[Federal Register Volume 85, Number 64 (Thursday, April 2, 2020)]
[Notices]
[Pages 18617-18626]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-06837]


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SECURITIES AND EXCHANGE COMMISSION

[Securities Exchange Act of 1934; Release No. 88493/March 27, 2020]


 In the Matter of the BOX Exchange LLC Regarding Proposed Rule 
Changes To Amend the Fee Schedule on the BOX Market LLC Options 
Facility To Establish BOX Connectivity Fees for Participants and Non-
Participants Who Connect to the BOX Network (File Nos. SR-BOX-2018-24, 
SR-BOX-2018-37, and SR-BOX-2019-04); Order Affirming Action by 
Delegated Authority and Disapproving Proposed Rule Changes Related to 
Connectivity and Port Fee

    This matter comes before the Securities and Exchange Commission 
(``Commission'') on a petition to review the Division of Trading and 
Markets's disapproval, by delegated authority, of proposed rule changes 
filed by the BOX Exchange LLC (``BOX'' or ``Exchange''). BOX proposed 
to amend the fee schedule on the BOX options facility to establish 
certain connectivity fees and reclassify its high-speed vendor feed 
connection as a port fee (File Nos. SR-BOX-2018-24, SR-BOX-2018-37, and 
SR-BOX-2019-04). The three filings propose identical rule changes.
    The Division of Trading and Markets, acting for the Commission 
pursuant to delegated authority, disapproved the proposed rule changes. 
Pursuant to Section 4A of the Securities Exchange Act of 1934, and 
Commission Rules of Practice 430 and 431, we have conducted a de novo 
review of the record. For the reasons discussed below, we conclude that 
BOX has not met its burden to demonstrate that the proposed rule 
changes are consistent with the Exchange Act. Nor do BOX's other 
arguments convince us that its proposed rule changes should be 
approved. Accordingly, we disapprove the proposed rule changes.

I. Background

A. The Proposed Rule Changes

1. BOX 1
    On July 19, 2018, BOX filed with the Commission, pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 and Rule 19b-4 
thereunder,\1\ a proposed rule change to amend the BOX fee schedule to 
establish certain connectivity fees and to reclassify its high speed 
vendor feed connection fee as a port fee (SR-BOX-2018-24) (``BOX 1''). 
BOX 1 was immediately effective upon filing with the Commission

[[Page 18618]]

pursuant to Section 19(b)(3)(A) of the Exchange Act,\2\ and was 
published for comment in the Federal Register on August 2, 2018.\3\
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    \1\ 15 U.S.C. 78s(b)(1); 17 CFR 240.19b-4.
    \2\ 15 U.S.C. 78s(b)(3)(A).
    \3\ Exchange Act Release No. 83728 (July 27, 2018), 83 FR 37853 
(Aug. 2, 2018), https://www.govinfo.gov/content/pkg/FR-2018-08-02/pdf/2018-16531.pdf.
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    BOX proposed to amend its fee schedule to establish connectivity 
fees for Participants and non-Participants who connect to the BOX 
network based on the amount of bandwidth made available to them.\4\ 
Participants and non-Participants with 10 Gigabit Connections to the 
Exchange would be charged $5,000 per connection per month, while those 
with slower, non-10 Gigabit Connections would be charged $1,000 per 
connection per month. Prior to its filing of BOX 1, BOX did not impose 
any fees for these connections. BOX also proposed to amend its fee 
schedule to reclassify its existing High Speed Vendor Feed (``HSVF'') 
connection fee as a port fee, rather than a connectivity fee (as it had 
previously been described), and to clarify that subscribers must be 
credentialed by BOX to receive the feed. BOX explained that it 
``believe[d] this reclassification is more accurate, as HSVF 
subscription is not dependent on a physical connection to the 
Exchange.'' \5\ Though the nomenclature would change, the amount of the 
HSVF port fee would remain at $1,500 per month for every month a 
Participant or non-Participant is credentialed to use the HSVF port.
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    \4\ See BOX Rule 100(a)(41) (defining a Participant as a firm or 
organization that is registered with the Exchange for purposes of 
participating in trading on a BOX facility).
    \5\ 83 FR at 37853.
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    On September 17, 2018, the Division of Trading and Markets, acting 
for the Commission by delegated authority, issued an order temporarily 
suspending BOX 1 pursuant to Section 19(b)(3)(C) of the Exchange Act 
and simultaneously instituting proceedings under Section 19(b)(2)(B) to 
determine whether to approve or disapprove BOX 1 (``OIP 1'').\6\
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    \6\ See 15 U.S.C. 78s(b)(3)(C), (b)(2)(B); Exchange Act Release 
No. 84168 (Sept. 17, 2018), 83 FR 47947 (Sept. 21, 2018), https://www.govinfo.gov/content/pkg/FR-2018-09-21/pdf/2018-20548.pdf. The 
Division also took similar action with respect to connectivity fees 
of other exchanges. That same month, the Division, again acting for 
the Commission by delegated authority, suspended immediately 
effective proposed rule changes submitted by the Miami International 
Securities Exchange, LLC (``MIAX'') and MIAX PEARL, LLC (``PEARL'') 
to increase their respective connectivity fees, and instituted 
proceedings to determine whether to approve or disapprove them. See 
Exchange Act Release No. 84175 (Sept. 17, 2018), 83 FR 47955 (Sept. 
21, 2018), https://www.govinfo.gov/content/pkg/FR-2018-09-21/pdf/2018-20547.pdf; and Exchange Act Release No. 84177 (Sept. 17, 2018), 
83 FR 47953 (Sept. 21, 2018), https://www.govinfo.gov/content/pkg/FR-2018-09-21/pdf/2018-20545.pdf. The filings were later withdrawn. 
MIAX, PEARL, and their affiliate exchange, MIAX Emerald, LLC 
(``Emerald''), have continued to file similar rule changes involving 
connectivity fees, but have withdrawn them before the Commission has 
acted on them. On December 20, 2019, MIAX, PEARL, and Emerald filed 
their most recent proposed rule changes involving connectivity fees, 
SR-MIAX-2019-51, SR-PEARL-2019-36, and SR-EMERALD-2019-39. Those 
filings were not withdrawn, and the Commission did not suspend them 
within sixty days.
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    Two days later, BOX filed a notice of intent to petition for review 
of OIP 1. The notice triggered an automatic stay of the delegated 
action under Commission Rule of Practice 431(e)--meaning that the 
suspension of BOX 1 was stayed and BOX was able to continue charging 
fees.\7\ BOX filed its petition for review of OIP 1 on September 26, 
2018.
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    \7\ 17 CFR 201.431(e).
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    We granted BOX's petition on November 16, 2018.\8\ At that time, we 
discontinued the stay of the suspension order and thus reinstated the 
suspension of BOX 1.\9\ After allowing additional statements to be 
filed in support of or in opposition to the suspension and institution 
of proceedings, we issued an order affirming OIP 1 on February 25, 
2019.\10\
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    \8\ See Exchange Act Release No. 84614 (Nov. 16, 2018), 83 FR 
59,432 (Nov. 23, 2018), https://www.govinfo.gov/content/pkg/FR-2018-11-23/pdf/2018-25471.pdf.
    \9\ Id. at 59432.
    \10\ See Exchange Act Release No. 85184 (Feb. 25, 2019), 84 FR 
6842 (Feb. 28, 2019), https://thefederalregister.org/2019-02-28/2019-03543.pdf.
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2. BOX 2 and BOX 3
    On November 30, 2018, less than two weeks after we granted its 
petition for review of OIP 1 (and reinstated the suspension of BOX 1), 
and while that petition was pending before the Commission, BOX filed a 
second proposed rule change (SR-BOX-2018-37) (``BOX 2'').\11\ BOX 2 
proposed fees that were identical to those proposed in BOX 1 and was 
also immediately effective upon filing, thus enabling BOX to continue 
charging the proposed fees. The Forms 19b-4 BOX submitted for the two 
filings were substantively identical, except that the BOX 2 filing 
added a list of categories of BOX's costs to offer connectivity 
services and stated that the proposed fees would ``offset'' the 
Exchange's costs in ``maintaining and enhancing a state-of-the-art 
exchange network infrastructure in the U.S. options industry.'' \12\
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    \11\ See Exchange Act Release No. 84823 (Dec. 14, 2018), 83 FR 
65381 (Dec. 20, 2018), https://www.govinfo.gov/content/pkg/FR-2018-12-20/pdf/2018-27512.pdf.
    \12\ See id. at 65382.
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    On December 14, 2018, the Division, acting for the Commission by 
delegated authority, issued an order temporarily suspending BOX 2 and 
instituting proceedings to determine whether to approve or disapprove 
it (``OIP 2'').\13\ BOX did not seek Commission review of OIP 2.
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    \13\ See id. at 65383.
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    On February 13, 2019, BOX filed a third proposed rule change (SR-
BOX-2019-04) (``BOX 3'') to amend the BOX fee schedule to establish the 
same fees proposed by BOX 1 and BOX 2. The proposed fees in BOX 3 were 
identical to those proposed in BOX 1 and 2, and the Forms 19b-4 for the 
filings were substantively identical. Again, BOX 3 was effective upon 
filing, enabling BOX to charge the proposed fees.
    On February 26, 2019, the Division, acting for the Commission by 
delegated authority, issued an order temporarily suspending BOX 3 and 
instituting proceedings to determine whether to approve or disapprove 
it (``OIP 3'').\14\ That same day, BOX filed a notice of intent to 
petition for review of OIP 3--which again triggered an automatic stay 
of the delegated action--and filed the petition on March 5, 2019. On 
March 22, 2019, the Commission issued an order simultaneously granting 
BOX's petition, lifting the automatic stay of the suspension, and 
affirming the determination to suspend and institute proceedings in OIP 
3.\15\
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    \14\ See Exchange Act Release No. 85201 (Feb. 26, 2019), 84 FR 
7146 (Mar. 1, 2019), https://www.govinfo.gov/content/pkg/FR-2019-03-01/pdf/2019-03706.pdf.
    \15\ See Exchange Act Release No. 85399 (Mar. 22, 2019) 84 FR 
11850 (Mar. 28, 2019), https://www.govinfo.gov/content/pkg/FR-2019-03-28/pdf/2019-05912.pdf.
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3. The Disapproval Order
    On March 29, 2019, the Division, acting for the Commission by 
delegated authority, issued an order disapproving the proposed rule 
changes in BOX 1, BOX 2, and BOX 3 (``Disapproval Order'').\16\ The 
Disapproval Order analyzed whether the proposed changes in BOX 1, BOX 
2, and BOX 3 (``Proposed Rule Changes'') were consistent with the 
requirements of the Exchange Act, including the Act's requirements that 
the rules of an exchange ``provide for the equitable allocation of 
reasonable . . . fees'' and not be ``designed to permit unfair 
discrimination between customers,

