS technology, however, like other types of technology, could
be used, in certain circumstances, to perform exchange activities
(e.g., crossing orders of multiple buyers and sellers using established
non-discretionary methods). The Commission requests comment on what
activities are performed today using OEMS technology and how the use of
OEMS technology might change in the future. The Commission requests
comment on whether and how activities performed through the use of OEMS
technology could meet the criteria of Rule 3b-16(a), as proposed to be
amended. Please explain why or why not.
---------------------------------------------------------------------------
\134\ See Bloomberg Letter I at 16; SIFMA AMG Letter at 11;
Broadridge Letter at 3; MFA Letter at 9; Letter from Kelvin To,
Founder and President, Data Boiler Technologies, LLC, dated Apr. 18,
2022 at 9. Several commenters express general concerns about and set
forth policy arguments against including OEMSs within the
Commission's exchange regulation. See, e.g., SIFMA AMG Letter at 6
(asserting that ``the Commission's drafting risks moving too far
beyond trading venues and is potentially capturing a broad range of
OEMS, ETF portal, and single user systems carefully developed by a
diverse group of market participants to introduce efficiencies and
costs savings into the market, but which do not allow for separate
users to interact and do not directly connect with multiple brokers
to confirm the non-discretionary execution of orders''); Letter from
Sarah Bessin, Associate General Counsel, Investment Company
Institute, dated Apr. 18, 2022 (``ICI Letter'') at 9 (arguing that
there are no perceived regulatory benefits from applying the ATS or
broker-dealer regulatory framework to internalized trading activity
on OEMSs, which is independently regulated, and stating that it may
``frustrate advisers' ability to seek best execution on behalf of
their clients'').
---------------------------------------------------------------------------
18. In light of comments that the concept of a communication
protocol system could capture various types of technologies used by
market participants for securities (e.g., GUIs, web chat providers,
primary market communication systems, software solutions, or trading
desks of a broker-dealer), please explain in detail and provide
examples of the specific activities performed through the use of such
technology identified by commenters.
19. In response to the Proposing Release, the Commission received
several comments expressing concern that the expansion of Exchange Act
Rule 3b-16 might encompass general internet chat services, such as
WhatsApp, Twitter, and Reddit.\135\ As stated in the Proposing Release,
systems that provide general connectivity for persons to communicate
without protocols containing requirements and limitations to negotiate
trades for securities (e.g., utilities or electronic web chat
providers) would not fall within the definition of exchange, as
proposed to be amended.\136\ However, the determination as to whether a
given system would meet the criteria under Rule 3b-16(a), as proposed
to be amended, must be based on the facts and circumstances surrounding
the operation of the system, not the market name or categorization
(i.e., simply because a program is called a ``chat'' or ``messaging''
service, it does not mean the service is per se outside the scope of
Rule 3b-16(a), as proposed to be amended). For example, if a chat or
messaging service was provided with a display functionality for trading
interest in securities, an execution facility for securities, or
protocols for participants to negotiate, the mere fact that the system
contains a chat feature or message service would not necessarily
preclude it from meeting the criteria of Rule 3b-16 as proposed to be
amended. What features of a chat or message service could be considered
protocols (i.e., requirements or limitations) under Rule 3b-16, as
proposed to be amended, that would allow buyers and sellers to interact
and negotiate a trade for securities? Are there currently any types of
chat services that are solely used for discussing securities but are
not used for negotiating a securities trade? Are there any types of
chat services that are currently designed for buyers and sellers to
interact and negotiate a trade for securities? Please explain why or
why not.
---------------------------------------------------------------------------
\135\ See, e.g., Chia Network Letter at 4-7 (stating that the
expansion to parties that ``make available'' established, non-
discretionary methods could capture large numbers of internet and
telecommunications providers, including any company that makes any
sort of messaging system available to internet users such as Twitter
and Reddit, and creates regulatory uncertainty for all such
entities); GDCA Letter II at 10 (stating that the term trading
interest ``sweeps up dialogue that otherwise would be outside the
rules,'' such as `` `inadvertent' or `incidental' exchange
activity'' through protocols ``with a primary social or business use
unrelated to trading'' that are ``used secondarily or incidentally
for trading'').
\136\ See Proposing Release at 15502 n.72.
---------------------------------------------------------------------------
20. Do commenters believe that there are other technologies, such
as social networking websites, business communication platforms,
financial information systems, blockchain technology nodes and smart
contracting platforms,\137\ that could be used to perform activities
that meet the criteria of Exchange Act Rule 3b-16(a), as proposed to be
amended? Are there any features of these systems that could be
considered protocols (i.e., requirements or limitations) that allow
buyers and sellers to interact and negotiate a trade for securities?
Please explain.
---------------------------------------------------------------------------
\137\ See infra note 278.
---------------------------------------------------------------------------
21. Form ATS is designed to enable the Commission to determine
whether an ATS subject to Regulation ATS is in compliance with
Regulation ATS and other federal securities laws.\138\ Form ATS
provides disclosures about, among other things, classes of subscribers,
securities traded, manner of operation, and procedures governing the
execution, reporting, clearance, and settlement of transactions.
Proposed Item 3(c) of Form ATS (current Form ATS Exhibit B) requires an
ATS to disclose a list of securities the ATS trades or expects to
trade, and requires disclosure of all securities, which includes crypto
asset securities.\139\
---------------------------------------------------------------------------
\138\ See Form ATS Instruction A.6.
\139\ See Proposing Release at 15653.
---------------------------------------------------------------------------
[[Page 29462]]
22. Form ATS-N is designed to provide market participants with
information to, among other things, help them make informed decisions
about whether to participate on an NMS Stock ATS (and, as proposed, on
a Government Securities ATS).\140\ Proposed Part I, Item 8 of Form ATS-
N would require an NMS Stock ATS or Government Securities ATS to
disclose information about the NMS stocks and government securities
that it makes available for trading, which would include any NMS stocks
or government securities that are crypto asset securities.\141\ Should
the Commission adopt an amendment to proposed Item 3(c) of Form ATS or
proposed Part I, Item 8 of Form ATS-N to require ATSs and NMS Stock
ATSs and Government Securities ATSs to specifically identify the
securities that are crypto asset securities? Why or why not? Should the
Commission make any other changes to Form ATS and Form ATS-N in light
of the Proposing Release and the information provided in this Reopening
Release?
---------------------------------------------------------------------------
\140\ See Form ATS-N Instruction D.
\141\ See Proposing Release at 15542.
