
[Federal Register Volume 77, Number 213 (Friday, November 2, 2012)]
[Notices]
[Pages 66197-66202]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[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

[[Page 66198]]

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

[[Page 66199]]

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

[[Page 66200]]

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

[[Page 66201]]

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

[[Page 66202]]

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 rule-comments@sec.gov. 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


