Notice2025-19314
In the Matter of the Application of Texas Stock Exchange LLC for Registration as a National Securities Exchange; Findings, Opinion, and Order of the Commission
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
October 2, 2025
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 90 Issue 189 (Thursday, October 2, 2025)</title>
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[Federal Register Volume 90, Number 189 (Thursday, October 2, 2025)]
[Notices]
[Pages 47880-47893]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-19314]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-104146; File No. 10-249]
In the Matter of the Application of Texas Stock Exchange LLC for
Registration as a National Securities Exchange; Findings, Opinion, and
Order of the Commission
September 30, 2025.
I. Introduction and Procedural History
On January 31, 2025, Texas Stock Exchange LLC (``TXSE'') filed with
the Securities and Exchange Commission (``Commission'') a Form 1
application (``Form 1'') under the Securities Exchange Act of 1934
(``Act'' or ``Exchange Act''), seeking registration as a national
securities exchange under Section 6 of the Exchange Act.\1\ On April 2,
2025, TXSE submitted Amendment No. 1 to its Form 1 application.\2\
Notice of the application, as amended, was published for comment in the
Federal Register on April 10, 2025.\3\ On July 9, 2025, the Commission
instituted proceedings pursuant to Section 19(a)(1)(B) of the Act \4\
to determine whether to grant or deny TXSE's application for
registration as a national securities exchange under Section 6 of the
Act.\5\ On July 29, 2025, TXSE filed another amendment to the Form 1
(``Amendment No. 2'').\6\ Amendment No. 2 was published for comment in
the Federal Register on August 5, 2025.\7\ The Commission has received
comments on the amended Form 1.\8\
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\1\ 15 U.S.C. 78f. The Form 1 is available on the Commission's
website at: <a href="https://www.sec.gov/rules-regulations/other-commission-orders-notices-information/txse-form-1">https://www.sec.gov/rules-regulations/other-commission-orders-notices-information/txse-form-1</a>. See also 15 U.S.C. 78s(a)(1)
(stating that the Commission shall, ``[w]ithin ninety days of the
date of publication of such notice (or within such longer period as
to which the applicant consents),'' grant the registration or
institute proceedings to determine whether the registration should
be denied).
\2\ In Amendment No. 1, TXSE submitted updated portions of its
Form 1 application, including Exhibits A-3 (Proposed First Amended
and Restated Limited Liability Company Agreement of Texas Stock
Exchange LLC), B-1 (Rules of TXSE), C (information regarding
subsidiaries or affiliates), E (description of the proposed
operation of the exchange), H (listing applications), J (list of
officers, governors, members of all standing committees, or persons
performing similar functions), and K (Shareholders owning 5% or
more).
\3\ See Securities Exchange Act Release No. 102773 (Apr. 4,
2025), 90 FR 15375 (``Notice'').
\4\ 15 U.S.C. 78s(a)(1)(B).
\5\ See Securities Exchange Act Release No. 103422, 90 FR 31360
(July 14, 2025).
\6\ In Amendment No. 2, TXSE submitted updated portions of its
Form 1 application, including Exhibits A-3, B-1, C, D, E, F, H, J,
and K. Amendment No. 2 is available on the Commission's website at:
<a href="https://www.sec.gov/rules-regulations/other-commission-orders-notices-information/txse-form-1">https://www.sec.gov/rules-regulations/other-commission-orders-notices-information/txse-form-1</a>.
\7\ See Securities Exchange Act Release No. 103604 (July 31,
2025), 90 FR 37607.
\8\ The public comment file for TXSE's Form 1 (File No. 10-249)
is available on the Commission's website at: <a href="https://www.sec.gov/comments/10-249/10-249.htm">https://www.sec.gov/comments/10-249/10-249.htm</a>.
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The Commission has reviewed the Exchange's registration
application, as amended, together with the comment letters received, in
order to make a determination whether to grant such registration. For
the reasons set forth below, and based on the representations set forth
in the Form 1, as amended, this order approves TXSE's application, as
amended, for registration as a national securities exchange.
II. Statutory Standards
Pursuant to Sections 6(b) and 19(a) of the Act,\9\ the Commission
shall by order grant an application for registration as a national
securities exchange if the Commission finds, among other things, that
the proposed exchange is so organized and has the capacity to carry out
the purposes of the Act and can comply, and can enforce compliance by
its members and persons associated with its members, with the
provisions of the Act, the rules and regulations thereunder, and the
rules of the exchange.\10\
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\9\ 15 U.S.C. 78f(b) and 15 U.S.C. 78s(a), respectively.
\10\ See also supra note 1 (discussing the time for Commission
action following publication of notice of an application for
exchange registration).
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As discussed in greater detail below, the Commission finds that
TXSE's application, as amended, for exchange registration meets the
requirements of the Act and the rules and regulations thereunder.
Further, the Commission finds that the proposed rules of TXSE are
consistent with Section 6 of the Act in that, among other things, they
are designed to: (1) assure fair representation of the exchange's
members in the selection of its directors and administration of its
affairs and provide that, among other things, one or more directors
shall be representative of investors and not be associated with the
exchange, or with a broker or dealer; \11\ (2) prevent fraudulent and
manipulative acts and practices, promote just and equitable principles
of trade, foster cooperation and coordination with persons engaged in
regulating, clearing, settling, processing information with respect to,
and facilitating transactions in securities, and remove impediments to
and perfect the mechanisms of a free and open market and a national
market system; \12\ (3) not permit unfair discrimination between
customers, issuers, or dealers; \13\ and (4) protect investors and the
public interest.\14\ The Commission also finds that the proposed rules
of TXSE are consistent with Section 11A of the Act.\15\ Finally, the
Commission finds that TXSE's proposed rules do not impose any burden on
competition not necessary or appropriate in furtherance of the purposes
of the Act.\16\
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\11\ See 15 U.S.C. 78f(b)(3).
\12\ See 15 U.S.C. 78f(b)(5).
\13\ See id.
\14\ See id.
\15\ 15 U.S.C. 78k-1.
\16\ 15 U.S.C. 78f(b)(8).
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III. Discussion
The Commission received comment letters expressing support for
TXSE's
[[Page 47881]]
Form 1.\17\ Many commenters state that entry of TXSE in the market will
increase competition in areas including listings, trading technologies,
market structure, and market data, and facilitate capital
formation,\18\ as well as increase efficiency.\19\ One commenter states
the introduction of TXSE may cause existing exchanges to ``revisit fee
structures'' and could ``lead to improvements in pricing
transparency.'' \20\
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\17\ See, e.g., Letters from Glen Hamer, President and CEO,
Texas Association of Business, dated May 6, 2025 (``TAB Letter'');
Ray Hunt, dated May 7, 2025; Morgan Meyer, Texas State
Representative, dated May 13, 2025 (``Meyer Letter''); Scott Leiter,
Managing Director and Chief Investor Officer, Deason Capital
Services, dated May 13, 2025; R. Carter Pate, dated May 16, 2025
(``Pate Letter''); Xavier Sztejnberg, Director of Wall Street for
McCombs School of Business, University of Texas at Austin, dated May
16, 2025 (``Sztejnberg Letter''); Phil Gramm, dated May 21, 2025
(``Gramm Letter''); John Cornyn, United States Senator, dated May
22, 2025 (``Cornyn Letter''); Michael Nicholas, CEO, Bond Dealers of
America, dated May 22, 2025 (``BDA Letter''); Chris Furlow,
President and CEO, Texas Bankers Association, dated May 23, 2025
(``TBA Letter''); Lee Bratcher, President, Texas Blockchain Council,
dated May 23, 2025 (``TBC Letter''); Ted Cruz, United States
Senator, dated May 23, 2025; Robert Arancio, Managing Director, Head
of Trading, dated May 27, 2025 (``Neuberger Letter''); Drew
McKnight, Co-CEO, Fortress Investment Group, dated May 27, 2025
(``Fortress Letter''); Justin Yancy, President, Texas Business
Leadership Council, dated June 2, 2025; Dale Young, Chairman and
CEO, Summit Financial Group, dated June 2, 2025 (``Summit Letter'');
Stephen John Berger, Managing Director, Global Head of Government
and Regulatory Policy, Citadel Securities, dated June 12, 2025
(``Citadel Letter''); Christopher Iacovella, President and CEO,
American Securities Association, dated July 9, 2025 (``ASA
Letter''); John L. Thor, Co-Chair, Hal S. Scott, President, and R.
Glen Hubbard, Co-Chair, Committee on Capital Markets Regulation,
dated Aug. 4, 2025 (``Committee on Capital Markets Letter'').
\18\ See, e.g., Citadel Letter at 1; TAB Letter; Meyer Letter;
Committee on Capital Markets Letter at 2. Several commenters observe
a downward trend in the number of public companies in recent years,
and state that competition for listing services may encourage more
companies to go public. See, e.g., Meyer Letter; Cornyn Letter; TBA
Letter at 2; Fortress Letter at 1; Citadel Letter at 1; Committee on
Capital Markets Letter at 2.
\19\ See, e.g., TAB Letter; Gramm Letter at 2; BDA Letter at 1;
Neuberger Letter at 2.
\20\ Sztejnberg Letter. Similarly, commenters state increased
competition may result in lower fees and compliance costs. See,
e.g., Summit Financial Group Letter; Gramm Letter at 2; and TBC
Letter.
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One commenter opposes approval of TXSE's Form 1, stating that
``TXSE fails to present a compelling justification for its addition to
the already saturated U.S. equity exchange landscape.'' \21\ This
commenter further states, ``fragmentation remains a persistent issue,
raising questions about whether new exchanges like TXSE enhance market
competition or simply complicate infrastructure without clear
innovation'' and that TXSE did not propose any advancements in
transparency, investor access, or market efficiency.\22\
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\21\ Taylor, Masters of Public Policy Student, Northwestern
University, dated July 14, 2025.
\22\ Id. But see Citadel Letter at 1 (stating ``[w]hile there is
a legitimate criticism of the proliferation of securities exchanges
that offer little differentiation or innovation in their products or
services, the innovation TXSE is proposing is unique and value-
additive for the capital markets'').
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In contrast, a commenter states that the market, rather than the
Commission, should decide how many exchanges there should be.\23\ The
commenter acknowledges ``legitimate concerns'' around certain market
structure issues, stating that ``these problems need to be addressed
regardless of whether we have three exchanges or three hundred'' and
that such concerns should not ``block approval of new exchange
applications.'' \24\ Instead, according to the commenter, ``[a]s long
as the proposed entrant can demonstrate that it can fulfill a national
securities exchange's legal obligations under the Securities Exchange
Act, then its registration should be approved.'' \25\
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\23\ See Letter from James J. Angel dated May 27, 2025, at 3.
\24\ See id.
\25\ See id.
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The Act does not require that a new exchange be novel or that it
provide innovation to the market. While adding another exchange to the
national market system can impose costs to the industry, including
specifically to those market participants that become members of TXSE,
as stated above in Section II, the Act requires that the Commission
grant an application for registration as a national securities exchange
if the Commission finds that the requirements of the Act and the rules
and regulations thereunder with respect to the applicant are
satisfied.\26\ For the reasons discussed throughout this order, the
Commission finds that TXSE's application, as amended, for exchange
registration meets the requirements of the Act and the rules and
regulations thereunder and accordingly grants the application for
registration.
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\26\ See supra notes 9-10 and accompanying text.
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A. Ownership and Governance of TXSE
TXSE is a Delaware limited liability company \27\ that will be
wholly owned by its sole member, TXSE Group Inc. (``TXSE Group''), a
Delaware corporation.\28\ TXSE Group will be the entity through which
the individual investors who are ultimate owners of the Exchange will
hold their ownership interests in the Exchange.\29\
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\27\ See Certification of Formation of Texas Stock Exchange LLC.
\28\ See Fourth Amended and Restated Certificate of
Incorporation of TXSE Group Inc. (``TXSE Group Certificate'').
\29\ See Form 1, Exhibit C and Exhibit K.
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1. TXSE Board of Directors
The Board \30\ of TXSE (``Exchange Board'') will be its governing
body and will possess all of the powers necessary for the management of
its business and affairs, including governance of TXSE as a self-
regulatory organization (``SRO'').\31\ Specifically:
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\30\ ``Board'' means the Board of Directors of TXSE. See Article
I of the proposed First Amended and Restated Limited Liability
Company Agreement of TXSE Exchange LLC (``TXSE LLC Agreement''). The
TXSE LLC Agreement states that the agreement is subject to certain
provisions of the Fourth Amended and Restated Stockholders'
Agreement, dated as of October 23, 2024, as amended from time to
time, by and among TXSE Group and its initial stockholders
(``Stockholders' Agreement''). See TXSE LLC Agreement. See also Form
1, Exhibit C, which includes the Stockholders' Agreement. To the
extent any provision of the Stockholders' Agreement is a stated
policy, practice, or interpretation (as defined in Rule 19b-4 under
the Act) of TXSE, any amendment thereto must be filed with the
Commission pursuant to Section 19(b)(4) of the Act and Rule 19b-4
thereunder. See Section 3(a)(27) of the Act, 15 U.S.C. 78c(a)(27)
(defining ``rules of an exchange'').
\31\ See TXSE LLC Agreement, Article III, Section 1. See also
Form 1, Exhibit J.
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<bullet> the Exchange Board initially will be composed of 10
Directors; \32\
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\32\ See TXSE LLC Agreement, Article III, Section 2(a). The term
``Director'' is defined in TXSE LLC Agreement, Article I. A Director
may not be subject to statutory disqualification. See TXSE LLC
Agreement, Article III, Section 2(d).
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<bullet> one Director will be the Chief Executive Officer (``CEO'')
of TXSE, who shall be considered an Industry Director; \33\
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\33\ See TXSE LLC Agreement, Article III, Section 2(b)(i).