---------------------------------------------------------------------------
23. Form ATS-R, which is filed on a quarterly basis and deemed
confidential when filed, is designed to enable the Commission to more
effectively track the growth and development of ATSs, as well as to
more effectively comply with its statutory obligations with respect to
ATSs, and improve investor protection.\142\ Among other things, Form
ATS-R requires ATSs to list all securities that were traded on the ATS
at any time during the period covered by the report \143\ and to report
total unit and dollar volume of transactions for certain categories of
securities.\144\ Should Form ATS-R be amended to require ATSs to
indicate whether any of the types of securities traded on the ATS are
crypto asset securities? For example, should Form ATS-R include a
checkbox for each type of security listed on Form ATS-R for the ATS to
indicate whether any of the securities transacted are crypto asset
securities? Why or why not? Should Form ATS-R be amended to require an
ATS to report the total unit and dollar volume of transactions in
crypto asset securities for each category of securities? Why or why
not? Should the Commission make any other changes to Form ATS-R in
light of the Proposing Release and the information provided in this
Reopening Release?
---------------------------------------------------------------------------
\142\ See Form ATS-R Instruction A.7.
\143\ See Form ATS-R Item 3. Form ATS-R also requires a list of
all subscribers that were participants of the ATS during each
calendar quarter. See Form ATS-R Item 2.
\144\ See Form ATS-R Item 4. For example, Form ATS-R requires
NMS Stock ATSs to report the total unit and dollar volume of
transactions in NMS stocks that are reported to the consolidated
tape in ``Listed Equity Securities'' (Item 4A), ``Nasdaq National
Market Securities'' (Item 4B), or ``Nasdaq SmallCap Market
Securities'' (Item 4C). In the Proposing Release, the Commission
proposed to delete the categories ``Nasdaq National Market
Securities'' and ``Nasdaq SmallCap Market Securities'' and require
ATSs to report the total volume previously reported under these
categories under ``Listed Equity Securities.'' See Proposing Release
at 15580.
---------------------------------------------------------------------------
24. Information about a New Rule 3b-16(a) System's operations,
including operations related to non-firm trading interest and protocols
provided for buyers and sellers to interact and negotiate the terms of
a trade, would be responsive to proposed Item 3(g) of Form ATS, which
requires a description of the manner of operation of the ATS. To assist
New Rule 3b-16(a) Systems in responding to Form ATS, should the
Commission adopt an amendment to proposed Item 3 of Form ATS to add the
following requirement as a disclosure: ``any display of trading
interest'' and ``protocols provided for buyers and sellers to interact
and negotiate the terms of a trade''? Please explain why or why not.
Although this information would be responsive to current Form ATS Item
8(a) and would be required to be included in current Form ATS Exhibit
F, the explicit references would make clear to ATSs that such
information is responsive to the form and must be provided.
25. Proposed Item 3(j) of Form ATS (current Form ATS Item 8(d),
which is required to be disclosed on Exhibit F) would require an ATS to
provide ``a description of the procedures governing execution,
reporting, clearance, and settlement of transactions effected through
the [ATS].'' \145\ Should the Commission adopt an amendment to the Item
to include a reference to the use of DLT among the procedures so that
the Item would state that the ATS must include ``a description of the
procedures, including through use of DLT, governing execution,
reporting, clearance, and settlement of transactions effected through
the alternative trading system''? Please explain why or why not.
Although a description of the use of DLT, or any other technology, in
these processes is currently required by the term ``procedures,'' the
explicit reference to DLT would make clear that a description of its
use would be required to be provided in Form ATS.
---------------------------------------------------------------------------
\145\ See id. at 15654.
---------------------------------------------------------------------------
26. As discussed above, several commenters ask questions about how
so-called ``DeFi'' systems could comply with the requirements of
Regulation ATS.\146\ Form ATS-N, which provides operational
transparency and regulatory oversight of NMS Stock ATSs and, as
proposed, of Government Securities ATSs, is technology neutral and asks
questions designed to apply to ATSs that vary in structure and offer
many different functionalities and trading processes and procedures.
However, Form ATS-N provides examples of specific functionalities and
procedures that would be responsive to particular questions. To assist
subject systems in responding to Form ATS-N, should the Commission
adopt any changes, particularly to the examples provided in Form ATS-N,
to clarify and highlight the applicability of certain items in Form
ATS-N to NMS Stock ATSs and Government Securities ATSs that use DLT?
Should, for example, the Commission adopt amendments to proposed Part
II, Item 5 to provide examples of other products and services that the
operator of a system that uses DLT may provide for the purpose of
effecting transactions or submitting, disseminating, or displaying
trading interest on the ATS? \147\ Should the Commission adopt
amendments to Part III, Item 5(a) to provide web-based systems as an
example of means by which the NMS Stock ATS or Government Securities
ATS permits trading interest to be entered directly into the ATS? \148\
Should the Commission adopt amendments to Part III, Item 15 to provide
examples of blockchain-based means by which trading interest can be
displayed or made known to the ATS subscribers or the public? \149\
Should the Commission adopt amendments to proposed Part III, Item 21 to
provide examples of blockchain-based procedures to manage the post-
trade processing, clearance, and/or settlement on the ATS? \150\ Should
the Commission adopt amendments to proposed Part III, Item 22 to
provide examples of blockchain-based market data sources? \151\
---------------------------------------------------------------------------
\146\ See, e.g., supra note 55.
\147\ See Proposing Release at 15546-48.
\148\ See id. at 15552-53.
\149\ See id. at 15563-65. Such amendments could provide
examples of blockchain-based means by which: an ATS may display
trading interest to its subscribers or the public; a subscriber can
display or make known trading interest through the ATS; and trading
interest bound for the ATS is made known to any person. See id.
\150\ See id. at 15568-69.
\151\ See id. at 15569.
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D. Exclusion From Exchange Act Rule 3b-16(a)
In the Proposing Release, the Commission proposed to amend Rule 3b-
16(b) to add an exclusion from Rule 3b-16(a) for systems that allow an
issuer
[[Page 29463]]
to sell its securities to investors.\152\ The Commission stated in the
Proposing Release that the exclusion was merely codifying in Rule 3b-
16(b)(3) an example the Commission provided in the Regulation ATS
Adopting Release for systems that have a single seller of its
securities.\153\ While such systems have multiple buyers (i.e.,
investors), they have only one seller for each security (i.e., issuers)
and, therefore, do not meet the criteria of Rule 3b-16(a) because the
systems do not bring together multiple buyers and multiple
sellers.\154\
---------------------------------------------------------------------------
\152\ See proposed Rule 3b-16(b)(3).
\153\ See Regulation ATS Adopting Release at 70849.
\154\ Id.
