[Federal Register Volume 77, Number 213 (Friday, November 2, 2012)]
[Notices]
[Pages 66197-66202]
[FR Doc No: 2012-26857]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68115; File No. SR-NASDAQ-2012-090]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order
Instituting Proceedings To Determine Whether To Approve or Disapprove
Proposed Rule Change To Amend Rule 4626--Limitation of Liability

October 26, 2012.

I. Introduction

    On July 23, 2012, The NASDAQ Stock Market LLC (``Nasdaq'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to amend Exchange Rule 4626--Limitation of
Liability (``accommodation proposal''). The proposed rule change was
published for comment in the Federal Register on August 1, 2012.\3\ The
Commission received 11 comment letters on this proposal \4\ and a
response letter from Nasdaq.\5\ On September 12, 2012, the Commission
extended the time period in which to either approve the accommodation
proposal, disapprove the accommodation

proposal, or to institute proceedings to determine whether to approve
or disapprove the accommodation proposal, to October 30, 2012.\6\ This
order institutes proceedings under Section 19(b)(2)(B) of the Act \7\
to determine whether to approve or disapprove the accommodation
proposal.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 67507 (July 26,
2012), 77 FR 45706 (``Notice'').
    \4\ See letters to Elizabeth M. Murphy, Secretary, Commission,
from Sis DeMarco, Chief Compliance Officer, Triad Securities Corp.,
dated August 20, 2012 (``Triad Letter''); Eugene P. Torpey, Chief
Compliance Officer, Vandham Securities Corp., dated August 21, 2012
(``Vandham Letter''); John C. Nagel, Managing Director and General
Counsel, Citadel LLC, dated August 21, 2012 (``Citadel Letter'');
Benjamin Bram, Watermill Institutional Trading LLC, dated August 22,
2012 (``Bram Letter''); Daniel Keegan, Managing Director, Citigroup
Global Markets Inc., dated August 22, 2012 (``Citi Letter'');
Theodore R. Lazo, Managing Director and Associate General Counsel,
Securities Industry and Financial Markets Association, dated August
22, 2012 (``SIFMA Letter''); Mark Shelton, Group Managing Director
and General Counsel, UBS Securities LLC, dated August 22, 2012
(``UBS Letter''); Andrew J. Entwistle and Vincent R. Cappucci,
Entwistle & Cappucci LLP, dated August 22, 2012 (``Entwistle
Letter''); Douglas G. Thompson, Michael G. McLellan, and Robert O.
Wilson, Finkelstein Thompson LLP, Christopher Lovell, Victor E.
Stewart, and Fred T. Isquith, Lovell Stewart Halebian Jacobson LLP,
Jacob H. Zamansky and Edward H. Glenn, Zamansky & Associates LLC,
dated August 22, 2012 (``Thompson Letter''); James J. Angel,
Associate Professor of Finance, Georgetown University, McDonough
School of Business, dated August 23, 2012 (``Angel Letter''); and
Leonard J. Amoruso, General Counsel, Knight Capital Group, Inc.,
dated August 29, 2012 (``Knight Letter'').
    \5\ See letter to Elizabeth M. Murphy, Secretary, Commission,
from Joan C. Conley, Senior Vice President and Corporate Secretary,
The NASDAQ Stock Market LLC, dated September 17, 2012 (``Nasdaq
Letter'').
    \6\ See Securities Exchange Act Release No. 67842 (September 12,
2012), 77 FR 57171 (September 17, 2012).
    \7\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of Proposal \8\
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    \8\ In issuing this order, the Commission neither makes any
findings nor expresses any opinion with regard to Nasdaq's
representations and interpretations contained in its accommodation
proposal.
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    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.\9\ However, existing Nasdaq Rule
4626(b) allows Nasdaq to compensate users of the Nasdaq Market Center
for losses directly resulting from the systems' actual failure to
correctly process an order, Quote/Order, message, or other data,
provided the Nasdaq Market Center has acknowledged receipt of the
order, Quote/Order, message, or data. Nasdaq's payment for all claims
made by all market participants related to the use of the Nasdaq Market
Center during a single calendar month shall not exceed the larger of
$500,000 or the amount of the recovery obtained by Nasdaq under any
applicable insurance policy.\10\
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    \9\ According to Nasdaq Rule 4626(a), any losses, damages, or
other claims, related to a failure of the Nasdaq Market Center to
deliver, display, transmit, execute, compare, submit for clearance
and settlement, adjust, retain priority for, or otherwise correctly
process an order, Quote/Order, message, or other data entered into,
or created by, the Nasdaq Market Center is absorbed by the member,
or the member sponsoring the customer, that entered the order,
Quote/Order, message, or other data into the Nasdaq Market Center.
    \10\ See Nasdaq Rule 4626(b)(1). With respect to the aggregate
of all claims made by all market participants during a single
calendar month related to a systems malfunction or error of the