``Industry Director'' means, among other criteria, a Director who is
or has served within the prior three years an officer, director, or
employee of a broker or dealer, excluding an outside director or a
director not engaged in the day-to-day management of a broker or
dealer. See TXSE LLC Agreement, Article I, for a description of all
of the circumstances regarding when a Director would be considered
an Industry Director. TXSE LLC Agreement, Article I.
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<bullet> at least 50% of the Directors of the Exchange Board shall
be Non-Industry Directors,\34\ and the remainder shall be Industry
Directors and Member Representative Directors;
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\34\ ``Non-Industry Director'' means a Director who is an
Independent Director or any other individual who would not be an
Industry Director. See TXSE LLC Agreement, Article I. ``Independent
Director'' means a Director who has no material relationship with
TXSE or any affiliate of TXSE or any Exchange Member or any
affiliate of any such Exchange Member; provided, however, that an
individual who otherwise qualifies as an Independent Director shall
not be disqualified from serving in such capacity solely because
such Director is a Director of TXSE or TXSE Group. See id.
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<bullet> at least 20% of the Directors on the Exchange Board shall
be Member Representative Directors; \35\
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\35\ See TXSE LLC Agreement, Article III, Section 2(b)(ii).
``Member Representative Director'' means a Director who has been
appointed as such to the initial Exchange Board pursuant to Section
3(g) of the TXSE LLC Agreement or elected by TXSE Group after having
been nominated by the Member Nominating Committee or by an Exchange
Member pursuant to the TXSE LLC Agreement and confirmed as the
nominee of Exchange members after majority vote of Exchange Members,
if applicable. A Member Representative Director must be an officer,
director, employee, or agent of an Exchange Member that is not a
Stockholder Exchange Member. See TXSE LLC Agreement, Article I. A
``Stockholder Exchange Member'' means an Exchange Member that also
maintains, directly or indirectly, an ownership interest in TXSE.
See id. ``Exchange Member'' or ``Member'' means any registered
broker or dealer that has been admitted to membership in the
national securities exchange operated by TXSE. An Exchange Member
shall have the status of a ``member'' of the Exchange as that term
is defined in Section 3(a)(3) of the Exchange Act. See id. See also
TXSE Rule 1.005(q).
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[[Page 47882]]
<bullet> at least two of the Non-Industry Directors shall also
qualify as Independent Directors; \36\ and
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\36\ See TXSE LLC Agreement, Article III, Section 2(b)(ii). In
addition, the Exchange Board shall have a ``Lead Director,'' who
shall be an Independent Director designated by the Exchange Board
and will preside over executive sessions of the Exchange Board. See
TXSE LLC Agreement, Article III, Section 4.
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<bullet> during such time as TXSE operates a listings business, the
Board shall include at least one Director who is representative of
issuers and investors and not associated with an Exchange Member, a
broker, or a dealer.\37\
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\37\ See TXSE LLC Agreement, Article III, Section 2(b)(ii). Such
Director may be, but is not required to be, an Independent Director.
Id.
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The initial Directors of the Exchange Board will be appointed by
TXSE Group and will serve until the first annual meeting of the LLC
Member.\38\ The first annual meeting of the LLC Member will be held
within 90 days after the Commission grants TXSE's exchange
registration.\39\
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\38\ See TXSE LLC Agreement, Article III, Section 3(g)). ``LLC
Member'' means any person who maintains a direct ownership interest
in TXSE, which shall initially be TXSE Group. See TXSE LLC
Agreement, Article I. The Exchange represents that if the Commission
approves the Exchange's Form 1 application, TXSE Group, as the
controlling LLC Member of the Exchange, will appoint interim
Directors of the Exchange Board which will include interim Member
Representative Director(s). Upon the appointment of the Interim
Directors by TXSE Group, the Interim Board would meet the Board
composition requirements set forth in the TXSE LLC Agreement. The
Exchange also represents that, prior to the commencement of
operations as an Exchange, the Exchange would complete the full
nomination, petition and voting processes set forth in the TXSE LLC
Agreement. See Form 1, Exhibit J.
\39\ See TXSE LLC Agreement, Article III, Section 3(g).
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In addition, TXSE Group will appoint the initial Nominating
Committee and Member Nominating Committee, consistent with each
committee's compositional requirements, to nominate candidates for
election to the Exchange Board.\40\ The Nominating Committee and Member
Nominating Committee, after completion of their respective duties for
nominating directors for election to the Board for that year, will
recommend candidates to serve on the succeeding year's Nominating
Committee or Member Nominating Committee, as applicable.\41\ Exchange
Members will have rights to nominate and elect additional candidates
for the Member Nominating Committee pursuant to a petition process.\42\
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\40\ See TXSE LLC Agreement, Article V1.
\41\ See id.
\42\ See id.
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The Nominating Committee will nominate candidates for election to
the Board.\43\ For Member Representative Director positions, the Member
Nominating Committee, composed solely of Member Representative
Members,\44\ will solicit input from Exchange Members, and Exchange
Members may submit petition candidates.\45\ If no candidates are
nominated pursuant to a petition process, then the initial nominees
approved and submitted by the Member Nominating Committee will be
nominated as Member Representative Directors by the Nominating
Committee.\46\ If a petition process produces additional candidates,
then the candidates nominated pursuant to the petition process,
together with those nominated by the Member Nominating Committee, will
be presented to Exchange Members for election to determine the final
designees for any open Member Representative Director positions.\47\ In
the event of a contested election, the candidates who receive the most
votes will be selected as the Member Representative Director designees
by the Member Nominating Committee.\48\
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\43\ See TXSE LLC Agreement, Article V, Section 2.
\44\ See TXSE LLC Agreement, Article V, Section 3. ``Member
Representative Member'' means a member of any committee or hearing
panel who is an officer, director, employee or agent of an Exchange
Member that is not a Stockholder Exchange Member. See TXSE LLC
Agreement, Article I.
\45\ See TXSE LLC Agreement, Article III, Section 3.
\46\ See TXSE LLC Agreement, Article III, Section 3(e).
\47\ See id.
\48\ See TXSE LLC Agreement, Article III, Section 3(f).
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The TXSE governance provisions are consistent with the Act. In
particular, the requirement that the number of Member Representative
Directors must be at least 20% of the Board and the means by which they
will be chosen by Exchange Members provides for the fair representation
of members in the selection of directors and the administration of TXSE
and therefore are consistent with Section 6(b)(3) of the Act.\49\ As
the Commission has previously stated, this requirement helps to ensure
that members have a voice in an exchange's self-regulatory program, and
that an exchange is administered in a way that is equitable to all
those who trade on its market or through its facilities.\50\
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\49\ 15 U.S.C. 78f(b)(3).
\50\ See, e.g., Securities Exchange Act Release Nos. 102853
(Apr. 11, 2025), 90 FR 16207 (Apr. 17, 2025) (File No. 10-244)
(order granting exchange registration of Green Impact Exchange, LLC
(``GIX'')) (``GIX Order''); 102650 (Mar. 13, 2025), 90 FR 12590
(Mar. 18, 2025) (order granting exchange registration of MX2 LLC
(``MX2'')) (``MX2 Order''); 101777 (Nov. 27, 2024), 89 FR 97092
(Dec. 6, 2024) (File No. 10-242) (order granting exchange
registration of 24X National Exchange LLC (``24X'')) (``24X
Order''); 100539 (July 15, 2024), 89 FR 58848 (July 19, 2024) (File
No. 10-240) (order granting exchange registration of MIAX Sapphire,
LLC; 88806 (May 4, 2020), 85 FR 27451 (May 8, 2020) (File No. 10-
237) (order granting exchange registration of MEMX LLC (``MEMX''))
(``MEMX Order''); 85828 (May 10, 2019), 84 FR 21841 (May 15, 2019)
(File No. 10-234) (order granting exchange registration of Long Term
Stock Exchange, Inc. (``LTSE'')) (``LTSE Order''); 79543 (Dec. 13,
2016), 81 FR 92901, 92903 (Dec. 20, 2016) (File No. 10-227) (order
granting exchange registration of MIAX PEARL, LLC (``MIAX PEARL'')
(``MIAX PEARL Order''); 68341 (Dec. 3, 2012), 77 FR 73065, 73067
(Dec. 7, 2012) (File No. 10-207) (order granting exchange
registration of Miami International Securities Exchange, LLC
(``MIAX'')) (``MIAX Order''); 58375 (Aug. 18, 2008), 73 FR 49498,
49501 (Aug. 21, 2008) (File No. 10-182) (order granting exchange
registration of BATS Exchange, Inc. (``BATS'')) (``BATS Order'');
53128 (Jan. 13, 2006), 71 FR 3550, 3553 (Jan. 23, 2006) (File No.
10-131) (order granting exchange registration of The Nasdaq Stock
Market, Inc. (``Nasdaq'')) (``Nasdaq Order'').
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In addition, with respect to the requirements that the number of
Non-Industry Directors equal or exceed the number of Industry Directors
and Member Representative Directors and that at least two Non-Industry
Directors shall also qualify as Independent Directors, the proposed
composition of the Exchange Board satisfies the requirements in Section
6(b)(3) of the Act.\51\ The Commission previously has stated that the
inclusion of public, non-industry representatives on exchange oversight
bodies is an important mechanism to support an exchange's ability to
protect the public interest.\52\ Further, the presence of public, non-
industry representatives can help to ensure that no single group of
market participants has the ability to systematically disadvantage
other market participants through the
[[Page 47883]]
exchange governance process. Public directors can provide unbiased
perspectives, which may enhance the ability of the Exchange Board to
address issues in a non-discriminatory fashion and foster the integrity
of the Exchange. For similar reasons, the additional composition
requirement that applies during such time as TXSE operates a listings
business (i.e., the requirement that one Director be representative of
issuers and investors and not associated with an Exchange Member \53\)
is consistent with the requirements of Section 6(b)(3) of the Act.
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\51\ 15 U.S.C. 78f(b)(3).
\52\ See, e.g., GIX Order, supra note 50, at 16210; MX2 Order,
supra note 50, at 12592; 24X Order, supra note 50, at 97094; MEMX
Order, supra note50, at 27452; LTSE Order, supra note 50, at 21843;
MIAX PEARL Order, supra note 50, at 92903; MIAX Order, supra note
50, at 73067; BATS Order, supra note 50, at 49501; and Nasdaq Order,
supra note 50, at 3553.
\53\ See TXSE LLC Agreement, Article III, Section 2(b)(ii)(C).
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2. Interim Board
As discussed above, TXSE Group will hold a special meeting to
appoint interim Directors of the Board (``Interim Board''), which will
include interim Member Representative Directors.\54\ Upon appointment
of the interim Directors, the Interim Board will meet the Exchange
Board composition requirements set forth in the TXSE LLC Agreement.\55\
The Interim Board will serve only until the first annual meeting of the
LLC Member, which will be held within 90 days after the Commission
grants the Exchange's registration as a national securities
exchange.\56\ The Exchange represents that it will complete the full
nomination, petition, and voting process set forth in the TXSE LLC
Agreement, which will provide persons that are approved as Exchange
Members after the date that the Commission grants the Exchange's
registration as a national securities exchange with the opportunity to
participate in the selection of Member Representative Directors as
promptly as possible after the effective date of the TXSE LLC
Agreement.\57\
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\54\ See Form 1, Exhibit J. See also supra note 38.
\55\ See id. See also TXSE LLC Agreement, Article III, Section
2.
\56\ See TXSE LLC Agreement, Article III, Section 3(g).
\57\ See Form 1, Exhibit J.
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3. Exchange Committees
TXSE has proposed to establish several named committees of the
Exchange Board, including an Appeals Committee \58\ and a Regulatory
Oversight Committee,\59\ as well as the Nominating Committee and Member
Nominating Committee, discussed above.\60\
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\58\ See TXSE LLC Agreement, Article IV, Section 1. The Appeals
Committee will preside over all appeals related to disciplinary and
adverse action determinations in accordance with TXSE rules. See
TXSE LLC Agreement, Article IV, Section 6(b).
\59\ See TXSE LLC Agreement, Article IV, Section 1. The
Regulatory Oversight Committee will be responsible for establishing
the goals, assessing the performance, and fixing the compensation of
the Chief Regulatory Officer and for recommending personnel actions
involving the Chief Regulatory Officer and senior regulatory
personnel. See TXSE LLC Agreement, Article IV, Section 6(a).
\60\ The Exchange Board could also establish additional
committees. See TXSE LLC Agreement, Article IV, Section 1. All
committees of the Exchange Board will be subject to the control and
supervision of the Exchange Board. See id.
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The Appeals Committee will consist of two Independent Directors,
and one Member Representative Director.\61\ Each member of the
Regulatory Oversight Committee must be an Independent Director.\62\
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\61\ See TXSE LLC Agreement, Article IV, Section 6(b).
\62\ See TXSE LLC Agreement, Article IV, Section 6(a).
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The TXSE proposed named committees, which are similar to the named
committees maintained by other exchanges,\63\ are designed to help
enable the Exchange to carry out its responsibilities under the Act and
are consistent with the Act, including Section 6(b)(1), which requires,
in part, an exchange to be so organized and have the capacity to carry
out the purposes of the Act.\64\
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\63\ See, e.g., GIX Order, supra note 50, at 16210; MEMX Order,
supra note 50, at 27453. See also Securities Exchange Act Release
No. 78101 (June 17, 2016), 81 FR 41142 (June 23, 2016) (File No. 10-
222) (order granting exchange registration of Investors' Exchange,
LLC (``IEX'')) (``IEX Order''); Article IV, Section 4.1 of the
Eleventh Amended and Restated Bylaws of Cboe Exchange, Inc.
\64\ 15 U.S.C. 78f(b)(1).