---------------------------------------------------------------------------
One commenter states that it is unclear whether the issuer
exclusion would cover portals on which multiple issuers offer
securities.\155\ Another commenter suggests that the exclusion for
issuer systems should be revised to state that it applies to a system
that ``allows one or more issuers to sell their securities to
investors, either directly or through placement agents or
underwriters.'' \156\ This commenter states that a system that allows
more than one issuer to sell its own securities is a single
counterparty system because for any particular security, there is only
one counterparty, the issuer of the securities.\157\ This commenter
further states that including the phrase ``or through placement agents
or underwriters'' is needed to make clear that the issuer exclusion may
continue to be applied if the system permits an issuer to use brokers
or underwriters, and this approach is desirable because it permits the
interposition of registered brokers, who provide a multitude of
services protective of the rights of investors.\158\
---------------------------------------------------------------------------
\155\ See SIFMA AMG Letter at 8.
\156\ See ABA Letter at 8.
\157\ Id. at 9.
\158\ Id.
---------------------------------------------------------------------------
Two commenters request that the Commission confirm that a system or
portal that an exchange-traded fund (``ETF'') sponsor uses to
facilitate ETF primary market operations (i.e., creation and redemption
of ETF shares) (``ETF Portal'') is not a communication protocol system,
as defined in the Proposing Release, and otherwise does not meet the
definition of ``exchange,'' as proposed to be amended.\159\ The
commenters state that ETF Portals enable registered broker-dealers that
serve as an ETF's authorized participants (``APs'') to communicate
creation or redemption requests for an ETF.\160\ One of the commenters
states that ETF Portals do not create a market place for secondary
market trading activity (i.e., trading of the actual ETF shares among
individual investors) because they are used by ETF sponsors for the
specific purpose of creating and redeeming their own issued
securities.\161\ In this respect, this commenter believes that ETF
Portals are similar to a system that allows issuers to sell their own
securities to investors.\162\ Another commenter similarly agrees that
ETF Portals should not be included in the definition of an ``exchange''
and does not believe there would be any public benefit to treating such
portals as exchanges and requiring ATS registration.\163\
---------------------------------------------------------------------------
\159\ See SIFMA AMG Letter at 8; ICI Letter at 13. The
commenters state that they do not believe that the Commission
intended to classify ETF Portals as exchanges under Rule 3b-16, as
proposed to be amended. See id.
\160\ See id.
\161\ See ICI Letter at 14. This commenter also states that an
ETF Portal's activities are limited in the following respects: ``(1)
the scope of ETFs involved in the creation or redemption process is
confined to those offered by the ETF sponsor; (2) only registered
broker-dealers that have an established agreement with an ETF
sponsor's ETF to act as an AP can submit creation or redemption
requests to the ETF; and (3) the system or portal does not directly
facilitate secondary market activity in the ETF (i.e., trading of
the actual ETF shares among individual investors), nor does it
provide access for individual investors that are not registered
broker-dealers.'' Id. at 13.
\162\ See id. at 14. This commenter further states that applying
the Regulation ATS and broker-dealer regulatory frameworks to ETF
Portals would impose unnecessary additional costs and burdens to the
ETF creation and redemption process, lead to unintended
consequences, and would not further the Commission's regulatory
objectives. See id. at 4.
\163\ See SIFMA AMG Letter at 8.
---------------------------------------------------------------------------
Request for Comment
27. Should the Commission adopt Rule 3b-16(b)(3), as proposed to be
amended? Why or why not? Should the Commission adopt the proposed Rule
3b-16(b)(3) exclusion but with certain revisions? If so, please
identify those revisions and explain. For example, should the
Commission adopt, as suggested by one commenter, the proposed issuer
exclusion with revisions to state that it applies to a system that
``allows one or more issuers to sell their securities to investors,
either directly or through placement agents or underwriters''? In
particular, should the Commission add ``one or more issuers'' to the
proposed issuer exclusion? What types of systems would be covered under
the revised issuer exclusion example above? Please explain. Is the
inclusion of ``either directly or through placement agents or
underwriters'' in the revised issuer exclusion example above necessary
or appropriate to clarify its application? If so, why?
28. How do ETF Portals operate for the creation and redemption of
securities? Who are the participants in ETF Portals and how do they
interact? Are there any trading activities conducted as part of the
creation and redemption process through an ETF Portal that are exchange
activities or necessitate further clarification by the Commission as to
whether such activities are exchange activities? Do an ETF Portal's
activities facilitate secondary market activity in the ETF? Why or why
not? Does trading in ETF Portals involve multiple buyers and sellers of
securities? Why or why not? What non-discretionary methods are
generally used by ETF Portals?
29. Do ETF Portals fall within the criteria of existing Exchange
Act Rule 3b-16(a) or Rule 3b-16(a), as proposed to be amended? Why or
why not? If the activities conducted through ETF Portals fall within
the criteria of existing Exchange Act Rule 3b-16(a) or Rule 3b-16(a),
as proposed to be amended, should the Commission adopt an exclusion
under Exchange Act Rule 3b-16(b)(3) for ETF Portals? If yes, please
explain why and explain what the exclusion should apply to. How should
an ETF Portal be defined for purposes of the exclusion? For example,
should the Commission expressly adopt an exclusion that applies only to
ETF Portals that fall within this definition: ``a system that allows
one or more issuers from the same sponsoring entity to solicit creation
or redemption requests for their own securities submitted by authorized
participants for those securities''? Should the Commission adopt an
exclusion that applies only to platforms that solely support primary
market transactions in investment company securities, where the issuer
of the security participates in each transaction either as the sole
buyer, or as the sole seller? If so, should the exclusion be available
only for securities issued by ETFs or also for securities issued by
other investment companies? Should the exclusion specify that it is
available only for transactions that take place at a price based on the
current net asset value of the security, as required by 17 CFR 270.22c-
1 (Rule 22c-1 under the Investment Company Act of 1940)? What ETF
Portals should not be excluded from Exchange Act Rule 3b-16(a)? Please
explain.
[[Page 29464]]
E. Compliance Date for Implementation of Proposed Amendments to Rule
3b-16
Exchange Act Rule 3b-16, as proposed to be amended, would require,
if adopted, New Rule 3b-16(a) Systems to comply with federal securities
laws applicable to national securities exchanges and ATSs. These
systems may trade securities that are crypto asset securities, or
specific types of securities, including NMS stock, over-the-counter
(``OTC'') equity securities, corporate bonds, municipal securities,
government securities, foreign sovereign debt, asset-backed securities,
restricted securities, or options. New Rule 3b-16(a) Systems provide
access to numerous and diverse market participants (e.g., retail
investors, institutional investors, broker-dealers, issuers) seeking to
perform different trading strategies and investment objectives in
various types of securities. To facilitate these market participants'
trading strategies and investment objectives, providers of these
trading systems employ assorted technology and protocols (e.g.,
internet, DLT, cloud) and apply a variety of methods to bring together
buyers and sellers in securities (e.g., RFQ, indication of interest,
negotiation, conditional orders, bid wanted in competition, streaming
axes).
