[Federal Register Volume 90, Number 51 (Tuesday, March 18, 2025)]
[Notices]
[Pages 12590-12602]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-04412]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-102650; File No. 10-247]
In the Matter of the Application of MX2 LLC for Registration as a
National Securities Exchange; Findings, Opinion, and Order of the
Commission
March 13, 2025.
I. Introduction and Procedural History
On September 19, 2024, MX2 LLC (``MX2'' or ``Exchange'') filed with
the Securities and Exchange Commission (``Commission'') a Form 1
application under the Securities Exchange Act of 1934 (``Act''),
seeking registration as a national securities exchange under Section 6
of the Act.\1\ On November 29, 2024, MX2 submitted Amendment No. 1 to
the application.\2\ Notice of the
[[Page 12591]]
application, as amended, was published for comment in the Federal
Register on December 17, 2024.\3\ The Commission received one comment
on the application.\4\
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\1\ 15 U.S.C. 78f. 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, MX2 submitted updated portions of its
Form 1, including Exhibits C (information regarding subsidiaries or
affiliates), C-2 (Seventh Amended and Restated LLC Agreement of MEMX
Holdings LLC), C-3 (Eighth Amended and Restated LLC Agreement of
MEMX Holdings LLC), C-16 (Second Amended and Restated LLC Agreement
of MEMX LLC), E (description of the proposed operation of the
exchange) and J (list of officers, governors, members of all
standing committees, or persons performing similar functions).
\3\ See Securities Exchange Act Release No. 101884 (Dec. 11,
2024), 89 FR 102214 (``Notice'').
\4\ Comments received in response to the Notice are available at
https://www.sec.gov/comments/10-247/10-247.htm.
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The Commission has reviewed the Exchange's registration
application, as amended, together with the comment letter 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 MX2's Form 1, as amended, this order approves MX2's Form 1
application, as amended, for registration as a national securities
exchange.
II. Statutory Standards
Pursuant to Sections 6(b) and 19(a) of the Act,\5\ 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.\6\
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\5\ 15 U.S.C. 78f(b) and 15 U.S.C. 78s(a), respectively.
\6\ 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
MX2'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 MX2 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; \7\ (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; \8\ (3) not permit unfair discrimination between
customers, issuers, or dealers; \9\ and (4) protect investors and the
public interest.\10\ The Commission also finds that the proposed rules
of MX2 are consistent with Section 11A of the Act.\11\ Finally, the
Commission finds that MX2's proposed rules do not impose any burden on
competition not necessary or appropriate in furtherance of the purposes
of the Act.\12\
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\7\ See U.S.C. 78f(b)(3).
\8\ See U.S.C. 78f(b)(5).
\9\ See id.
\10\ See id.
\11\ 15 U.S.C. 78k-1.
\12\ 15 U.S.C. 78f(b)(8).
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III. Discussion
As proposed, MX2 would be substantively identical to its affiliated
national securities exchange, MEMX LLC (``MEMX''), with the same
governance structure and a substantively identical rulebook.\13\ One
commenter, stating that ``there appears to be nothing unique about this
exchange application,'' further stated that MX2 would ``contribute to
the fragmentation problem'' that ``adds costs and doesn't help
transparency or liquidity'' and ``does nothing for overall market
quality.'' \14\ The commenter stated that it is ``not in favor of new
exchanges being approved unless they can bring a value-added innovation
to the market'' and further stated that ``[w]hile MX2 may still be
planning something innovative, it's not in the documents that were
filed with the [Commission].'' \15\
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\13\ As discussed below, MX2 proposes to incorporate by
reference most chapters of the MEMX rulebook except MEMX Chapter 1
(Adoption, Interpretation and Application of Rules, and
Definitions), Chapter 2 (Members of the Exchange), Rule 8.15 in
Chapter 8 (Imposition of Fines for Minor Violation(s) of Rules),
Chapter 11 (Trading Rules), and Chapter 15 (Dues, Fees, Assessments
and Other Charges, Effective Date). See also supra note 191
(concerning rules incorporated by reference). The chapters that are
not incorporated by reference are substantively identical to the
corresponding rules of MEMX. References to MX2 rules discussed
herein include those rules contained in the MX2 proposed rulebook as
well as those corresponding MEMX rules that MX2 proposes to
incorporate by reference.
\14\ Letter from Joseph Saluzzi, Themis Trading LLC, dated Jan.
31, 2025, available at https://www.sec.gov/comments/10-247/10247-563415-1614842.pdf. The commenter stated that ``[e]xchange
medallions are very valuable since they can generate data related
fees including a share of the SIP tape revenue pool''. Id. The
commenter stated that MEMX earned in 2023 $23 million from the
equities market data plans, which the commenter estimates exceeded
the trading fees MEMX may have earned that year. See id.
\15\ Id. at 2.
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As explained above in section II, the Act states the Commission
shall 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. As stated above and for the reasons discussed throughout this
order, the Commission finds that MX2'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.\16\
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\16\ The Commission similarly granted the Form 1 application for
exchange registration of MEMX, whose governing documents, rules,
forms, and application were substantively identical to those of MX2.
See Securities Exchange Act Release No. 88806 (May 4, 2020), 85 FR
27451 (May 8, 2020) (File No. 10-237) (order granting exchange
registration of MEMX LLC) (``MEMX Order'').
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While MX2's Form 1 application does not contain any novel features
when compared to MEMX, the Exchange 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 MX2, the Commission is required to consider a
Form 1 application for consistency with statutory standards and the
record does not support a denial of MX2's Form 1 application as
inconsistent with the Exchange Act.
A. Governance of MX2
MX2 will be owned by MEMX Holdings LLC (``MEMX Holdings''), a
Delaware limited liability company. In turn, MEMX Holdings is owned by
a group of investors that include broker-dealers and banks.
1. MX2 Board of Directors
The board of directors of MX2 (``Exchange Board'') \17\ will be its
governing body and will possess all of the powers necessary for the
management of its business and affairs, including governance of MX2 as
a self-regulatory organization (``SRO'').\18\ Specifically:
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\17\ A Director may not be subject to statutory
disqualification. See First Amended and Restated Limited Liability
Company Agreement of MX2 (``MX2 LLC Agreement''), Article VII,
Section 7.6(d).
\18\ See MX2 LLC Agreement, Article VII, Section 7.2. See also
Form 1, Exhibit J.
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[[Page 12592]]
the Exchange Board initially will be composed of 10
directors; \19\
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\19\ See MX2 LLC Agreement, Article VII, Section 7.3(a).
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one director will be the Chief Executive Officer of MX2;
\20\
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\20\ See MX2 LLC Agreement, Article VII, Section 7.3(b)(i).
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the number of Non-Industry Directors \21\ will equal or
exceed the sum of the number of Industry Directors \22\ and Member
Representative Directors; \23\
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\21\ ``Non-Industry Director'' means a Director who is an
Independent Director or any other individual who would not be an
Industry Director. See MX2 LLC Agreement, Article I, Section 1.1.
\22\ ``Industry Director'' means, among other criteria, a
Director who is or has been 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 MX2 LLC Agreement, Article I, Section 1.1.,
for a description of all of the circumstances regarding when a
Director would be considered an Industry Director.
\23\ See MX2 LLC Agreement, Article VII, Section 7.3(b)(ii)(A).
``Member Representative Director'' means a Director who has been
appointed as such to the initial Exchange Board pursuant to Section
7.4 of the MX2 LLC Agreement or elected by MEMX Holdings after
having been nominated by the Member Nominating Committee or by an
Exchange member pursuant to the MX2 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 Unitholder Exchange Member. See MX2 LLC Agreement, Article I,
Section 1.1.
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at least two of the Non-Industry Directors shall also
qualify as Independent Directors; \24\
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\24\ ``Independent Director'' means a Director who has no
material relationship with the Exchange or any affiliate of the
Exchange or any Exchange Member or any affiliate of any 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 MX2, MEMX, or MEMX Holdings. See MX2 LLC Agreement, Article I,
Section 1.1.