[[Page 18619]]

issuers, brokers, or dealers.'' \17\ The Disapproval Order recognized 
that BOX attempted to justify its fees under the market-based test that 
the Commission has historically applied to assess the equitableness and 
reasonableness of market data fees, and that BOX also presented a cost-
based justification for its fees.\18\ The Disapproval Order analyzed 
both sets of arguments and concluded that BOX failed to provide 
sufficient information to show that the Proposed Rule Changes were 
consistent with the requirements of the Exchange Act under either a 
market-based or cost-based test. On April 8, 2019, BOX filed a petition 
for review of the Disapproval Order, which the Commission granted on 
May 23, 2019.\19\
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    \16\ Order Disapproving Proposed Rule Changes To Amend the Fee 
Schedule on the BOX Market LLC Options Facility To Establish BOX 
Connectivity Fees for Participants and Non-Participants Who Connect 
to the BOX Network, Exchange Act Release No. 85459 (Mar. 29, 2019), 
84 FR 13363 (Apr. 4, 2019), https://www.govinfo.gov/content/pkg/FR-2019-04-04/pdf/2019-06519.pdf.
    \17\ See Exchange Act Section 19(b)(2)(C), 15 U.S.C. 
78s(b)(2)(C) (stating that the Commission ``shall approve a proposed 
rule change of a self-regulatory organization if it finds that such 
proposed rule change is consistent with the requirements of'' the 
Exchange Act); Exchange Act Sections 6(b)(4)-(5), 15 U.S.C. 
78f(b)(4)-(5).
    \18\ See Disapproval Order, 84 FR at 13,367-70 (discussing BOX's 
market-based and cost-based arguments).
    \19\ Exchange Act Release No. 85927 (May 23, 2019), https://www.sec.gov/rules/sro/box/2019/34-85927.pdf. On March 27, 2019, BOX 
filed a fourth proposed rule change (SR-BOX-2019-09) (``BOX 4''), 
but withdrew this filing on March 29, 2019. See BOX Regulation, Rule 
Filings, http://rules.boxoptions.com/rulefilings (last visited Mar. 
25, 2020). On June 26, 2019, BOX filed a fifth proposed rule change 
(SR-BOX-2019-22) (``BOX 5''), but withdrew it on August 22, 2019. 
Exchange Act Release No. 86835 (Aug. 30, 2019), 84 FR 47009 (Sept. 
5, 2019), https://www.govinfo.gov/content/pkg/FR-2019-09-06/pdf/2019-19223.pdf. That same day, BOX filed a sixth proposed rule 
change (SR-BOX-2019-25) (``BOX 6''), but withdrew it on September 5, 
2019. See BOX Regulation, Rule Filings, http://rules.boxoptions.com/rulefilings (last visited Mar. 25, 2020). Also on September 5, 2019, 
BOX filed a seventh proposed rule change (SR-BOX-2019-27) (``BOX 
7''), Exchange Act Release No. 87014 (Sept. 19, 2019), 84 FR 50534 
(Sept. 25, 2019), https://www.govinfo.gov/content/pkg/FR-2019-09-25/pdf/2019-20706.pdf, but withdrew it on November 1, 2019. BOX filed 
an eighth proposed rule change (SR-BOX-2019-32) (``BOX 8'') on 
October 31, 2019, a ninth proposed rule change (SR-BOX-2019-38) 
(``BOX 9'') on December 20, 2019, a tenth proposed rule change (SR-
BOX-2019-39) (``BOX 10'') on December 31, 2019, and an eleventh 
proposed rule change (SR-BOX-2020-01) (``BOX 11'') on January 15, 
2020, which were withdrawn on December 23, 2019, December 31, 2019, 
January 15, 2020, and January 29, 2020, respectively. The Division 
did not suspend BOX 4 through 11 before they were withdrawn. On 
January 29, 2020, BOX filed a twelfth proposed rule change (SR-BOX-
2020-03) (``BOX 12''). Because each proposed rule change is 
immediately effective upon filing, BOX has been able to charge these 
fees despite the suspension and subsequent disapproval of BOX 1, 2, 
and 3.
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B. The Relevant Precedent

    Recent decisions by the Court of Appeals for the D.C. Circuit and 
the Commission guide our review of the Proposed Rule Changes. We 
summarize that relevant precedent here.
1. The NetCoalition litigation
    In 2010, the D.C. Circuit vacated the Commission's approval of a 
fee rule for market data filed by NYSE Arca, Inc. (``NYSE Arca'').\20\ 
The court held that focusing on whether competitive market forces 
constrained the exchange's pricing decisions was an acceptable basis 
for assessing the fairness and reasonableness of the fees pursuant to 
the Exchange Act, but determined that the record did not factually 
support the conclusion that significant competitive forces limited NYSE 
Arca's ability to set unfair or unreasonable prices. The D.C. Circuit 
vacated and remanded for further proceedings.
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    \20\ NetCoalition v. SEC, 615 F.3d 525, 534-35, 539-44 (D.C. 
Cir. 2010) (``NetCoalition I'').
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    Subsequently, NYSE Arca filed with the Commission a new rule that 
imposed the same fees that had been vacated by the D.C. Circuit and 
designated the filing as effective immediately pursuant to Sections 
19(b)(3)(A) and (C), which were amended as part of the Dodd-Frank Act 
in 2010.\21\ The Commission did not suspend that filing, and another 
petition for review to the D.C. Circuit ensued. On that petition, the 
court held that it lacked jurisdiction to consider challenges to the 
Commission's non-suspension of the fees under Exchange Act Section 
19(b).\22\ But the court, in so holding, ``[took] the Commission at its 
word'' that the Commission would ``make the [Exchange Act] section 
19(d) process available to parties'' seeking to challenge fees as 
improper limitations or prohibitions of access to exchange services, 
and recognized that this Commission process would ``open[ ] the gate to 
[judicial] review.'' \23\
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    \21\ Dodd-Frank Wall Street Reform and Consumer Protection Act 
of 2010, Public Law 111-203, 124 Stat. 1376 (July 21, 2010); see 
also Exchange Act Sections 19(b)(3)(A), (C), 15 U.S.C. 78s(b)(3)(A), 
(C) (permitting self-regulatory organizations (``SROs'') to 
designate as immediately effective rule changes ``establishing or 
changing a due, fee, or other charge imposed by the [SRO] on any 
person, whether or not the person is a member of the [SRO]'').
    \22\ NetCoalition v. SEC, 715 F.3d 342, 351 (DC Cir. 2013) 
(``NetCoalition II'').
    \23\ Id. at 353.
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    Following that decision, the Securities Industry and Financial 
Markets Association (``SIFMA'') filed a challenge with the Commission 
to NYSE Arca's 2010 fee rule under Exchange Act Section 19(d) on the 
ground that it was an improper limitation of access to exchange 
services. We consolidated that challenge with a challenge to a 2010 
Nasdaq fee rule.\24\
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    \24\ See Sec. Indus. & Fin. Mkts. Ass'n, Exchange Act Release 
No. 72182, 2014 WL 1998525, at *6, 11-13 (May 16, 2014) (identifying 
Nasdaq fee rule for Level 2 depth-of-book data product).
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    On October 16, 2018, we issued our decision in the consolidated 
proceeding (``SIFMA Decision'').\25\ We held that the exchanges failed 
to meet their burden of establishing that the challenged fees were 
consistent with the purposes of the Exchange Act--that the fees were 
fair and reasonable and not unreasonably discriminatory. We noted that 
we were not making a determination that the fees themselves were not 
fair and reasonable. Rather, we explained that it was possible the 
challenged fees could be shown to be fair and reasonable and otherwise 
consistent with the Exchange Act, but that the evidence submitted by 
the exchanges failed to satisfy their burden on the existing record. 
Accordingly, we set those fees aside. The exchanges filed a petition 
for review of the SIFMA Decision with the D.C. Circuit and the case 
remains pending.
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    \25\ See Sec. Indus. & Fin. Mkts. Ass'n, Exchange Act Release 
No. 84432, 2018 WL 5023228 (Oct. 16, 2018), petition for review 
filed, No. 18-1292 (D.C. Cir. docketed Oct. 23, 2018).
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    During the pendency of the challenge that led to the SIFMA 
Decision, over 60 related challenges to national securities exchange 
rule changes and National Market System (``NMS'') plan amendments were 
filed with the Commission.\26\ Contemporaneously with the SIFMA 
Decision, we issued a separate order (``Remand Order'') remanding those 
related challenges to the respective exchanges and NMS plan 
participants and instructing the exchanges and plan participants to 
consider the impact of the SIFMA Decision on the challengers' 
assertions that the contested rule changes and plan amendments should 
be set aside.\27\ We further directed the exchanges and NMS plans to 
identify or develop fair procedures for them to use in assessing the 
challenged rule changes and NMS plan amendments as potential denials or 
limitations to services. Several exchanges and plan participants moved 
for reconsideration of the Remand Order. We denied reconsideration on 
May 7, 2019, but we tolled the deadlines set in the Remand Order until 
after the resolution of the appeal of the SIFMA Decision in the D.C. 
Circuit.\28\
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    \26\ Sec. Indus. & Fin. Mkts. Ass'n, Exchange Act Release No. 
84433, 2018 WL 5023230, at * 3-6 (Oct. 16, 2018) (listing 
challenges).
    \27\ Id.
    \28\ Sec. Indus. & Fin. Mkts. Ass'n, Exchange Act Release No. 
85802, 2019 WL 2022819, at * 3 (May 7, 2019). Oral argument on the 
appeal was held on February 18, 2020.
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2. Susquehanna
    In August 2017, the D.C. Circuit issued a decision in Susquehanna