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B. TXSE Group and Regulation of the Exchange
When TXSE commences operations as a national securities exchange,
it will have all of the attendant regulatory obligations under the Act.
In particular, TXSE will be responsible for the operation and
regulation of its trading system and the regulation of its members.
Certain provisions in both the TXSE and TXSE Group governing documents
are designed to facilitate the ability of TXSE to fulfill its
regulatory obligations and to help facilitate Commission oversight of
TXSE. The discussion below summarizes some of these key provisions.
1. Ownership Structure; Ownership and Voting Limitations
As stated above, TXSE will be owned by TXSE Group. The TXSE Group
Certificate includes restrictions on the ability to own and vote shares
of stock of TXSE Group.\65\ These limitations are designed to prevent
any TXSE Group stockholder from exercising undue control over the
operation of the Exchange and to ensure that the Exchange and the
Commission are able to carry out their regulatory obligations under the
Act.
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\65\ These provisions are consistent with ownership and voting
limits approved by the Commission for other SROs, except as
discussed below. See, e.g., GIX Order, supra note 50; MX2 Order,
supra note 50; 24X Order, supra note 50; MEMX Order, supra note 50;
LTSE Order, supra note 50; MIAX PEARL Order, supra note 50; MIAX
Order, supra note 50; BATS Order, supra note 50, and IEX Order,
supra note 63; see also Securities Exchange Act Release Nos. 76998
(Jan. 29, 2016), 81 FR 6066 (Feb. 4, 2016) (File No. 10-221) (order
granting exchange registration of ISE Mercury, LLC (``ISE
Mercury'')) (``ISE Mercury Order''); 70050 (July 26, 2013), 78 FR
46622 (Aug. 1, 2013) (File No. 10-209) (order granting exchange
registration of ISE Gemini, LLC (``ISE Gemini'')) (``ISE Gemini
Order''); 62158 (May 24, 2010), 75 FR 30082 (May 28, 2010) (CBOE-
2008-88) (Cboe Exchange demutualization order); 53963 (June 8,
2006), 71 FR 34660 (June 15, 2006) (SR-NSX-2006-03) (National Stock
Exchange demutualization order); 51149 (Feb. 8, 2005), 70 FR 7531
(Feb. 14, 2005) (SR-CHX-2004-26) (Chicago Stock Exchange
demutualization order); and 49098 (Jan. 16, 2004), 69 FR 3974 (Jan.
27, 2004) (SR-Phlx-2003-73) (Philadelphia Stock Exchange
demutualization order).
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In particular, for so long as TXSE Group shall control, directly or
indirectly, any Regulated Securities Exchange Subsidiary, which would
include TXSE,\66\ no Person,\67\ either alone or together with its
Related Persons,\68\ will be permitted to beneficially own, directly or
indirectly, shares of stock of TXSE Group representing in the aggregate
more than 40% of the then-outstanding shares of stock of TXSE
Group.\69\ A more restrictive condition will apply to the broker-dealer
members of the Exchange, who will be prohibited from beneficially
owning, directly or indirectly, either alone or together with their
Related Persons, shares of stock of TXSE Group representing in the
aggregate more than 20% of the then-outstanding shares of stock of TXSE
Group.\70\ If any Person,
[[Page 47884]]
either alone or together with their Related Persons, at any time
beneficially owns shares of stock of TXSE Group in violation of these
ownership limits, TXSE Group will be required (to the extent funds are
legally available) to redeem the shares in excess of the applicable
ownership limit at their par value.\71\
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\66\ ``Regulated Securities Exchange Subsidiary'' means any
registered national securities exchange controlled, directly or
indirectly, by TXSE Group, including TXSE. See TXSE Group
Certificate, Article SIXTH.
\67\ See TXSE Group Certificate, Article SIXTH (defining
``Person'').
\68\ See id. (defining ``Related Persons''). Pursuant to the
TXSE Group Certificate, ``Related Persons'' include, among others,
any two or more Persons that have any agreement, arrangement or
understanding (whether or not in writing), other than the
Stockholders' Agreement, to act together for the purpose of
acquiring, voting, holding or disposing of shares of the stock of
the Corporation. Id. As stated above, any amendment to a provision
of the Stockholders' Agreement would be subject to Section 19(b) and
Rule 19b-4 thereunder, to the extent the provision is a rule of
TXSE. See supra note 30.
\69\ See TXSE Group Certificate, Article SEVENTH(b)(i)(A). There
are limited exceptions to these prohibitions. See infra notes 75-77
and accompanying text.
\70\ See TXSE Group Certificate, Article SEVENTH(b)(i)(B). This
restriction, unlike others discussed below (see infra note 75-77 and
accompanying text), cannot be waived. See TXSE Group Certificate,
Article SEVENTH(b)(ii).
\71\ See TXSE Group Certificate, Article SEVENTH(b)(v), (c).
TXSE Group shall redeem the number of shares of stock necessary so
that such Person, together with its Related Persons, shall
beneficially own directly or indirectly shares of stock of TXSE
Group not in violation of the ownership limitations, after taking
into account that such redeemed shares shall become treasury shares
and shall no longer be deemed to be outstanding. See id. In
addition, if any Person, either alone or together with its Related
Persons, at any time purports to acquire beneficial ownership of
shares of stock of TXSE Group in violation of the ownership
limitations, then TXSE Group shall record on its books the transfer
of only that number of shares that would not violate the ownership
limitations and shall treat the remaining shares as owned by the
purported transferor, for all purposes, including without
limitation, voting, payment of dividends and distributions with
respect to such shares whether upon liquidation or otherwise. TXSE
Group Certificate, Article SEVENTH(b)(iv).
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In addition, for so long as TXSE Group shall control, directly or
indirectly, any Regulated Securities Exchange Subsidiary, which would
include TXSE, no Exchange Member, alone or together with its Related
Persons, shall be entitled to vote or cause the voting of shares of
stock of TXSE Group, beneficially owned directly or indirectly by such
Exchange Member or its Related Persons, in person or by proxy or
through any voting agreement or other arrangement, to the extent that
such shares represent in the aggregate more than 20% of the then-
outstanding votes entitled to be cast on such matter (``Voting
Limitation'').\72\ Further, if any Exchange Member, either alone or
together with its Related Persons, enters into any agreement, plan or
other arrangement with any other person, either alone or together with
its Related Persons, under circumstances that would result in shares of
stock of TXSE Group that would be subject to such agreement, plan, or
other arrangement not being voted on any matter or any proxy relating
thereto being withheld, where the effect of such agreement, plan, or
other arrangement would be to enable any Exchange Member, either alone
or together with its Related Persons, to vote, possess the right to
vote, or cause the voting of shares of stock of TXSE Group that would
exceed 20% of the then outstanding votes entitled to be cast on such
matter, then the Exchange Member with the right to vote such shares,
shall not be entitled to vote the excess shares and TXSE Group shall
disregard any purported voting of such shares.\73\ Unlike other
registered national securities exchange structures, the TXSE Group
Certificate does not apply a similar 20% Voting Limitation to TXSE
Group stockholders that are not also Exchange Members.\74\
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\72\ See TXSE Group Certificate, Article SEVENTH(a)(i).
\73\ See id.
\74\ See TXSE Group Certificate. See also Notice, supra note 3,
at 15375, n.2; supra note 65.
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TXSE Group will be permitted to waive the 40% ownership limitation
pursuant to a resolution of the TXSE Group Board,\75\ if it makes
certain determinations.\76\ Any such waiver will not be effective
unless and until approved by the Commission.\77\ TXSE Group would not
be permitted to waive the 20% ownership limitation or 20% Voting
Limitation with respect to Exchange Members and their Related
Persons.\78\
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\75\ See TXSE Group Certificate, Article SEVENTH(b)(ii)
\76\ See TXSE Group Certificate, Article SEVENTH(b)(iii). The
required determinations are that such waiver will not impair the
ability of TXSE Group or TXSE to carry out their respective
responsibilities under the Act and the rules and regulations
promulgated thereunder; that such waiver is otherwise in the best
interests of TXSE Group, its stockholders, and TXSE; that such
waiver will not impair the ability of the Commission to enforce the
Act; and that such Person and its Related Persons are not subject to
any applicable ``statutory disqualification'' (as defined in Section
3(a)(39) of the Act). See id. These provisions are consistent with
provisions related to the waiver of ownership and voting limits
approved by the Commission for other SROs. See, e.g., GIX Order, MX2
Order, 24X Order, MEMX Order, LTSE Order, MIAX PEARL Order, MIAX
Order, and BATS Order, supra note 50; ISE Mercury Order and ISE
Gemini Order, supra note 65; IEX Order, supra note 63; and
Securities Exchange Act Release No. 61698 (Mar. 12, 2010), 75 FR
13151 (Mar. 18, 2010) (File Nos. 10-194 and 10-196) (order granting
exchange registration of DirectEdge exchanges) (``DirectEdge
Exchanges Order'').
\77\ See TXSE Group Certificate, Article SEVENTH(b)(ii)(C).
\78\ See TXSE Group Certificate, Article SEVENTH(a),
(b)(iii)(D).
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Any person that proposes to own shares of stock of TXSE Group in
excess of the 40% ownership limitation, will be required to deliver
written notice to the TXSE Group of its intention.\79\ The notice must
be delivered to TXSE Group not less than 45 days (or any shorter period
to which the TXSE Group Board expressly consents) before the proposed
ownership of such stock.\80\
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\79\ See TXSE Group Certificate, Article SEVENTH(b)(ii)(A).
\80\ See id. ``TXSE Group Board'' means the Board of Directors
of TXSE Group. See TXSE Group Certificate, Article FOURTH(c).
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The TXSE Group Certificate also contains provisions that are
designed to further safeguard the ownership limitations and Voting
Limitation described above or are otherwise related to direct and
indirect changes in control. Specifically, TXSE Group shall have the
right to require any Person and its Related Persons that the TXSE Group
Board reasonably believes to be subject to the Voting Limitation, to
beneficially own stock in violation of the ownership limitations, or to
beneficially own an aggregate of 5% or more of the then outstanding
shares of stock of TXSE Group entitled to vote on any matter, to
provide to TXSE Group upon request, complete information as to all
shares of stock of TXSE Group beneficially owned by such Person and its
Related Persons.\81\
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\81\ See TXSE Group Certificate, Article SEVENTH(d). This
provision will also provide TXSE Group the right to request from
such persons information as to any other factual matter relating to
the applicability or effect of TXSE Group Certificate Article
SEVENTH, which includes the ownership limitations and Voting
Limitation, as may reasonably be requested of such person and its
Related Persons. See id.
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The TXSE LLC Agreement does not include the same change of control
provisions that are present in the TXSE Group Certificate because the
TXSE LLC Agreement instead explicitly identifies its owner (TXSE Group)
by name as the ``LLC Member'' of TXSE.\82\ Thus, any changes in the
ownership of TXSE would require the TXSE LLC Agreement to be amended.
Any amendment to the TXSE LLC Agreement, including to ownership of
TXSE, would constitute a proposed rule change under Section 19(b) of
the Act \83\ and Rule 19b-4 \84\ thereunder that will be required to be
filed with, or filed with and approved by, the Commission.\85\
Moreover, pursuant to the TXSE LLC Agreement itself, any transfer of
limited liability company interests of TXSE will be subject to prior
approval by the Commission pursuant to the rule filing procedure under
Section 19 of the Act.\86\
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\82\ See TXSE LLC Agreement, Exhibit A.
\83\ 15 U.S.C. 78s(b).
\84\ 17 CFR 240.19b-4.
\85\ See TXSE LLC Agreement, Article VIII, Sections 1(b), 4.
\86\ See TXSE LLC Agreement, Article X, Section 9.
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Although TXSE Group is not directly responsible for regulation, its
activities with respect to the operation of TXSE must be consistent
with, and must not interfere with, the self-regulatory obligations of
TXSE.\87\ As described above, the provisions applicable to direct and
indirect changes in control of TXSE Group and TXSE, as well as the
Voting Limitation imposed on owners of TXSE Group who also are Exchange
Members, are designed to help prevent any owner of TXSE Group from
exercising undue influence or control
[[Page 47885]]
over the operation of TXSE and to help ensure that TXSE retains a
sufficient degree of independence to effectively carry out its
regulatory obligations under the Act.
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\87\ See, e.g., IEX Order, supra note 63.
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In addition, these limitations are designed to address the
conflicts of interests that might result from a member of a national
securities exchange owning interests in the exchange. As the Commission
has stated in the past, a member's ownership interest in an entity that
controls an exchange could become so large as to cast doubt on whether
the exchange may fairly and objectively exercise its self-regulatory
responsibilities with respect to such member.\88\ A member that is a
controlling shareholder of an exchange could seek to exercise that
controlling influence by directing the exchange to refrain from, or the
exchange may hesitate to, diligently monitor and conduct surveillance
of the member's conduct or diligently enforce the exchange's rules and
the federal securities laws with respect to conduct by the member that
violates such provisions. As such, these requirements are designed to
minimize the potential that a person or entity can improperly interfere
with or restrict the ability of the Exchange to effectively carry out
its regulatory oversight responsibilities under the Act.
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\88\ See, e.g., GIX Order, supra note 50; MX2 Order, supra note
50; 24X Order, supra note 50; MEMX Order, supra note 50; LTSE Order,
supra note 50; MIAX PEARL Order, supra note 50; MIAX Order, supra
note 50; BATS Order, supra note 50; IEX Order, supra note 63; ISE
Mercury Order, supra note 65; and DirectEdge Exchanges Order, supra
note 76.