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at least one of the Non-Industry Directors shall be
representative of issuers and investors and not associated with an
Exchange Member, a broker, or a dealer; and
at least 20% of the directors on the Exchange Board will
be Member Representative Directors.\25\
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\25\ See MX2 LLC Agreement, Article VII, Section 7.3(b)(ii)(D).
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The initial directors of the Exchange Board will be appointed by
MEMX Holdings and will serve until the first annual meeting of Company
Members.\26\ The first annual meeting of Company Members will be held
within 90 days after the Commission grants MX2's exchange
registration.\27\
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\26\ See MX2 LLC Agreement, Article VII, Section 7.3(f).
``Company Members'' means MEMX Holdings. See MX2 LLC Agreement,
Article I, Section 1.1.
\27\ See MX2 LLC Agreement, Article VII, Section 7.3(f).
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In addition, MEMX Holdings 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.\28\ 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.\29\ MX2
members will have rights to nominate and elect additional candidates
for the Member Nominating Committee pursuant to a petition process.\30\
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\28\ See MX2 LLC Agreement, Article VIII, Section 8.7(b).
\29\ See id.
\30\ See MX2 LLC Agreement, Article VII, Section 7.4
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The Nominating Committee will nominate candidates for election to
the Board.\31\ For Member Representative Director positions, the Member
Nominating Committee, composed solely of Member Representative
Committee or Panel Members,\32\ will solicit input from MX2 members and
members may submit petition candidates.\33\ 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.\34\ 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 MX2 members for election to determine the final
designees for any open Member Representative Director positions.\35\ 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.\36\
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\31\ See MX2 LLC Agreement, Article VII, Section 7.4(a).
\32\ ``Member Representative Committee or Panel Members'' 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
Unitholder Exchange Member. See MX2 LLC Agreement, Article I,
Section 1.1.
\33\ See MX2 LLC Agreement, Article VII, Section 7.4(a). See
also MX2 LLC Agreement, Article VII, Section 8.7(c).
\34\ See MX2 LLC Agreement, Article VII, Section 7.4(e).
\35\ See id.
\36\ See MX2 LLC Agreement, Article VII, Section 7.4(f).
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The MX2 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 MX2 members provides for the fair representation of
members in the selection of directors and the administration of MX2 and
therefore are consistent with Section 6(b)(3) of the Act.\37\ 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.\38\
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\37\ 15 U.S.C. 78f(b)(3).
\38\ See, e.g., MEMX Order, supra note 16; Securities Exchange
Act Release Nos. 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 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 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 Exchange'')) (``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 Order''); and 53128 (Jan. 13, 2006), 71 FR 3550, 3553
(Jan. 23, 2006) (File No. 10-131) (order granting exchange
registration of Nasdaq Stock Market, Inc.) (``Nasdaq Order'').
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In addition, with respect to the requirements that the number of
Non-Industry Directors equal or exceed the sum of the number of
Industry Directors and Member Representative Directors, that at least
two Non-Industry Directors shall also qualify as Independent Directors,
and that at least one of the Non-Industry Directors shall be
representative of issuers and investors and not associated with an
Exchange Member, a broker, or a dealer, the proposed composition of the
Exchange Board satisfies the requirements in Section 6(b)(3) of the
Act,\39\ which require in part that one or more directors be
representative of issuers and investors and not be associated with a
member of the exchange, or with a broker or dealer. 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.\40\
Further, the presence of public, non-industry representatives can
[[Page 12593]]
help to ensure that no single group of market participants has the
ability to systematically disadvantage other market participants
through the 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.
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\39\ 15 U.S.C. 78f(b)(3).
\40\ See, e.g., MEMX Order, supra note 16, at 27452; LTSE Order,
supra note 38, at 21843; MIAX PEARL Order, supra note 38, at 92903;
MIAX Order, supra note 38, at 73067; BATS Order, supra note 38, at
49501; and Nasdaq Order, supra note 38, at 3553.
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2. Interim Board
MEMX Holdings will hold a special meeting to appoint Interim
Directors of the Board (``Interim Board''), which will include Interim
Member Representative Directors.\41\ Upon appointment of the Interim
Directors, the Interim Board will meet the Board composition
requirements set forth in the MX2 LLC Agreement.\42\ The Interim Board
members will serve only until the first annual meeting of Company
Members, which will be held within 90 days after the Commission grants
the Exchange's registration as a national securities exchange.\43\ The
Exchange represents that it will complete the full nomination,
petition, and voting process set forth in the MX2 LLC Agreement, which
will provide persons that are approved as MX2 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 MX2 LLC Agreement.\44\
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\41\ See Form 1, Exhibit J.
\42\ See id. See also MX2 LLC Agreement, Article VII, Section
7.3.
\43\ See MX2 LLC Agreement, Article VII, Section 7.3(f).
\44\ See Form 1, Exhibit J.
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3. Exchange Committees
MX2 has proposed to establish several named committees of the
Exchange Board, including: an Appeals Committee \45\ and a Regulatory
Oversight Committee,\46\ as well as the Nominating Committee and Member
Nominating Committee, discussed above.\47\
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\45\ See MX2 LLC Agreement, Article VIII, Section 8.1. The
Appeals Committee will preside over all appeals related to
disciplinary and adverse action determinations in accordance with
MX2 rules. See MX2 LLC Agreement, Article VIII, Section 8.6.
\46\ See MX2 LLC Agreement, Article VIII, Section 8.1. 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 MX2 LLC Agreement, Article VIII, Section 8.8(c).
\47\ The Exchange Board could also establish additional
committees. See MX2 LLC Agreement, Article VIII, Section 8.1. All
committees of the Board will be subject to the control and
supervision of the Board. See id.
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The Appeals Committee will consist of two Independent Directors,
and one Member Representative Director.\48\ Each member of the
Regulatory Oversight Committee must be an Independent Director.\49\
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\48\ See MX2 LLC Agreement, Article VIII, Section 8.6.
\49\ See MX2 LLC Agreement, Article VIII, Section 8.8(e).
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The MX2 proposed named committees, which are similar to the named
committees maintained by other exchanges,\50\ 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.\51\
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\50\ See, e.g., MEMX Order, supra note 16, 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 Order''); Article
IV, Section 4.1 of the Eleventh Amended and Restated Bylaws of Cboe
Exchange, Inc.
\51\ 15 U.S.C. 78f(b)(1).
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B. MEMX Holdings and Regulation of the Exchange
When MX2 commences operations as a national securities exchange, it
will have all of the attendant regulatory obligations under the Act. In
particular, MX2 will be responsible for the operation and regulation of
its trading system and the regulation of its members. Certain
provisions in both the MX2 and MEMX Holdings governing documents are
designed to facilitate the ability of MX2 to fulfill its regulatory
obligations and to help facilitate Commission oversight of MX2. The
discussion below summarizes some of these key provisions.
1. Ownership Structure; Ownership and Voting Limitations
As stated above, MX2 will be owned by MEMX Holdings. The proposed
Eighth Amended and Restated Limited Liability Company Agreement of MEMX
Holdings (``MEMX Holdings LLC Agreement'') includes restrictions on the
ability to own and vote units representing a fractional part of the
interest in MEMX Holdings (``Units'').\52\ These limitations are
designed to prevent any party to the MEMX Holdings LLC Agreement 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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\52\ ``Unit'' is defined in Article I, Section 1.1 of the MEMX
Holdings LLC Agreement. These provisions are consistent with
ownership and voting limits approved by the Commission for other
SROs. See, e.g., MEMX Order, supra note 16, IEX Order, supra note
50, and LTSE Order, MIAX PEARL Order, MIAX Order, and BATS Order,
supra note 38; 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
Order''); 70050 (July 26, 2013), 78 FR 46622, 46624 (Aug. 1, 2013)
(File No. 10-209) (order granting exchange registration of ISE
Gemini, LLC) (``ISE Gemini Order''); 62158 (May 24, 2010), 75 FR
30082 (May 28, 2010) (CBOE-2008-88) (Cboe demutualization order);
53963 (June 8, 2006), 71 FR 34660 (June 15, 2006) (SR-NSX-2006-03)
(NSX demutualization order); 51149 (Feb. 8, 2005), 70 FR 7531 (Feb.