[[Page 18620]]

International Group v. SEC.\29\ There, the court held that the 
Commission's order approving a proposed rule change filed by the 
Options Clearing Corporation (``OCC'')--its ``Capital Plan''--failed to 
meet the standards of the Administrative Procedure Act (``APA'').\30\ 
In so ruling, the court found that the Commission's analysis was flawed 
in that the Commission relied too heavily on OCC's representations 
rather than performing an independent analysis of the Capital Plan or 
critically evaluating OCC's analysis of the Plan.\31\ The court 
emphasized that the Commission's ``unquestioning reliance on OCC's 
defense of its own actions is not enough to justify approving the 
Plan.'' \32\ Nor, according to the court, could the Commission reach a 
conclusion ``unsupported by substantial evidence.'' \33\ The D.C. 
Circuit remanded for further proceedings.
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    \29\ 866 F.3d 442 (D.C. Cir. 2017).
    \30\ Id. at 447 (citing NetCoalition I).
    \31\ Id.
    \32\ Id.
    \33\ Id. at 447-48.
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    Following the remand, the Commission disapproved the OCC Capital 
Plan, finding that the information OCC submitted before the Commission 
was insufficient to support a finding that the Plan was consistent with 
the Exchange Act.\34\ In reaching this determination, the Commission 
reiterated the D.C. Circuit's holding that it must ``critically 
evaluate the representations made and the conclusions drawn'' by the 
self-regulatory organization (``SRO'') in determining whether a 
proposed rule change is consistent with the Exchange Act.\35\ OCC 
subsequently submitted a new proposal to adopt a capital management 
policy, which the Commission approved after a comprehensive analysis 
and review of the record.\36\
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    \34\ See Exchange Act Release No. 85121 (Feb. 13, 2019), 84 FR 
5157 (Feb. 20, 2019) (SR-OCC-2015-02), https://www.govinfo.gov/content/pkg/FR-2019-02-20/pdf/2019-02731.pdf.
    \35\ See id. at 5157.
    \36\ See Exchange Act Release No. 88029 (Jan. 24, 2020), 85 FR 
5500 (Jan. 30, 2020), https://www.govinfo.gov/content/pkg/FR-2020-01-30/pdf/2020-01643.pdf.
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II. Analysis

    Our Rules of Practice set forth procedures for reviewing actions 
made pursuant to delegated authority.\37\ Pursuant to Rule 431(a), the 
Commission may affirm, reverse, modify, set aside, or remand for 
further proceedings, in whole or in part, the action made pursuant to 
delegated authority. Here, we conducted a de novo review of both the 
Disapproval Order and the record, which includes, among other items: 
(1) The Proposed Rule Changes and attachments thereto, as well as 
supplemental information submitted by BOX; (2) comments received in 
connection with the Proposed Rule Changes, including responses from 
BOX; (3) orders issued in connection with the Proposed Rule Changes and 
comments received in connection with them; and (4) BOX's petitions for 
review and related arguments. As a result of that de novo review, we 
affirm the action disapproving the Proposed Rule Changes for the 
reasons expressed below.
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    \37\ See 17 CFR 201.431.
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A. BOX Has Not Met Its Burden To Demonstrate That the Proposed Rule 
Changes Are Consistent With the Exchange Act

    Under Section 19(b)(2)(C) of the Exchange Act, the Commission must 
approve an SRO's proposed rule change if it finds that it is consistent 
with the applicable requirements of the Exchange Act and the rules and 
regulations thereunder; if it does not make such a finding, the 
Commission must disapprove the proposed rule change.\38\ Here, the 
applicable provisions of the Act include Section 6, which requires that 
an exchange's rules provide for the ``equitable allocation of 
reasonable dues, fees, and other charges among its members and issuers 
and other persons using its facilities,'' do not ``permit unfair 
discrimination between customers, issuers, brokers, or dealers,'' and 
do ``not impose any burden on competition not necessary or appropriate 
in furtherance of the purposes of'' the Exchange Act.\39\
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    \38\ 15 U.S.C. 78s(b)(2)(C).
    \39\ 15 U.S.C. 78f(b)(4), (5), (8).
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    Additionally, under Rule of Practice 700(b)(3), the ``burden to 
demonstrate that a proposed rule change is consistent with the Exchange 
Act and the rules and regulations issued thereunder . . . is on the 
self-regulatory organization that proposed the rule change.'' \40\ The 
description of a proposed rule change, its purpose and operation, its 
effect, and a legal analysis of its consistency with applicable 
requirements, must all be sufficiently detailed and specific to support 
an affirmative Commission finding.\41\ Any failure of an SRO to provide 
the requisite information may result in the Commission not having a 
sufficient basis to find that a proposed rule change is consistent with 
the Exchange Act and the applicable rules and regulations issued 
thereunder.\42\
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    \40\ 17 CFR 201.700(b)(3).
    \41\ See Exchange Act Release No. 63723 (Jan. 14, 2011), 76 FR 
4066, 4071 (Jan. 24, 2011), https://www.sec.gov/rules/final/2011/34-63723fr.pdf (release accompanying amendments to Rules of Practice) 
(``2011 Rule Amendments Adopting Release'').
    \42\ See id.
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    The Commission has historically applied a ``market-based'' test in 
assessing whether exchanges' market data fees satisfy the requisite 
Exchange Act requirements.\43\ Under that test, we consider whether an 
exchange ``was subject to significant competitive forces in setting the 
terms of its proposal for [market data], including the level of any 
fees.'' \44\ If an exchange meets that burden, we will find that the 
rule is consistent with the Exchange Act unless there is ``a 
substantial countervailing basis to find that the terms'' of the rule 
violate the Exchange Act or the rules thereunder.\45\ BOX asserts that 
the Proposed Rule Changes satisfy the market-based test.
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    \43\ Cf. NetCoalition I, 615 F.3d at 532, 534-35, 537 (finding 
Commission's use of market-based test--one that relies primarily on 
the effect of competitive forces to assess the terms on which market 
data is made available to investors--to be permissible). The 
Disapproval Order noted that market data fees and connectivity fees 
``present similar issues'' and so merit similar assessment under a 
market-based test. See Disapproval Order, 84 FR at 13367. Because 
BOX presents a market-based argument in support of its connectivity 
fees, we assess that argument under a market-based test.
    \44\ Exchange Act Release No. 59039 (Dec. 2, 2008), 73 FR 74770, 
74781 (Dec. 9, 2008), https://www.govinfo.gov/content/pkg/FR-2008-12-09/pdf/E8-28908.pdf (``2008 ArcaBook Approval Order'').
    \45\ Id. at 74781; see also SIFMA Decision, 2018 WL 5023228, at 
* 12 (citing same).
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    An exchange may ``provide a substantial basis, other than 
competitive forces, . . . demonstrating that the terms of the [fee] 
proposal are equitable, fair, reasonable, and not unreasonably 
discriminatory.'' \46\ We have recognized ``that sufficient evidence 
may be presented for the Commission to sustain or strike the fee on 
other grounds.'' \47\ It is the exchange's prerogative to choose what 
basis to provide, and a cost-based argument could be one such 
basis.\48\ But whatever the bases, it is the exchange's burden to show 
that its proposed fees are consistent with the Exchange Act.\49\

[[Page 18621]]