Nasdaq Market Center concerning locked/crossed market, trade through
protection, market maker quoting, order protection, or firm quote
compliance functions of the market participant, to the extent such
functions are electronically enforced by the Nasdaq trading system
and where Nasdaq determines in its sole discretion that such systems
malfunction or error was caused exclusively by Nasdaq and no outside
factors contributed to the systems malfunction or error, Nasdaq's
payment during a single calendar month will not exceed the larger of
$3,000,000 or the amount of the recovery obtained by Nasdaq under
any applicable insurance policy. See Nasdaq Rule 4626(b)(2). The
Facebook initial public offering does not implicate the types of
systems errors or malfunctions described in Nasdaq Rule 4626(b)(2).
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    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'').\11\ Specifically, Nasdaq proposes
to compensate market participants for certain claims related to system
difficulties in the Nasdaq Halt and Imbalance Cross process (``Cross'')
\12\ in connection with the Facebook IPO in an amount not to exceed $62
million.\13\ Further, as proposed, claims for compensation must arise
solely from realized or unrealized direct trading losses from four
specific categories of Cross orders: (i) Sell Cross orders that were
submitted between 11:11 a.m. ET and 11:30 a.m. ET on May 18, 2012, that
were priced at $42.00 or less, and that did not execute; (ii) sell
Cross orders that were submitted between 11:11 a.m. ET and 11:30 a.m.
ET on May 18, 2012, that were priced at $42.00 or less, and that
executed at a price below $42.00; (iii) buy Cross orders priced at
exactly $42.00 and that were executed in the Cross, but not immediately
confirmed; and (iv) buy Cross orders priced above $42.00 and that were
executed in the Cross, but not immediately confirmed, but only to the
extent entered with respect to a customer \14\ that was permitted by
the member to cancel its order prior to 1:50 p.m. and for which a
request to cancel the order was submitted to Nasdaq by the member, also
prior to 1:50 p.m.\15\
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    \11\ In addition to adding proposed subsection (b)(3) to Nasdaq
Rule 4626, Nasdaq proposes to make certain technical amendments to
existing subsections of that rule. See, e.g., proposed Nasdaq Rule
4626(b)(4) and (b)(6).
    \12\ See Nasdaq Rule 4753.
    \13\ See proposed Nasdaq Rule 4626(b)(3); Notice, supra note 3,
at 47507.
    \14\ As proposed, unless Nasdaq Rule 4626 states otherwise, the
term ``customer'' includes any unaffiliated entity upon whose behalf
an order is entered, including any unaffiliated broker or dealer.
See proposed Nasdaq Rule 4626(b)(3)(A).
    \15\ See proposed Nasdaq Rule 4626(b)(3)(A); Notice, supra note
3, at 45710-11. In addition, proposed Nasdaq Rule 4626(b)(3)(C)
states that alleged losses arising in any form or that in any way
resulted from any other causes would not be considered losses
eligible for the proposed accommodations. Proposed Nasdaq Rule
4626(b)(3)(C) sets forth a non-exhaustive list of examples of such
losses.
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    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.\16\ With respect to Cross orders described
in (iv) above, the amount of loss would be reduced by 30 percent.\17\
Further, according to proposed Rule 4626(b)(3)(B), the measure of loss
for the Cross orders described in (ii) above would be 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.\18\
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    \16\ $40.527 constitutes the volume-weighted average price
(``VWAP'') of Facebook stock on May 18, 2012, between 1:50 p.m. ET
and 2:35 p.m. ET. See proposed Nasdaq Rule 4626(b)(3)(B). See also
Notice, supra note 3, at 45710-11 (describing Nasdaq's rationale for
establishing the $40.527 benchmark).
    \17\ See proposed Nasdaq Rule 4626(b)(3)(B); see also Notice,
supra note 3, at 45710 (describing Nasdaq's rationale for lowering
the amount of eligible losses for the fourth category of Cross
orders).
    \18\ Each member's direct trading losses calculated in
accordance with proposed Nasdaq Rule 4626(b)(3)(A) and (B) are
referred to as the ``member's share.'' See proposed Nasdaq Rule
4626(b)(3)(B).
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    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.\19\ As proposed, the Financial Industry
Regulatory Authority, Inc. (``FINRA'') would process and evaluate all
the claims submitted, using the standards set forth in Nasdaq Rule
4626.\20\ FINRA would then provide to the Nasdaq Board of Directors and
the Board of Directors of The NASDAQ OMX Group, Inc. an analysis of the
total value of eligible claims submitted under proposed Nasdaq Rule
4626(b)(3), and Nasdaq would thereafter file with the Commission a
proposed rule change setting forth the amount of eligible claims and
the amount it proposes to