Several commenters express concern that New Rule 3b-16(a) Systems
would not be provided enough time to comply with their new regulatory
obligations.\164\ As stated in the Proposing Release, the Commission
expects that many New Rule 3b-16(a) Systems would elect to register as
broker-dealers and comply with Regulation ATS; \165\ however, they can
also elect to register as exchanges.\166\ The Commission recognizes
that New Rule 3b-16(a) Systems are operating today and would seek to
comply with the Proposed Rules without disrupting their current
business and their participants. To facilitate the trading system
operators' compliance with the Proposed Rules, the Commission is
soliciting further public comment on any compliance dates for the
Proposed Rules.
---------------------------------------------------------------------------
\164\ See, e.g., MarketAxess Letter at 5; Letter from Teana
Baker-Taylor, Chief Policy Officer, Chamber of Digital Commerce,
dated Mar. 24, 2022 (``Chamber Letter'') at 5; Letter from Elisa
Hirschmann, Executive Director, Chief Compliance Officer, BrokerTec
Americas LLC, CME Group, Inc., dated Apr. 18, 2022 at 4; Bloomberg
Letter I at 4-5; Letter from Scot J. Halvorsen, Associate General
Counsel, Cboe Global Markets, Inc., dated Apr. 18, 2022 (``Cboe
Letter'') at 2; Crypto Council Letter at 7.
\165\ See Proposing Release at 15502.
\166\ See id. at 15617-18.
---------------------------------------------------------------------------
Request for Comment
30. Should the Commission adopt a compliance date to delay
implementation for New Rule 3b-16(a) Systems? Why or why not? Should
the Commission adopt the same compliance date for all New Rule 3b-16(a)
Systems or different compliance dates depending on certain factors,
such as the type of securities the system trades? Please explain. For
example, should the Commission adopt separate compliance dates to
implement the proposed amendments to Exchange Act Rule 3b-16 for
trading systems that trade one or more of the following: NMS stock, OTC
equity securities, corporate bonds, municipal securities, government
securities, foreign sovereign debt, asset-backed securities, restricted
securities, or options? Please explain.
31. As indicated above, crypto assets generally use DLT as a method
to record ownership and transfers, and a crypto asset that is a
security is not a separate type or category of security for purposes of
federal securities laws based solely on the use of DLT.\167\ Should the
Commission adopt a separate compliance date for New Rule 3b-16(a)
Systems that trade crypto asset securities? \168\ Please explain. If
the Commission adopts a different compliance date for New Rule 3b-16(a)
Systems that trade crypto asset securities, for purposes of ascribing
such compliance date, should ``crypto asset securities'' be defined to
mean securities that are also issued and/or transferred using
distributed ledger or blockchain technology, including, but not limited
to, so-called ``virtual currencies,'' ``coins,'' and ``tokens,'' to the
extent they rely on cryptographic protocols? \169\ Please explain.
---------------------------------------------------------------------------
\167\ See supra note 27 and accompanying text.
\168\ Such a delayed compliance date for New Rule 3b-16(a)
Systems would not impact the obligation of systems that meet the
existing criteria of Rule 3b-16 to comply with existing rules.
\169\ In the past, the Commission used this definition for
``digital asset securities'' in the Commission Statement on Custody
of Digital Asset Securities by Special Purpose Broker-Dealers. See
supra note 26.
---------------------------------------------------------------------------
32. Should the Commission adopt a uniform compliance period for all
categories of securities that is one year? Or would a shorter or longer
time period than one year be sufficient or necessary? If commenters
believe the Commission should adopt different compliance dates for
trading systems that trade a category of security, what compliance date
should the Commission adopt for such trading systems? Please explain.
33. Should the Commission adopt different compliance dates for New
Rule 3b-16(a) Systems based on the types of participants that trade on
the system? For example, should the Commission adopt a delayed
compliance date for trading systems that have predominately retail,
institutional, or broker-dealer participants? Please explain. What
compliance date should the Commission adopt for these types of trading
systems? Please explain.
34. Should the Commission adopt different compliance dates for New
Rule 3b-16(a) Systems based on the different means by which
participants enter trading interest into the system? For example,
should the Commission adopt a delayed compliance date for trading
systems that perform intermediary services, such as entering trading
interest into the trading system on behalf of users or offering users
services other than trading? Should the Commission adopt a delayed
compliance date for trading systems that allow buyers and sellers to
enter trading interest into the system directly without an
intermediary? Please explain. What compliance date should the
Commission adopt for these types of trading systems? Please explain.
35. Should the Commission adopt different compliance dates for New
Rule 3b-16(a) Systems based on different trading protocols that bring
together buyers and sellers to negotiate a trade? For example, should
the Commission adopt different compliance dates for trading systems
that provide RFQs, indications of interest, bids wanted in competition,
or streaming axes? Should the Commission adopt a delayed compliance
date for trading systems that use AMMs for buyers and sellers to enter
trading interest into the system and negotiate a trade? What compliance
date should the Commission adopt for these types of trading systems?
Please explain.
36. Should the Commission adopt different compliance dates for New
Rule 3b-16(a) Systems based on the technology supporting its exchange
activity (e.g., internet, DLT, cloud)? For example, should the
Commission adopt a delayed compliance date for trading systems that use
DLT to bring together buyers and sellers using trading interest and
establish protocols that allow participants to negotiate a trade?
Please explain. What compliance date should the Commission adopt for
these types of trading systems? Please explain.
37. Should the Commission adopt different compliance dates for New
Rule 3b-16(a) Systems based on the volume that trading systems
transact? For example, should the Commission adopt a delayed compliance
date for a trading system that transacts a certain level of dollar
volume or share volume, and if
[[Page 29465]]
so, what should that volume be? Should the Commission adopt different
compliance dates for trading systems based on all of their transaction
volume or only transaction volume in a category of security or in a
crypto asset security? Please explain. What compliance date should the
Commission adopt for these types of trading systems? Please explain.
38. Should the Commission adopt different compliance dates for New
Rule 3b-16(a) Systems based on a combination of factors described above
or any other factors? Please explain.
IV. Paperwork Reduction Act
In the analysis of the proposed rule amendments under the Paperwork
Reduction Act of 1995 (``PRA'') of the Proposing Release, the
Commission estimated 22 Communication Protocol Systems \170\ would be
impacted by the Proposed Rules. This estimate included systems that
offer trading of OTC equity securities and restricted securities, some
of which trade crypto asset securities.