BOX invokes both a cost-based and market-based justification for the 
Proposed Rule Changes, and so we evaluate both here.
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    \46\ 2008 ArcaBook Approval Order, 73 FR at 74781; see also 
SIFMA Decision, 2018 WL 5023228, at * 12 (citing same).
    \47\ 2008 ArcaBook Approval Order, 73 FR at 74781; see also 
SIFMA Decision, 2018 WL 5023228, at * 12 (citing same).
    \48\ We, and the D.C. Circuit, have also recognized that an 
exchange's costs of providing data could be relevant to the fairness 
of the fees charged under the market-based approach. See SIFMA 
Decision, 2018 WL 5023228, at *33 (citing NetCoalition I, 615 F.3d 
at 537).
    \49\ See Rule of Practice 700(b)(3), 17 CFR 201.700(b)(3); see 
also 2008 ArcaBook Approval Order, 73 FR at 74781; General 
Instructions for Form 19b-4, Sec. I.3, https://www.sec.gov/files/form19b-4.pdf.
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1. BOX Has Not Demonstrated, as it Asserts, That the Proposed Rule 
Changes Are Consistent With the Exchange Act as an Offset of Costs
    In each of its filings under review, BOX begins by raising a cost-
based argument. BOX states that the fees will ``allow the Exchange to 
recover costs associated with offering access through the network 
connections, . . . offset the costs BOX incurs in maintaining, and 
implementing ongoing improvements to the trading systems, including 
connectivity costs, costs incurred on software and hardware 
enhancements and resources dedicated to software development, quality 
assurance, and technology support.'' \50\ The information BOX has 
provided is insufficient to support these assertions, and so BOX has 
failed to meet its burden to demonstrate that the Proposed Rule Changes 
are consistent with the Exchange Act on this cost basis.
---------------------------------------------------------------------------

    \50\ See 83 FR at 37854 (BOX 1); see also 83 FR at 65383 (same 
as to BOX 2); 84 FR at 7148 (same as to BOX 3).
---------------------------------------------------------------------------

    BOX has not submitted the requisite information for us to evaluate 
the reasonableness of the fees being charged on the basis of cost. We 
have explained that a cost-based approach contemplates consideration of 
whether the fees ``bear at least some relationship to costs.''\51\ BOX 
fails to provide the information necessary to determine whether there 
is any relationship between the amounts that it anticipates it will 
collect from the fees and the costs that it asserts it will offset 
through those fees. Indeed, BOX fails to identify either the amount of 
these total revenues or the amount of the specific costs they will 
offset. Nor does BOX identify the frequency of these purported costs 
(such as one-time implementation costs, fixed costs, etc.), or the 
expected revenues from the Proposed Rule Changes. We therefore have no 
basis upon which to evaluate BOX's argument that the fees established 
by the Proposed Rule Changes are necessary to offset its costs,\52\ and 
we have no way to ascertain the relationship, if any, between the 
connectivity fees and the costs they purport to offset.
---------------------------------------------------------------------------

    \51\ Bloomberg L.P., Exchange Act Release No. 83755, 2018 WL 
3640780, at * 9 & n.63 (July 31, 2018).
    \52\ See 15 U.S.C. 78f(b)(4) (requiring that an exchange's rules 
provide for ``reasonable'' fees).
---------------------------------------------------------------------------

    We also lack the information necessary to evaluate whether these 
fees are being allocated equitably.\53\ Because BOX fails to explain 
why these enumerated costs are appropriately offset by connectivity 
fees (as opposed to some other fees), nor to what extent fees charged 
for other services and products (such as data products and trading 
services) offset them, we are unable to determine whether the costs 
attributable to supporting connectivity are being equitably allocated 
to those using that connectivity. BOX also provides no explanation for 
how it arrived at the specific amounts of the fees ($5,000 per month 
for 10 Gb connections and $1,000 per month for non-10 Gb connections) 
nor the disparity between them, beyond noting that one connection 
``use[s] more bandwidth.'' Consequently, we are unable to determine 
whether the pricing unfairly discriminates between different groups 
using connectivity.\54\
---------------------------------------------------------------------------

    \53\ See id. (requiring that an exchange's rules ``provide for 
the equitable allocation'' of its fees).
    \54\ See 15 U.S.C. 78f(b)(5) (requiring that an exchange's rules 
not be designed ``to permit unfair discrimination between customers, 
issuers, brokers, or dealers'').
---------------------------------------------------------------------------

    BOX argues that the Disapproval Order ``cited no authority for the 
proposition that an exchange is invariably required to provide a 
detailed analysis of costs in support of a proposed fee filing.'' 
Although BOX is correct that we do not require a cost-based 
justification in support of a proposed fee filing, BOX, in its filings, 
chose to justify its Proposed Rule Changes as reasonable in light of 
its claimed costs. Having done so, BOX must present sufficient evidence 
to demonstrate that the Proposed Rule Changes are consistent with the 
Exchange Act under a cost-based theory.\55\ An ``unquestioning reliance 
on'' an SRO's ``defense of its own actions is not enough''; rather, we 
must ``critically review[ the] analysis or perform [our] own.'' \56\ 
BOX has not provided sufficient evidence for us to discharge our review 
function, and so we must disapprove these Proposed Rule Changes under a 
cost-based analysis.
---------------------------------------------------------------------------

    \55\ BOX also argues that providing more detailed information 
would put it at a ``significant competitive disadvantage because it 
would expose sensitive information.'' BOX is free to seek 
confidential treatment of any such information under Rule of 
Practice 190, 17 CFR 201.190.
    \56\ See Susquehanna, 866 F.3d at 447; see also 15 U.S.C. 
78s(b)(2)(C) (stating that the Commission ``shall disapprove a 
proposed rule change'' of an SRO ``if it does not make a finding'' 
of consistency with the Exchange Act (emphasis added)); cf. Eagle 
Supply Grp., Inc., Exchange Act Release No. 39800, 1998 WL 133847, 
at * 4 (Mar. 25, 1998) (remanding under Section 19(f) of the 
Exchange Act so that NASD could ``provide a sufficient basis for its 
decision to enable us to make the requisite determination''); 
Jonathan Feins, Exchange Act Release No. 37091, 1996 WL 169441, at * 
2 (Apr. 10, 1996) (stating, in reviewing SRO disciplinary action, 
that ``it is important that a self-regulatory organization clearly 
explain the bases for its conclusions'' and that if it ``fails to do 
so, we cannot discharge properly our review function'').
---------------------------------------------------------------------------

    BOX also attempts to support its cost-based argument by asserting 
that the proposed fees are reasonable because they are equal to or 
lower than competitors' fees.\57\ But Rule of Practice 700(b)(3) 
provides that a ``mere assertion . . . that another self-regulatory 
organization has a similar rule in place'' is ``not sufficient'' to 
``explain why the proposed rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a self-regulatory organization.'' \58\ BOX cites no 
contrary authority and provides no explanation as to why, without 
providing sufficient cost information, its comparison of its own fees 
to a competitor's fees is sufficient here.\59\ The mere fact that 
another exchange charges similar fees does not demonstrate that BOX's 
fees are reasonable.\60\ The circumstances that would make another 
exchange's fees reasonable (assuming they are) would not necessarily be 
the same for BOX.
---------------------------------------------------------------------------

    \57\ See 83 FR at 37854 (BOX 1); see also 83 FR at 65382-83 
(same as to BOX 2), 84 FR at 7148 (same as to BOX 3).
    \58\ 17 CFR 201.700(b)(3). See Exchange Act Section 
19(b)(2)(C)(i), 15 U.S.C. 78s(b)(2)(C)(i) (``The Commission shall 
approve a proposed rule change of a self-regulatory organization if 
it finds that such proposed rule change is consistent with the 
requirements of this chapter and the rules and regulations issued 
under this chapter that are applicable to such organization.'') 
(emphasis added); see also Exchange Act Section 19(b)(2)(F), 15 
U.S.C. 78s(b)(2)(F) (requiring Commission to ``promulgate rules 
setting forth the procedural requirements of the proceedings 
required'' for SRO rule review); 2011 Rule Amendments Adopting 
Release, 76 FR at 4067 (adopting release for Rule 700 noting the 
rules are being promulgated to fulfill the requirements of Exchange 
Act Section 19(b)(2)(F)). To the extent that BOX points to other 
exchanges' fees to argue that the amounts of the Proposed Rule 
Changes are constrained by competition, with no further showing of 
competitive forces, we reject this argument for the same reason.
    \59\ We also note that some of those other fees BOX cites are 
the subject of pending proceedings to determine if they are fair and 
reasonable and otherwise consistent with the Exchange Act. See 
Remand Order, 2018 WL 5023230.
    \60\ 2011 Rule Amendments Adopting Release, 76 FR at 4071 
(stating that rather than a ``mere assertion'' that another SRO has 
a similar rule in place, the SRO must provide a ``legal analysis'' 
of the proposed rule change's ``consistency with applicable 
requirements'' that is ``sufficiently detailed and specific to 
support an affirmative Commission finding'').
---------------------------------------------------------------------------

    BOX argues that it did not need to submit additional information 
because it submitted its proposals as

[[Page 18622]]

immediately effective rule changes. According to BOX, Susquehanna 
presented a different situation than the one here because it involved a 
rule change submitted for approval under Exchange Act Section 19(b)(2) 
rather than an immediately effective rule filing under Section 
19(b)(3). But when the Commission suspends an immediately effective 
rule filing, Section 19(b)(3) requires that the Commission institute 
proceedings to determine whether the proposed rule change should be 
approved or disapproved under Section 19(b)(2)(B)--the same provision 
at issue in Susquehanna.\61\ Once the Commission did so here, the 
Exchange Act's requirements for approving a proposed rule change apply 
equally, regardless of whether the Proposed Rule Rules were initially 
filed pursuant to Section 19(b)(2) or 19(b)(3).
---------------------------------------------------------------------------

    \61\ See 15 U.S.C. 78s(b)(3)(C).
---------------------------------------------------------------------------