pay to its members.\21\ All payments would be made in cash and would
not be made until the proposed rule change setting forth the amount of
eligible claims becomes final and effective.\22\
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    \19\ See proposed Nasdaq Rule 4626(b)(3)(D). According to
Nasdaq, notice of approval would be publicly posted on the Nasdaq
Trader Web site at www.nasdaqtrader.com and provided directly to all
member firms via an Equity Trader Alert. See Notice, supra note 3,
at 45712.
    \20\ See proposed Nasdaq Rule 4626(b)(3)(D). FINRA may request
such supplemental information as it deems necessary to assist its
evaluation of claims. See id. According to Nasdaq, FINRA's role
would be limited to measuring data against the benchmarks
established under Nasdaq Rule 4626(b)(3) to ascertain the
eligibility and value of each member's claims. See Notice, supra
note 3, at 45712. Further, Nasdaq represents that FINRA staff
assessing the claims would not be involved in providing regulatory
services to any Nasdaq market, and they would not have purchased
Facebook stock during Nasdaq's IPO opening process or currently own
Facebook stock. See id.
    \21\ See proposed Nasdaq Rule 4626(b)(3)(E). According to
Nasdaq, the report that FINRA prepares for Nasdaq on its analysis of
the eligibility of claims also would be provided to the public
members of FINRA's Audit Committee. See Notice, supra note 3, at
45712.
    \22\ See proposed Nasdaq Rule 4626(b)(3)(E).
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    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 \23\ and covered
proprietary losses.\24\ Failure to provide the required attestation
within the specified time period would void the member's eligibility to
receive compensation under proposed Nasdaq Rule 4626(b)(3).\25\ In
addition, under proposed Nasdaq Rule 4626(b)(3)(H), all payments to
members under the accommodation proposal would be contingent upon the
execution and delivery to Nasdaq of a release by the member of all
claims by it 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 any actions or omissions related in any way
to that Cross.\26\ The failure to provide this release within 14 days
after the effective date of the proposed rule change setting forth the
amount of eligible claims would void the member's eligibility to
receive compensation pursuant to proposed Nasdaq Rule 4626(b)(3).\27\
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    \23\ According to proposed Nasdaq Rule 4626(b)(3)(F)(i),
``customer compensation'' means the amount of compensation,
accommodation, or other economic benefit provided or to be provided
by the member to its customers (other than customers that were
brokers or dealers trading for their own account) in respect of
trading in Facebook on May 18, 2012.
    \24\ According to proposed Nasdaq Rule 4626(b)(3)(F)(ii),
``covered proprietary losses'' means the extent to which the losses
reflected in the member's share were incurred by the member trading
for its own account or for the account of a customer that was a
broker or dealer trading for its own account.
    \25\ See proposed Nasdaq Rule 4626(b)(3)(F). In addition, each
member must maintain books and records that detail the nature and
amount of customer compensation and covered proprietary losses. See
id. According to Nasdaq, it, through FINRA, would expect to examine
the accuracy of a member's attestation at a later date. See Notice,
supra note 3, at 45712.
    \26\ See proposed Nasdaq Rule 4626(b)(3)(H); Notice, supra note
3, at 45713 (explaining the purpose of the release requirement).
    \27\ See proposed Nasdaq Rule 4626(b)(3)(H).
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    With respect to the priority of payment under proposed Nasdaq Rule
4626(b)(3), payments would be made in two tranches.\28\ First, if the
member has provided customer compensation, the member would receive an
amount equal to the lesser of the member's share or the amount of
customer compensation.\29\ Second, the member would receive an amount
with respect to covered proprietary losses, however, the sum of
payments to a member would not exceed the member's share.\30\ According
to proposed Nasdaq Rule 4626(b)(3)(G), if the amount calculated under
the first tranche (i.e., customer compensation) exceeds $62 million,
accommodation would be prorated among members eligible to receive
accommodation under the first tranche. If the first tranche is paid in
full and the amount calculated under the second tranche exceeds the
funds remaining from the $62 million accommodation pool, such funds
would be prorated among members eligible to receive accommodation under
the second tranche.\31\ Further, if a member's eligibility to receive
funds is voided under proposed Nasdaq Rule 4626(b)(3), and the funds
payable to other members must be prorated, the funds available to pay
other members would be increased accordingly.\32\
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    \28\ See proposed Nasdaq Rule 4626(b)(3)(G).
    \29\ See id.
    \30\ See id.
    \31\ See id.
    \32\ See id.
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III. Summary of Comments and Nasdaq's Response