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The Commission has recognized that ``to be effective, an SRO must
be structured in such a way that regulatory staff is unencumbered by
inappropriate business pressure'' that could ``inhibit effective
regulation and discourage vigorous enforcement against members.'' \89\
To help ensure independent and empowered SRO regulatory operations,
TXSE has, among other things, adopted a governance structure designed
to mitigate the inherent conflict. Specifically, TXSE has an
independent Chief Regulatory Officer that oversees the Exchange's
regulatory operations and that reports to an independent Regulatory
Oversight Committee of the Exchange Board. In addition, TXSE has an
Exchange Board composed of at least 50% Non-Industry Directors \90\
with required key board committees that are either fully independent or
majority independent, such as the Regulatory Oversight Committee \91\
and the Appeals Committee.\92\
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\89\ See, e.g., Securities Exchange Act Release No. 50700 (Nov.
18, 2004), 69 FR 71256 (Dec. 8, 2004) (Concept Release Concerning
Self-Regulation). Nevertheless, the federal securities laws require
member involvement in the overall governance and administration of
an exchange. See, e.g., 15 U.S.C. 78f(b)(3) (requiring an exchange,
among other things, to provide to its broker-dealer members ``a fair
representation of its members in the selection of its directors and
administration of its affairs'').
\90\ In addition, at least two of the Non-Industry Directors
shall be Independent Directors. See TXSE LLC Agreement, Article III,
Section 2(b)(ii).
\91\ Each member of the Regulatory Oversight Committee will be
an Independent Director. See TXSE LLC Agreement, Article IV, Section
6(a).
\92\ The Appeals Committee will consist of two Independent
Directors and one Member Representative Director. See TXSE LLC
Agreement, Article IV, Section 6(b).
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Ownership and voting limits in the governing documents of an
exchange and/or its holding company further protect the status of SRO
independence. The provisions that TXSE has proposed are consistent with
those in place across all exchanges today, except as described above
regarding the application of the Voting Limitation solely to TXSE Group
stockholders that are also Exchange Members, and are designed to
prevent any direct or indirect owner from exercising control over the
operation of the exchange as well as to ensure that the exchange and
the Commission are able to carry out their regulatory obligations under
the Act.\93\ These provisions impose limits on voting and ownership of
exchange holding companies, with more stringent limits imposed on
member owners.\94\
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\93\ The Exchange has not proposed to impose a voting limitation
on direct and indirect owners of TXSE Group that are not Exchange
Members. While the Commission has previously found such a limitation
consistent with the Act in approving other exchange governance
structures (see, e.g., supra note 65), the lack of such a provision
does not prevent a finding that TXSE's proposed governance structure
is consistent with the Act, and with Section 6(b)(1) in particular,
which requires an exchange to be so organized and have the capacity
to carry out the purposes of the Act. When proposing rules
pertaining to the governance, administration, transparency and
ownership of SROs in 2004, including proposing to require exchanges
to limit the ability of their members that are brokers or dealers to
own or vote a significant interest in the exchange, the Commission
did not propose to impose voting or ownership limitations on persons
that were not also exchange members. See Securities Exchange Act
Release No. 50699 (Nov. 18, 2004), 69 FR 71126, at 71143-46 (Dec. 8,
2004). The Commission stated that ``the conflict with respect to
members creates a risk that a member could use its controlling
interest in its regulator to influence the regulatory process to its
benefit.'' Id. at 71143. Accordingly, because of ``the significant
incentives for a member to attempt to exercise undue influence in
such a case,'' the Commission proposed to require SROs to impose
voting and ownership limitations on members. Id. In contrast, the
Commission proposed a less restrictive approach for non-members than
the rules that had, at the time, been adopted by exchanges. The
Commission recognized that there is the potential for any person
that controls an exchange to direct its operation so as to cause the
SRO to neglect its regulatory obligations under the Act, but
determined not to propose the approach then adopted by exchanges
that applied ownership and voting limitations on persons that were
not exchange members in light of the substantive governance and
other standards it was proposing to strengthen the independence of
SROs and their regulatory functions. See id. at 71143. As discussed
herein, exchanges have implemented many of the types of provisions
that the Commission proposed in 2004 to strengthen such
independence. TXSE has similarly proposed to implement such
provisions as described herein. The Commission finds that, in light
of such other provisions, including TXSE's proposed ownership
limitations and Voting Limitation, TXSE's proposed governance
structure is consistent with the Act.
\94\ See supra notes 65-78 and accompanying text.
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As a registered exchange, TXSE will be subject to the same
regulatory standards applicable to any other exchange regardless of the
identity of the ultimate owners of that exchange. As discussed above
and further below and except as otherwise noted, TXSE has proposed to
adopt industry-standard protections in a governance structure for
itself and its holding company that is designed to preserve TXSE's
self-regulatory independence by protecting TXSE from inappropriate
business pressures. The proposed provisions, including the proposed
ownership limitations and Voting Limitation, when taken together should
serve to mitigate potential conflicts of interest and protect the
regulatory operations of TXSE.\95\
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\95\ See, e,g., infra notes 98-109 and accompanying text
(discussing provisions designed to help ensure the independence of
TXSE's regulatory function and facilitate the ability of TXSE to
carry out its regulatory responsibilities under, and operate in a
manner consistent with, the Act). See also infra notes 111-115
(discussing Commission authority and controlling person obligations
under Sections 19, 20 and 21C of the Act).
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TXSE's and TXSE Group's proposed governance provisions are
consistent with the Act, including Section 6(b)(1), which requires, in
part, an exchange to be so organized and have the capacity to carry out
the purposes of the Act.\96\ In particular, these requirements are
designed to minimize the potential that a person could improperly
interfere with or restrict the ability of the Commission or the
Exchange to effectively carry out their regulatory oversight
responsibilities under the Act.
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\96\ 15 U.S.C. 78f(b)(1).
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2. Regulatory Independence and Oversight
Although TXSE Group will not itself carry out regulatory functions,
its activities with respect to the operation of TXSE must be consistent
with, and must not interfere with, TXSE's self-regulatory obligations.
In this regard, TXSE and TXSE Group propose to adopt certain provisions
in their respective governing documents that are designed to help
maintain the independence of
[[Page 47886]]
the regulatory functions of TXSE. These proposed provisions are
substantially similar to those included in the governing documents of
other exchanges that recently have been granted registration.\97\
Specifically:
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\97\ See, e.g., GIX Order, supra note 50; MX2 Order, supra note
50; 24X Order, supra note 50; MEMX Order, supra note 50; LTSE Order,
supra note 50; IEX Order, supra note 63; and DirectEdge Exchanges
Order, supra note 76.
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<bullet> the directors, officers, employees, and agents of TXSE
Group must give due regard to the preservation of the independence of
the self-regulatory function of TXSE and to its obligations to
investors and the general public and must not take actions which would
interfere with the effectuation of decisions by the Exchange Board
relating to its regulatory functions (including disciplinary matters)
or which would adversely affect TXSE's ability to carry out its
responsibilities under the Act.\98\
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\98\ See Second Amended and Restated Bylaws of TXSE Group Inc.
(``TXSE Group Bylaws''), Article 12, Section 12.3. Similarly,
Article III, Section 1(d) of the TXSE LLC Agreement requires the
Exchange Board and each Director, when managing the business and
affairs of TXSE, to consider the requirements of Section 6(b) of the
Act and requires each Director, officer, or employee of TXSE to
comply with the federal securities laws and regulations thereunder
and cooperate with the Commission, and TXSE pursuant to its
regulatory authority. Article III, Section 1(e) of the TXSE LLC
Agreement also requires the Exchange Board, when evaluating any
proposal to take into account all factors that the Exchange Board
deems relevant, including, without limitation, to the extent deemed
relevant: the potential impact on the integrity, continuity and
stability of the national securities exchange operated by TXSE and
the other operations of TXSE, on the ability to prevent fraudulent
and manipulative acts and practices, and on investors and the
public, and whether such proposal would promote just and equitable
principles of trade, foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to and facilitating transactions in
securities or assist in the removal of impediments to or perfection
of the mechanisms for a free and open market and a national market
system.
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<bullet> TXSE Group must comply with the federal securities laws
and the rules and regulations promulgated thereunder, and must
cooperate with the Commission and TXSE, pursuant to, and to the extent
of, their respective regulatory authority.\99\ In addition, TXSE
Group's officers, directors, employees, and agents must comply with the
federal securities laws and the rules and regulations promulgated
thereunder and cooperate with the Commission and TXSE pursuant to, and
to the extent of, their respective regulatory authority.\100\ TXSE
Group must take reasonable steps necessary to cause its agents to so
cooperate.\101\
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\99\ See TXSE Group Bylaws, Article 12, Section 12.1.
\100\ See TXSE Group Bylaws, Article 12, Section 12.4.
\101\ See TXSE Group Bylaws, Article 12, Section 12.1.
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<bullet> TXSE Group, and its officers, directors, employees, and
agents must submit to the jurisdiction of the U.S. federal courts, the
Commission, and TXSE, for purposes of any suit, action or proceeding
pursuant to the U.S. federal securities laws, and the rules and
regulations thereunder, arising out of, or relating to, TXSE's
activities.\102\
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\102\ See TXSE Group Certificate, Article SEVENTEENTH(a).
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<bullet> All books and records of TXSE reflecting confidential
information pertaining to the self-regulatory function of TXSE
(including but not limited to disciplinary matters, trading data,
trading practices, and audit information) must be retained in
confidence by TXSE and its personnel, including directors, officers,
Board Observers, employees, and agents, and will not be used by TXSE
for any non-regulatory purposes and shall not be made available to any
person (including, without limitation, any TXSE member) other than to
personnel of the Commission, and those personnel of TXSE, members of
committees of the Exchange Board, members of the Exchange Board, or
hearing officers and other agents of TXSE, to the extent necessary or
appropriate to properly discharge the self-regulatory responsibilities
of TXSE.\103\ Similar provisions apply to TXSE Group and its directors,
officers, employees, and agents.\104\
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\103\ See TXSE LLC Agreement, Article X, Section 4. Pursuant to
Article I of the TXSE LLC Agreement, ``Board Observer'' means the
representative that certain investors in TXSE Group have the right
to designate to attend all meetings of the Exchange Board, and any
committee thereof, in a non-voting observer capacity, pursuant to
the Stockholders' Agreement.
\104\ See TXSE Group Bylaws, Article 11. The TXSE Group Bylaws
further provide that all books and records of TXSE reflecting
confidential information pertaining to the self-regulatory function
of TXSE that come into the possession of TXSE Group, and the
information contained in those books and records of TXSE, will be
retained in confidence by TXSE and the officers, directors,
employees and agents of TXSE Group. See id. The TXSE Group and TXSE
governing documents acknowledge that requirements to keep such
information confidential shall not limit or impede the rights of the
Commission to access and examine such confidential information
pursuant to the U.S. federal securities laws and the rules and
regulations thereunder, or limit the ability of officers, directors,
employees, or agents of TXSE or TXSE Group to disclose such
information to the Commission or TXSE. See TXSE LLC Agreement,
Article X, Section 4 and TXSE Group Bylaws, Article 11.
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<bullet> The books and records of TXSE and TXSE Group must be
maintained in the United States \105\ and, to the extent they are
related to the operation or administration of TXSE, TXSE Group's books
and records will be subject at all times to inspection and copying by
the Commission and TXSE.\106\
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\105\ See TXSE LLC Agreement, Article X, Section 4; and TXSE
Group Bylaws, Article 1, Section 1.3.
\106\ See TXSE Group Bylaws, Article 11.
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<bullet> Furthermore, to the extent they are related to the
business of TXSE, the books, records, premises, officers, directors,
employees, and agents of TXSE Group will be deemed to be the books,
records, premises, officers, directors, employees, and agents of TXSE,
for purposes of, and subject to oversight pursuant to, the Act.\107\
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\107\ See id.
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<bullet> TXSE Group will take reasonable steps necessary to cause
its officers, directors, employees, and agents, prior to accepting a
position as an officer, director, employee or agent (as applicable)
with TXSE Group to consent in writing to the applicability of
provisions regarding non-interference, confidentiality, books and
records, compliance and cooperation, jurisdiction, and regulatory
obligations, with respect to their activities related to TXSE.\108\
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\108\ See TXSE Group Bylaws, Article 12, Section 12.2; TXSE
Group Certificate, Article EIGHTEENTH.
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<bullet> The TXSE Group Bylaws require that, so long as TXSE Group
controls TXSE, any changes to that document must be submitted to the
Exchange Board for approval, and, if such change is required to be
filed with the Commission pursuant to Section 19(b) of the Act and the
rules and regulations thereunder, such change shall not be effective
until filed with and effective by operation of law, or filed with, and
approved by, the Commission.\109\
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\109\ See TXSE Group Bylaws, Article 9, Section 9.2; TXSE Group
Certificate, Article FOURTEENTH.
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The provisions discussed in this section, which are designed to
help ensure the independence of TXSE's regulatory function and
facilitate the ability of TXSE to carry out its regulatory
responsibilities under, and operate in a manner consistent with, the
Act, are appropriate and consistent with the requirements of the Act,
particularly with Section 6(b)(1), which requires, in part, an exchange
to be so organized and have the capacity to carry out the purposes of
the Act.\110\
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\110\ 15 U.S.C. 78f(b)(1).
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Further, Section 19(h)(1) of the Act \111\ provides the Commission
with the authority ``to suspend for a period not exceeding twelve
months or revoke the registration of [an SRO], or to censure or impose
limitations upon the activities, functions, and operations of [an SRO],
if [the Commission] finds, on the record after notice and opportunity
for hearing,
[[Page 47887]]
that [the SRO] has violated or is unable to comply with any provision
of the Act, the rules or regulations thereunder, or its own rules or
without reasonable justification or excuse has failed to enforce
compliance . . .'' with any such provision by its members (including
associated persons thereof). If the Commission were to find, or become
aware of, through staff review and inspection or otherwise, facts
indicating any violations of the Act, including without limitation
Sections 6(b)(1) and 19(g)(1),\112\ these matters could provide the
basis for a disciplinary proceeding under Section 19(h)(1) of the Act.