2. BOX Has Not Demonstrated That the Fees Established by the Proposed 
Rule Changes Are Constrained by Competition to Equitable and Reasonable 
Levels
    BOX also argues under the market-based test that its services are 
subject to sufficient competition to render its fees equitable, 
reasonable, and otherwise consistent with the Exchange Act. BOX has 
not, however, provided the evidence necessary to support the Proposed 
Rule Changes or its arguments. Consequently, BOX has failed to meet its 
burden to demonstrate that the fees established by the Proposed Rule 
Changes are equitably allocated, not unfairly discriminatory, and do 
not impose an unnecessary or inappropriate burden on competition.
a. BOX Has Not Demonstrated That Total Platform Theory Demonstrates 
That the Fees Established by the Proposed Rule Changes Are Constrained 
by Competition
    BOX argues that the ``total platform'' theory demonstrates that its 
fees are constrained by competition. The premise of the theory is that 
an exchange is a platform with joint products and joint costs.\62\ In 
the context of market data fees, the D.C. Circuit has stated that the 
theory posits that ``[a]lthough an exchange may price its trade 
execution fees higher and its market data fees lower (or vice versa), 
because of `platform' competition the exchange nonetheless receives the 
same return from the two `joint products' in the aggregate.'' \63\
---------------------------------------------------------------------------

    \62\ See SIFMA Decision, 2018 WL 5023228, at *14, 23 (citing 
NetCoalition I, 615 F.3d at 542 n.16).
    \63\ Id. at *14 (quoting NetCoalition I, 615 F.3d at 542 n.16).
---------------------------------------------------------------------------

    BOX relies on platform theory to assert that because a market is 
competitive on a platform basis, the fees charged by the platform are 
consistent with the Exchange Act. An SRO that relies on platform theory 
to support a proposed fee change must provide data and analysis 
demonstrating that these competitive forces are sufficient to constrain 
the SRO's pricing.\64\ It remains true that an SRO must establish by a 
preponderance of the record that the fee is ``reasonable,'' \65\ and 
that it is neither unfairly discriminatory nor an undue burden on 
competition.\66\
---------------------------------------------------------------------------

    \64\ Id. at *17-19, 23 (finding that the exchange presenting the 
platform theory argument did not substantiate its assertions with 
evidence sufficient to support its platform-based arguments).
    \65\ See Exchange Act Section 6(b)(4), 15 U.S.C. 78f(b)(4).
    \66\ See Exchange Act Sections 6(b)(5), (8), 15 U.S.C. 
78f(b)(5), (8).
---------------------------------------------------------------------------

    BOX argues that its exchange is a trading platform, and so its 
ability to price its joint products, including the connectivity 
services at issue here, is constrained by competition for order flow. 
In particular, BOX claims that the competition it faces for order flow 
ensures that its proposed connectivity fees are reasonable and 
otherwise consistent with the requirements of the Exchange Act. BOX has 
failed to show that platform theory has any applicability here.
    BOX supports its argument by relying on an economic analysis of the 
extent to which competitive forces constrain the prices of connectivity 
services offered by Nasdaq (the ``Nasdaq Statement'').\67\ The Nasdaq 
Statement argues that Nasdaq's provision of connectivity services is 
``inextricably linked'' to its provision of trading services such that 
it is not possible to evaluate Nasdaq's pricing of connectivity 
services in isolation from the trading and other ``joint'' services it 
offers. The Nasdaq Statement also argues that Nasdaq is subject to 
significant competition from other trading exchanges and rivals that 
can be expected to constrain Nasdaq's aggregate return from its joint 
products. Because connectivity services are an ``input'' into trading, 
the Nasdaq Statement contends, competition for equity trading will thus 
constrain the pricing of connectivity services. Neither the Nasdaq 
Statement itself nor the arguments BOX makes based on it establish that 
BOX's Proposed Rule Changes are consistent with the Exchange Act.\68\
---------------------------------------------------------------------------

    \67\ See Attachment to Letter from Jeffrey S. Davis, Nasdaq, 
Inc., to Brent J. Fields, Secretary, Securities and Exchange 
Commission (Feb. 13, 2019), https://www.sec.gov/comments/4-729/4729-4930892-178427.pdf.
    \68\ BOX also does not explain whether, if it charges fees for 
connectivity based on the fact that it also offers other ``joint'' 
services that are ``inextricably linked,'' consumers receive any 
benefit for paying fees that are priced in this manner.
---------------------------------------------------------------------------

i. The Nasdaq Statement Does Not Establish That BOX Has Met Its Burden 
of Demonstrating That the Proposed Rule Changes Are Consistent With the 
Exchange Act
    The Nasdaq Statement does not establish that the Proposed Rule 
Changes are consistent with the Exchange Act for several reasons. 
First, the Nasdaq Statement does not establish that the fact that an 
exchange offers multiple products constrains its pricing of 
connectivity fees to reasonable levels. In explaining how equity 
exchanges like Nasdaq offer joint products to their customers and have 
joint costs to do so, the Nasdaq Statement repeatedly compares Nasdaq 
to a fitness center competing for members with other centers. But this 
analogy is not apt. Consumers rarely are members of more than one 
fitness center, but many traders trade at multiple exchanges. Traders 
may make trades at or close to the same time on different exchanges and 
regularly pay for data and connectivity services at some or all of the 
exchanges.\69\ In contrast, if Gym A raises its rates for some fees, 
this may drive some of its members to Gym B because the total cost of 
Gym A's platform has increased. A similar example involving Exchanges A 
and B does not necessarily hold because traders are frequently 
customers of multiple exchanges. Exchange customers may need to connect 
to both Exchange A and B, as well as others, for a variety of reasons 
(e.g., to ensure best execution, to implement profitable trading 
strategies based on access to complete market data, to provide 
competitive trade execution, to comply

[[Page 18623]]

with regulatory obligations such as the Order Protection Rule). Thus, 
an increase in Exchange A's connectivity fees might simply increase the 
cost of trading, rather than drive market participants to Exchange B.
---------------------------------------------------------------------------

    \69\ See, e.g., SIFMA Decision, 2018 WL 5023228, at *5 (noting 
that companies subscribe to multiple exchanges to take advantage of 
``valuable trading opportunities'') and *29 (noting that traders 
engaging in high-frequency or algorithmic trading usually require 
``depth-of-book data from multiple exchanges'' to pursue their 
trading strategies); see also, e.g., Letter from Theodore R. Lazo 
and Ellen Greene, SIFMA, to Brent J. Fields, Secretary, Securities 
and Exchange Commission (Oct. 15, 2018) at 2, https://www.sec.gov/comments/sr-box-2018-24/srbox201824-4530417-176029.pdf (positing 
that it is necessary for certain firms to connect to numerous--if 
not all--exchanges and obtain their depth-of-book data to effectuate 
their trading strategies or meet their execution obligations); 
Letter from Tyler Gellasch, Health Markets, to Brent J. Fields, 
Secretary, Securities and Exchange Commission (Aug. 23, 2019) at 6-7 
& n.22, 12 & n.35, https://www.sec.gov/comments/sr-box-2018-24/srbox201824-4258035-173056.pdf (same).
---------------------------------------------------------------------------

    Second, BOX has not demonstrated the relevance of the Nasdaq 
Statement's reliance on economic theory relating to two-sided 
transaction platforms. Under that theory, because two-sided transaction 
platforms ``facilitate a single, simultaneous transaction'' between two 
participants, they ``cannot raise prices on one side without risking a 
feedback loop of declining demand.'' \70\ ``Price increases on one side 
of the platform . . . do not suggest anticompetitive effects without 
some evidence that they have increased the overall cost of the 
platform's services.'' \71\ As a result, it is necessary to 
``evaluat[e] both sides of a two-sided transaction platform . . . to 
accurately assess competition.'' \72\ The Nasdaq Statement asserts that 
equity exchanges are two-sided markets to the extent that they bring 
together liquidity providers (those market participants that provide 
liquidity by posting quotes on exchanges) with liquidity takers (those 
market participants that take liquidity by trading against posted 
quotes).
---------------------------------------------------------------------------

    \70\ Ohio v. Am. Express Co., 138 S. Ct. 2274, 2285-86 (2018).
    \71\ Id. at 2286.
    \72\ Id. at 2287.
---------------------------------------------------------------------------

    BOX fails to establish that there is a two-sided market for its 
connectivity services. Consumers purchase connectivity services from 
BOX, but BOX does not bring together buyers and sellers of 
connectivity. As a result of failing to establish that a two-sided 
market for its connectivity services exists, BOX has not demonstrated 
that the framework for evaluating competition with respect to a two-
sided transaction platform has relevance here.
    Third, the Nasdaq Statement is inapposite to our analysis of the 
fees at issue here because it addresses the equities market and opines 
on Nasdaq's connectivity services rather than the options market and 
BOX's connectivity services.\73\ We reject BOX's argument that the 
Nasdaq Statement's conclusions necessarily apply to the options market 
and BOX's connectivity services.\74\ BOX has not demonstrated that the 
analysis of the equities market in the Nasdaq Statement is applicable 
in the context of the options market. BOX asserts that it is the 
Commission's burden to demonstrate that the conclusions of the Nasdaq 
Statement do not apply here, but this is not correct. Rather, as 
Commission Rule of Practice 700(b)(3) provides, ``[t]he burden to 
demonstrate that a proposed rule change is consistent with the Exchange 
Act and the rules and regulations issued thereunder that are applicable 
to the self-regulatory organization is on the self-regulatory 
organization that proposed the rule change.'' \75\ And because ``[t]he 
self-serving views of the regulated entities . . . provide little 
support to establish that significant competitive forces affect their 
pricing decisions,'' BOX's assertion that the Nasdaq Statement applies 
to the fees at issue here does not discharge its burden.\76\ BOX may 
not simply assert that the conclusions of the Nasdaq Statement apply to 
its market; it must substantiate that assertion and show that they do. 
As the D.C. Circuit has recognized, the Commission cannot ``merely 
accept'' BOX's unsupported assertions.\77\
---------------------------------------------------------------------------