---------------------------------------------------------------------------
\170\ The Proposing Release referred to systems that would newly
meet the definition of ``exchange'' under the Proposed Rules as
``Communication Protocol Systems.'' See Proposing Release at 15496
n.5. See also id. at 15586 (estimating the total number of
Communication Protocol Systems to be 22).
---------------------------------------------------------------------------
The Commission is revising the estimated number of trading systems
that would be impacted by the proposed amendments to Exchange Act Rule
3b-16 to include: (1) New Rule 3b-16(a) Systems that trade crypto asset
securities and were not included in the estimates in the Proposing
Release, and (2) New Rule 3b-16(a) Systems for non-crypto asset
securities that have exited, entered, or intend to enter, the market
since the Commission issued the Proposing Release. The Commission is
not revising its estimate of the per-respondent burdens that would be
imposed by the proposed amendments to Rule 3b-16(a). The summary of the
``collection of information'' requirements within the meaning of the
PRA and the proposed use of such information described in the Proposing
Release are unchanged.
A. Respondents
As discussed in the Proposing Release,\171\ the Commission believes
that New Rule 3b-16(a) Systems would likely choose to register as a
broker-dealer and comply with the conditions of Regulation ATS rather
than register as a national securities exchange because of the lighter
regulatory requirements imposed on ATSs, as compared to registered
exchanges.\172\ For purposes of this PRA analysis, New Rule 3b-16(a)
Systems that would comply with Regulation ATS are referred to as
``Newly Designated ATSs.'' \173\ In the Proposing Release, the
Commission estimated the total number of Newly Designated ATSs, across
all asset classes, to be 22.\174\ Since issuing the Proposing Release,
the Commission has learned, based on public sources of information, of
several trading systems that appear to offer the use of non-firm
trading interest, provide non-discretionary protocols, trade crypto
asset securities, and were not included within the Commission's initial
estimate of the number of respondents. Based on publicly-available
information, these trading systems may meet the criteria of Exchange
Act Rule 3b-16(a) as proposed to be amended and therefore, this PRA
analysis includes estimates of the burdens that these systems would
incur under the Proposed Rules. Many of the entities operating such
trading systems, however, depending on their activities and other facts
and circumstances, may be subject to existing federal securities laws
and registration requirements, including the requirement to register as
an exchange under existing criteria of Rule 3b-16(a) or the requirement
to register as a broker-dealer. In this regard, the Commission
recognizes that it may be over-estimating the number of respondents
that may be subject to the Proposed Rules. Specifically, the Commission
is revising the estimated total number of Newly Designated ATSs from
the 22 estimated systems in the Proposing Release to a total of 35-46
estimated Newly Designated ATSs,\175\ which would include: (1) an
additional 15-20 New Rule 3b-16(a) Systems that trade crypto asset
securities,\176\ and (2) 20-26 Newly Designated ATSs (revised from the
22 Newly Designated ATSs estimated in the Proposing Release),\177\
which has been revised to reflect New Rule 3b-16(a) Systems for non-
crypto asset securities that have exited, entered, or intend to enter,
the market since the Commission issued the Proposing Release. For the
purposes of this PRA analysis, the Commission is analyzing the burdens
for an estimated 46 Newly Designated ATSs, based on
[[Page 29466]]
the high end of these ranges.\178\ Some or all of this total number
will be subject to the following collections of information \179\ as
estimated below:\180\
---------------------------------------------------------------------------
\171\ See id. at section VII.
\172\ See id. at section II.D. As discussed above, today, the
Commission preliminarily believes that some amount of crypto asset
securities trade on New Rule 3b-16(a) Systems. See supra note 31.
These systems are not included as estimated respondents for the
purposes of the PRA analysis because they are already required to
comply with current applicable regulations; the proposed amendments
to Rule 3b-16 would not result in any new burden on these systems.
Rather, the PRA analysis includes the estimated number of
respondents for which a new burden would be imposed by the proposed
amendments to Rule 3b-16. Further, as discussed earlier in this
section, the Commission is not revising its estimate of the per-
respondent burdens that would be imposed by the proposed amendments
to Rule 3b-16. The increase in the estimate of total burdens across
all respondents is due solely to the Commission revising its
estimate of the number of respondents to include: (1) systems that
would meet the criteria of Rule 3b-16, as proposed to be amended,
and trade crypto asset securities; and (2) systems that would meet
the criteria of Rule 3b-16, as proposed to be amended, and trade
securities that are not crypto asset securities and have entered,
intend to enter, or exited the market since the Commission issued
the Proposing Release.
\173\ See supra note 170. The description of respondents and
burden estimates described in this Reopening Release for Newly
Designated ATSs supersedes and replaces corresponding respondent and
burden estimates for Communication Protocol Systems in the Proposing
Release.
\174\ See Proposing Release at section VII.C.
\175\ As discussed in the Proposing Release, some of the
estimates could change based on how the Newly Designated ATSs
structure their operations if subject to Regulation ATS. See id. at
15586 n.749. For example, the Commission is basing some of the below
estimates on the assumption that operators of Newly Designated ATSs
that are affiliated with existing broker-dealers would structure
their operations so that the existing broker-dealer would operate
the ATS to avoid the costs of new broker-dealer registration. In
addition, the Commission estimates that 2 Newly Designated ATSs that
trade municipal securities or corporate debt securities would meet
the volume thresholds to satisfy the conditions for complying with
ATS-specific systems capacity, integrity and security recordkeeping
as well as systems outages requirements. This number is based on
aggregate data reported by broker-dealers and could vary based on
how these systems structure their businesses.
\176\ The Commission received several comments stating that the
PRA analysis in the Proposing Release underestimated or did not
include systems that trade crypto asset securities. See, e.g.,
Bloomberg Letter II at 2-3; Coin Center Letter at 25; Coinbase
Letter at 6; Crypto Council Letter at 4-7. One commenter states that
the Commission did not include approximately 288 crypto
``exchanges,'' 200 crypto AMMs, and 9 front-end platforms that offer
liquidity aggregation and (smart) order routing functionality. See
Bloomberg Letter II at 2-3. It is not clear from the comment letter
whether these systems operate in the U.S., use non-firm trading
interest, and provide non-discretionary protocols to bring together
buyers and sellers to negotiate, and thus would be New Rule 3b-16(a)
Systems and subject to the new burdens analyzed under the PRA. In
addition, the Commission preliminarily believes that some amount of
crypto asset securities trade on New Rule 3b-16(a) Systems. See
supra note 31. These systems could be some or many of the systems
the commenter references. However, without additional information,
the Commission is unable to assess whether the systems referenced by
the commenter would meet existing Rule 3b-16(a), or Rule 3b-16(a),
as proposed to be revised. In addition, some commenters estimate
that hundreds or thousands of persons could be captured by the
proposed rule change. See supra note 60. See also SIFMA Letter II at
8-9 (stating that ``[t]he broad concept of communication protocol
systems could theoretically capture hundreds, if not thousands, of
systems across asset classes'' and there is a disconnect with the
Commission's estimate that 22 systems would be affected by the
Proposed Rules). As discussed above, systems would constitute a
single exchange and be responsible for compliance as a single
entity. See supra section II.B.