14, 2005) (SR-CHX-2004-26) (CHX demutualization order); and 49098
(Jan. 16, 2004), 69 FR 3974 (Jan. 27, 2004) (SR-Phlx-2003-73) (Phlx
demutualization order).
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In particular, for so long as MEMX Holdings shall control, directly
or indirectly, MX2, no person,\53\ either alone or together with its
related persons,\54\ will be permitted to beneficially own, directly or
indirectly, of record or beneficially, shares constituting more than
40% of any class of Units.\55\ 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, more than 20% of any class of
Units.\56\ If any party to the MEMX Holdings LLC Agreement purports to
transfer \57\ any Units or Unit Equivalents \58\ in violation of these
ownership limits, MEMX Holdings will be required (to the extent funds
are legally available) to redeem the Units in excess of the applicable
ownership limit.\59\
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\53\ See MEMX Holdings LLC Agreement, Article I, Section 1.1
(defining ``Person'').
\54\ See id. (defining ``Related Persons'').
\55\ See MEMX Holdings LLC Agreement, Article III, Section
3.5(a)(i). There are limited exceptions to these prohibitions. See
infra notes 63-65 and accompanying text.
\56\ See MEMX Holdings LLC Agreement, Article III, Section
3.5(a)(ii). This restriction, unlike others discussed below (see
infra note 63 and accompanying text), cannot be waived. See MEMX
Holdings LLC Agreement, Article III, Section 3.5(b)(ii).
\57\ See MEMX Holdings LLC Agreement, Article I, Section 1.1
(defining ``transfer'' in this context).
\58\ See id. (defining ``Unit Equivalents'').
\59\ See MEMX Holdings LLC Agreement, Article III, Section
3.7(c). The price of the redeemed Units or Unit Equivalents is also
prescribed in the MEMX Holdings LLC Agreement. See id. The number of
Units or Unit Equivalents to be redeemed is to be calculated after
taking into account that the redeemed Units or Unit Equivalents will
become treasury shares and will no longer be deemed to be
outstanding. See id. It is further provided in the MEMX Holdings LLC
Agreement that any Units or Unit Equivalents that have been called
for redemption may not be deemed outstanding Units or Unit
Equivalents if a sum sufficient to redeem the Units or Unit
Equivalents has been irrevocably deposited or set aside to pay the
redemption price. From and after the redemption date (unless MEMX
Holdings defaults in providing funds for the payment of the
redemption price), the redeemed Units or Unit Equivalents that have
been redeemed will become treasury shares, and all rights of the
holder of the redeemed Units or Unit Equivalents in MEMX Holdings
(except the right to receive from MEMX Holdings the redemption price
against delivery to MEMX Holdings of evidence of ownership of the
shares) will cease. See id. In addition, in the event that any
redemption has resulted in any person owning such number of Units or
Unit Equivalents that is in violation of the ownership limits, MEMX
Holdings will be required to redeem those Units or Unit Equivalents
pursuant to the limitation provisions. See id.
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[[Page 12594]]
In addition, no person, alone or together with its related persons,
may, directly, indirectly, or pursuant to any agreement, vote or cause
the voting of Units or give any consent or proxy with respect to Units
representing more than 20% of the voting power of the then issued and
outstanding Units (``Voting Limitation'').\60\ Further, no person,
either alone or together with its related persons, may enter 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 the Units that are subject to such agreement, plan, or
other arrangement not being voted on any matter or matters or any proxy
relating thereto being withheld, where the effect of such agreement,
plan, or other arrangement would be to enable any person, either alone
or together with its related persons, to vote, possess the right to
vote, or cause the voting of Units that would represent more than 20%
of the voting power of the then issued and outstanding Units.\61\
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\60\ See MEMX Holdings LLC Agreement, Article III, Section
3.5(a)(iii).
\61\ See id. In addition, the quorum requirements of the MEMX
Holdings board of directors (``MEMX Holdings Board'') will require
the presence of (1) a Market Maker Director, (2) a Bank Director,
(3) a Buy Side Director, and (4) a Retail Broker Director. See MEMX
Holdings LLC Agreement, Article VIII, Section 8.6(a)(i). See also
MEMX Holdings LLC Agreement, Article I, Section 1.1 (defining Market
Maker Director, Bank Director, Buy Side Director, and Retail Broker
Director). This quorum provision will guard against undue influence
over the affairs of MEMX Holdings by any particular category of MEMX
Holdings investor.
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The MEMX Holdings Board will be permitted to waive the 40%
ownership limitation and the 20% Voting Limitation pursuant to a
resolution duly adopted by the MEMX Holdings Board by Supermajority
Board Vote,\62\ if it makes certain determinations.\63\ Any such waiver
will not be effective unless and until approved by the Commission.\64\
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\62\ See MEMX Holdings LLC Agreement, Article I, Section 1.1
(defining ``Supermajority Board Vote'').
\63\ See MEMX Holdings LLC Agreement, Article III, Section
3.5(b)(ii). See also supra note 56 (concerning the inability to
waive restrictions for broker-dealer members of the Exchange). The
required determinations are that such waiver will not impair the
ability of the Exchange to carry out its functions and
responsibilities as an ``exchange'' under the Act and the rules and
regulations promulgated thereunder; that such waiver is otherwise in
the best interests of MEMX Holdings, its stockholders, and the
Exchange; that such waiver will not impair the ability of the
Commission to enforce the Act and the rules and regulations
promulgated thereunder; and that such Person and its Related Persons
are not subject to any applicable ``statutory disqualification''
within the meaning of Section 3(a)(39) of the Act. See id. See also
MEMX Holdings LLC Agreement, Article III, Section 3.5(c). These
provisions are consistent with ownership and voting limits approved
by the Commission for other SROs. See, e.g., MEMX Order, supra note
16, IEX Order, supra note 50, ISE Mercury Order and ISE Gemini
Order, supra note 52; LTSE Order, MIAX PEARL Order, MIAX Order, and
BATS Order, supra note 38; 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'').
\64\ See MEMX Holdings LLC Agreement, Article III, Section
3.5(b)(ii).
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Any person that proposes to own Units in excess of the 40%
ownership limitation, or to vote or grant any proxies or consents with
respect to Units constituting more than 20% of the voting power of the
then outstanding Units, will be required to deliver written notice to
the MEMX Holdings Board of its intention.\65\ The notice must be
delivered to the MEMX Holdings Board not less than 45 days (or any
shorter period to which the Board expressly consents) before the
proposed ownership of such Units or the proposed vote.\66\
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\65\ See MEMX Holdings LLC Agreement, Article III, Section
3.5(d).
\66\ See id.
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The MEMX Holdings LLC Agreement also contains provisions that are
designed to further safeguard the ownership and voting limitations
described above, or are otherwise related to direct and indirect
changes in control. Specifically, any person that, either alone or
together with its related persons beneficially owns, directly or
indirectly (whether by acquisition or a change in the number of Units
outstanding), of record or beneficially 5% or more of the then
outstanding Units will be required to notify the MEMX Holdings Board in
writing of such ownership.\67\ Thereafter, such persons will be
required to update MEMX Holdings of any increase or decrease of 1% or
more in their previously reported ownership percentage.\68\ Further, in
the event of a merger or affiliation between MEMX Holdings members, the
surviving member or surviving affiliated group will (1) if both such
members had nominated a director that is serving on the MEMX Holdings
Board at the time of their merger or affiliation, remove or cause the
removal of one of such directors effective upon the consummation of
such merger or affiliation, and (2) thereafter have the right to
nominate only one director and the number of directors shall be reduced
accordingly.\69\
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\67\ See MEMX Holdings LLC Agreement, Article III, Section
3.6(a). The notice will require the Person's full legal name; the
Person's title or status and the date on which such title or status
was acquired; the Person's and its Related Person's) approximate
ownership interest in MEMX Holdings; and whether the person has
power, directly or indirectly, to direct the management or policies
of MEMX Holdings, whether through ownership of securities, by
contract or otherwise. See id.
\68\ See MEMX Holdings LLC Agreement, Article III, Section
3.6(b). Changes of less than 1% must also be reported to MEMX
Holdings if they result in such Person crossing a 20% or 40%
ownership threshold. See id. In addition, the Exchange's rules also
impose limits on affiliation between the Exchange and a member of
the Exchange. See MX2 Rule 2.10 (No Affiliation between Exchange and
any Member).