    \73\ Because the equities market and connectivity offerings of 
Nasdaq's equities exchanges are not at issue here, we need not (and 
do not) determine whether the underlying conclusions of the Nasdaq 
Statement are correct with respect to Nasdaq.
    \74\ For this same reason, we reject BOX's reliance on the fact 
that both the Commission and the D.C. Circuit have acknowledged the 
existence of ``fierce'' competition for order flow. See NetCoalition 
I, 615 F.3d at 539 (``No one disputes that competition for order 
flow is `fierce.' '') quoting 2008 ArcaBook Approval Order, 73 FR at 
74782)). These authorities addressed competition for order flow 
among equity exchanges and other trading venues, not competition for 
connectivity in options markets.
    \75\ See Rule of Practice 700(b)(3), 17 CFR 201.700(b)(3).
    \76\ NetCoalition I, 615 F.3d at 541; accord Susquehanna, 866 
F.3d at 447, 450 (citing NetCoalition I for same proposition); see 
also id. at 443 (finding that by ``grant[ing] approval [of the SRO 
rule change] without itself making the findings and determinations 
prescribed by'' the Exchange Act, the Commission ``effectively 
abdicated that responsibility'' to the SRO).
    \77\ Susquehanna, 866 F.3d at 447.
---------------------------------------------------------------------------

ii. The Arguments BOX Makes Based on the Nasdaq Statement Do Not 
Establish That the Fees Established by the Proposed Rule Changes Are 
Consistent With the Exchange Act
    We reject BOX's assertion in its petition for review that the 
conclusions of the Nasdaq Statement are ``confirmed by other parts of 
the record pertaining to specific BOX customers.'' BOX relies on a 
comment submitted by an individual that it asserts is employed by a 
previous BOX Participant that ended its membership three months before 
the connectivity fees were announced and implemented. The comment 
expresses concern that BOX's connectivity fees are excessive.\78\ BOX 
also relies on a comment from a former BOX customer objecting to the 
level of BOX's fees, challenging BOX's assertion that no one complained 
about the fees, and explaining that the fees had caused the commenter 
to terminate service.\79\ But these two comments are insufficient to 
demonstrate that BOX's total return across the platform remains the 
same regardless of whether it charges more for connectivity fees and 
less for transaction fees or vice versa. The actions of one or two 
customers are insufficient to establish that the fees in the Proposed 
Rule Changes are reasonable as required by the Exchange Act.
---------------------------------------------------------------------------

    \78\ Comment from Anand Prakash (Mar. 27, 2019), https://www.sec.gov/comments/sr-box-2019-04/srbox201904-183648.htm (``If 
this fee increase goes in effect, we wouldn't be able to subscribe 
to BOX market data as the cost of access will go higher and as such, 
we wouldn't be able to participate in trades on BOX. As of now, we 
have stopped our access to BOX as we await for a decision on this 
fees increase.'').
    \79\ Comment from Stefano Durdic, former owner of R2G Services, 
LLC (Mar. 27, 2019), https://www.sec.gov/comments/sr-box-2019-04/srbox201904-5214039-183647.pdf.
---------------------------------------------------------------------------

    BOX also affirmatively attempts to distinguish itself from the 
exchanges discussed in the Nasdaq Statement. BOX argues that it is in 
particular need of connectivity fees compared to other exchanges 
because it ``does not own and operate its own data center and therefore 
cannot control data center costs.'' \80\ But BOX does not explain how 
this difference in its cost structure might affect the applicability of 
the Nasdaq Statement's analysis, which involves balancing the 
exchange's total joint costs against the services offered.
---------------------------------------------------------------------------

    \80\ 83 FR at 65382 (BOX 2).
---------------------------------------------------------------------------

    Finally, BOX argues, based on the Nasdaq Statement, that 
``regulatory forbearance'' is appropriate because there purportedly is 
no economically rational way for an exchange to allocate its joint 
costs since it offers joint products. This argument effectively urges 
the Commission not to review the fees BOX charges for connectivity. But 
as the D.C. Circuit stated in NetCoalition I, ``an agency may not shirk 
a statutory responsibility simply because it may be difficult.'' \81\ 
Indeed, as the D.C. Circuit later emphasized in Susquehanna, ``[w]hen a 
statute requires an agency to make a finding as a prerequisite to 
action, it must do so.'' \82\ We must have a basis for approving BOX's 
proposed fee changes, and BOX has not demonstrated that its inability 
to allocate its costs to those fees is such a basis.
---------------------------------------------------------------------------

    \81\ 615 F.3d at 539.
    \82\ 866 F.3d at 446 (quoting Gerber v. Norton, 294 F.3d 173, 
185-86 (D.C. Cir. 2002)).

---------------------------------------------------------------------------

[[Page 18624]]

b. BOX Has Not Otherwise Offered Evidence That the Proposed Rule 
Changes Are Constrained by Competition
    BOX also argues that competitive forces separate from those related 
to platform theory also constrain their connectivity fee pricing. But, 
again, BOX fails to provide sufficient factual support for these 
assertions and so fails to meet its burden of establishing that the 
Proposed Rule Changes are consistent with the Exchange Act.
    BOX argues that market participants do not need to connect to BOX, 
and that ``the possibility that market participants will discontinue 
routing orders to a trading platform if it sets its connectivity fees 
at an unreasonably high level is a substantial constraint on exchanges' 
ability to increase connectivity fees.'' But BOX does not address the 
effects of regulatory obligations, such as best execution and trade-
through requirements associated with the Order Protection Rule, which 
suggest that, at least under certain circumstances, firms would be 
limited in their ability to discontinue routing orders to BOX.\83\ 
Moreover, as we stated in the SIFMA Decision, there ``must be evidence 
that competition will in fact constrain pricing . . . before the 
Commission approves a fee . . . premised on a competitive pricing 
model.'' \84\ And BOX does not establish that connectivity to BOX is 
unnecessary in the options market or that market participants would, in 
fact, discontinue routing orders to it if it sets its connectivity fees 
at an unreasonably high level such that this behavior would constrain 
its pricing decisions.\85\
---------------------------------------------------------------------------

    \83\ See Options Order Protection and Locked/Crossed Market Plan 
(2009) Section 5, https://www.theocc.com/components/docs/clearing/services/options_order_protection_plan.pdf; see also Rule 611 of 
Regulation NMS, 17 CFR 242.611 (Order Protection Rule for equities 
market).
    \84\ See SIFMA Decision, 2018 WL 5023228, at *18; see also id. 
at *17-22 (analyzing exchanges' arguments regarding link between 
order flow and market data fee prices and finding exchanges failed 
to meet their burden in part due to regulatory constraints on firms' 
ability to move order flow).
    \85\ Cf. NetCoalition I, 615 F.3d at 541 (dismissing examples 
provided in 2008 ArcaBook Approval Order as ``two anecdotes'' that 
``say nothing about whether an exchange like NYSE Arca is 
constrained to price its depth-of-book data competitively'').
---------------------------------------------------------------------------

    BOX also argues that the Proposed Rule Changes will not impose an 
unnecessary or inappropriate burden on competition because as a ``small 
Exchange in the already highly competitive environment for options 
trading, BOX does not have the market power necessary to set prices for 
services that are unreasonable or unfairly discriminatory.'' \86\ It 
argues that because market participants are not required to connect to 
BOX, they simply will not do so if its connectivity fees are 
unreasonably high, and that those that do need to connect can do so 
through third parties. But as explained above, BOX has not established 
that firms may simply refrain from connecting to BOX (or connect 
through a third party with attendant lag time) without running afoul of 
applicable regulatory obligations or failing to take steps necessary to 
meet customer needs. Nor has BOX offered any information regarding the 
effect of the connectivity fees on its market share over the months in 
which the fees were charged since BOX filed its initial fee filing.\87\
---------------------------------------------------------------------------

    \86\ 83 FR at 37854 (BOX 1).
    \87\ See supra note 19. We calculate that from July 2018, when 
BOX 1 was filed, through February 2020, BOX has been authorized to 
collect these fees for at least fifteen of these twenty months, 
including nine of the eleven months after issuance of the 
Disapproval Order.
---------------------------------------------------------------------------

    The record does not support BOX's position that the connectivity 
fees at issue satisfy the market-based test. BOX has provided 
inadequate information regarding the competiveness of the market for 
connectivity services. This does not mean that the fees are not 
consistent with the Exchange Act, but we cannot approve them under the 
market-based test unless BOX establishes that significant competitive 
forces limit its ability to set unreasonable prices.\88\
---------------------------------------------------------------------------

    \88\ See NetCoalition I, 615 F.3d at 539-44 (vacating rule 
approval because market-based test had not been satisfied).
---------------------------------------------------------------------------