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\111\ See 15 U.S.C. 78s(h)(1).
\112\ 15 U.S.C. 78f(b)(1); 15 U.S.C. 78s(g)(1).
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Even in the absence of the governance provisions described above,
under Section 20(a) of the Act,\113\ any person with a controlling
interest in TXSE would be jointly and severally liable with and to the
same extent that TXSE is liable under any provision of the Act, unless
the controlling person acted in good faith and did not directly or
indirectly induce the act or acts constituting the violation or cause
of action. In addition, Section 20(e) of the Act \114\ creates aiding
and abetting liability for any person who knowingly provides
substantial assistance to another person in violation of any provision
of the Act or rule thereunder. Further, Section 21C of the Act \115\
authorizes the Commission to enter a cease-and-desist order against any
person who has been ``a cause of'' a violation of any provision of the
Act through an act or omission that the person knew or should have
known would contribute to the violation. These provisions are
applicable to TXSE Group.
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\113\ 15 U.S.C. 78t(a).
\114\ 15 U.S.C. 78t(e).
\115\ 15 U.S.C. 78u-3.
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3. Regulatory Oversight Committee
The regulatory operations of TXSE will be monitored by the
Regulatory Oversight Committee of the Exchange Board. As mentioned
above, the Regulatory Oversight Committee will consist only of
Independent Directors.\116\ The Regulatory Oversight Committee will be
responsible for overseeing the adequacy and effectiveness of TXSE's
regulatory and SRO responsibilities, assessing TXSE's regulatory
performance, and assisting the Exchange Board (and committees of the
Exchange Board) in reviewing TXSE's regulatory plan and the overall
effectiveness of TXSE's regulatory functions.\117\
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\116\ See TXSE LLC Agreement, Article IV, Section 6(a).
\117\ See id.
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Further, the Chief Regulatory Officer (``CRO'') of TXSE will have
general supervision over TXSE's regulatory operations, including
responsibility for overseeing TXSE's surveillance, examination, and
enforcement functions and for administering any regulatory services
agreements with another SRO to which TXSE is a party.\118\ The
Regulatory Oversight Committee, in consultation with the CEO of TXSE,
will be responsible for establishing the goals, assessing the
performance, and fixing the compensation of the CRO and for
recommending personnel actions involving the CRO and senior regulatory
personnel.\119\
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\118\ See TXSE LLC Agreement, Article VI, Section 5.
\119\ See TXSE LLC Agreement, Article IV, Section 6(a). To the
extent that the CEO of TXSE has any indirect supervisory
responsibility for the role or function of the CRO, including but
not limited to, implementation of the budget for the regulatory
function or regulatory personnel matters, the Regulatory Oversight
Committee will take all steps reasonably necessary to ensure that
the CEO does not compromise the regulatory autonomy and independence
of the CRO or the regulatory function. See id.
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4. Regulatory Funding and Services
As a prerequisite for the Commission's granting of an exchange's
application for registration, an exchange must be organized and have
the capacity to carry out the purposes of the Act.\120\ Specifically,
an exchange must be able to enforce compliance by its members, and
persons associated with its members, with the federal securities laws
and rules thereunder and the rules of the exchange.\121\ The discussion
below summarizes how TXSE proposes to conduct and structure its
regulatory operations.
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\120\ See 15 U.S.C. 78f(b)(1).
\121\ See id. See also Section 19(g) of the Act, 15 U.S.C.
78s(g).
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a. Regulatory Funding
To help ensure that TXSE has and will continue to have adequate
funding to be able to meet its responsibilities under the Act, TXSE
states that, if the Commission approves TXSE's application for
registration as a national securities exchange, TXSE Group will
allocate sufficient assets to TXSE to enable TXSE's operation.\122\
Specifically, TXSE represents that TXSE Group will make a cash
contribution to TXSE of $5,000,000, ``in addition to any previously-
provided in-kind contributions, such as legal, regulatory, and
infrastructure-related services.'' \123\ TXSE also represents that such
cash and in-kind contributions from TXSE Group will be adequate to
operate TXSE, including the regulation of TXSE,\124\ and that TXSE and
TXSE Group will enter into a written agreement that requires TXSE Group
to provide adequate funding over time for the TXSE's operations,
including the regulation of TXSE.\125\
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\122\ See Form 1, Exhibit I.
\123\ See Form 1, Exhibit I.
\124\ See Form 1, Exhibit I.
\125\ See Form 1, Exhibit I. TXSE represents that this agreement
will provide that TXSE receive all fees, including regulatory fees
and trading fees, payable by TXSE's members, as well as any funds
received from any applicable market data fees and tape revenue, and
will further provide that TXSE Group will reimburse TXSE for its
costs and expenses to the extent the TXSE's assets are insufficient
to meet its costs and expenses. See id.
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Further, any ``Regulatory Funds'' received by TXSE will not be used
for non-regulatory purposes or distributed to TXSE Group, but rather
will be applied to fund the regulatory operations of TXSE (including
surveillance and enforcement activities), or, as applicable, used to
pay restitution and disgorgement to customers.\126\ Any excess non-
regulatory funds, as solely determined by TXSE, will be remitted to
TXSE Group in accordance with the TXSE LLC Agreement.\127\
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\126\ See TXSE LLC Agreement, Article IX, Section 4. Article I
of the TXSE LLC Agreement defines ``Regulatory Funds'' as ``fees,
fines, or penalties derived from the regulatory operations of
[TXSE],'' but such term does not include ``revenues derived from
listing fees, market data revenues, transaction revenues, or any
other aspect of the commercial operations of [TXSE], even if a
portion of such revenues are used to pay costs associated with the
regulatory operations of [TXSE].'' This definition is consistent
with the rules of other SROs. See, e.g., MIAX Sapphire By-Laws,
Article IX, Section 9.4; GIX LLC Agreement, Article XVII, Section
17.04(b); MX2 LLC Agreement, Article XVII, Section 17.4(b); 24X LLC
Agreement, Article XI, Section 11.4(b); MEMX LLC Agreement, Article
XVII, Section 17.4(b); LTSE Bylaws, Article I(bb); Amended and
Restated By-Laws of MIAX Exchange, Article 1(ll); By-Laws of NASDAQ
PHLX LLC, Article I(ii); and By-Laws of NASDAQ BX, Inc., Article
I(ii).
\127\ See Form 1, Exhibit I.
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b. Regulatory Contract with the Financial Industry Regulatory Authority
(``FINRA'')
Although TXSE will be an SRO with all of the attendant regulatory
obligations under the Act, it has represented to the Commission that it
intends to enter into a regulatory services agreement (``RSA'') with
FINRA, under which FINRA as a regulatory services provider will perform
certain regulatory functions on TXSE's behalf.\128\ Specifically, TXSE
expects that such services will include performance of investigation,
disciplinary, and hearing services.\129\ Notwithstanding the RSA, TXSE
will retain legal responsibility for the regulation of its members and
its market
[[Page 47888]]
and the performance of FINRA as its regulatory services provider.
Because TXSE anticipates entering into an RSA with FINRA, it has not
made provisions to fulfill the regulatory services that will be
undertaken by FINRA. Accordingly, the Commission is conditioning the
operation of TXSE on a final RSA that specifies the services that will
be provided to TXSE.
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\128\ See Form 1, Exhibit L. See also TXSE Rule 8.001(d).
\129\ See Form 1, Exhibit L.
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It is consistent with the Act for TXSE to contract with FINRA to
perform certain examination, enforcement, and disciplinary
functions.\130\ These functions are fundamental elements of a
regulatory program and constitute core self-regulatory functions. FINRA
has the expertise and experience to perform these functions for
TXSE.\131\ However, TXSE, unless relieved by the Commission of its
responsibility, bears the self-regulatory responsibilities and primary
liability for self-regulatory failures, not the SRO retained to perform
regulatory functions on TXSE's behalf.\132\ In performing these
regulatory functions, however, FINRA may nonetheless bear liability for
causing or aiding and abetting the failure of TXSE to perform its
regulatory functions.\133\ Accordingly, although FINRA will not act on
its own behalf under its SRO responsibilities in carrying out these
regulatory services for TXSE, FINRA may have secondary liability if,
for example, the Commission finds that the contracted functions are
being performed so inadequately as to cause a violation of the federal
securities laws or rules thereunder by TXSE.\134\
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\130\ For example, GIX, MX2, 24X, MEMX, LTSE, IEX, MIAX
Exchange, MIAX PEARL, LLC, Nasdaq MRX, LLC, Cboe EDGA Exchange,
Inc., Cboe EDGX Exchange, Inc. (``Cboe EDGX''), and Cboe BZX
Exchange, Inc. (``Cboe BZX'') have entered into RSAs with FINRA.
\131\ See, e.g., GIX Order, supra note 50; MX2 Order, supra note
50; 24X Order, supra note 50; MEMX Order, supra note 50; LTSE Order,
supra note 50; Nasdaq Order, supra note 50; IEX Order, supra note
63; and DirectEdge Exchanges Order, supra note 76. The Commission is
not approving the RSA or any of its specific terms.
\132\ See 15 U.S.C. 78s(g)(1).
\133\ For example, if failings by FINRA have the effect of
leaving TXSE in violation of any aspect of TXSE's self-regulatory
obligations, TXSE would bear direct liability for the violation,
while FINRA may bear liability for causing or aiding and abetting
the violation. See, e.g., GIX Order, supra note 50; MX2 Order, supra
note 50; 24X Order, supra note 50; MEMX Order, supra note 50; LTSE
Order, supra note 50; Nasdaq Order, supra note 5050; BATS Order,
supra note 50; IEX Order, supra note 63; and DirectEdge Exchanges
Order, supra note 76.
\134\ See, e.g., GIX Order, supra note 50; MX2 Order, supra note
50; 24X Order, supra note 50; MEMX Order, supra note 50; LTSE Order,
supra note 50; Nasdaq Order, supra note 50; and IEX Order, supra
note 63.
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c. Rule 17d-2 Agreements
Section 19(g)(1) of the Act,\135\ among other things, requires
every SRO registered as either a national securities exchange or
national securities association to comply with the Act, the rules and
regulations thereunder, and the SRO's own rules, and, absent reasonable
justification or excuse, enforce compliance by its members and persons
associated with its members.\136\ Rule 17d-2 of the Act permits SROs to
propose joint plans to allocate regulatory responsibilities amongst
themselves for their common rules with respect to their common
members.\137\ These agreements, which must be filed with and declared
effective by the Commission, generally cover areas where each SRO's
rules substantively overlap, including such regulatory functions as
personnel registration and sales practices. For example, the Commission
recently declared effective a plan to allocate regulatory
responsibilities between FINRA and MEMX pursuant to which FINRA assumes
examination and enforcement responsibility for broker-dealers that are
members of both FINRA and MEMX with respect to the rules of MEMX that
are substantially similar to the applicable rules of FINRA, as well as
certain specified provisions of the federal securities laws.\138\
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\135\ 15 U.S.C. 78s(g)(1).
\136\ 15 U.S.C. 78q(d) and 15 U.S.C. 78s(g)(2), respectively.
\137\ See 15 U.S.C. 78q(d)(1) and 17 CFR 240.17d-2. Section
17(d)(1) of the Act allows the Commission to relieve an SRO of
certain responsibilities with respect to members of the SRO who are
also members of another SRO (``common members''). Specifically,
Section 17(d)(1) allows the Commission to relieve an SRO of its
responsibilities to: (i) receive regulatory reports from such
members; (ii) examine such members for compliance with the Act and
the rules and regulations thereunder, and the rules of the SRO; or
(iii) carry out other specified regulatory responsibilities with
respect to such members.
\138\ See Securities Exchange Act Release No. 96101 (Oct. 18,
2022), 87 FR 64280 (Oct. 24, 2022) (File No. 4-762). See also, e.g.,
Securities Exchange Act Release Nos. 103497 (July 18, 2025) 90 FR
34696 (July 23, 2025) (FINRA/GIX); 103130 (May 27, 2025), 90 FR
23389 (June 2, 2025) (FINRA/24X); 86587 (Aug. 7, 2019), 84 FR 39883
(Aug. 12, 2019) (File No. 4-747) (FINRA/LTSE); 83696 (July 24,
2018), 83 FR 35682 (July 27, 2018) (File No. 4-678) (FINRA/MIAX
Exchange/MIAX PEARL); 77321 (Mar. 8, 2016), 81 FR 13434 (Mar. 14,
2016) (File No. 4-697) (FINRA/ISE Mercury, LLC); 73641 (Nov. 19,
2014), 79 FR 70230 (Nov. 25, 2014) (File No. 4-678) (FINRA/MIAX
Exchange); 70053 (July 26, 2013), 78 FR 46656 (Aug. 1, 2013) (File
No. 4-663) (FINRA/Topaz Exchange n/k/a ISE Gemini, LLC); 59218 (Jan.
8, 2009), 74 FR 2143 (Jan. 14, 2009) (File No. 4-575) (FINRA/Boston
Stock Exchange, Inc. (``BSE'')); 58818 (Oct. 20, 2008), 73 FR 63752
(Oct. 27, 2008) (File No. 4-569) (FINRA/BATS Exchange, Inc.); 55755
(May 14, 2007), 72 FR 28087 (May 18, 2007) (File No. 4-536)
(National Association of Securities Dealers, Inc. (``NASD'') n/k/a
FINRA/Chicago Board of Options Exchange, Inc. concerning the CBOE
Stock Exchange, LLC); 55367 (Feb. 27, 2007), 72 FR 9983 (Mar. 6,
2007) (File No. 4-529) (NASD/International Securities Exchange,
LLC); and 54136 (July 12, 2006), 71 FR 40759 (July 18, 2006) (File
No. 4-517) (NASD/Nasdaq).