\69\ See MEMX Holdings LLC Agreement, Article VIII, Section
8.17(a). See also MX2 LLC Agreement, Article VII, Section 7.3(c)(v).
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The Exchange's LLC Agreement does not include the same change of
control provisions that are present in the MEMX Holdings LLC Agreement
because the MX2 LLC Agreement instead explicitly identifies its owner
(MEMX Holdings) by name as the Company Member of MX2.\70\ Thus, any
changes in the ownership of MX2 would require the MX2 LLC Agreement to
be amended. Any amendment to the MX2 LLC Agreement, including to
ownership of the Exchange, would constitute a proposed rule change
under Section 19(b) of the Act \71\ and Rule 19b-4 \72\ thereunder that
will be required to be filed with, or filed with and approved by, the
Commission.\73\ Moreover, pursuant to the MX2 LLC Agreement itself, any
transfer of limited liability company interests of MX2 will be subject
to prior approval by the Commission pursuant to the rule filing
procedure under Section 19 of the Act.\74\
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\70\ See MX2 LLC Agreement, Schedule 1.
\71\ 15 U.S.C. 78s(b).
\72\ 17 CFR 240.19b-4.
\73\ See MX2 LLC Agreement, Article XVIII, Section 18.2.
\74\ See MX2 LLC Agreement, Article XV, Section 15.1(a).
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Although MEMX Holdings is not directly responsible for regulation,
its activities with respect to the operation of MX2 must be consistent
with, and must not interfere with, the self-regulatory obligations of
MX2.\75\ As described above, the provisions applicable to direct and
indirect changes in control of MEMX Holdings and MX2, as well as the
voting limitation imposed on owners of MEMX
[[Page 12595]]
Holdings who also are MX2 members, are designed to help prevent any
owner of MEMX Holdings from exercising undue influence or control over
the operation of the Exchange and to help ensure that the Exchange
retains a sufficient degree of independence to effectively carry out
its regulatory obligations under the Act.
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\75\ See, e.g., IEX Order, supra note 50.
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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.\76\ 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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\76\ See, e.g., MEMX Order, supra note 16; ISE Mercury Order,
supra note 52; IEX Order, supra note 50; LTSE Order, MIAX PEARL
Order, MIAX Order, and BATS Order, supra note 38; and DirectEdge
Exchanges Order, supra note 63.
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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.'' \77\
To help ensure independent and empowered SRO regulatory operations, MX2
has, among other things, adopted a governance structure designed to
mitigate the inherent conflict. Specifically, MX2 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 of directors. In addition, MX2 has a
majority independent board of directors with other key independent
board committees, such as the Regulatory Oversight Committee.\78\
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\77\ 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'').
\78\ Each member of the Regulatory Oversight Committee will be
an Independent Director. See Article VIII, Section 8.8(e) of the MX2
LLC Agreement.
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Ownership and voting limits in the governing documents of the
exchange and/or its holding company further protects the status of SRO
independence. The provisions that MX2 has proposed, which are
consistent with those in place across all exchanges today, 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. These provisions impose limits on voting and ownership
of exchange holding companies, with more stringent ownership limits
imposed on member owners.\79\
---------------------------------------------------------------------------
\79\ See supra notes 53-74 and accompanying text.
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As a registered exchange, MX2 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, MX2 has proposed to adopt industry-standard
protections in a governance structure for itself and its holding
company that is designed to preserve MX2's self-regulatory independence
by protecting MX2 from inappropriate business pressures.
MX2's and MEMX Holdings' 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.\80\ 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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\80\ 15 U.S.C. 78f(b)(1).
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2. Regulatory Independence and Oversight
Although MEMX Holdings will not itself carry out regulatory
functions, its activities with respect to the operation of MX2 must be
consistent with, and must not interfere with, MX2's self-regulatory
obligations. In this regard, MX2 and MEMX Holdings propose to adopt
certain provisions in their respective governing documents that are
designed to help maintain the independence of the regulatory functions
of MX2. These proposed provisions are substantially similar to those
included in the governing documents of other exchanges that recently
have been granted registration.\81\ Specifically:
---------------------------------------------------------------------------
\81\ See, e.g., MEMX Order, supra note 16; IEX Order, supra note
50; LTSE Order and MIAX Order, supra note 38; and DirectEdge
Exchanges Order, supra note 63.
---------------------------------------------------------------------------
the directors, officers, employees, and agents of MEMX
Holdings must give due regard to the preservation of the independence
of the self-regulatory function of MX2 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 interfere with MX2's ability to carry out its
responsibilities under the Act.\82\
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\82\ See MEMX Holdings LLC Agreement, Article VIII, Section
8.18(b). Similarly, Article VII, Section 7.2(b) of the MX2 LLC
Agreement requires the Exchange Board and each Director, when
managing the business and affairs of MX2, to consider the
requirements of Section 6(b) of the Act and requires each Director,
officer, or employee of MX2 to comply with the federal securities
laws and regulations thereunder and cooperate with the Commission,
and MX2 pursuant to its regulatory authority. Article VII, Section
7.2(c) of the MX2 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 MX2 and the other operations of MX2, 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.
---------------------------------------------------------------------------
MEMX Holdings must comply with the federal securities laws
and the rules and regulations promulgated thereunder, and must
cooperate with the Commission, MX2, Financial Industry Regulatory
Authority, Inc. (``FINRA''), and any other SROs of which MEMX Execution
Services LLC (``MEMX ES'') is a member, pursuant to and to the extent
of their respective regulatory authority.\83\ In addition, MEMX
Holdings' officers, directors, employees, and agents must comply with
the federal securities laws and the rules and regulations promulgated
[[Page 12596]]
thereunder and are deemed to agree to cooperate with: (1) the
Commission and MX2 in respect of the Commission's oversight
responsibilities regarding MX2 and the self-regulatory functions and
responsibilities of MX2; and (2) FINRA, any other SROs of which MEMX ES
is a member, and MEMX ES in respect of FINRA's and any such other SRO's
oversight responsibilities regarding MEMX ES.\84\ MEMX Holdings must
take reasonable steps necessary to cause its officers, directors,
employees and agents to so cooperate.\85\
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\83\ See MEMX Holdings LLC Agreement, Article XI, Section
11.3(h). MEMX ES is a subsidiary of MEMX Holdings that is a broker-
dealer and a member of FINRA. See id.
\84\ See id.
\85\ See id.
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MEMX Holdings, and its officers, directors, employees, and
agents must submit to the jurisdiction of the U.S. federal courts, the
Commission, and MX2, 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, MX2
activities.\86\
---------------------------------------------------------------------------
\86\ See MEMX Holdings LLC Agreement, Article XV, Section
15.12(b).
---------------------------------------------------------------------------
All books and records of MX2 reflecting confidential
information pertaining to the self-regulatory function of MX2
(including but not limited to disciplinary matters, trading data,
trading practices, and audit information) must be retained in
confidence by MX2 and its personnel, including directors, Board
observers, officers, employees, and agents, and will not be used by MX2
for any non-regulatory purposes and shall not be made available to any
person (including, without limitation, any MX2 member) other than to
personnel of the Commission, personnel of another self-regulatory
organization performing regulatory services on behalf of MX2, a
processor operating pursuant to an effective national market system
plan (i.e., the Consolidated Audit Trail processor), and those
personnel of MX2, members of committees of the Exchange Board, members
of the Exchange Board, or hearing officers and other agents of MX2, to
the extent necessary or appropriate to properly discharge the self-
regulatory responsibilities of MX2.\87\ Similar provisions apply to
MEMX Holdings and its directors, officers, employees, and agents.\88\
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\87\ See MX2 LLC Agreement, Article XIII, Section 13.1. See also
MX2 LLC Agreement, Article VII, Section 7.3(c)(ix) (discussing the
rights of MEMX Holdings investors to appoint non-voting observers to
the Exchange Board).
