May 5 -- The Securities and Exchange Commission (“Commission”) is reopening the comment period for its proposal (“Proposed Rules”) to amend the rule under the Securities Exchange Act of 1934 (“Exchange Act”) that defines certain terms used in the statutory definition of “exchange.” The reopening provides supplemental information and economic analysis regarding trading systems that trade crypto asset securities that would be newly included in the definition of “exchange” under the Proposed Rules. The Commission is requesting further information and public comment on certain aspects of the Proposed Rules as applicable to all securities and the compliance dates and other alternatives for the Proposed Rules. The Proposed Rules were set forth in Release No. 34–94062 (“Proposing Release”), and the related comment period, which was reopened in Release No. 34–94868 on May 9, 2022, ended on June 13, 2022. The reopening of this comment period is intended to allow interested persons further opportunity to analyze and comment on the Proposed Rules in light of the supplemental information provided herein (“Reopening Release”).
The comment period for the proposed amendments published on March 18, 2022, at 87 FR 15496, which was initially reopened on May 12, 2022, at 87 FR 29059, is again reopened. Comments should be received on or before June 13, 2023.
Exchange Act section 3(a)(1) states that the term “exchange” means any organization, association, or group of persons, whether incorporated or unincorporated, which constitutes, maintains, or provides a market place or facilities for bringing together purchasers and sellers of securities or for otherwise performing with respect to securities the functions commonly performed by a stock exchange as that term is generally understood, and includes the market place and the market facilities maintained by such exchange.
Title 17 section 240.3b–16(a) (“Rule 3b–16(a)”) defines certain terms in the definition of “exchange” under section 3(a)(1) of the Exchange Act to include any organization, association, or group of persons that: (1) brings together the orders for securities of multiple buyers and sellers; and (2) uses established, non-discretionary methods (whether by providing a trading facility or by setting rules) under which such orders interact with each other, and the buyers and sellers entering such orders agree to the terms of a trade. Title 17 section 240.3b–16(b) (“Rule 3b–16(b)”) explicitly excludes certain systems from the definition of “exchange.” Title 17 section 240.3b–16 (“Rule 3b–16”) provides a functional test to assess whether a trading platform meets the definition of exchange and, if so, triggers exchange registration. Section 5 of the Exchange Act requires an organization, association, or group of persons that meets the definition of “exchange” under section 3(a)(1) of the Exchange Act, unless otherwise exempt, to register with the Commission as a national securities exchange pursuant to section 6 of the Exchange Act.
Title 17 section 240.3a1–1(a)(2) (“Rule 3a1–1(a)(2)”) exempts from the Exchange Act section 3(a)(1) definition of “exchange” an organization, association, or group of persons that complies with Regulation ATS, which requires, among other things, meeting the definition of an alternative trading system (“ATS”) and registering as a broker-dealer. As a result of the exemption, an organization, association, or group of persons that meets the definition of an exchange and complies with Regulation ATS is not required by section 5 of the Exchange Act to register as a national securities exchange pursuant to section 6 of the Exchange Act, is not an SRO, and, therefore, is not required to comply with the regulatory requirements applicable to national securities exchanges and SROs.
January 2022 Proposed Amendments to Exchange Act Rule 3b–16: As described more fully in the Proposing Release, the Commission proposed to amend Exchange Act Rule 3b–16 to, among other things, replace “orders” with “trading interest” and define “trading interest”; remove the term “multiple” before “buyers and sellers”; add “communication protocols” as an example of an established, non-discretionary method that an organization, association, or group of persons can provide to bring together buyers and sellers of securities; simplify and align the rule text with the statutory definition of “exchange” under section 3(a)(1) of the Exchange Act; and add an exclusion under Exchange Act Rule 3b–16(b) for systems that allow an issuer to sell its securities to investors.
Specifically, the Commission proposed to amend Exchange Act Rule 3b–16(a) to include within the definition of “exchange” an organization, association, or group of persons that constitutes, maintains, or provides a market place or facilities for bringing together buyers and sellers of securities or for otherwise performing with respect to securities the functions commonly performed by a stock exchange if it is not subject to an exception under Rule 3b–16(b) and it: (1) brings together buyers and sellers of securities using trading interest; and (2) makes available established, non-discretionary methods (whether by providing a trading facility or communication protocols, or by setting rules) under which buyers and sellers can interact and agree to the terms of a trade. For purposes of this Reopening Release, trading systems that meet the criteria of Exchange Act Rule 3b–16(a), as proposed to be amended (i.e., offer the use of non-firm trading interest and provide non-discretionary protocols), are referred to throughout the release as “New Rule 3b–16(a) Systems.” New Rule 3b–16(a) Systems would be subject to the definition of “exchange” and be required to register as a national securities exchange or comply with the conditions to an exemption to such registration, such as Regulation ATS.
In response to the Proposing Release, the Commission received many comments. In particular, the Commission received requests for information about the application of the Proposed Rules to trading systems for crypto asset securities and trading systems that use distributed ledger or blockchain technology (broadly referred to as “DLT”), including systems commenters characterize as decentralized finance or “DeFi.” Commenters request information about whether and how such systems can comply with existing federal securities laws and the Proposed Rules.
Given these comments, the Commission is issuing this Reopening Release regarding the potential effects of the proposed amendments to Exchange Act Rule 3b–16 on trading systems for crypto asset securities and trading systems using DLT, including systems commenters characterize as various forms of “DeFi,” and requesting further information and public comment on aspects of the Proposed Rules, more generally. This Reopening Release also supplements the economic analysis in the Proposing Release by providing additional analysis on the estimated impact of the Proposed Rules on trading systems for crypto asset securities and those using DLT, which include various so-called “DeFi” trading systems, and requests further comment.
FRN:
https://www.federalregister.gov/d/2023-08544 [46 pages]