\177\ The original 22 Newly Designated ATSs the Commission
estimated in the Proposing Release may include ATSs that trade
crypto asset securities.
\178\ In the Proposing Release, the Commission certified that
the proposed amendments to Regulation ATS would not, if adopted,
have a significant economic impact on a substantial number of small
entities pursuant to section 3(a) of the Regulatory Flexibility Act
of 1980 (5 U.S.C. 603(a)). See Proposing Release at 15645. The
Commission did not receive any comment regarding its certification.
Although the Commission is now revising its estimate of the number
of respondents that would be subject to the proposed rules, the
Commission continues to certify that the proposed amendments would
not, if adopted, have a significant economic impact on a substantial
number of small entities. As in the Proposing Release, the
Commission encourages written comments regarding this certification.
\179\ The estimates presented here relate only to those
collections of information for which the burdens will change as a
result of increasing the estimated total number of Newly Designated
ATSs. For the complete estimated burden associated with the proposed
amendments, the estimates here for Newly Designated ATSs should be
considered together with those originally included in the Proposing
Release for Communication Protocol Systems, see Proposing Release at
section VII, with any burden identified by the identical combination
of Collection of Information and rule number replaced and superseded
by that contained here.
\180\ The estimated respondents for the Rule 304/Form ATS-N
collection of information is based on the assumption that systems
that operate multiple market places that are affiliated with a new
or existing broker-dealer will all be operated by such broker-
dealer, and that such systems will not register multiple broker-
dealers to operate multiple affiliated ATSs.
----------------------------------------------------------------------------------------------------------------
Number of
Collection of information Rule respondents Description
----------------------------------------------------------------------------------------------------------------
Rule 301 of Regulation ATS and 17 CFR 37 The Commission estimates that certain Newly
Forms ATS and ATS-R. 242.301(b)(2) Designated ATSs that trade securities
(``Rule other than NMS stocks or government
301(b)(2)''). securities or repos, including crypto
asset securities, would be required to
file the proposed modernized Form ATS.
Rule 301(b)(5).... 10 The Commission estimates that certain Newly
Designated ATSs would meet the volume
thresholds in government securities, NMS
stocks, corporate debt securities,
municipal securities, equity securities
that are not NMS stocks and for which
transactions are reported to an SRO and be
subject to the Fair Access Rule.
17 CFR 46 The Commission estimates that all Newly
242.301(b)(9) Designated ATSs will need to comply with
(``Rule the requirement to file quarterly reports
301(b)(9)''). on the proposed modernized Form ATS-R.
17 CFR 46 The Commission estimates that all Newly
242.301(b)(10) Designated ATSs will need to comply with
(``Rule the requirement to have written safeguards
301(b)(10)''). and written procedures to protect
subscribers' confidential trading
information.
Rule 302 of Regulation ATS..... 17 CFR 242.302 46 The Commission estimates that all Newly
(``Rule 302''). Designated ATSs will need to comply with
the recordkeeping requirements for ATSs.
Rule 303 of Regulation ATS..... 17 CFR 242.303 46 The Commission estimates that all Newly
(``Rule 303''). Designated ATSs will need to comply with
the record preservation requirements for
ATSs.
Rule 304 of Regulation ATS..... 17 CFR 242.304 9 The Commission estimates that certain
(``Rule 304''). Communication Protocol Systems that trade
NMS stocks or government securities or
repos would be required to file Form ATS-
N, as proposed to be revised.
Rule 15b1-1 and Form BD........ 17 CFR 240.15b1-1 27 The Commission estimates that certain Newly
(``Rule 15b1-1''). Designated ATSs are not currently
registered as or affiliated with a broker-
dealer and will need to register using
Form BD. This would include all Newly
Designated ATSs that trade crypto asset
securities that do not currently file a
Form ATS.
Form ID........................ 17 CFR 232.101 27 The Commission estimates that the same
(``Rule 101 of subset of Newly Designated ATSs that are
Regulation S-T''). not currently registered as or affiliated
with a broker-dealer will also need to
file Form ID to apply for EDGAR access.
----------------------------------------------------------------------------------------------------------------
B. Total PRA Burdens
The Commission continues to assume that, under the proposed
amendments, Newly Designated ATSs will choose to register as broker-
dealers and comply with the conditions of Regulation ATS, rather than
register as a national securities exchange,\181\ and the estimates
below reflect this assumption.
---------------------------------------------------------------------------
\181\ See Proposing Release at 15618 n.1056 and accompanying
text.
---------------------------------------------------------------------------
1. Burden of Rule 301 of Regulation ATS and Forms ATS and ATS-R
a. Rule 301(b)(2) Burden on Newly Designated ATSs
As discussed in the Proposing Release, the Commission estimates
that each Newly Designated ATS would incur an initial burden of 20.5
hours \182\ and an annual burden of 5 hours \183\ for complying with
Rule 301(b)(2). In light of the revision of the Commission's estimate
of Newly Designated ATSs, the Commission estimates the following total
initial and annual burdens:
---------------------------------------------------------------------------
\182\ The Commission's currently approved baseline for the
average initial compliance burden for each initial operation report
(``IOR'') on Form ATS is 20 hours (Attorney at 13 hours + Compliance
Clerk at 7 hours). See Extension Without Change of a Currently
Approved Collection: Regulation ATS Rule 301 Amendments; ICR
Reference No. 202101-3235-011; OMB Control No. 3235-0509 (June 9,
2018), available at <a href="https://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=202101-3235-011">https://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=202101-3235-011</a> (``Rule 301 PRA Supporting
Statement''). The Commission proposed amendments to Part I of Form
ATS, which would add an additional burden of 0.5 hours per filing
using the modernized form (Compliance Clerk at 0.5 hours), and
therefore the average compliance burden for each Form ATS filing
would be 20.5 hours. See Proposing Release at section V.B and
section VII.E (discussing proposed changes).