\88\ The MEMX Holdings LLC Agreement provides that all books and
records of MX2 reflecting confidential information pertaining to the
self-regulatory function of MX2 that come into the possession of
MEMX Holdings, and the information contained in those books and
records, will be subject to confidentiality restrictions and will
not be used for any non-regulatory purposes. See MEMX Holdings LLC
Agreement, Article XII, Section 12.2(c). The MX2 and MEMX Holdings
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 information or limit the
ability of officers, directors, employees, or agents of MX2 or MEMX
Holdings to disclose such information to the Commission or MX2. See
MX2 LLC Agreement, Article XIII, Section 13.1 and MEMX Holdings LLC
Agreement, Article XII, Section 12.2(c).
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The books and records of MX2 and MEMX Holdings must be
maintained in the United States \89\ and, to the extent they are
related to the operation or administration of MX2, MEMX Holdings' books
and records will be subject at all times to inspection and copying by
the Commission and MX2.\90\
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\89\ See MX2 LLC Agreement, Article XIII, Section 13.1; and MEMX
Holdings LLC Agreement, Article XII, Section 12.2(a).
\90\ See MEMX Holdings LLC Agreement, Article XII, Section
12.2(b).
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Furthermore, to the extent they are related to the
operation or administration of MX2, the books, records, premises,
officers, directors, employees, and agents of MEMX Holdings will be
deemed to be the books, records, premises, officers, directors,
employees, and agents of MX2, for purposes of, and subject to oversight
pursuant to, the Act.\91\
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\91\ See id.
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MEMX Holdings 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 MEMX Holdings 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 MX2.\92\
---------------------------------------------------------------------------
\92\ See MEMX Holdings LLC Agreement, Article VIII, Section
8.18(b).
---------------------------------------------------------------------------
The MEMX Holdings LLC Agreement requires that, so long as
MEMX Holdings controls MX2, 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.\93\
---------------------------------------------------------------------------
\93\ See MEMX Holdings LLC Agreement, Article XV, Section
15.9(a).
---------------------------------------------------------------------------
The provisions discussed in this section, which are designed to
help ensure the independence of MX2's regulatory function and
facilitate the ability of MX2 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.\94\
---------------------------------------------------------------------------
\94\ 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------
Further, Section 19(h)(1) of the Act \95\ provides the Commission
with the authority ``to suspend for a period not exceeding twelve
months or revoke the registration of [an SRO], or to censure or impose
limitations upon the activities, functions, and operations of [an SRO],
if [the Commission] finds, on the record after notice and opportunity
for hearing, that [the SRO] has violated or is unable to comply with
any provision of the Act, the rules or regulations thereunder, or its
own rules or without reasonable justification or excuse has failed to
enforce compliance . . . '' with any such provision by its members
(including associated persons thereof). 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),\96\ these matters could
provide the basis for a disciplinary proceeding under Section 19(h)(1)
of the Act.
---------------------------------------------------------------------------
\95\ See 15 U.S.C. 78s(h)(1).
\96\ 15 U.S.C. 78f(b)(1); 15 U.S.C. 78s(g)(1).
---------------------------------------------------------------------------
Even in the absence of the governance provisions described above,
under Section 20(a) of the Act,\97\ any person with a controlling
interest in MX2 would be jointly and severally liable with and to the
same extent that MX2 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 \98\ 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 \99\
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 MEMX Holdings.
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\97\ 15 U.S.C. 78t(a).
\98\ 15 U.S.C. 78t(e).
\99\ 15 U.S.C. 78u-3.
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[[Page 12597]]
3. Regulatory Oversight Committee
The regulatory operations of MX2 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.\100\ The Regulatory Oversight Committee will be
responsible for overseeing the adequacy and effectiveness of MX2's
regulatory and SRO responsibilities, assessing MX2's regulatory
performance, and assisting the Exchange Board (and committees of the
Exchange Board) in reviewing MX2's regulatory plan and the overall
effectiveness of MX2's regulatory functions.\101\
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\100\ See supra note 49 and accompanying text.
\101\ See MX2 LLC Agreement, Article VIII, Section 8.8(a).
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Further, the Chief Regulatory Officer (``CRO'') of MX2 will have
general supervision over MX2's regulatory operations, including
responsibility for overseeing MX2's surveillance, examination, and
enforcement functions and for administering any regulatory services
agreements with another SRO to which MX2 is a party.\102\ The
Regulatory Oversight Committee, in consultation with the Chief
Executive Officer of MX2, 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.\103\
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\102\ See MX2 LLC Agreement, Article IX, Section 9.3.
\103\ See MX2 LLC Agreement, Article VIII, Section 8.8(c). To
the extent that the Chief Executive Officer of MX2 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 Chief Executive Officer does not compromise the
regulatory autonomy and independence of the CRO or the regulatory
function. See MX2 LLC Agreement, Article VIII, Section 8.8(d).
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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.\104\ 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.\105\ The discussion
below summarizes how MX2 proposes to conduct and structure its
regulatory operations.
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\104\ See 15 U.S.C. 78f(b)(1).
\105\ See id. See also Section 19(g) of the Act, 15 U.S.C.
78s(g).
---------------------------------------------------------------------------
a. Regulatory Funding
To help ensure that MX2 has and will continue to have adequate
funding to be able to meet its responsibilities under the Act, MX2
states that, if the Commission approves MX2's application for
registration as a national securities exchange, MEMX Holdings will
allocate sufficient assets to MX2 to enable the Exchange's
operation.\106\ Specifically, MX2 represents that MEMX Holdings will
make a cash contribution to MX2 of $5,000,000, ``in addition to any
previously-provided in-kind contributions, such as legal, regulatory,
and infrastructure-related services.'' \107\ MX2 also represents that
such cash and in-kind contributions from MEMX Holdings will be adequate
to operate MX2, including the regulation of the Exchange, and that MEMX
Holdings and MX2 will enter into an agreement that requires MEMX
Holdings to provide adequate funding for the Exchange's operations,
including the regulation of the Exchange.\108\
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\106\ See Form 1, Exhibit I.
\107\ See id.
\108\ See id. MX2 represents that this agreement will provide
that MX2 will receive all fees, including regulatory fees and
trading fees, payable by MX2's members, as well as any funds
received from any applicable market data fees and tape revenue, and
will further provide that MEMX Holdings will reimburse MX2 for its
costs and expenses to the extent that the Exchange's assets are
insufficient to meet its costs and expenses. See id.
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Further, any ``Regulatory Funds'' received by MX2 will not be used
for non-regulatory purposes or distributed, advanced or allocated to
MEMX Holdings, but rather will be applied to fund the regulatory
operations of MX2, or, as applicable, used to pay restitution and
disgorgement to customers.\109\ Any excess non-regulatory funds, as
solely determined by MX2, will be remitted to MEMX Holdings in
accordance with the MX2 LLC Agreement.\110\
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\109\ See MX2 LLC Agreement, Article XVII, Section 17.4(b).
Article I, Section 1.1 of the MX2 LLC Agreement defines ``Regulatory
Funds'' as ``fees, fines, or penalties derived from the regulatory
operations of [MX2],'' 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 [MX2],
even if a portion of such revenues are used to pay costs associated
with the regulatory operations of [MX2].'' This definition is
consistent with the rules of other SROs. See, e.g., 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).
\110\ See Form 1, Exhibit I.
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b. Regulatory Contract With FINRA
Although MX2 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 MX2's behalf.\111\ Specifically, MX2
expects that such services will include performance of investigation,
disciplinary, and hearing services.\112\ Notwithstanding the RSA, MX2
will retain legal responsibility for the regulation of its members and
its market and the performance of FINRA as its regulatory services
provider. Because MX2 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 MX2 on a final RSA that specifies the services that will
be provided to MX2.
---------------------------------------------------------------------------
\111\ See Form 1, Exhibit L. See also MX2 Rule 9.8.
\112\ See Form 1, Exhibit L.
---------------------------------------------------------------------------
It is consistent with the Act for MX2 to contract with FINRA to
perform certain examination, enforcement, and disciplinary
functions.\113\ 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
MX2.\114\ However, MX2, 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 MX2's behalf.\115\ In performing these
regulatory functions, however, FINRA may nonetheless bear liability for
causing or aiding and abetting the failure of MX2 to perform its
regulatory functions.\116\ Accordingly, although FINRA will not act on
its own behalf under its SRO
[[Page 12598]]
responsibilities in carrying out these regulatory services for MX2,
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 MX2.\117\
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\113\ For example, 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. have entered into
RSAs with FINRA.