    As previously noted, the Commission received 11 comment letters on
the accommodation proposal and one response letter from Nasdaq.\33\
Eight commenters raised concerns with respect to the accommodation
proposal,\34\ two commenters expressed their support for the
accommodation proposal,\35\ and one commenter addressed the issue of
exchange liability more broadly.\36\
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    \33\ See supra notes 4 and 5.
    \34\ See Triad Letter; Vandham Letter; Bram Letter; Citi Letter;
SIFMA Letter; UBS Letter; Entwistle Letter; and Thompson Letter,
supra note 4.
    \35\ See Citadel Letter and Knight Letter, supra note 4.
    \36\ See Angel Letter, supra note 4. The Angel Letter does not
opine on the proposal, but rather comments more generally on what
the appropriate parameters of liability should be for national
securities exchanges.
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    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.

A. Release of All Claims Relating to the Facebook IPO Cross

    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.\37\ Specifically, one
commenter indicated that requiring execution of the release as a
precondition to participation in the accommodation proposal creates a
``fundamentally unfair dilemma'' for members.\38\ According to the
commenter, Nasdaq members must choose to execute a release of claims
and participate in the accommodation program, which may not make the
member whole, or pursue ``cost-and resource-intensive alternative
avenues of recovery.'' \39\ Another commenter noted that releases of
claims are typically the product of commercial, arms-length negotiation
and not part of a rule imposed by a regulatory authority.\40\ Finally,
one commenter suggested that Nasdaq members be given the option to
``opt in'' to the accommodation program on an order by order basis or a
firm by firm basis.\41\
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    \37\ See UBS Letter, supra note 4, at 3-4; Vandham Letter, supra
note 4, at 3; and Knight Letter, supra note 4, at 2.
    \38\ See UBS Letter, supra note 4, at 3.
    \39\ See id.
    \40\ See Knight Letter, supra note 4, at 2.
    \41\ See Vandham Letter, supra note 4, at 3.
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    In response, Nasdaq asserted that the release requirement is fair,
reasonable, and furthers the objectives of Section 6(b)(5) of the Act
\42\ because it is ``aimed at avoiding unnecessary litigation and
ensuring equal treatment of all members receiving funds under the
[accommodation] [p]roposal.'' \43\ Moreover, Nasdaq noted that
participation in the accommodation program and execution of the release
are entirely voluntary.\44\ Accordingly, members that wish to forego
participation in the accommodation program and pursue claims against

Nasdaq instead remain free to do so.\45\ Nasdaq also noted that the use
of a release is routine in the context of a payment in settlement of a
disputed claim, including those brought against regulated entities.\46\
Finally, Nasdaq argued that allowing members to participate in the
accommodation program without releasing Nasdaq from other claims
related to the Facebook IPO Cross would, in effect, ``subsidize the
costs of future litigation against itself.'' \47\
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    \42\ 15 U.S.C. 78f(b)(5).
    \43\ See Nasdaq Letter, supra note 5, at 5.
    \44\ See id.
    \45\ See id.
    \46\ See id.
    \47\ See id.
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B. Nasdaq's Uniform Benchmark Price