\183\ The Commission's currently approved baseline for the
average ongoing compliance burden for each amendment to a Form ATS
IOR is 4 hours ((Attorney at 1.5 hours + Compliance Clerk at 0.5
hours) x 2 IOR amendments a year). See Rule 301 PRA Supporting
Statement. The Commission proposed amendments to Part I of Form ATS,
including a requirement applicable to an ATS filing an IOR amendment
to attach as Exhibit 3 a marked document to indicate changes to
``yes'' or ``no'' answers and additions or deletions from any Item
in Part I, Part II, and Part III, which would add an additional
annual burden of 1 hour per ATS using the modernized form
(Compliance Clerk at 0.5 hours x 2 IOR amendments a year). Therefore
the average compliance burden for each Form ATS filing would be 5
hours. See Proposing Release at section V.B and section VII.E
(discussing proposed changes).
[[Page 29467]]
----------------------------------------------------------------------------------------------------------------
Total burden
(number of
Burden type Respondent type Number of Burden per respondents x
respondents respondent burden per
respondent)
----------------------------------------------------------------------------------------------------------------
Initial......................... Newly Designated 37 20.5 hours........ 758.5 hours.
ATSs.
Annual.......................... ................... ................. 5 hours........... 185 hours.
----------------------------------------------------------------------------------------------------------------
b. Rule 301(b)(5) Burden on Newly Designated ATSs
As discussed in the Proposing Release, the Commission estimates an
annual compliance burden of 37 hours per respondent for Rule
301(b)(5).\184\ In light of the revision of the Commission's estimate
of Newly Designated ATSs, the Commission estimates the following total
annual burdens:
---------------------------------------------------------------------------
\184\ The Commission's currently approved baseline for the
average compliance burden per respondent is 37 hours = 10 hours for
Fair Access standards recordkeeping (Attorney at 5 hours x 2
responses a year) + 27 hours for Fair Access notices (Attorney at 1
hour x 27 responses a year). See Proposing Release at section
VII.D.1.b.
----------------------------------------------------------------------------------------------------------------
Total annual burden
Number of Annual burden per (number of respondents x
Respondent type respondents respondent annual burden per
respondent)
----------------------------------------------------------------------------------------------------------------
Newly designated ATSs.................. 10 37 hours................. 370 hours.
----------------------------------------------------------------------------------------------------------------
c. Rule 301(b)(6) Burden on Newly Designated ATSs
The Commission estimates that none of the Newly Designated ATSs
trading crypto asset securities or that have entered or intend to enter
the market since the Commission issued the Proposing Release would meet
the applicable volume requirements and be subject to the requirements
of 17 CFR 242.301(b)(6) (``Rule 301(b)(6)''), and therefore, the
estimates in the Proposing Release remain unchanged.
d. Rule 301(b)(9) Burden on All Respondents
As discussed in the Proposing Release, the Commission estimates an
annual compliance burden of 19 hours per new Form ATS-R respondent
\185\ and 3 hours per existing Form ATS-R respondent.\186\ In light of
the revision of the Commission's estimate of Newly Designated ATSs, the
Commission estimates the following total annual burdens:
---------------------------------------------------------------------------
\185\ The annual burden per Newly Designated ATS would be 4.75
hours x 4 quarterly filings annually = 19 burden hours. See
Proposing Release at 15590 n.770.
\186\ The annual burden per existing Form ATS-R respondent would
be 0.75 hours x 4 quarterly filings annually = 3 burden hours. See
id. at 15590 n.771.
----------------------------------------------------------------------------------------------------------------
Total annual burden
Number of Annual burden per (number of respondents x
Respondent type respondents respondent annual burden per
respondent)
----------------------------------------------------------------------------------------------------------------
Newly Designated ATSs.................. 46 19 hours................. 874 hours.
----------------------------------------------------------------------------------------------------------------
e. Rule 301(b)(10) Burden on Newly Designated ATSs
As discussed in the Proposing Release, the Commission estimates an
initial burden of 8 hours \187\ and an annual burden of 4 hours \188\
per respondent for complying with Rule 301(b)(10). In light of the
revision of the Commission's estimate of Newly Designated ATSs, the
Commission estimates the following total initial and annual burdens:
---------------------------------------------------------------------------
\187\ The Commission's currently approved baseline for the
average initial compliance burden is 8 hours (Attorney at 7 hours +
Compliance Clerk at 1 hour). See Rule 301 PRA Supporting Statement.
\188\ The Commission's currently approved baseline for the
average ongoing compliance burden is 4 hours (Attorney at 2 hours +
Compliance Clerk at 2 hours). See id.
----------------------------------------------------------------------------------------------------------------
Total burden
(number of
Burden type Respondent type Number of Burden per respondents x
respondents respondent burden per
respondent)
----------------------------------------------------------------------------------------------------------------
Initial......................... Newly Designated 46 8 hours........... 368 hours.
ATSs.
Annual.......................... ................... ................. 4 hours........... 184 hours.
----------------------------------------------------------------------------------------------------------------
2. Burden of Rules 302 and 303 of Regulation ATS on Newly Designated
ATSs
---------------------------------------------------------------------------
\189\ The Commission's currently approved baseline for the
average compliance burden is 45 hours (Compliance Clerk at 45
hours). See Extension Without Change of a Currently Approved
Collection: Rule 302 (17 CFR 242.302) Recordkeeping Requirements for
Alternative Trading Systems; ICR Reference No. 201906-3235-011; OMB
Control No. 3235-0510 (Oct. 24, 2019), available at <a href="https://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=201906-3235-011">https://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=201906-3235-011</a>.
There is no initial burden associated with this rule.
As discussed in the Proposing Release, the Commission estimates an
annual burden of 45 hours per respondent to comply with Rule 302 \189\
and 15 hours to comply with Rule 303.\190\ In light of the revision of
the Commission's estimate of Newly Designated ATSs, the Commission
estimates the following total annual burdens:
---------------------------------------------------------------------------
\190\ The Commission's currently approved baseline for the
average compliance burden is 15 hours (Compliance Clerk at 15
hours). See Extension Without Change of a Currently Approved
Collection: Rule 303 (17 CFR 242.303) Record Preservation
Requirements for Alternative Trading Systems; ICR Reference No.
202101-3235-010; OMB Control No. 3235-0505 (June 25, 2021),
available at <a href="https://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=202101-3235-010">https://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=202101-3235-010</a>. There is no initial burden
associated with this rule.
[[Page 29468]]
----------------------------------------------------------------------------------------------------------------
Total annual
burden (number of
Rule Respondent type Number of Annual burden per respondents x
respondents respondent annual burden per
respondent)
----------------------------------------------------------------------------------------------------------------
Rule 302........................ Newly Designated 46 45 hours.......... 2,070 hours.
