
[Federal Register Volume 78, Number 246 (Monday, December 23, 2013)]
[Notices]
[Pages 77540-77545]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-30448]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71098; File No. SR-NASDAQ-2013-152]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
To Describe the Implementation of Rule 4626(b)(3)

December 17, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on December 9, 2013, The NASDAQ Stock Market LLC (``NASDAQ'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III, below, which Items have been prepared by the 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange is filing a proposal to describe the implementation of 
Rule 4626(b)(3). There is no text of the proposed rule change. The 
complete text of the filing is available on the Exchange's Web site at 
http://nasdaq.cchwallstreet.com, at the principal office of the 
Exchange, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose

I. Introduction

    On March 22, 2013, the Commission approved a proposal by Nasdaq to 
establish a one-time voluntary accommodation policy for claims arising 
from system difficulties that Nasdaq experienced during the initial 
public offering (``IPO'') of Facebook, Inc. (``Facebook'' or ``FB'') on 
May 18, 2012.\3\ Rule 4626 limits the liability of Nasdaq and its 
affiliates with respect to any losses, damages, or other claims arising 
out of the Nasdaq Market Center or its use and provides for limited 
accommodations under the conditions specified in the rule.\4\ Rule 
4626(b)(1) provides that for the aggregate of all claims made by market 
participants related to the use of the Nasdaq Market Center during a 
single calendar month, Nasdaq's payments under Rule 4626 shall not 
exceed the larger of $500,000 or the amount of the recovery obtained by 
Nasdaq under any applicable insurance policy. Rule 4626(b)(2) states 
that for the aggregate of all claims made by market participants 
related to systems malfunctions or errors of the Nasdaq Market Center 
concerning locked/crossed compliance, trade through protection, market 
maker quoting, order protection, or firm quote compliance, during a 
single calendar month Nasdaq's payments under Rule 4626 shall not 
exceed the larger of

[[Page 77541]]

$3,000,000 or the amount of the recovery obtained by Nasdaq under any 
applicable insurance policy. Rule 4626(b)(3) establishes a methodology 
for submission, evaluation, and payment of claims associated with the 
Facebook IPO.
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    \3\ Securities Exchange Act Release No. 69216 (March 22, 2013), 
78 FR 19040 (March 28, 2013) (SR-NASDAQ-2012-090) (``Approval 
Order''). See also Securities Exchange Act Release No. 67507 (July 
26, 2012), 77 FR 45706 (August 1, 2012) (SR-NASDAQ-2012-090) 
(``Proposing Release'').
    \4\ Rule 4626(a) provides that except as set forth in the 
accommodation portion of the rule, ``Nasdaq and its affiliates shall 
not be liable for any losses, damages, or other claims arising out 
of the Nasdaq Market Center or its use. 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 shall be 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.''
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    On May 18, 2012, Nasdaq experienced system difficulties during the 
Nasdaq Halt and Imbalance Cross Process (the ``Cross'') for the FB IPO. 
These difficulties delayed the completion of the Cross from 11:05 a.m. 
until 11:30 a.m.\5\ Based on its assessment of the information 
available at the time, Nasdaq concluded that the system issues would 
not have any effects beyond the delay itself. In an exercise of its 
regulatory authority, Nasdaq determined to proceed with the IPO at 
11:30 a.m. rather than postpone it.
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    \5\ All times in this filing are Eastern Time.
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    As a result of the system difficulties, however, certain orders for 
FB stock that were entered between 11:11:00 a.m. and 11:30:09 a.m. in 
the expectation of participating in the Cross--and that were not 
cancelled prior to 11:30:09 a.m.--either did not execute or executed 
after 1:50 p.m. at prices other than the $42.00 price established by 
the Cross. (Other orders entered between 11:11:00 a.m. and 11:30:09 
a.m., including cancellations, buy orders below $42.00, and sell orders 
above $42.00, were handled without incident.) System issues also 
delayed the dissemination of Cross transaction reports from 11:30 a.m. 
until 1:50 p.m. At 1:50 p.m., Nasdaq system difficulties were 
completely resolved.
    Rule 4626(b)(3) provides that, as a result of these unique 
circumstances, Nasdaq will accommodate members for losses attributable 
to the system difficulties on May 18, 2012 in an amount not to exceed 
$62 million. Rule 4626(b)(3)(A) provides that all claims for such 
accommodation must arise solely from realized or unrealized direct 
trading losses arising from the following specific Cross orders:
    (i) SELL Cross orders that were submitted between 11:11 a.m. and 
11:30 a.m. 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. and 
11:30 a.m. 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 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.
    As originally approved, Rule 4626(b)(3)(D) provided that all claims 
related to the FB IPO must be submitted in writing not later than 7 
days after formal approval of the FB accommodation proposal by the 
Commission, which occurred on March 22, 2013. In recognition of the 
fact that the Passover and Good Friday holidays occurred during the 
week when claim submissions would otherwise be due, Nasdaq submitted an 
immediately effective proposed rule change to extend the deadline for 
claim submission until 11:59 p.m. on April 8, 2013.\6\ Nasdaq received 
claims with respect to 75 market participant identifiers (``MPIDs'') 
within the deadline. Nasdaq did not receive any claims after the 
deadline.
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    \6\ Securities Exchange Act Release No. 69250 (March 28, 2013), 
78 FR 20160 (April 3, 2013) (SR-NASDAQ-2013-055).
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    Rule 4626(d)(3)(D) further provides that all claims shall be 
processed and evaluated by the Financial Industry Regulation Authority 
(``FINRA''), applying the standards set forth in Rule 4626. FINRA is 
authorized to request such supplemental information as it deems 
necessary to assist its evaluation of claims.
    Rule 4626(b)(3)(E) provides that FINRA shall provide to the Nasdaq 
Board of Directors and the Board of Directors of NASDAQ OMX an analysis 
of the total value of eligible claims. FINRA has provided the required 
analysis. The provision further requires that Nasdaq will file with the 
Commission a rule proposal setting forth the amount of eligible claims 
under the standards set forth in Rule 4626 and the amount proposed to 
be paid to members by Nasdaq. This proposed rule change, filed pursuant 
to authority delegated by the Nasdaq Board of Directors, satisfies this 
requirement. In addition, the proposed rule change discusses the 
application of Rule 4626 to certain types of claims. Finally, the 
proposed rule change discusses the process contemplated for payment of 
valid claims.

