Daily Rules, Proposed Rules, and Notices of the Federal Government
Pursuant to existing Nasdaq Rule 4626(a), Nasdaq and its affiliates are not liable for any losses, damages, or other claims arising out of the Nasdaq Market Center or its use.
As set forth in more detail in the Notice, Nasdaq proposes to add subsection (3) to Nasdaq Rule 4626(b) to establish a voluntary accommodation program for certain claims arising from the initial public offering ("IPO") of Facebook, Inc. ("Facebook") on May 18, 2012 (collectively "Facebook IPO").
According to proposed Nasdaq Rule 4626(b)(3)(B), the measure of loss for the Cross orders described in (i), (iii), and (iv) above would be the lesser of: (a) The differential between the expected execution price of the orders in the Cross process that established an opening print of $42.00 and the actual execution price received; or (b) the differential between the expected execution price of the orders in the Cross process that established an opening print of $42.00 and a benchmark price of $40.527.
With respect to the process for submitting claims pursuant to proposed Nasdaq Rule 4626(b)(3), all claims must be submitted in writing no later than seven days after this accommodation proposal is approved by the Commission.
Furthermore, as proposed, in order to receive payment under proposed Nasdaq Rule 4626(b)(3), not later than seven days after the effective date of the proposed rule change setting forth the amount of eligible claims, the member must submit to Nasdaq an attestation detailing the amount of customer compensation
With respect to the priority of payment under proposed Nasdaq Rule 4626(b)(3), payments would be made in two tranches.
As previously noted, the Commission received 11 comment letters on the accommodation proposal and one response letter from Nasdaq.
Commenters raised concerns in the following areas, each of which is discussed in greater detail below: (1) The requirement that market participants release all other potentially valid claims as a condition to participation in the accommodation program; (2) Nasdaq's calculation and use of a benchmark price of $40.527; (3) the categories of claim-eligible trading losses; (4) the amount of the accommodation pool; (5) regulatory immunity from private suits and limitations on liability; (6) the applicability of Nasdaq Rule 4626; (7) the impact of approval of the accommodation proposal on pending litigation; and (8) two procedural issues.
Several commenters expressed concerns that payment to eligible claimants are conditioned upon the member firm executing a release of claims by the firm or its affiliates against Nasdaq for losses associated with the Facebook IPO on May 18, 2012.
In response, Nasdaq asserted that the release requirement is fair, reasonable, and furthers the objectives of Section 6(b)(5) of the Act
Several commenters expressed concern with Nasdaq's calculation and use of the uniform benchmark price of $40.527 to determine the amount of compensation owed to a member under the accommodation proposal.
In its response letter, Nasdaq reasserted that the use of the VWAP of Facebook stock during the 45 minute window after 1:50 p.m. is appropriate as the benchmark price because 45 minutes provided members enough time to identify and mitigate any unexpected losses or unanticipated positions.
Several commenters stated that the types of orders eligible to receive compensation under the accommodation proposal are too narrowly defined.
Another commenter observed that the accommodation proposal provides no direct compensation to "ordinary retail investors" and does not guarantee that retail investors would receive any compensation for losses.
Nasdaq responded that the question before the Commission is only whether the proposal is consistent with the requirements of the Act.
Several commenters argued that the proposed $62 million accommodation pool is an insufficient amount to compensate market participants harmed by Nasdaq's systems issues.
Nasdaq responded that commenters' objections to the amount of compensation are "unpersuasive" because the Commission has already determined that rules, such as existing Nasdaq Rule 4626, limiting exchange liability are consistent with the Act.
Several commenters stated that Nasdaq is not entitled to immunity from liability because it was acting in its "for profit" capacity in its handling of the Facebook IPO, rather than acting in its "regulatory capacity" as a self-regulatory organization.
Nasdaq responded that the Commission's task with regard to the accommodation proposal is only to determine whether the proposed rule change is consistent with the Act, and the Commission does not need to address the issue of regulatory immunity to do so.
According to one commenter, market participants' losses "resulted not from the type of ordinary system failures contemplated by Rule 4626 * * *, but rather from a known design flaw that resulted in a similar technology issue dating back to Fall 2011, as well as Nasdaq's high-risk, profit-oriented behavior prior to and during the IPO * * *"
Nasdaq emphasized in response that Rule 4626 is a pre-existing Commission approved rule and that the rule squarely applies to Nasdaq's systems issues related to the Facebook IPO.
Two commenters expressed concern that Commission approval of the accommodation proposal might negatively impact other adjudications of disputes with Nasdaq regarding the Facebook IPO.
Several commenters raised procedural concerns regarding the implementation of the accommodation proposal.
Nasdaq responded that commenters' requests to extend the one-year time limit for members to bring claims against Nasdaq improperly ask the Commission to interfere with existing contractual relationships that have no bearing on whether Nasdaq Rule 4626 should be amended.
The Commission is instituting proceedings pursuant to Section 19(b)(2)(B) of the Act
Pursuant to Section 19(b)(2)(B) of the Act,
As discussed above, Nasdaq's accommodation proposal would amend its existing Rule 4626 to provide $62 million to compensate certain types of claims arising in connection with the Facebook IPO Cross on May 18, 2012. Further, as proposed, a Nasdaq member must execute a release of all claims by the member or its affiliates against Nasdaq or its affiliates for losses that arise out of, are associated with, or relate in any way to the Facebook IPO Cross or to any actions or omissions related in any way to that Cross in order to receive any payment under proposed Nasdaq Rule 4626(b)(3). The concerns articulated by commenters, including the limited categories of claims eligible for compensation, the method of determining losses for certain categories of eligible claims, and the requirement that a member waive all claims against
Accordingly, in light of the concerns raised by commenters, the Commission believes that questions are raised as to whether Nasdaq's accommodation proposal is consistent with the requirements of Section 6(b)(5) of the Act, including whether the accommodation proposal would promote just and equitable principles of trade, protect investors and the public interest, and not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers.
The Commission requests that interested persons provide written submissions of their views, data, and arguments with respect to the concerns identified above, as well as any other concerns they may have with the accommodation proposal. In particular, the Commission invites the written views of interested persons concerning whether the accommodation proposal is consistent with Section 6(b)(5)
Interested persons are invited to submit written data, views, and arguments regarding whether the accommodation proposal should be approved or disapproved by November 23, 2012. Any person who wishes to file a rebuttal to any other person's submission must file that rebuttal by December 7, 2012. Comments may be submitted by any of the following methods:
* Use the Commission's Internet comment form (
* Send an email to
* Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.