ATSs.
Rule 303........................ ................... ................. 15 hours.......... 690 hours.
----------------------------------------------------------------------------------------------------------------
3. Burden of Rule 304 of Regulation ATS and Form ATS-N on Newly
Designated ATSs
As discussed in the Proposing Release, the Commission estimates an
initial compliance burden of 136.4 hours per new Form ATS-N respondent
\191\ and an annual burden of 47 hours.\192\ In light of the revision
of the Commission's estimate of Newly Designated ATSs, the Commission
estimates the following total annual burdens:
---------------------------------------------------------------------------
\191\ The Commission's currently approved baseline for the
average initial compliance burden for each initial Form ATS-N is
130.4 hours (currently approved baseline burden to complete an
initial Form ATS at 20 hours: Attorney at 13 hours and Compliance
Clerk at 7 hours; see Proposing Release at 15588 n.759) + (Part I at
0.5 hour) + (Part II at an average of 29 hours) + (Part III at an
average of 78.75 hours) + (Access to EDGAR at 0.15 hours) + (Posting
link to published Form ATS-N on ATS website at 2 hours) = 130.4
burden hours. See Extension Without Change of a Currently Approved
Collection: Regulation ATS Rule 304 and Form ATS-N; ICR Reference
No. 202109-3235-014; OMB Control No. 3235-0763 (January 3, 2022),
available at <a href="https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202109-3235-014">https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202109-3235-014</a> (``Rule 304 PRA Supporting
Statement''). The aggregate totals by professional, including the
baseline, are estimated to be approximately 54.6 hours for an
Attorney, 0.5 hours for a Chief Compliance Manager, 34.55 hours for
a Compliance Manager, 32.25 hours for a Senior Systems Analyst, 1
hour for a Senior Marketing Manager, and 7.5 hours for a Compliance
Clerk. The Commission estimates that the proposed amendments to Form
ATS-N would add an additional burden of 6 hours per filing (Attorney
at 2.5 hours, Compliance Manager at 1.5 hours, Senior Systems
Analyst at 1.5 hours, and Compliance Clerk at 0.5 hours), and
therefore the average compliance burden for each new Form ATS-N
filer would be 136.4 hours. See Proposing Release at section V.B and
section VII.E (discussing proposed changes).
\192\ The currently approved baseline for filing amendments to
Form ATS-N is 47 hours ((Attorney at 5.5 hours + Compliance Manager
at 2 hours + Compliance Clerk at 1.9 hours) x 5 amendments a year).
See Rule 304 PRA Supporting Statement.
----------------------------------------------------------------------------------------------------------------
Total burden
(number of
respondents x
Number of Burden per burden per
Burden type Respondent type respondents respondent respondent,
(hours) rounded to
nearest 0.5
hours)
----------------------------------------------------------------------------------------------------------------
Initial............................. Newly Designated ATSs.. 9 136.4 1,227.5
Annual.............................. ....................... .............. 47 423
----------------------------------------------------------------------------------------------------------------
4. Burden of Rule 15b1-1 and Form BD on Newly Designated ATSs
As discussed in the Proposing Release, the Commission estimates an
initial burden of 2.75 hours \193\ and an annual burden of 1 hour \194\
per respondent for completing Form BD. In light of the revision of the
Commission's estimate of Newly Designated ATSs, the Commission
estimates the following total initial and annual burdens:
---------------------------------------------------------------------------
\193\ The Commission's currently approved baseline for the
average initial compliance burden for each Form BD is 2.75 hours
(Compliance Manager at 2.75 hours). See Extension Without Change of
a Currently Approved Collection: Form BD and Rule 15b1-1.
Application for registration as a broker-dealer; ICR Reference No.
201905-3235-016; OMB Control No. 3235-0012 (Aug. 7, 2019), available
at <a href="https://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=201905-3235-016">https://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=201905-3235-016</a>. (``Form BD PRA Supporting Statement'').
\194\ The Commission's currently approved baseline for the
average ongoing compliance burden for each respondent amending Form
BD is 0.95 hours (Compliance Manager at 0.33 hours x 2.87 amendments
per year). See Form BD PRA Supporting Statement.
----------------------------------------------------------------------------------------------------------------
Total burden
(number of
respondents x
Number of Burden per burden per
Burden type Respondent type respondents respondent respondent,
(hours) rounded to
nearest 0.5
hours)
----------------------------------------------------------------------------------------------------------------
Initial............................. Newly Designated ATSs.. 27 2.75 74
Annual.............................. ....................... .............. 0.95 25.5
----------------------------------------------------------------------------------------------------------------
[[Page 29469]]
5. Burden of Form ID on Newly Designated ATSs
As discussed in the Proposing Release, the Commission estimates,
with regards to Rule 101 of Regulation S-T, an initial burden of 0.15
hours \195\ and no annual burden per respondent for completing Form ID.
In light of the revision of the Commission's estimate of Newly
Designated ATSs, the Commission estimates the following total burdens:
---------------------------------------------------------------------------
\195\ See Revision of a Currently Approved Collection: Form ID--
EDGAR Password; ICR Reference No. 202104-3235-022; OMB Control No.
3235-0328 (Apr. 29, 2021), available at <a href="https://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=202104-3235-022">https://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=202104-3235-022</a>.
----------------------------------------------------------------------------------------------------------------
Total initial
burden (number of
respondents x
Respondent type Number of Initial burden per initial burden per
respondents respondent (hours) respondent,
rounded to nearest
0.5 hours)
----------------------------------------------------------------------------------------------------------------
Newly Designated ATSs.................................. 27 0.15 4
----------------------------------------------------------------------------------------------------------------
6. Burden of Regulation SCI on Newly Designated ATSs
The Commission does not estimate any Newly Designated ATSs that
trade crypto asset securities or that have exited, entered, or intend
to enter the market since the Commission issued the Proposing Release
will be subject to Regulation SCI,\196\ and therefore, the estimates in
the Proposing Release remain unchanged.
---------------------------------------------------------------------------
\196\ ``Regulation SCI'' consists of 17 CFR 242.1000 through
242.1007.
---------------------------------------------------------------------------
C. Request for Comments
Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits
comments to:
39. Evaluate whether the proposed collection of information is
necessary for the proper performance of the Commission's functions,
including whether the information shall have practical utility;
40. Evaluate the accuracy of the Commission's estimates of the
burden of the proposed collection of information;
41. Determine whether there are ways to enhance the quality,
utility, and clarity of the information to be collected;
42. Evaluate whether there are ways to minimize the burden of
collection of information on those who are to re
[…truncated; see source link]Indexed from Federal Register on May 5, 2023.
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