    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.\48\
Generally, these commenters stated that, contrary to Nasdaq's
assertion, a ``reasonably diligent member'' would not have mitigated
losses during the first forty-five minutes after execution reports were
delivered to firms.\49\ More specifically, two commenters stated that
the uniform benchmark price should be based on a VWAP of Facebook stock
on Monday, May 21, 2012.\50\
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    \48\ See Triad Letter, supra note 4, at 1-3; Vandham Letter,
supra note 4, at 2; Bram Letter, supra note 4, at 1; Citi Letter,
supra note 4, at 2 and 10. According to Nasdaq, the forty-five
minutes after execution reports were delivered ``would have been
ample time for a reasonably diligent member to have identified any
unexpected customer losses or unanticipated customer positions, and
taken steps to mitigate or liquidate them.'' See Notice, supra note
3, at footnote 24.
    \49\ See Triad Letter, supra note 4, at 1-3; Vandham Letter,
supra note 4, at 2; Bram Letter, supra note 4, at 1; Citi Letter,
supra note 4, at 2 and 10.
    \50\ See Triad Letter, supra note 4, at 1; Citi Letter, supra
note 4, at 2 (stating that the benchmark price should be the VWAP of
Facebook stock between the opening price on Monday, May 21, 2012 and
the price at noon on that same day).
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    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.\51\
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    \51\ See Nasdaq Letter, supra note 5, at 3. Specifically, Nasdaq
noted that: (i) All orders and cancellations, including those
entered between 11:11 a.m. and 11:30 a.m., were ``executed,
cancelled, or released into the market'' by 1:50 p.m.; (ii)
confirmations of all trades and cancellations had been disseminated
to members by 1:50 p.m.; and (iii) Nasdaq began reporting a firm bid
and ask to the tape and all data feeds were operating normally by
1:50 p.m. See id., at 3-4. Nasdaq also stated that it issued a
``System Status message'' informing members that all systems were
operating normally at 1:57 p.m. See id., at 4.
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C. Nasdaq's Categories of Claim-Eligible Trading Losses

    Several commenters stated that the types of orders eligible to
receive compensation under the accommodation proposal are too narrowly
defined.\52\ Two commenters believe that Nasdaq should provide
compensation for losses resulting from ``downstream operational,
technological and customer issues.'' \53\ One commenter stated that
Nasdaq's system failures, specifically the failure to deliver execution
reports for more than two hours after trading began, ``caused direct
and severe damage'' to the commenter and other market participants and
led to direct trading losses.\54\ Another commenter argued that
customer orders entered before 11:11 a.m. on May 18, 2012, that were
``cancel/replaced'' between 11:11 a.m. and 11:30:09 a.m. should be
treated differently from other orders entered during such time and
should be entitled to full compensation.\55\
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    \52\ See UBS Letter, supra note 4, at 2-3; Citi Letter, supra
note 4, at 7-10; and Vandham Letter, supra note 4, at 3.
    \53\ See UBS Letter, supra note 4, at 3; Citi Letter, supra note
4, at 7-10 (noting that ``[i]n some cases, investors submitted
multiple redundant orders based on the belief that the orders were
not going through'' and ``[i]n other cases, investors submitted
cancelations before receiving order confirmations, but were stuck
with the stock.'').
    \54\ See UBS Letter, supra note 4, at 3.
    \55\ See Vandham Letter, supra note 4, at 3. The commenter
believes that Nasdaq's failure to properly account for cancel/
replaced orders resulted in Nasdaq ``taking the profits generated
from certain clients to distribute amongst a larger group.'' See id.
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    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.\56\ Because Nasdaq's proposal contemplates paying retail
customers through Nasdaq member broker-dealers, the commenter expressed
concern that there is no guarantee that compensation will ultimately be
passed back to the retail investor, especially in instances where the
member's ``customer'' is another broker-dealer.\57\
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    \56\ See Thompson Letter, supra note 4, at 3-4.
    \57\ See id., at 11.
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    Nasdaq responded that the question before the Commission is only
whether the proposal is consistent with the requirements of the
Act.\58\ Nasdaq asserted that commenters have not argued that the
proposal ``discriminates unfairly'' among members or that it is
otherwise inconsistent with the requirements of the Act.\59\ Nasdaq
stated its belief that none of the comments provide a basis for the
Commission to determine that a modification to the methodology and
criteria it proposed ``is necessary to remedy any inconsistency with
the Exchange Act.'' \60\ With respect to retail investors, Nasdaq
stated that its accommodation proposal would benefit retail investors
with eligible claims even though Nasdaq has no direct relationship with
them.\61\ Nasdaq noted that the accommodation proposal requires each
member to submit an attestation detailing the amount of compensation
provided or to be provided by the member to its customers.\62\
Moreover, Nasdaq pointed out that accommodation payments are to be made
in two tranches with the first tranche going toward retail customer
claims.\63\
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    \58\ See Nasdaq Letter, supra note 5, at 2.
    \59\ See id.
    \60\ See id., at 4.
    \61\ See id., at 8.
    \62\ See id.
    \63\ See id.
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D. $62 Million Accommodation Pool Is Insufficient