\114\ See, e.g., MEMX Order, supra note 16; LTSE Order, supra
note 38; IEX Order, supra note 50; DirectEdge Exchanges Order, supra
note 63; and Nasdaq Order, supra note 38. The Commission is not
approving the RSA or any of its specific terms.
\115\ See 15 U.S.C. 78s(g)(1).
\116\ For example, if failings by FINRA have the effect of
leaving MX2 in violation of any aspect of MX2's self-regulatory
obligations, MX2 would bear direct liability for the violation,
while FINRA may bear liability for causing or aiding and abetting
the violation. See, e.g., MEMX Order, supra note 16; LTSE Order,
supra note 38; IEX Order, supra note 50; Nasdaq Order and BATS
Order, supra note 38; and DirectEdge Exchanges Order, supra note 63.
\117\ See, e.g., MEMX Order, supra note 16; LTSE Order, supra
note 38; IEX Order, supra note 50; and Nasdaq Order, supra note 38.
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c. Rule 17d-2 Agreements
Section 19(g)(1) of the Act,\118\ 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.\119\ 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.\120\ 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.\121\
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\118\ 15 U.S.C. 78s(g)(1).
\119\ 15 U.S.C. 78q(d) and 15 U.S.C. 78s(g)(2), respectively.
\120\ 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.
\121\ 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. 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) and 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.\122\ MX2 has represented to the
Commission that it will join all applicable plans, including Rule 17d-2
plans for the allocation of regulatory responsibilities.\123\ Similar
to other exchanges, the Commission understands from MX2 that it will
enter into a bilateral Rule 17d-2 agreement covering common members of
MX2 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
MX2 as an exchange on MX2 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.\124\
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\122\ See Securities Exchange Act Release No. 12935 (Oct. 28,
1976), 41 FR 49091 (Nov. 8, 1977) (Rule 17d-2 Adopting Release).
\123\ See Form 1, Exhibit E.
\124\ See Securities Exchange Act Release Nos. 100636 (Aug. 1,
2024), 89 FR 64517 (Aug. 7, 2024) (File No. 4-618) (multiparty plan
concerning covered Regulation NMS and Consolidated Audit Trail
rules); and 89972 (Sept. 23, 2020), 85 FR 61062 (Sept. 29, 2020)
(File No, 4-566) (multiparty plan for insider trading rules).
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Because MX2 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.\125\ Accordingly, the Commission is
conditioning the operation of MX2 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 MX2 as a party.
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\125\ For common members, the regulatory obligations will be
covered by the Rule 17d-2 agreements, and for MX2 members that are
not also members of FINRA, the regulatory obligations will be
covered by the RSA.
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C. MX2 Trading System
MX2 will operate a fully automated electronic order book and will
not maintain or operate a physical trading floor. Only broker-dealer
members of MX2 and entities that enter into market access arrangements
with members (collectively, ``Users'') will have access to the MX2
system.\126\ Users will be able to electronically submit orders to buy
or sell securities traded on the Exchange through a variety of
systems.\127\ MX2 will allow firms to register as market makers with
affirmative and negative market making obligations.\128\
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\126\ To obtain authorized access to the MX2 system, each User
must enter into a User Agreement with MX2. See MX2 Rule 11.3(a).
\127\ For a discussion of the means of access to MX2, see MX2
Form 1, Exhibit E, Section 1.
\128\ See MX2 Rules 11.17 through 11.20. MX2'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, Market
Orders, or Pegged Orders.\129\ Orders may be submitted with the
following time-in-force instructions, as applicable: Immediate-or-
Cancel; Day; Fill-or-Kill; Good `til Time, and Regular Hours Only.\130\
Users may submit orders with the display instructions of Displayed or
Non-Displayed.\131\ A Limit Order with a Displayed instruction also may
include a Reserve Quantity.\132\ Displayed orders will be displayed on
an anonymous basis at a specified price.\133\ Orders may be entered as
a Round Lot, Odd Lot, or Mixed Lot.\134\ In addition, a User may attach
a Minimum Execution Quantity instruction to the order.\135\ Users also
may choose to designate orders as Book Only or Post Only.\136\ MX2's
proposed order types and instructions are similar to order types and
instructions approved by the Commission and
[[Page 12599]]
currently available on other national securities exchanges.\137\
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\129\ See MX2 Rule 11.8(a)-(c). Limit Orders may be designated
as Intermarket Sweep Orders. See MX2 Rule 11.8(b)(5). Pegged Orders
may be designated as either a Primary Peg or a Midpoint Peg. See MX2
Rules 11.6(h) and 11.8(c).
\130\ See MX2 Rules 11.6(o) and 11.8.
\131\ See MX2 Rules 11.6(c) and 11.8(a)-(c). Market Orders and
Pegged Orders are not eligible for display. See MX2 Rules 11.8(a)(3)
and 11.8(c)(3).
\132\ See MX2 Rules 11.6(k), and 11.8(b)(4).
\133\ See MX2 Rule 11.10(b).
\134\ See MX2 Form 1, Exhibit E, Section 2, and MX2 Rules
11.6(q) and 11.8(a)-(c).
\135\ See MX2 Rules 11.6(l) and 11.8(a)-(c).
\136\ See id.
\137\ See, e.g., MEMX Rules 11.6 and 11.8 and Cboe EDGX Rules
11.6 and 11.8. While MX2 Rule 11.10, Interp .02(b), which offers
batch cancel functionality, is similar to Cboe EDGX Rule 11.10,
Interp .02(b), MX2 uses the term ``batch cancel functionality,''
while Cboe EDGX uses the term ``purge port'' and Cboe EDGX specifies
that a user can ``simultaneously cancel all or a subset of its
orders in one or more symbols across multiple logical ports,'' while
MX2's provision specifies that a user can ``simultaneously cancel
all or a subset of its orders in one or more symbols.''
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Like MEMX, MX2 will offer a Random Replenishment instruction in
connection with a Limit Order submitted with a Reserve Quantity
instruction.\138\ In addition to randomizing the size of the refreshed
displayed portion, this instruction will allow the User to elect to
have the MX2 system randomly replenish the displayed replenishment
quantity at different time intervals ranging up to one millisecond
following each execution that triggers replenishment.\139\
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\138\ See MX2 Form 1, Exhibit E, Section 2(a), and MX2 Rule
11.6(k)(1)(A).
\139\ See id.
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The MX2 system will continuously and automatically match orders
pursuant to price/time priority. For equally-priced trading interest in
time priority, MX2 will give first priority to the portion of a Limit
Order with a displayed instruction over Limit Orders with a non-
displayed instruction, Pegged Orders, and Reserve Quantity of Limit
Orders.\140\ With respect to the price of executions that would occur
on MX2, the MX2 system is designed to comply with the order protection
requirements of Rule 611 of Regulation NMS \141\ by requiring that, for
any execution to occur on MX2 during regular trading hours, the price
must be equal to, or better than, the Protected NBBO unless an
exception to Rule 611 applies.\142\ Orders may be executed on the
Exchange during the Market Session or during Pre- and Post-Market
Sessions; \143\ however, some order types and functionality are
available only during the Market Session.\144\
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\140\ See MX2 Rule 11.9(a)(2). The highest-priced order to buy
(lowest-priced order to sell) will have priority over all other
orders to buy (sell) in all cases. Rule 11.9 describes how orders
will be ranked based on time when orders to buy (sell) are entered
into the MX2 system at the same price.
\141\ 17 CFR 242.611.
\142\ See MX2 Rules 1.5 (defining ``Protected NBBO'') and
11.10(a)(2).
\143\ MX2's Market Session will run from 9:30 a.m. ET to 4:00
p.m. ET, its Pre-Market Session will run from 7:00 a.m. ET to 9:30
a.m. ET, and its Post-Market Session will run from 4:00 p.m. ET to
8:00 p.m. ET. See MX2 Rule 1.5.