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A Rule 17d-2 plan that is declared effective by the Commission
relieves the specified SRO of those regulatory responsibilities
allocated by the plan to another SRO.\139\ TXSE has represented to the
Commission that it will join all applicable plans, including Rule 17d-2
plans for the allocation of regulatory responsibilities.\140\ Similar
to other exchanges, the Commission understands from TXSE that it will
enter into a bilateral Rule 17d-2 agreement covering common members of
TXSE and FINRA. This agreement will allocate to FINRA regulatory
responsibility, with respect to common members, for specified
regulatory and enforcement matters arising out of specified common
rules and specified provisions of the Act and the rules and regulations
thereunder. In addition, the Commission is conditioning operation of
TXSE as an exchange on TXSE first joining the applicable multilateral
Rule 17d-2 plans, including the multi-party Rule 17d-2 plan for the
allocation of regulatory responsibilities with respect to certain
Regulation NMS and Consolidated Audit Trail rules and the multi-party
Rule 17d-2 plan for the surveillance, investigation, and enforcement of
common insider trading rules.\141\
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\139\ See Securities Exchange Act Release No. 12935 (Oct. 28,
1976), 41 FR 49091 (Nov. 8, 1977) (Rule 17d-2 Adopting Release).
\140\ See Form 1, Exhibit E.
\141\ See Securities Exchange Act Release Nos. 63430 (Dec. 3,
2010), 75 FR 76758 (Dec. 9, 2010) (File No. 4-618) (order approving
and declaring effective a multiparty 17d-2 plan concerning covered
Regulation NMS and Consolidated Audit Trail rules); 58526 (Sept. 12,
2008), 73 FR 54646 (Sept. 22, 2008) (File No. 4-566) (order
approving and declaring effective a multiparty 17d-2 plan for
insider trading rules).
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Because TXSE anticipates entering into these Rule 17d-2 agreements,
it has not made provision to fulfill the regulatory obligations that
will be undertaken by FINRA and other SROs under these agreements with
respect to common members.\142\ Accordingly, the Commission is
conditioning the operation of TXSE on approval by the Commission of a
Rule 17d-2 agreement that allocates the above specified matters to
FINRA, and the approval of an amendment to the existing multi-party
Rule 17d-2 plans specified above to add TXSE as a party.
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\142\ For common members, the regulatory obligations will be
covered by the Rule 17d-2 agreements, and for TXSE members that are
not also members of FINRA, the regulatory obligations will be
covered by the RSA.
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[[Page 47889]]
C. TXSE Trading System
TXSE will operate a fully automated electronic order book and will
not maintain or operate a physical trading floor. Only Members of TXSE
and entities that enter into market access arrangements with members
(collectively, ``Users'' \143\) will have access to the TXSE
system.\144\ Users will be able to electronically submit orders to buy
or sell securities traded on the Exchange through a variety of
systems.\145\ TXSE will allow firms to register as market makers with
affirmative and negative market making obligations.\146\
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\143\ See TXSE Rule 1.005(jj).
\144\ To obtain authorized access to the TXSE system, each User
must enter into a User Agreement with TXSE. See TXSE Rule 11.003(a).
\145\ For a discussion of the means of access to TXSE, see Form
1, Exhibit E-1.
\146\ See TXSE Rules 11.015 through 11.018. TXSE's rules
relating to market makers are similar to the rules of other national
securities exchanges. See, e.g., MEMX Rules 11.17 through 11.20 and
Cboe EDGX Rules 11.17 through 11.20.
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Users may submit orders to the Exchange as Limit Orders (including
Market Maker Peg Orders), Market Orders, or Pegged Orders.\147\ Orders
must be submitted with one of the following time-in-force instructions,
as applicable: Immediate-or-Cancel; System; Day; or Regular Hours
Only.\148\ In addition to these time-in-force instructions, Limit
Orders and Pegged Orders may also be submitted with a Good `til Time
instruction.\149\ Users may submit Limit Orders with the display
instructions of Displayed or Non-Displayed.\150\ A Limit Order with a
Displayed instruction also may include a Reserve Quantity.\151\
Displayed orders will be displayed on an anonymous basis at a specified
price.\152\ Limit Orders may also include a Display-Price Sliding
instruction so orders can be automatically re-priced to comply with
Rule 610 of Regulation NMS or Rule 201 of Regulation SHO.\153\ Users
may also submit Market Maker Peg Orders, which track the national best
bid or national best offer within a designated percentage to comply
with market maker quotation requirements.\154\ Orders may be entered as
a Round Lot, Odd Lot, or Mixed Lot.\155\ In addition, a User may attach
a Minimum Execution Quantity instruction to a Limit Order with a time-
in-force of Immediate-or-Cancel or a Market Order with a time-in-force
of Immediate-or-Cancel.\156\ Limit Orders may also be designated as
Intermarket Sweep or Post Only.\157\ All orders will be designated as
Book Only.\158\ TXSE's proposed order types and instructions are
similar to order types and instructions approved by the Commission and
currently available on other national securities exchanges.\159\
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\147\ See TXSE Rule 11.007. Limit Orders may be designated as
Intermarket Sweep Orders. See TXSE Rule 11.007(b)(5). Pegged Orders
may be designated as either a Primary Peg, a Midpoint Peg, or a
Market Peg. See TXSE Rule 11.007(c). Market Maker Peg Orders are a
type of limit order. See TXSE Rule 11.007(e).
\148\ See TXSE Rule 11.007(a)(1), (b)(1), and (c)(1).
\149\ See TXSE Rule 11.007(b)(1) and (c)(1).
\150\ See TXSE Rule 11.007(b)(3). Market Orders and Pegged
Orders are not eligible for display. See TXSE Rules 11.007(a)(3) and
11.007(c)(3).
\151\ See TXSE Rule 11.007(b)(4).
\152\ See TXSE Rule 11.009(b).
\153\ See TXSE Rule 11.006(j).
\154\ See TXSE Rule 11.007(e). Market Maker Peg Orders are
always displayed. See id.
\155\ See Form 1, Exhibit E, and TXSE Rule 11.006(q) and
11.007(a) through (c).
\156\ See TXSE Rules 11.007(a)(2), (b)(2), and (c)(2).
\157\ See TXSE Rule 11.007(b)(5).
\158\ See TXSE Rule 11.007.
\159\ See, e.g., MEMX Rules 11.6 and 11.8; LTSE 11.190(a); and
Cboe EDGX Rules 11.6 and 11.8.
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TXSE will offer a Random Replenishment instruction in connection
with a Limit Order submitted with a Reserve Quantity instruction.\160\
In addition to randomizing the size of the refreshed displayed portion,
this instruction will allow the User to elect to have the TXSE system
randomly replenish the displayed replenishment quantity at different
time intervals ranging up to one millisecond following each execution
that triggers replenishment.\161\
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\160\ See TXSE Rule 11.006(k)(1).
\161\ See TXSE Rule 11.006(k)(1)(A).
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The TXSE system will continuously and automatically match orders
pursuant to price/time priority. The highest-priced order to buy
(lowest-priced order to sell) will have priority over all other orders
to buy (sell) in all cases. For equally-priced trading interest in time
priority, TXSE will give first priority to the portion of a Limit Order
with a displayed instruction (including a Market Maker Peg Order),
second priority to Limit Orders with a non-displayed instruction
(including the Reserve Quantity of Limit Orders), and third to Orders
with a Peg instruction (i.e., Primary Peg Order, Midpoint Peg Order,
Market Peg Order).\162\ With respect to the price of executions that
would occur on TXSE, the TXSE system is designed to comply with the
order protection requirements of Rule 611 of Regulation NMS \163\ by
requiring that, for any execution to occur on TXSE during regular
trading hours, the price must be equal to, or better than, the
Protected NBBO, unless an exception to Rule 611 applies.\164\ Orders
may be executed on the Exchange during the Regular Market Session or
during Pre- and Post-Market Sessions; \165\ however, some order types
and functionality are available only during the Regular Market
Session.\166\
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\162\ See TXSE Rule 11.008. See also Form 1, Exhibit E-1. Orders
in each category (i.e., Limit Orders with a displayed instruction,
Limit Orders with a non-displayed instruction, and Orders with a
Pegged Instruction) will generally be ranked in priority based on
the time such orders were initially received by the System.
\163\ 17 CFR 242.611.
\164\ See TXSE Rules 1.005(x) (defining ``Protected NBBO'') and
11.009(a)(2).
\165\ TXSE's Regular Trading Hours will be from 9:30am ET to 4pm
ET, its Pre-Market Session will run from 8am ET to 9:30am ET, and
its Post-Market Session will run from 4pm ET to 5pm ET. See TXSE
Rules 1.005(z), (v) and (u).
\166\ See TXSE Rule 11.007(a) through (c), (e).
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In addition, TXSE's rules are designed to address locked and
crossed markets, as required by Rule 610(e) of Regulation NMS,\167\ in
that they are designed not to disseminate interest that would lock or
cross a protected quote, to require Users to reasonably avoid
displaying interest that locks or crosses any protected quotation, and
are reasonably designed to assure the reconciliation of locked or
crossed interest.\168\
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\167\ 17 CFR 242.610(e).
\168\ See TXSE Rule 11.009(f). See also TXSE Rule 11.006(a)
(allowing Users to attach a Cancel Back instruction to immediately
cancel an order when, if displayed, it would create a violation of
Rule 610(d) of Regulation NMS, 17 CFR 242.610(d)), and TXSE Rules
11.006(j) and 11.007(b)(8) (relating to price sliding functionality
to avoid violations of Rule 610(e) of Regulation NMS, 17 CFR
242.610(e)).
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Initially, TXSE will not offer any outbound routing functionality;
\169\ thus, as noted above, all orders submitted to TXSE will be
treated as Book Only,\170\ though Limit Orders may also include the
execution instructions of Intermarket Sweep Order, if appropriate.\171\
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\169\ See Form 1, Exhibit E, Section 2(b).
\170\ See TXSE Rule 11.007.
\171\ See TXSE Rule 11.007(b)(5).
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The Commission finds that TXSE's trading rules are consistent with
the Act and, in particular, the Section 6(b)(5) requirement that an
exchange's rules be designed to promote just and equitable principles
of trade, remove impediments to and perfect the mechanisms of a free
and open market and a national market system, and protect investors and
the public interest.\172\
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\172\ See 15 U.S.C. 78f(b)(5). TXSE's trading rules, including
its rules relating to market makers, order types and instructions,
execution, and opening processes, are similar to existing exchanges'
trading rules. See, e.g., Chapter XI of the MEMX rulebook and
Chapter XI of the Cboe BZX rulebook.
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As a national securities exchange, TXSE will be a trading center
whose quotations can be ``automated
[[Page 47890]]
quotations'' under Rule 600(b)(6).\173\ TXSE has designed itself to
qualify by being an ``automated trading center'' under Rule 600(b)(7)
whose best-priced, displayed quotation will be a ``protected
quotation'' under Rules 600(b)(81) and 600(b)(82), and for purposes of
Rule 611.\174\
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\173\ See TXSE Rule 11.009(b).
\174\ See 17 CFR 242.600(b)(81) through (82) and 17 CFR 242.611.
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To meet their regulatory responsibilities under Rule 611(a) of
Regulation NMS, other trading centers will be required to have
sufficient notice of new protected quotations, as well as all necessary
information and technical specifications.\175\ It would be a reasonable
policy and procedure under Rule 611(a) to require that industry
participants begin treating TXSE's best bid and best offer as a
protected quotation as soon as possible but no later than 90 days after
the date of this order, or such later date as TXSE begins operation as
a national securities exchange. The Commission has taken the same
position with other new equities exchanges.\176\
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\175\ See Securities Exchange Act Release No. 53829 (May 18,
2006), 71 FR 30038, 30041 (May 24, 2006) (File No. S7-10-04)
(extending the compliance dates for Rule 610 and Rule 611 of
Regulation NMS under the Act).
\176\ See, e.g., GIX Order, supra note 50, at 16216; MX2 Order,
supra note 50, at 12600; MEMX Order, supra note 50, at 27461; BATS
Order, supra note 50, at 49505; and DirectEdge Exchanges Order,
supra note 76, at 13163.
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D. Discipline and Oversight of Members
As stated above, one prerequisite for the Commission's grant of an
exchange's application for registration is that a proposed exchange
must be so organized and have the capacity to be able to carry out the
purposes of the Act.\177\ Specifically, an exchange must be able to
enforce compliance by its members and persons associated with its
members with the federal securities laws and rules thereunder and the
rules of the exchange.\178\ As also stated above, pursuant to an RSA
with FINRA, FINRA will perform many of the initial disciplinary
processes on behalf of TXSE.\179\ For example, FINRA will investigate
potential securities laws violations, issue complaints, and conduct
hearings pursuant to TXSE rules. Appeals from disciplinary decisions
will be heard by the TXSE Appeals Committee,\180\ and the TXSE Appeals
Committee's decision shall be final unless the Exchange Board on its
own initiative orders review of a disciplinary decision.\181\
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\177\ See 15 U.S.C. 78f(b)(1).
\178\ See id.
\179\ See supra notes 128-129 and accompanying text. See also
TXSE Rule 8.001(d) (stating that TXSE and FINRA are parties to a
regulatory services agreement, pursuant to which FINRA will perform
certain functions described in Chapter 8 on behalf of TXSE).
\180\ See TXSE Rule 8.010(b).
\181\ See TXSE Rule 8.010(b) and (c).