    Several commenters argued that the proposed $62 million
accommodation pool is an insufficient amount to compensate market
participants harmed by Nasdaq's systems issues.\64\
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    \64\ See UBS Letter, supra note 4, at 2 (estimating that its
losses are ``in excess of $350 million'' and describing Nasdaq's
proposal to pay $62 million in the aggregate as ``woefully
inadequate''); see also Thompson Letter, supra note 4, at 4, 20.
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    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.\65\ Accordingly, if the
accommodation proposal is disapproved, Nasdaq asserted that the current
limitation on liability of $500,000 would apply.\66\ Nasdaq emphasized
that members who believe the amount of compensation offered is
insufficient or otherwise dislike the accommodation proposal may elect
not to participate.\67\ Nasdaq also stated that the purpose of the
accommodation proposal is ``not to pay all claims of losses alleged
with respect to the trading of Facebook stock,'' but rather the purpose
is ``to modify an existing rule that limits Nasdaq's liability to
$500,000 in order to make additional funds available to compensate
members and their customers for the categories of loss

defined in the [accommodation] [p]roposal * * * .'' \68\
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    \65\ See Nasdaq Letter, supra note 5, at 2.
    \66\ See id.
    \67\ See id., at 2-3.
    \68\ See id., at 4.
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E. Regulatory Immunity From Private Suits and Limitations on Liability

    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.\69\ However,
the two commenters that supported the accommodation proposal noted that
the broader issues of regulatory immunity and limitations on exchange
liability should be considered separately from Nasdaq's accommodation
proposal.\70\
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    \69\ See Citi Letter, supra note 4, at 2-4 and 12-15; SIFMA
Letter, supra note 4, at 2-4; Thompson Letter, supra note 4, at 8-
10.
    \70\ See Citadel Letter, supra note 4, at 2; Knight Letter,
supra note 4, at 2.
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    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.\71\
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    \71\ See Nasdaq Letter, supra note 5, at 6-7.
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F. Applicability of Nasdaq Rule 4626

    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 * * *'' \72\
This commenter argued that it is improper to use Rule 4626 to create an
accommodation fund in connection with the Facebook IPO because the
losses suffered in connection with the IPO do not fall within the
parameters of Rule 4626.\73\
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    \72\ See Citi Letter, supra note 4, at 4, 15-16.
    \73\ See id.
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    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.\74\
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    \74\ See Nasdaq Letter, supra note 5, at 5-6.
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G. Impact on Pending Litigation

    Two commenters expressed concern that Commission approval of the
accommodation proposal might negatively impact other adjudications of
disputes with Nasdaq regarding the Facebook IPO.\75\ The commenters
expressed concern that courts or other adjudicative bodies might
interpret Commission approval of the accommodation proposal as defining
or approving the classes of eligible claimants as restricted only to
market participants who submitted one of the four enumerated Cross
order types.\76\ The Nasdaq Letter did not specifically respond to
commenters' concerns on this issue.
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    \75\ See Thompson Letter, supra note 4, at 4-8; see also
Entwistle Letter, supra note 4, at 2.
    \76\ See id.
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H. Procedural Concerns