\144\ See MX2 Rules 11.8(a)-(c).
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In addition, MX2's rules are designed to address locked and crossed
markets, as required by Rule 610(d) of Regulation NMS,\145\ in that
they are designed not to disseminate interest that would lock or cross
a protected quote, 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.\146\
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\145\ 17 CFR 242.610(d).
\146\ See MX2 Rule 11.10(f). See also MX2 Rule 11.6(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 MX2 Rules 11.6(j) and
11.8(b)(8) (relating to price sliding functionality to avoid
violations of Rule 610(d) of Regulation NMS, 17 CFR 242.610(d)).
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In addition, MX2 will offer outbound routing functionality though
its affiliated routing broker-dealer, MEMX ES.\147\ A member's use of
the order routing functionality provided by the Exchange's affiliated
routing broker-dealer is entirely optional and members may use other
broker-dealers to route out to other market centers.\148\
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\147\ See MX2 Rule 2.11.
\148\ See id.
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The Commission finds that MX2'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.\149\
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\149\ See 15 U.S.C. 78f(b)(5). MX2's trading rules, including
its rules relating to market makers, order types and instructions,
priority, 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 EDGX rulebook.
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As stated above, MX2 proposes to offer routing services to its
Users through its affiliated broker-dealer, MEMX ES.\150\ The
Commission previously has stated that an exchange-affiliated outbound
router, as a ``facility'' of the exchange, will be subject to the
exchange's and the Commission's regulatory oversight, and that the
exchange will be responsible for ensuring that the affiliated outbound
routing function is operated consistent with Section 6 of the Act and
the exchange's rules.\151\ For example, in approving an exchange with
an affiliated outbound routing broker, the Commission previously stated
that ``[a] conflict of interest would arise if the national securities
exchange (or an affiliate) provided advantages to its broker-dealer
that are not available to other members.'' \152\ The Commission further
explained that ``advantages, such as greater access to information,
improved speed of execution, or enhanced operational capabilities in
dealing with the exchange, might constitute unfair discrimination under
the Act.'' \153\
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\150\ See MX2 Rule 2.11.
\151\ See, e.g., Securities Exchange Act Release No. 62716 (Aug.
13, 2010), 75 FR 51295 (Aug. 19, 2010) (order granting exchange
registration of BATS Y Exchange, Inc.).
\152\ Securities Exchange Act Release No. 44983 (Oct. 25, 2001),
66 FR 55225, 55233 (Nov. 1, 2001) (PCX-00-25) (order approving
Archipelago Exchange (``ArcaEx'') as the equities trading facility
of PCX Equities, Inc.) (``ArcaEx Order'').
\153\ Id.
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MX2's proposed outbound routing rule is similar to rules the
Commission has approved for other exchanges that utilize affiliated
routing brokers.\154\ In particular, MX2's affiliated broker-dealer
does not have any structural or informational advantages in its
provision of routing services as compared to a third-party broker-
dealer member of MX2 performing a similar function for itself or
others.\155\ Accordingly, the outbound routing functionality of MX2 is
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
mechanism of a free and open market and a national market system,
protect investors and the public interest, and not permit unfair
discrimination between customer, issuers, brokers or dealers.\156\
---------------------------------------------------------------------------
\154\ See, e.g., MEMX Rule 2.11 and Cboe EDGX Rule 2.11.
\155\ See MX2 Rule 2.11. For example, MX2's rule provides that
the Exchange shall have procedures and controls to adequately
restrict the flow of confidential and proprietary information
between the Exchange and its facilities, including MEMX ES. See MX2
Rule 2.11(a)(5).
\156\ See 15 U.S.C. 78f(b)(5).
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As a national securities exchange, MX2 will be a trading center
whose quotations can be ``automated quotations'' under Rule
600(b)(6).\157\ MX2 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.\158\
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\157\ See MX2 Rule 11.10(b).
\158\ See 17 CFR 242.600(b)(81)-(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
[[Page 12600]]
specifications.\159\ It would be a reasonable policy and procedure
under Rule 611(a) to require that industry participants begin treating
MX2'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 MX2 begins operation as a national securities
exchange. The Commission has taken the same position with other new
equities exchanges.\160\
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\159\ 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).
\160\ See, e.g., MEMX Order, supra note 16, at 27461; BATS
Order, supra note 38, at 49505; and DirectEdge Exchanges Order,
supra note 63, 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.\161\ 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.\162\ As also stated above, pursuant to an RSA
with FINRA, FINRA will perform many of the initial disciplinary
processes on behalf of MX2.\163\ For example, FINRA will investigate
potential securities laws violations, issue complaints, and conduct
hearings pursuant to MX2 rules. Appeals from disciplinary decisions
will be heard by the MX2 Appeals Committee,\164\ and the MX2 Appeals
Committee's decision shall be final.\165\ In addition, the Exchange
Board on its own initiative may order review of a disciplinary
decision.\166\
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\161\ See 15 U.S.C. 78f(b)(1).
\162\ See id.
\163\ See supra notes 111-112 and accompanying text. See also
MX2 Rule 9.8 (stating that MX2 and FINRA are parties to a regulatory
contract, pursuant to which FINRA will perform certain functions
described in Chapter 9 on behalf of MX2).
\164\ See MX2 Rule 8.10(b).
\165\ See id.
\166\ See MX2 Rule 8.10(c).
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The MX2 LLC Agreement and MX2 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.\167\ The Exchange's rules also permit MX2 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.\168\ MX2's
rules also provide for the imposition of fines for certain minor rule
violations in lieu of commencing disciplinary proceedings.\169\
Accordingly, as a condition to the operation of MX2, a Minor Rule
Violation Plan (``MRVP'') filed by MX2 under Act Rule 19d-1(c)(2) must
be declared effective by the Commission.\170\
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\167\ See generally MX2 LLC Agreement, Article XVII and MX2
Rules Chapters 7 and 8.
\168\ See MX2 Rule 8.1(a).
\169\ See MX2 Rule 8.15.
\170\ 17 CFR 240.19d-1(c)(2).
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The Commission finds that the MX2 LLC Agreement and rules
concerning its disciplinary and oversight programs are consistent with
the requirements of Sections 6(b)(6) and 6(b)(7) of the Act \171\ in
that they provide fair procedures for the disciplining of members and
persons associated with members. The Commission further finds that the
rules of MX2 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 MX2.\172\
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\171\ 15 U.S.C. 78f(b)(6) and (b)(7).
\172\ See 15 U.S.C. 78f(b)(1).
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E. Trading on MX2 Pursuant to Unlisted Trading Privileges
MX2 does not intend to be a primary listing market for securities.
Accordingly, MX2 has not proposed rules that would allow it to
primarily list any securities at this time. Instead, MX2 has proposed
to trade securities pursuant to unlisted trading privileges (``UTP'').
MX2 Rule 14.1 establishes the Exchange's authority to trade securities
on a UTP basis. MX2 Rule 14.1(a) provides that MX2 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.\173\ MX2 Rule
14.1(a) further provides that any such security would be subject to all
MX2 rules applicable to trading on MX2, unless otherwise noted.
---------------------------------------------------------------------------
\173\ 15 U.S.C. 78l(f).
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MX2 Rule 14.1(b) establishes additional rules for trading of UTP
Exchange Traded Products, which are defined in MX2 Rule 1.1. MX2 Rule
14.1(b) provides that MX2 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 and (c) information
about the dissemination of value of the underlying assets or indices.
MX2 Rule 14.1(b)(2) establishes certain requirements for members that
have customers that trade UTP Exchange Traded Products.\174\ MX2 Rule
14.1(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. MX2 Rule
14.1(b)(5) 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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\174\ MX2 Rule 14.1(b)(2)(A) states that MX2 Rule 14.1(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 1940 Act, and are
not otherwise subject to prospectus delivery requirements under the
Securities Act. MX2 Rule 14.1(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. MX2 Rule
14.1(b)(2)(C) requires members to provide a prospectus to a customer
requesting a prospectus.