B. Disapproval Is Not Arbitrary and Capricious

    BOX argues that the Disapproval Order should be vacated because it 
arbitrarily and capriciously treats BOX differently from other 
exchanges and ``represents a fundamental shift in the Commission's 
regulatory approach to connectivity fees.'' According to BOX, ``in 
suspending and then disapproving'' the Proposed Rule Changes, the 
Division departed from a policy of allowing other immediately effective 
exchange rule filings to go into effect. BOX points to instances in 
which the Commission--by delegated authority or otherwise--did not 
suspend and institute proceedings on immediately effective connectivity 
fee (and data fee) filings by other exchanges. But neither the 
Commission's actions regarding OIP 1, OIP 2, and OIP 3, nor the 
disapproval of the Proposed Rule Changes, constitute an impermissible 
change in policy or otherwise arbitrary or capricious action.
    First, BOX's primary complaint is not about the merits of the 
Disapproval Order but about the decisions to suspend BOX's rule filings 
and institute proceedings to consider whether to approve or disapprove 
them. These are the decisions that BOX contends depart from prior 
Commission practice, and which, it claims, have caused BOX to be 
treated unfairly compared with other exchanges.\89\ But Exchange Act 
Section 19(b)(3) states that the determination of whether to suspend an 
immediately effective rule filing and institute proceedings is not 
reviewable under Section 25 of the Exchange Act and is not ``final 
agency action'' for purposes of review.\90\ As the D.C. Circuit 
explained in NetCoalition II, the plain language was ``clear and 
convincing evidence of the Congress's intent to preclude'' judicial 
review of the Commission's determination whether to suspend an SRO rule 
filing or to allow it to become effective without instituting a rule 
disapproval proceeding.\91\ Thus, neither the previous determinations 
to not suspend other fee filings nor the determination to suspend 
here--including whether those decisions departed from any prior 
practice--constitute reviewable agency action.\92\ It is the decision 
whether to approve or disapprove the Proposed Rule Changes, after the 
Proposed Rule Changes have been suspended and proceedings instituted, 
and not the decision whether to suspend BOX's rule filings and 
institute proceedings to determine whether they should be approved or 
disapproved, that is relevant here and that would be reviewable.
---------------------------------------------------------------------------

    \89\ We note that since July 2018, when BOX 1 was filed, BOX has 
filed over forty additional immediately effective rule filings. 
Other than BOX 2 and 3, none of those rule filings have been 
suspended. See SR-BOX-2018-25, 26, 27, 28, 30, 32, 33, 34, 35, 36, 
38, 39; SR-BOX-2019-01, 02, 03, 05, 07, 08, 10, 11, 12, 13, 14, 15, 
16, 17, 18, 20, 21, 22, 23, 25, 27, 28, 30, 31, 32, 33, 34, 35, 36, 
38, 39; SR-BOX-2020-01, 02, 03, 05, 06, 07.
    \90\ 15 U.S.C. 78s(b)(3)(C).
    \91\ 715 F.3d at 351 (internal quotation marks and citations 
omitted).
    \92\ Id. at 353 (``We make clear that [Exchange Act] section 
19(b)(3)(C) imposes a jurisdictional bar to our review of the 
Commission's decision not to suspend a proposed rule change.'') 
(emphasis in original); see also supra note 90 (Commission's 
decision to suspend a rule change is not reviewable).
---------------------------------------------------------------------------

    Second, BOX points to no formal Commission policy regarding the 
suspension of immediately effective rule filings and, in fact, there is 
none.\93\

[[Page 18625]]

Rather, the determination whether to suspend an immediately effective 
exchange fee filing and institute proceedings to determine whether it 
is consistent with the Exchange Act occurs on a case-by-case basis. As 
BOX itself emphasizes in its filings, Section 19(b)(3) does not require 
the Commission to take any action or form any conclusion about the 
Proposed Rule Changes BOX filed or about any other exchange's filing. 
The determination not to suspend a fee filing does not constitute 
reviewable Commission action or require an explanation from the 
Commission.\94\ When the Commission does determine to suspend an 
immediately effective rule change and institute proceedings to 
determine whether to approve or disapprove a fee, the Commission does 
explain the specific issues in that case that led to its conclusion, as 
occurred in the current instance.\95\ The Commission's exercise of 
discretion is consistent with the Exchange Act's provisions.\96\
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    \93\ BOX refers to the staff guidance the Division issued to 
assist SROs in preparing fee filings that would meet their burdens 
under the Exchange Act and related rules. See ``Staff Guidance on 
SRO Rule Filings Related to Fees'' (May 21, 2019), https://www.sec.gov/tm/staff-guidance-sro-rule-filings-fees. But this 
document makes no mention of any previous purported policy to not 
suspend rule filings, nor any new policy to do otherwise now. And, 
as the staff guidance itself makes clear, it represents only the 
views of the staff of the Division of Trading and Markets--not the 
Commission--and the Commission neither approved nor disapproved its 
contents. Id. at n.1.
    \94\ Although a determination not to suspend a proposed fee rule 
change would not be reviewable, the enforcement of a rule that has 
gone into effect could still be challenged as a limitation of access 
to exchange services through an application for review to the 
Commission under Exchange Act Section 19(d), 15 U.S.C. 78s(d). See 
Sec. Indus. & Fin. Mkts. Ass'n, 2014 WL 1998525, at *6-11 
(explaining jurisdictional limits of Section 19(d) and setting forth 
framework for determining whether fees are reviewable as limitations 
of access under the Exchange Act and referencing timeliness 
requirement).
    \95\ See, e.g., OIP 1, 83 FR at 47948 (explaining reasoning for 
suspension). And once the Commission issues a final approval or 
disapproval order, that order could then be appealed.
    \96\ See 15 U.S.C. 78s(b)(3)(C) (``[T]he Commission summarily 
may temporarily suspend the change in the rules . . . if it appears 
to the Commission that such action is necessary or appropriate in 
the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of this chapter.'').
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    BOX bases its argument on its observation that before OIP 1 issued 
on September 17, 2018, the Commission had not suspended any immediately 
effective exchange fee filings regarding connectivity fees. It is true 
that recently, the Commission's case-by-case review of these filings 
has led to the Commission suspending more immediately effective filings 
than previously. But BOX's argument that our treatment of previous 
filings renders disapproval of the Proposed Rule Changes at issue here 
arbitrary and capricious ignores the need for the Commission to respond 
to intervening legal developments. As discussed above, in the 
NetCoalition litigation, as well as in Susquehanna, the D.C. Circuit 
has recently reiterated the Commission's obligation to examine the 
factual support for assertions that competitive forces constrain fees 
and emphasized the need for the Commission to ``critically review[ ]'' 
an SRO's analysis.\97\
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    \97\ 866 F.3d at 447.
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    Consistent with the court's directives, following Susquehanna and 
prior to OIP 1, the Commission issued several orders indicating a need 
for further substantiation of various fee filings.\98\ After OIP 1 was 
issued on September 17, 2018, the Division suspended other immediately 
effective exchange fee filings regarding connectivity fees.\99\ For 
example, as discussed above, the Division suspended effective upon 
filing rule changes to increase connectivity fees submitted by MIAX and 
PEARL around the same time as OIP 1.\100\
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    \98\ See, e.g., Exchange Act Release No. 83148 (May 1, 2018), 83 
FR 20126 (May 7, 2018), https://www.govinfo.gov/content/pkg/FR-2018-05-07/pdf/2018-09579.pdf; Exchange Act Release No. 83149 (May 1, 
2018), 83 FR 20129 (May 7, 2018), https://www.govinfo.gov/content/pkg/FR-2018-05-07/pdf/2018-09580.pdf (orders summarily abrogating 
immediately effective NMS plan amendments regarding fees because of 
concerns that there was not enough information provided to show 
consistency with the Exchange Act); Bloomberg L.P., 2018 WL 3640780, 
at *9 (staying the effectiveness of NMS Plan amendments because the 
filings did ``not identify any basis by which [the] fee changes 
could be assessed for fairness and reasonableness'' beyond an 
``unsupported declaration'' to that effect).
    \99\ See, e.g., Exchange Act Release No. 85152 (Feb. 15, 2019), 
84 FR 5737 (Feb. 22, 2019), https://www.govinfo.gov/content/pkg/FR-2019-02-22/pdf/2019-03041.pdf (suspending proposed rule changes 
filed by Nasdaq BX, Inc. and Nasdaq PHLX LLC involving port fees). 
The filings were later withdrawn.
    \100\ See supra note 6. BOX argues that the Division's approach 
to MIAX and PEARL ``further underscore[s] that BOX is being treated 
less favorably than other exchanges'' because the Division did not 
immediately suspend refiled versions of those rule proposals ``and 
instead permitted them to remain in effect during the comment 
period.'' BOX ignores the fact that MIAX and PEARL withdrew their 
rule proposals before resubmitting them, meaning that, unlike with 
respect to BOX, proceedings were not pending when they filed new 
versions of their proposed rules. Moreover, the Division has not 
immediately suspended any of BOX's subsequent versions of the 
Proposed Rule Changes; instead, BOX, like MIAX and PEARL, has 
continued to withdraw them. In many instances, all of these 
exchanges, including BOX, have not withdrawn their proposed rules 
until the very end of the comment period, enabling them to charge 
the proposed fees. See supra note 87.
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    As the D.C. Circuit stated in Road Sprinkler Fitters Local Union 
669 v. Herman, it is not ``arbitrary and capricious for an agency to 
change its position in response to new legal developments.'' \101\ And 
here, to the extent that the treatment of immediately effective rule 
filings has changed, that change was prompted by recent case law. Under 
these circumstances, our action in suspending the Proposed Rule Changes 
was not arbitrary or capricious.\102\
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    \101\ 234 F.3d 1316, 1320 (D.C. Cir. 2000).
    \102\ BOX also argues that the Remand Order--which remanded 
immediately effective rule changes and NMS plan amendments 
challenged as improper limitations of access to services under 
Exchange Act Sections 19(d) and 11A--exacerbated its allegedly 
disparate treatment by allowing other exchanges' fees to remain in 
effect. But the determination to suspend BOX 1 was made before the 
Remand Order issued, so that order had no effect on BOX's treatment 
here.
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C. The Proposed Rule Changes Are Not Currently in Effect