    Several commenters raised procedural concerns regarding the
implementation of the accommodation proposal.\77\ Two commenters noted
that Nasdaq should waive the one-year time limit to bring actions
against Nasdaq in Sections 18(H) and 19 of its Service Agreement given
the amount of time it could take to implement the compensation process
set forth in the proposed rule change.\78\ Three commenters stated that
Nasdaq member firms should not be required to release Nasdaq from
liability before member firms receive notice of a final payment amount
pursuant to the accommodation proposal.\79\
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    \77\ See Citi Letter, supra note 4, at 16; SIFMA Letter, supra
note 4, at 5; and Knight Letter, supra note 4, at 2.
    \78\ Section 18(H) provides ``that any claim, dispute,
controversy, or other matter in question arising out of the
agreement must be made no later than one year after it has arisen.
Section 19 of the agreement provides that any claim, dispute,
controversy, or other matter in question arising out of the
agreement is expressly waived if it is not brought within that
period.'' See SIFMA Letter, supra note 4, at 5; see also Citi
Letter, supra note 4, at 16.
    \79\ See SIFMA Letter, supra note 4, at 5-6; Citi Letter, supra
note 4, at 16; and Knight Letter, supra note 4, at 2.
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    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.\80\
As for concerns that claimants might have to release their claims
against Nasdaq prior to receiving compensation under the accommodation
proposal, Nasdaq stated that it does not object to the release becoming
effective upon payment.\81\
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    \80\ See Nasdaq Letter, supra note 5, footnote 11. Nasdaq
believes that members who voluntarily choose to proceed with their
claims outside of the accommodation proposal ``should do so under
the terms and conditions they have agreed to, and not seek to use
the Commission's notice and comment process to renegotiate their
prior contractual commitments.'' See id.
    \81\ See id., at footnote 9. Nasdaq also stated that it intends
to implement the accommodation proposal such that a member would be
aware of the results of its claim prior to being required to execute
a release. See id.
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IV. Proceedings To Determine Whether To Approve or Disapprove SR-
NASDAQ-2012-090 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \82\ to determine whether the proposed rule
change should be approved or disapproved. Institution of such
proceedings is appropriate at this time in view of the legal and policy
issues raised by the proposed rule change, as discussed below.
Institution of proceedings does not indicate that the Commission has
reached any conclusions with respect to any of the issues involved.
Rather, as described in greater detail below, the Commission seeks and
encourages interested persons to provide additional comment on the
proposed rule change.
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    \82\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\83\ the Commission is
providing notice of the grounds for disapproval under consideration. In
particular, Section 6(b)(5) of the Act \84\ requires that the rules of
a national securities exchange be designed, among other things, to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, to foster cooperation and
coordination with persons engaged in regulating, clearing, settling,
processing information with respect to, and facilitating transactions
in securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest; and not be designed to
permit unfair discrimination between customers, issuers, brokers, or
dealers.
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    \83\ 15 U.S.C. 78s(b)(2)(B).
    \84\ 15 U.S.C. 78f(b)(5).
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    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

Nasdaq or its affiliates for losses that relate to the Facebook IPO
Cross, raise questions about 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 market participants.\85\
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    \85\ See supra Sections III.A.-C.
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    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.

V. Procedure: Request for Written Comments

    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) \86\ or any
other provision of the Act, or the rules and regulations thereunder.
Although there do not appear to be any issues relevant to approval or
disapproval which would be facilitated by an oral presentation of
views, data, and arguments, the Commission will consider, pursuant to
Rule 19b-4, any request for an opportunity to make an oral
presentation.\87\
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    \86\ 15 U.S.C. 78f(b)(5).
    \87\ Section 19(b)(2) of the Act, as amended by the Securities
Acts Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the
Commission flexibility to determine what type of proceeding--either
oral or notice and opportunity for written comments--is appropriate
for consideration of a particular proposal by a self-regulatory
organization. See Securities Act Amendments of 1975, Senate Comm. on
Banking, Housing & Urban Affairs, S. Reps. No. 75, 94th Cong., 1st
Sess. 30 (1975).
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    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:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to<EMAIL_ADDRESS>Please include
File Number SR-NASDAQ-2012-090 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2012-090. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the accommodation proposal that are
filed with the Commission, and all written communications relating to
the accommodation proposal between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such filings also will be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-NASDAQ-2012-090 and should
be submitted on or before November 23, 2012. Rebuttal comments should
be submitted by December 7, 2012.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\88\
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    \88\ 17 CFR 200.30-3(a)(57).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-26857 Filed 11-1-12; 8:45 am]
BILLING CODE 8011-01-P