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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 MX2 Rule 14.1, is
consistent with Section 12(f) of the Act and Rule 12f-5
thereunder.\175\ 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.\176\ MX2 Rule 14.1 includes a provision that any security
traded UTP on the Exchange ``shall be subject to all Exchange rules
applicable to trading on the Exchange, unless otherwise noted.'' The
provisions in MX2 Rule 14.1 are
[[Page 12601]]
substantively the same as the existing rules of NYSE National,
Inc.\177\ Accordingly, pursuant to Section 12(f) of the Act and Rule
12f-5 thereunder, MX2 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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\175\ 15 U.S.C. 78l(f); 17 CFR 240.12f-5.
\176\ 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).
\177\ See NYSE National Rule 5.1.
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F. Section 11(a) of the Act
Section 11(a)(1) of the Act \178\ 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,\179\ 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;
\180\ (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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\178\ 15 U.S.C. 78k(a)(1).
\179\ 17 CFR 240.11a2-2(T).
\180\ 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, MX2 requested that the Commission
concur with MX2's conclusion that MX2 members that enter orders into
the MX2 trading system satisfy the conditions of Rule 11a2-2(T).\181\
For the reasons set forth below, MX2 members entering orders into the
MX2 trading system could satisfy the conditions of Rule 11a2-2(T).
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\181\ See Letter from Anders Franzon, General Counsel, MX2,
dated Mar. 4, 2025 (``MX2 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.\182\ MX2 has represented that MX2 does not have a physical
trading floor, and the MX2 trading system will receive orders from
members electronically through remote terminals or computer-to-computer
interfaces.\183\ The MX2 trading system satisfies this off-floor
transmission condition.
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\182\ See, e.g., Nasdaq Order, supra note 38; ArcaEx Order,
supra note 152; 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'').
\183\ See MX2 11(a) Letter, supra note 181.
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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. MX2 represented that at no time following the
submission of an order is a member or an associated person of the
member able to acquire control or influence over the result or timing
of the order's execution.\184\ According to MX2, the execution of a
member's order is determined solely by what quotes and orders are
present in the system at the time the member submits the order, and the
order priority based on the MX2 rules.\185\ Accordingly, a MX2 member
and its associated persons do not participate in the execution of an
order submitted to the MX2 trading system.\186\
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\184\ See id. MX2 states that a member may cancel or modify the
order, or modify the instructions for executing the order, after the
order has been transmitted, provided that such cancellations or
modifications are transmitted from off an exchange floor. 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 180 (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'').
\185\ See MX2 11(a) Letter, supra note 181.
\186\ See, e.g., BATS Order, supra note 38, at 49505; and
DirectEdge Exchanges Order, supra note 63, 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 MX2 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.\187\ MX2 has
represented that the design of the MX2 trading system ensures that no
member has any special or unique trading advantage in the handling of
its orders after transmitting its orders to MX2.\188\ Based on MX2's
representation, the MX2 trading system satisfies this condition.
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\187\ See, e.g., BATS Order at 49505, supra note 38, at 49505;
and DirectEdge Exchanges Order, supra note 63, 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
182.
\188\ See MX2 11(a) Letter, supra note 181.
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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.\189\ MX2 members trading for covered accounts over
which they exercise investment discretion
[[Page 12602]]
must comply with this condition in order to rely on the rule's
exemption.\190\
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\189\ See, e.g., BATS Order, supra note 38, at 49505; and
DirectEdge Exchanges Order, supra note 63, 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 180 (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'').
\190\ MX2 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 MX2 11(a) Letter, supra note 181.
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G. Exemption From Section 19(b) of the Act With Regard to FINRA Rules
Incorporated by Reference
MX2 proposes to incorporate by reference certain FINRA rules and
MEMX rules as MX2 rules.\191\ Thus, for those MX2 rules, Exchange
members will comply with the MX2 rule by complying with the FINRA rule
or MEMX rule referenced therein. In connection with its proposal to
incorporate FINRA rules and MEMX rules by reference, MX2 requested,
pursuant to Rule 240.0-12,\192\ an exemption under Section 36 of the
Act from the rule filing requirements of Section 19(b) of the Act for
changes to those MX2 rules that are effected solely by virtue of a
change to a cross-referenced FINRA or MEMX rule.\193\ MX2 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 rule or MEMX rule that is incorporated by reference is proposed
and whenever any such proposed change is approved by the Commission or
otherwise becomes effective.\194\
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\191\ See Letter from Anders Franzon, General Counsel, MX2,
dated Mar. 4, 2025 (``Exemption Request Letter''). MX2 proposes to
incorporate by reference the definition of ``Retail Order'' in FINRA
Rule 5320.03, via MX2 Rule 11.21(a)(2). In addition, MX2 proposes to
incorporate by reference the following MEMX rules: MEMX Chapter 3
(``Rules of Fair Practice'') via MX2 Chapter 3; MEMX Chapter 4
(``Books and Records'') via MX2 Chapter 4; MEMX Chapter 5
(``Supervision'') via MX2 Chapter 5; MEMX Chapter 6 (``Extensions of
Credit'') via MX2 Chapter 6; MEMX Chapter 7 (``Suspension by Chief
Regulatory Officer'') via MX2 Chapter 7; MEMX Chapter 8
(``Discipline'') via MX2 Chapter 8; MEMX Chapter 9 (``Arbitration'')
via MX2 Chapter 9; MEMX Chapter 10 (``Adverse Action'') via MX2
Chapter 10; MEMX Chapter 12 (``Trading Practice Rules'') via MX2
Chapter 12; MEMX Chapter 13 (``Miscellaneous Provisions'') via MX2
Chapter 13; and MEMX Chapter 14 (``Trading on an Unlisted Trading
Privileges Basis'') via MX2 Chapter 14.
\192\ See 17 CFR 240.0-12.
\193\ See Exemption Request Letter, supra note 191.
\194\ See Exemption Request Letter, supra note 191. MX2 will
provide such notice through a posting on the same website location
where MX2 posts 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 or MEMX website
where FINRA's or MEMX's proposed rule change is posted. See id.
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Using its authority under Section 36 of the Act,\195\ the
Commission is hereby granting MX2'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 MX2 proposes to
incorporate by reference.\196\ This exemption is conditioned upon MX2
providing written notice to its members whenever FINRA or MEMX proposes
to change a rule that MX2 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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\195\ 15 U.S.C. 78mm.
\196\ The Commission previously exempted other exchanges from
the requirement to file proposed rule changes under Section 19(b) of
the Act. See, e.g., MEMX Order, supra note 16; IEX Order, supra note
50; ISE Mercury Order, supra note 52; MIAX Order, MIAX Pearl Order,
and BATS Order, supra note 38; DirectEdge Exchanges Order, supra
note 63.
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H. Conclusion
It is ordered that the application of MX2 for registration as a
national securities exchange be, and it hereby is, granted.
It is furthered ordered that operation of MX2 is conditioned on the
satisfaction of the requirements below:
A. Participation in National Market System Plans. MX2 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. MX2 must join the Intermarket
Surveillance Group.
C. Minor Rule Violation Plan. A MRVP filed by MX2 under Rule 19d-
1(c)(2) must be declared effective by the Commission.\197\
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\197\ 17 CFR 240.19d-1(c)(2).
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D. Rule 17d-2 Agreement. An agreement pursuant to Rule 17d-2 \198\
that allocates regulatory responsibility for those matters specified
above \199\ must be declared effective by the Commission, or MX2 must
demonstrate that it independently has the ability to fulfill all of its
regulatory obligations.
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\198\ 17 CFR 240.17d-2.
\199\ See supra notes 123-124 and accompanying text.
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E. Participation in Multi-Party Rule 17d-2 Plans. MX2 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. MX2 must finalize the provisions of the RSA with its
regulatory services provider, as described above, that will specify the
MX2 and Commission rules for which the regulatory services provider
will provide certain regulatory functions, or MX2 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,\200\ that
MX2 shall be exempted from the rule filing requirements of Section
19(b) of the Act with respect to the FINRA rules and MEMX rules that
MX2 proposes to incorporate by reference into MX2's rules, subject to
the conditions specified in this Order.
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\200\ 15 U.S.C. 78mm.
By the Commission.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2025-04412 Filed 3-17-25; 8:45 am]
BILLING CODE 8011-01-P