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TXSE's rules provide that the Exchange has disciplinary
jurisdiction over its Members so that it can enforce its Members'
compliance with its rules and the federal securities laws and
rules.\182\ The Exchange's rules also permit TXSE to sanction Members
for violations of its rules and violations of the federal securities
laws and rules by, among other things, expelling or suspending Members,
limiting Members' activities, functions, or operations, fining or
censuring Members, or suspending or barring a person from being
associated with a Member, or any other fitting sanction.\183\ TXSE's
rules also provide for the imposition of fines for certain minor rule
violations in lieu of commencing disciplinary proceedings.\184\
Accordingly, as a condition to the operation of TXSE, a Minor Rule
Violation Plan (``MRVP'') filed by TXSE under Act Rule 19d-1(c)(2) must
be declared effective by the Commission.\185\
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\182\ See generally TXSE Rule Chapters 7 and 8.
\183\ See TXSE Rule 8.001(a).
\184\ See TXSE Rule 8.015.
\185\ 17 CFR 240.19d-1(c)(2).
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The Commission finds that TXSE's rules concerning its disciplinary
and oversight programs are consistent with the requirements of Sections
6(b)(6) and 6(b)(7) of the Act \186\ in that they provide fair
procedures for the disciplining of members and persons associated with
members. The Commission further finds that the rules of TXSE provide it
with the ability to comply, and with the ability to enforce compliance
by its members and persons associated with its members, with the
provisions of the Act, the rules and regulations thereunder, and the
rules of TXSE.\187\
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\186\ 15 U.S.C. 78f(b)(6) and (b)(7).
\187\ See 15 U.S.C. 78f(b)(1).
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E. Listing and Trading Securities on TXSE <SUP>188</SUP>
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\188\ While commenters were generally supportive of TXSE's
proposal to establish a listing market (see, e.g., TBA Letter; BDA
Letter at 1; Fortress Letter at 1; Committee on Capital Markets
Letter at 1-2), some commenters were specifically supportive of
TXSE's proposed listing standards (see, e.g., Letter from Cromwell
Coulson, President and CEO, OTC Markets Group Inc., dated July 29,
2025 at 1; ASA Letter), or were specifically supportive of TXSE
expanding the market for exchange-traded products (see, e.g., Pate
Letter at 2; Gramm Letter at 2).
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1. Registration Under Section 12(b) of the Act
Once TXSE begins operations as a national securities exchange, a
security will be considered for listing on TXSE only if such security
is registered pursuant to Section 12(b) of the Act \189\ or such
security is subject to an exemption.\190\ An issuer may register a
security pursuant to Section 12(b) by submitting to TXSE a listing
application that provides certain required information.\191\ The
Exchange will review the listing application and, if the listing
application is approved, will certify to the Commission that it has
approved the security for listing and registration.\192\ Registration
of the security will become effective thirty days after the receipt of
such certification by the Commission or within a shorter period of time
as the Commission may determine.\193\ Once registration is effective
the security is eligible for listing on TXSE.\194\
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\189\ 15 U.S.C. 78l(b).
\190\ 15 U.S.C. 78l(c); TXSE Rule 16.203.
\191\ 15 U.S.C. 78l(b); TXSE Rule 16.202. Prior to submitting a
listing application to TXSE, the issuer would be required to
participate in a free confidential pre-application eligibility
review, in which the TXSE Exchange will determine whether the issuer
meets its listing criteria and is eligible to submit a listing
application. See TXSE Rule 16.201.
\192\ See TXSE Rule 16.203(f); 15 U.S.C. 78l(d).
\193\ 15 U.S.C. 78l(d).
\194\ See TXSE Rule 14.203(f); 15 U.S.C. 78l(d).
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2. Initial and Continuing Listing Standards
TXSE's proposed initial and continuing listing standards for
securities to be listed and traded on the Exchange are substantially
similar to the current rules for the Nasdaq Global Select Market of
Nasdaq, NYSE, or IEX.\195\ The Commission has previously found that the
initial and continuing listing standards of Nasdaq, NYSE, and IEX are
consistent with the Act.\196\
[[Page 47891]]
TXSE's proposed initial and continuing listing standards are consistent
with the requirements of the Act. With respect to the standards
relating to the listing and delisting of companies, including
procedures and prerequisites for initial and continued listing on TXSE,
obligations of security issuers listed on TXSE, as well as rules
describing the application and qualification process,\197\ TXSE's
proposed listing rules for securities are substantially similar to
those of Nasdaq, NYSE or IEX. TXSE Rule 16.201, which is substantially
similar to the analogous rules of IEX and NYSE,\198\ requires a company
seeking the initial listing of one or more classes of securities on
TXSE to participate in a free confidential pre-application eligibility
review to determine whether the company meets the TXSE's listing
criteria and, if, upon completion of this review, TXSE determines that
a company is eligible for listing, TXSE will notify that company in
writing that it has been cleared to submit an original listing
application. In addition, with respect to the standards relating to
other securities, including securities of exchange-traded funds and
other exchange-traded derivative securities products, TXSE's proposed
listing rules are substantially similar to those of Nasdaq.\199\
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\195\ See Nasdaq Rule 5000 series; NYSE Listed Company Manual;
IEX Chapters 14 and 16; TXSE Rule Chapters 16 and 17. In addition,
TXSE proposed a Confidential Pre-Application Review of Eligibility
for its proposed listing standards, which is based on the equivalent
rules of IEX and the New York Stock Exchange LLC (``NYSE''). See
TXSE Rule 16.201; see also IEX Rule 14.201 and NYSE Listed Company
Manual Sections 101 and 104 (providing for a free confidential
review of the eligibility for listing of any company that requests
such a review and provides the necessary documents).
\196\ See Securities Exchange Act Release No. 53128 (Jan. 13,
2006), 71 FR 3550 (Jan. 23, 2006) (File No. 10-131) (approving the
application of Nasdaq to become a registered national securities
exchange); IEX Order, supra note 63; NYSE Listed Company Manual
Sections 1, 7, and 8. See also Securities Exchange Act Release Nos.
66648 (Mar. 23, 2012), 77 FR 19428 (Mar. 30, 2012) (SR-NASDAQ-2012-
013) (approving the adoption of listing rules relating to certain
derivative securities products); 48745 (Nov. 4, 2003), 68 FR 64154
(Nov. 12, 2003) (SR-NYSE-2002-33, SR-NASD-2002-77, SR-NASD-2002-80,
SR-NASD-2002-138, SR-NASD-2002-139, and SR-NASD-2002-141) (order
approving rules relating to corporate governance of listed
companies, including rules relating to the internal audit function)
(``NYSE Listing Rules Order''); 51813 (June 9, 2005), 70 FR 35484
(SR-NYSE-2004-20) (order approving amendments to NYSE's original and
continued listing standards).
\197\ See TXSE Rules Chapter 16. The requirements relating to
the listing of companies are substantially similar to those of
Nasdaq or NYSE. See Nasdaq Rule 5000 series; NYSE Listed Company
Manual Sections 1, 7, and 8. TXSE's general procedures and
prerequisites for initial and continued listing are substantially
similar to those of Nasdaq, while the initial and continued listing
requirements (including numerical standards) are substantially
similar to those of NYSE. See id. TXSE's rules governing the process
for delisting are substantially similar to those of IEX. See TXSE
Rule 16.500 et seq.; IEX Rule 14.500 et seq.
\198\ See supra note 196 (referencing TXSE Rule 16.201, IEX Rule
14.201, and NYSE Listed Company Manual Sections 101 and 104).
\199\ See TXSE Rules Chapter 17; see also the Nasdaq Rule 5000
series.
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3. Corporate Governance Standards
TXSE's proposed corporate governance standards in connection with
securities to be listed and traded on the Exchange are substantially
similar to the current rules of Nasdaq and NYSE.\200\ The Commission
has previously found that the corporate governance standards for listed
issuers of Nasdaq, NYSE, and IEX are consistent with the Act.\201\ The
Commission finds that TXSE's proposed corporate governance listing
standards for listed issuers contained in TXSE's proposed rules are
consistent with Section 6(b)(5) of the Act and satisfy the requirements
of Section 10A(m) of the Act and Rule 10A-3 thereunder.\202\ TXSE's
corporate governance standards for listed issuers are designed to
promote independent and objective review and oversight of the
accounting and auditing practices of listed issuers and to enhance
audit committee independence, authority, and responsibility by
implementing the standards set forth in Rule 10A-3.
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\200\ See Nasdaq Rule 5600 et seq.; NYSE Listed Company Manual
Section 303A et seq. TXSE Rule 16.414 requiring listed companies to
maintain an internal audit function is substantially similar to IEX
Rule 14.414 and NYSE Listed Company Manual Section 303A.07(c) (each
requiring listed companies to maintain an internal audit function to
provide management and the audit committee with ongoing assessments
of the listed company's risk management processes and system of
internal control). TXSE Rule 16.407 providing exemptions from
certain governance requirements is substantially similar to Nasdaq
Rule 5615 and IEX Rule 14.407.
\201\ See supra note 196. TXSE proposed to adopt a requirement
for listed issuers to have an internal audit function that is
substantially similar to IEX's and NYSE's. See supra note 200
(referencing NYSE Listed Company Manual Section 303A.07(c); IEX Rule
14.414; TXSE Rule 16.414. See also NYSE Listing Rules Order, supra
note 196; IEX Order, supra note 63.
\202\ See 15 U.S.C. 78f(b)(5); 15 U.S.C. 78j-1(m); 17 CFR
240.10A-3.
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4. Trading Pursuant to Unlisted Trading Privileges
TXSE proposes to trade securities pursuant to unlisted trading
privileges (``UTP''). TXSE Rule 14.001 establishes the Exchange's
authority to trade securities on a UTP basis. TXSE Rule 14.001(a)
provides that TXSE may extend UTP to any security that is an NMS stock
that is listed on another national securities exchange or with respect
to which UTP may otherwise be extended in accordance with Section 12(f)
of the Act.\203\ That rule further provides that any such security
would be subject to all TXSE rules applicable to trading on TXSE,
unless otherwise noted.
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\203\ 15 U.S.C. 78l(f).
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TXSE Rule 14.001(b) establishes additional rules for trading of UTP
Exchange Traded Products, which are defined in TXSE Rule 1.005(ll).
TXSE Rule 14.001(b)(1) provides that TXSE will distribute an
information circular prior to the commencement of trading in a UTP
Exchange Traded Product that generally would include the same
information as the information circular provided by the listing
exchange, including (a) the special risks of trading the Exchange
Traded Product, (b) the Exchange's rules that would apply to the
Exchange Traded Product; (c) information about the dissemination of
value of the underlying assets or indices; and (d) the applicable
trading hours for UTP Exchange Traded Products and risks of trading in
the Pre-Market and Post-Market Sessions due to the lack of calculation
or dissemination of the underlying index value, the intraday indicative
value or a similar value. TXSE Rule 14.001(b)(2) establishes certain
requirements for members that have customers that trade UTP Exchange
Traded Products.\204\ TXSE Rule 14.001(b)(4) also establishes certain
requirements for any member registered as a market maker in a UTP
Exchange Traded Product that derives its value from one or more
currencies, commodities, or derivatives based on one or more currencies
or commodities, or is based on a basket or index composed of currencies
or commodities.\205\ TXSE Rule 14.001(b)(6) provides that the Exchange
will enter into comprehensive surveillance sharing agreements with
markets that trade components of the index or portfolio on which the
UTP Exchange Traded Product is based to the same extent as the listing
exchange's rules require the listing exchange to enter into
comprehensive surveillance sharing agreements with such markets.
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\204\ TXSE Rule 14.001(b)(2)(A) states that TXSE Rule
14.001(b)(2) applies to UTP Exchange Traded Products that are the
subject of an order by the Commission exempting the series from
certain prospectus delivery requirements under Section 24(d) of the
Investment Company Act of 1940, and are not otherwise subject to
prospectus delivery requirement under the Securities Act of 1933.
TXSE Rule 14.001(b)(2)(B) requires members to provide a written
description of the terms and characteristics of UTP Exchange Traded
Products to purchasers of such securities, not later than the time
of confirmation of the first transaction, and with any sales
materials relating to UTP Exchange Traded Products. TXSE Rule
14.001(b)(2)(C) requires members to provide a prospectus to a
customer requesting a prospectus.
\205\ TXSE Rule 14.001(b)(5) provides that Market Makers in a
UTP Exchange Traded Product that is a Commodity-Related Security
shall comply with TXSE Rule 17.127.
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The Commission finds that the Exchange's proposed approach to the
trading of securities on a UTP basis, as set forth in TXSE Rule 14.001,
is consistent with Section 12(f) of the Act and Rule 12f-5
thereunder.\206\ Rule 12f-5 under the Act requires an exchange that
extends unlisted trading privileges to securities to have in effect a
rule or rules providing for transactions in the class or type of
security to which the exchange extends unlisted trading
privileges.\207\ TXSE Rule 14.001 includes a provision that any
security traded UTP on the Exchange ``shall be
[[Page 47892]]
subject to all Exchange rules applicable to trading on the Exchange,
unless otherwise noted.'' The provisions in TXSE Rule 14.001 are
substantively the same as the existing rules of other national
securities exchanges.\208\ Accordingly, pursuant to Section 12(f) of
the Act and Rule 12f-5 thereunder, TXSE will be permitted to extend
unlisted trading privileges to securities of the same class, subject to
the trading rules of the Exchange.
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\206\ 15 U.S.C. 78l(f); 17 CFR 240.12f-5.
\207\ See 17 CFR 240.12f-5. See also Securities Exchange Act
Release No. 35737 (Apr. 21, 1995), 60 FR 20891 (Apr. 28, 1995) (File
No. S7-4-95) (adopting Rule 12f-5 under the Act).
\208\ See, e.g., LTSE Rule 14.350 and MEMX Rule 14.1.