    BOX also asserts that its Proposed Rule Changes have been ``deemed 
approved by operation of law'' pursuant to Exchange Act Section 
19(b)(2)(B). That section requires the Commission to ``issue an order'' 
approving or disapproving a proposed rule change within, at most, 240 
days of the proposed rule change's filing.\103\ If the Commission fails 
to issue an order within that period, the proposed rule change is 
deemed to have been approved.\104\ BOX argues that because the Division 
by delegated authority, and not the Commission itself, issued the 
Disapproval Order within the required 240-day period, the Proposed Rule 
Changes have been deemed approved.\105\ This argument lacks merit.
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    \103\ See 15 U.S.C. 78s(b)(2)(B)(ii).
    \104\ See 15 U.S.C. 78s(b)(2)(D).
    \105\ BOX cited BOX 1 and BOX 2 as having been deemed approved 
since the relevant period had not yet elapsed for BOX 3 when it made 
its argument.
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    The Commission complied with the requirements of the statute. 
Section 19(b)(2)(D) requires only that the Commission ``issue an 
order'' approving or disapproving the proposed rule change within 240 
days. The Disapproval Order was issued within that period.
    Although orders issued by delegated authority are issued by 
Commission staff, they are issued with the full authority of the 
Commission and are signed by the Secretary's office on behalf of the 
Commission. Section 4A of the Exchange Act authorizes the Commission to 
delegate certain functions--including approval or disapproval of 
proposed rule changes under Section 19--to a ``division of the 
Commission.'' \106\ And the Commission's Rules of Practice make clear 
that ``an action made pursuant to delegated authority shall have 
immediate effect and be deemed the action of the Commission.'' \107\
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    \106\ See 15 U.S.C. 78d-1(a).
    \107\ See Commission Rule of Practice 431(e), 17 CFR 201.431(e). 
See also, e.g., Rule of Practice 430(c), 17 CFR 201.430(c) 
(referring to ``a final order entered pursuant to [delegated 
authority]''); Rule of Practice 431(f), 17 CFR 201.431(f) (giving an 
order by delegated authority operative effect, even when review has 
been sought, until a person receives actual notice that it was been 
stayed, modified, or reversed on review).

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[[Page 18626]]

    Moreover, Congress was aware of the Commission's ability to 
delegate authority to approve SRO rule filings when the time 
restrictions in Exchange Act Section 19(b)(2)(D) were enacted. Yet it 
did not indicate that a delegated order would not comply with the 
statutory deadlines. Congress authorized actions taken by delegated 
authority in 1962,\108\ added the 240-day requirement for approving or 
disapproving a proposed rule change in 1975,\109\ and added the 
provision that a proposed rule change is deemed approved if the 
Commission fails to act in that time in 2010.\110\ Indeed, Congress 
amended the delegated authority provisions at the same time it enacted 
the majority of the current review provisions for SRO proposed rule 
changes.\111\
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    \108\ See ``An Act to Authorize the Securities and Exchange 
Commission to Delegate Certain Functions,'' Public Law 87-592, 76 
Stat. 394, 394-95 (1962).
    \109\ See Securities Act Amendments of 1975, Public Law 94-29, 
89 Stat. 97.
    \110\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Public Law 111-203, 124 Stat. 1376 (2010). Commission Rule of 
Practice 431(e), which states that actions performed by delegated 
authority shall be deemed the actions of the Commission, was 
originally enacted in 1963, and in its current form in 1995. See 
Exchange Act Release No. 35833 (June 9, 1995), 60 FR 32738, 32823 
(June 23, 1995), https://www.govinfo.gov/content/pkg/FR-1995-06-23/pdf/95-14750.pdf (noting that Rule of Practice 431(e) replaced 
previous Rule 26(e)); Exchange Act Release No. 7031, 1963 WL 64555, 
at *12 (Mar. 8, 1963) (``Any determination at a delegated level 
shall have immediate effect and be deemed the action of the 
Commission.'').
    \111\ See Securities Act Amendments of 1975, 89 Stat. 97.
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    To construe Section 19(b)(2), as BOX does, to require Commission 
review of an order by delegated authority to be completed within 240 
days ``would undermine both the specific deadlines set forth in the 
statute and the Commission's ability to delegate functions.'' \112\ 
Exchange Act Section 4A makes clear that, when it delegates an action, 
the Commission retains a discretionary right to review staff action, 
either on its own initiative or at the request of a party to that 
action.\113\ If action taken by delegated authority were insufficient 
to meet the statutory deadline, the Commission would either be unable 
to delegate this function, or be faced with the possibility that this 
right of review would be thwarted; action taken by delegated authority 
close to the end of the statutory period would leave insufficient time 
for either the Commission or outside parties to seek review. 
Alternatively, to avoid this result, an action taken by delegated 
authority would have to be taken well before the end of the statutory 
period so the Commission could complete any review of the action before 
the underlying proposed rule change was deemed approved. And the 
Commission might have to issue its decision with insufficient time to 
engage in the independent and thoughtful analysis required by both the 
Exchange Act and the APA or otherwise have the order deemed approved 
before completing its deliberations.\114\
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    \112\ See Order Setting Aside Action by Delegated Authority and 
Disapproving a Proposed Rule Change, as Modified by Amendments No. 1 
and No. 2, Regarding the Acquisition of CHX Holdings, Inc. by North 
America Casin Holdings, Inc., Exchange Act Release No. 82727 (Feb. 
15, 2018) at 21-23, https://www.sec.gov/rules/sro/chx/2018/34-82727.pdf.
    \113\ See 15 U.S.C. 78d-1(b).
    \114\ See Motor Vehicle Mfrs. Ass'n v. State Farm Mut. Auto. 
Ins. Co., 463 U.S. 29, 43 (1983) (``[T]he agency must examine the 
relevant data and articulate a satisfactory explanation for its 
action including a `rational connection between the facts found and 
the choice made.''') (quoting Burlington Truck Lines, Inc. v. United 
States, 371 U.S. 156, 168 (1962)).
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    Nor does Exchange Act Section 4A(c) support BOX's argument. That 
provision states: ``If the right to exercise such review is declined, 
or if no such review is sought within the time stated in the rules 
promulgated by the Commission, then the action [taken by delegated 
authority] shall, for all purposes, including appeal or review thereof, 
be deemed the action of the Commission.'' \115\ Contrary to BOX's 
assertion, this does not mean that an action taken by delegated 
authority shall `` `be deemed the action of the Commission' only `[i]f 
the right to exercise such review is declined, or if no such review is 
sought within the time stated in the rules promulgated by the 
Commission.' '' \116\ Section 4A is silent on the effect of a delegated 
action when Commission review is sought and granted.\117\ And the 
Commission employed the rulemaking authority granted by Section 4A(b) 
to promulgate Rule 431(e), which provides that actions made pursuant to 
delegated authority are deemed actions of the Commission.\118\
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    \115\ 15 U.S.C. 78d-1(c).
    \116\ The emphasis and alteration are in BOX's filing. The 
language in the internal quotation marks is in Section 4A(c), 15 
U.S.C. 78d-1(c). The word ``only'' is not. Id.
    \117\ Cf. Indiana Bell Telephone Co., Inc. v. McCarthy, 362 F.3d 
378, 387 (7th Cir. 2004) (noting that decisions made pursuant to 
delegated authority represent actions of the agency).
    \118\ See Exchange Act Section 4A(a), 15 U.S.C. 78d-1(a) 
(``[T]he Commission shall have the authority to delegate, by 
published order or rule, any of its functions . . . .''); see also 
Exchange Act Release No. 35833 (June 9, 1995), 60 FR 32738, 32777 
(June 23, 1995), https://www.govinfo.gov/content/pkg/FR-1995-06-23/pdf/95-14750.pdf (noting that Commission was relying on the 
authority granted by Exchange Act Section 4A, among other 
provisions, in promulgating the Rule 430 series); Exchange Act 
Release No. 7031, 1963 WL 64555, at *1 (Mar. 8, 1963) (noting that 
original rule relied on same language from Section 4A(a)).
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III. Conclusion

    For the reasons set forth above, the Commission does not find, 
pursuant to Section 19(b)(2) of the Exchange Act, that BOX has met its 
burden of demonstrating that the Proposed Rule Changes are consistent 
with the requirements of the Exchange Act and the rules and regulations 
thereunder applicable to a national securities exchange. It is 
therefore ordered, pursuant to Rule 431 of the Commission's Rules of 
Practice, that the Proposed Rule Changes (SR-BOX-2018-24; SR-BOX-2018-
37; SR-BOX-2019-04) be, and hereby are, disapproved.

    By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-06837 Filed 4-1-20; 8:45 am]
BILLING CODE 8011-01-P