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F. Section 11(a) of the Act
Section 11(a)(1) of the Act \209\ prohibits a member of a national
securities exchange from effecting transactions on that exchange for
its own account, the account of an associated person, or an account
over which it or its associated person exercises investment discretion
(collectively, ``covered accounts''), unless an exception applies. Rule
11a2-2(T) under the Act,\210\ known as the ``effect versus execute''
rule, provides exchange members with an exemption from the Section
11(a)(1) prohibition. Rule 11a2-2(T) permits an exchange member,
subject to certain conditions, to effect transactions for covered
accounts by arranging for an unaffiliated member to execute
transactions on the exchange. To comply with Rule 11a2-2(T)'s
conditions, a member: (i) must transmit the order from off the exchange
floor; (ii) may not participate in the execution of the transaction
once it has been transmitted to the member performing the execution;
\211\ (iii) may not be affiliated with the executing member; and (iv)
with respect to an account over which the member or an associated
person has investment discretion, neither the member nor its associated
person may retain any compensation in connection with effecting the
transaction except as provided in the rule.
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\209\ 15 U.S.C. 78k(a)(1).
\210\ 17 CFR 240.11a2-2(T).
\211\ This prohibition also applies to associated persons. See
15 U.S.C. 78f(b)(8). The member may, however, participate in
clearing and settling the transaction. See Securities Exchange Act
Release No. 14563 (Mar. 14, 1978), 43 FR 11542 (Mar. 17, 1978)
(regarding the NYSE's Designated Order Turnaround System) (``1978
Release'')).
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In a letter to the Commission, TXSE requested that the Commission
concur with TXSE's conclusion that Exchange Members that enter orders
into the TXSE trading system satisfy the conditions of Rule 11a2-
2(T).\212\ For the reasons set forth below, Exchange Members entering
orders into the TXSE trading system could satisfy the conditions of
Rule 11a2-2(T).
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\212\ See letter from Jeff Brown, Chief Legal Officer and
General Counsel, TXSE, dated Sept. 5, 2025 (``TXSE 11(a) Letter'').
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First, Rule 11a2-2(T) requires that orders for covered accounts be
transmitted from off the exchange floor. In the context of automated
trading systems, the Commission has found that the off-floor
transmission condition is met if a covered account order is transmitted
from a remote location directly to an exchange's floor by electronic
means.\213\ TXSE has represented that it does not have a physical
trading floor, and the TXSE trading system will receive orders from
Exchange Members electronically through remote terminals or computer-
to-computer interfaces.\214\ The TXSE trading system satisfies this
off-floor transmission condition.
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\213\ See, e.g., Nasdaq Order, supra note 50; Securities
Exchange Act Release Nos. 61419 (Jan. 26, 2010), 75 FR 5157 (Feb. 1,
2010) (SR-BATS-2009-031) (approving BATS options trading); 59154
(Dec. 23, 2008), 73 FR 80468 (Dec. 31, 2008) (SR-BSE-2008-48)
(approving equity securities listing and trading on BSE); 57478
(Mar. 12, 2008), 73 FR 14521 (Mar. 18, 2008) (SR-NASDAQ-2007-004 and
SR-NASDAQ-2007-080) (approving Nasdaq Options Market options
trading); 29237 (May 24, 1991), 56 FR 24853 (May 31, 1991) (SR-NYSE-
90-52 and SR-NYSE-90-53) (approving NYSE's Off-Hours Trading
Facility); and 15533 (Jan. 29, 1979), 44 FR 6084 (Jan. 31, 1979)
(``1979 Release'').
\214\ See TXSE 11(a) Letter, supra note 212, at 3.
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Second, Rule 11a2-2(T) requires that the member and any associated
person not participate in the execution of its order after the order
has been transmitted. TXSE represented that at no time following the
submission of an order is an Exchange Member or an associated person of
the Exchange Member able to acquire control or influence over the
result or timing of the order's execution.\215\ According to TXSE, the
execution of an Exchange Member's order is determined solely by what
quotes and orders are present in the system at the time the Exchange
Member submits the order, and the order priority based on the TXSE
rules.\216\ Accordingly, an Exchange Member and its associated persons
do not participate in the execution of an order submitted to the TXSE
trading system.\217\
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\215\ See id. The Commission has stated that the non-
participation condition is satisfied under such circumstances so
long as such modifications or cancellations are also transmitted
from off the floor. See 1978 Release, supra note 211 (stating that
the ``non-participation requirement does not prevent initiating
members from canceling or modifying orders (or the instructions
pursuant to which the initiating member wishes orders to be
executed) after the orders have been transmitted to the executing
member, provided that any such instructions are also transmitted
from off the floor'').
\216\ See TXSE 11(a) Letter, supra note 212, at 3.
\217\ See, e.g., BATS Order, supra note 50, at 49505; and
DirectEdge Exchanges Order, supra note 76, at 13164.
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Third, Rule 11a2-2(T) requires that the order be executed by an
exchange member who is unaffiliated with the member initiating the
order. The Commission has stated that this condition is satisfied when
automated exchange facilities, such as the TXSE trading system, are
used, as long as the design of these systems ensures that members do
not possess any special or unique trading advantages in handling their
orders after transmitting them to the exchange.\218\ TXSE has
represented that the design of the TXSE trading system ensures that no
Exchange Member has any special or unique trading advantage in the
handling of its orders after transmitting its orders to TXSE.\219\
Based on TXSE's representation, the TXSE trading system satisfies this
condition.
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\218\ See, e.g., BATS Order, supra note 50, at 49505; and
DirectEdge Exchanges Order, supra note 76, at 13164. In considering
the operation of automated execution systems operated by an
exchange, the Commission stated that, while there is not an
independent executing exchange member, the execution of an order is
automatic once it has been transmitted into the system. Because the
design of these systems ensures that members do not possess any
special or unique trading advantages in handling their orders after
transmitting them to the exchange, the Commission has stated that
executions obtained through these systems satisfy the independent
execution condition of Rule 11a2-2(T). See 1979 Release, supra note
213.
\219\ See TXSE 11(a) Letter, supra note 212, at 4.
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Fourth, in the case of a transaction effected for an account with
respect to which the initiating member or an associated person thereof
exercises investment discretion, neither the initiating member nor any
associated person thereof may retain any compensation in connection
with effecting the transaction, unless the person authorized to
transact business for the account has expressly provided otherwise by
written contract referring to Section 11(a) of the Act and Rule 11a2-
2(T) thereunder.\220\ TXSE
[[Page 47893]]
Members trading for covered accounts over which they exercise
investment discretion must comply with this condition in order to rely
on the rule's exemption.\221\
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\220\ See, e.g., BATS Order, supra note 50, at 49505; and
DirectEdge Exchanges Order, supra note 76, at 13164. In addition,
Rule 11a2-2(T)(d) requires a member or associated person authorized
by written contract to retain compensation, in connection with
effecting transactions for covered accounts over which such member
or associated persons thereof exercises investment discretion, to
furnish at least annually to the person authorized to transact
business for the account a statement setting forth the total amount
of compensation retained by the member or any associated person
thereof in connection with effecting transactions for the account
during the period covered by the statement. See 17 CFR 240.11a2-
2(T)(d). See also 1978 Release, supra note 211 (stating ``[t]he
contractual and disclosure requirements are designed to assure that
accounts electing to permit transaction-related compensation do so
only after deciding that such arrangements are suitable to their
interests'').
\221\ TXSE represented that it will advise its membership
through the issuance of an Information Circular that those members
trading for covered accounts over which they exercise investment
discretion must comply with this condition in order to rely on the
rule's exemption. See TXSE 11(a) Letter, supra note 212, at 4.
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IV. Exemption From Section 19(b) of the Act With Regard to Certain
Rules Incorporated by Reference
TXSE proposes to incorporate by reference certain FINRA rules and
Nasdaq Options Market LLC (``NOM'') rules as TXSE rules.\222\ Thus, for
those TXSE rules, Exchange Members will comply with the TXSE rule by
complying with the FINRA or NOM rule referenced therein. In connection
with its proposal to incorporate FINRA and NOM rules by reference, TXSE
requested, pursuant to Rule 0-12,\223\ an exemption under Section 36 of
the Act from the rule filing requirements of Section 19(b) of the Act
for changes to those TXSE rules that are effected solely by virtue of a
change to a cross-referenced FINRA or NOM rule.\224\ TXSE represents in
its letter that, as a condition to the exemption, it will provide
written notice to its Members whenever a proposed rule change to a
FINRA or NOM rule that is incorporated by reference is proposed and
whenever any such proposed change is approved by the Commission or
otherwise becomes effective.\225\
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\222\ See Letter from Jeff Brown, Chief Legal Officer and
General Counsel, TXSE, dated Sept. 5, 2025 (``Exemption Request
Letter''). TXSE proposes to incorporate by reference the following
FINRA rules and NOM rules: (1) FINRA Rule 2210 (Communications with
the Public), via TXSE Rule 3.005 (Communications with the Public);
(2) FINRA Rule 2241 (Research Analysts and Research Reports), via
TXSE Rule 3.013(b)(3) (Payments Involving Publications that
Influence the Market Price of Security); (3) FINRA Rule 4512(c)
(Consolidated Audit Trail Definitions), via TXSE Rule 4.005(d)
(Consolidated Audit Trail definitions); (4) FINRA Rule 2268
(Requirements when using Predispute Arbitration Agreements for
Customer Accounts), via TXSE Rule 9.003 (Predispute Arbitration
Agreements); (5) FINRA Rule 5320.03 (Riskless Principal Exception),
via TXSE Rule 11.019(a)(2) (Retail Orders); (6) FINRA Rule 5270
(Front Running of Block Transactions), via TXSE Rules 12.014(a) and
(b) (Front Running of Block Transactions); (7) NOM Rules at Options
4A, Section 4 (Designation of Narrow-Based and Micro-Narrow-Based
Index Options), via TXSE Rule 17.111(a)(4)(A) and (B) (Trading of
Certain Derivative Securities).
\223\ See 17 CFR 240.0-12.
\224\ See Exemption Request Letter, supra note 222.
\225\ See Exemption Request Letter, supra note 222, at 2. TXSE
will provide such notice through a posting on the same website
location where TXSE will post its own rule filings pursuant to Rule
19b-4 under the Act, within the required time frame. The website
posting will include a link to the location on the FINRA website
where FINRA's proposed rule change is posted. See id.
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Using its authority under Section 36 of the Act,\226\ the
Commission is hereby granting TXSE's request for an exemption, pursuant
to Section 36 of the Act, from the rule filing requirements of Section
19(b) of the Act with respect to the rules that TXSE proposes to
incorporate by reference.\227\ This exemption is conditioned upon TXSE
providing written notice to its Members whenever FINRA or Nasdaq
proposes to change a rule that TXSE has incorporated by reference. This
exemption is appropriate in the public interest and consistent with the
protection of investors because it will promote more efficient use of
Commission and SRO resources by avoiding duplicative rule filings based
on simultaneous changes to identical rules of more than one SRO.
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\226\ 15 U.S.C. 78mm.
\227\ The Commission previously exempted other exchanges from
the requirement to file proposed rule changes under Section 19(b) of
the Act. See, e.g., GIX Order, supra note 50; MX2 Order, supra note
50; 24X Order, supra note 50; MEMX Order, supra note 50; MIAX Order,
supra note 50; MIAX Pearl Order, supra note 50; BATS Order, supra
note 50; IEX Order, supra note 63; ISE Mercury Order, supra note 65;
and DirectEdge Exchanges Order, supra note 76.
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V. Conclusion
It is ordered that the application of TXSE for registration as a
national securities exchange be, and it hereby is, granted.
It is furthered ordered that operation of TXSE is conditioned on
the satisfaction of the requirements below:
A. Participation in National Market System Plans. TXSE must join
the CT Plan, the Consolidated Tape Association Plan, the Consolidated
Quotation Plan, and the Nasdaq UTP Plan (or any successors thereto);
the National Market System Plan Establishing Procedures Under Rule 605
of Regulation NMS; the Regulation NMS Plan to Address Extraordinary
Market Volatility; the Plan for the Selection and Reservation of
Securities Symbols; and the National Market System Plan Governing the
Consolidated Audit Trail.
B. Intermarket Surveillance Group. TXSE must join the Intermarket
Surveillance Group.
C. Minor Rule Violation Plan. A MRVP filed by TXSE under Rule 19d-
1(c)(2) must be declared effective by the Commission.\228\
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\228\ 17 CFR 240.19d-1(c)(2).
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D. Rule 17d-2 Agreement. An agreement pursuant to Rule 17d-2 \229\
that allocates regulatory responsibility for those matters specified
above \230\ must be declared effective by the Commission, or TXSE must
demonstrate that it independently has the ability to fulfill all of its
regulatory obligations.
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\229\ 17 CFR 240.17d-2.
\230\ See supra notes 139-141 and accompanying text.
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E. Participation in Multi-Party Rule 17d-2 Plans. TXSE must become
a party to the multi-party Rule 17d-2 agreement concerning the
surveillance, investigation, and enforcement of common insider trading
rules and the agreement concerning certain Regulation NMS and
Consolidated Audit Trail rules.
F. RSA. TXSE must finalize the provisions of the RSA with its
regulatory services provider, as described above, that will specify the
TXSE and Commission rules for which the regulatory services provider
will provide certain regulatory functions, or TXSE must demonstrate
that it independently has the ability to fulfill all of its regulatory
obligations.
It is further ordered, pursuant to Section 36 of the Act,\231\ that
TXSE shall be exempted from the rule filing requirements of Section
19(b) of the Act with respect to the FINRA and NOM rules that TXSE
proposes to incorporate by reference into TXSE's rules, subject to the
conditions specified in this Order.
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\231\ 15 U.S.C. 78mm.
By the Commission.
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-19314 Filed 10-1-25; 8:45 am]
BILLING CODE 8011-01-P
</pre></body>
</html>Indexed from Federal Register on October 2, 2025.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.