II. FINRA Review Process

    For the claim review process, FINRA established a working group 
consisting of FINRA Market Regulation Department analysts and managers 
(``FB Claims Team'' or ``FINRA staff''). During the review process, the 
designated analysts and managers did not perform any regulatory 
services for any Nasdaq market, did not purchase FB stock (either in 
the secondary market or as part of Nasdaq's IPO opening process) and 
did not own FB stock.\7\
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    \7\ A Steering Committee, composed of members of senior 
management of the Market Regulation Department, provided guidance to 
the FB Claims Team on the resolution of process and substantive 
issues arising during the course of the FB claim evaluation process, 
reviewed the form and content of the review summary forms for each 
claim, and monitored the overall progress of the claim review 
effort. However, members of the Steering Committee did not 
participate in the FB Claim Team's assessment of and decisions to 
recommend the approval or disapproval of individual claims.
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    Following the issuance of the Approval Order, Nasdaq made each 
claim received by Nasdaq (including associated worksheets) available to 
FINRA by means of an encrypted shared access folder. The FB Claims Team 
copied the claims and stored them on a FINRA network folder. Access to 
the FINRA network folder was limited to FINRA staff directly working on 
the FB claim review process. Throughout the process, the FB Claims Team 
reconciled with Nasdaq staff the number of claims. After the window for 
submitting claims closed on April 8, 2013, the FB Claims Team held a 
meeting with a representative of Nasdaq to verify that each claim 
received by Nasdaq had been copied to the FINRA network folder.
    Upon receipt of a claim, a manager in the FB Claims Team performed 
a preliminary review of the claim to determine if the information 
submitted appeared to be accurate and complete per the criteria set 
forth in the rule filing. For each claim a matter was opened in a FINRA 
database and the matter was linked back to the claimant's submission 
for internal tracking purposes.\8\
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    \8\ If a member firm submitted a claim with multiple MPIDs, the 
FB Claims staff opened one matter in the tracking system. In the 
case of claims involving sponsored access arrangements, the FB 
Claims staff opened one matter in the tracking system under the 
sponsoring firm.
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    In several instances, FB Claims Team staff contacted the firm 
filing the claim to obtain additional information or confirm certain 
information provided within its claim worksheet. A dedicated email 
address was established to facilitate all electronic communications 
with firms. Access to the mailbox was limited to those staff directly 
working on the FB claim review process.
    To assist the FB Claims Team, staff within FINRA's Market 
Regulation Department developed scripts to retrieve order and execution 
information related to each order listed on the individual claim 
worksheets. The

[[Page 77542]]

FB Claims Team was provided with the complete Nasdaq SingleBook order 
lifecycle, including execution messages, for each IPO Cross order and 
any corresponding Order Audit Trail System (``OATS'') order lifecycles. 
This information was posted on the same FINRA network where the claim 
worksheets were stored. Market Regulation staff providing technology 
support also provided additional data to validate the covering trade 
information provided by the firms and assisted with ad hoc queries, 
upon the request of the FB Claims Team. The Market Regulation 
Department staff providing technology support to the FB Claims Team did 
not perform any assessment of the eligibility of any individual orders 
in the claims or make any determination as to whether any such orders 
were entitled to any accommodation.
    The FB Claims Team staff reviewed the information provided by 
Market Regulation Department technology support staff and compared the 
information to the order information provided by the firms. In certain 
instances, staff contacted firms to request additional information or 
obtain clarification regarding any issues.
    After completing the analysis of each order listed in the claim, 
one of the assigned analysts prepared a review summary memo for 
supervisory review. The summary memo contained a report of findings, 
which included sections regarding: (a) The order information; (b) the 
direct trading losses calculation by the firm; (c) the staff's analysis 
of the order information broken out by category; and (d) the staff's 
direct trading losses calculation. Each review summary memo was 
submitted for two levels of supervisory review.
    After receiving FINRA's review summary memos for each claim, Nasdaq 
reviewed and determined that it concurred with FINRA's analysis. 
Thereafter, on October 25, 2013, Nasdaq transmitted to members that had 
submitted claims the results of the analysis for their claims. Based on 
questions it then received from several members, Nasdaq concluded that 
there may have been some confusion regarding the scope of permissible 
claims based on Cross orders to BUY priced at $42. Accordingly, in an 
effort to ensure that all potential valid claims were fully considered, 
on November 4, 2013, Nasdaq contacted all claimants to provide them the 
opportunity to provide FINRA with additional information to support 
claims with regard to these orders. As a result of this process, the FB 
Claims Team prepared supplemental review summary memos with respect to 
several claims. Nasdaq reviewed and determined that it concurred with 
FINRA's analysis, and the supplemental review summary memos were 
transmitted to affected members on December 6, 2013.

III. Results

    The first category of covered claims, as provided in Rule 
4626(b)(3)(A)(i), is SELL Cross orders that were submitted between 
11:11 a.m. and 11:30 a.m. on May 18, 2012, that were priced at $42 or 
less, and that did not execute (``Category I''). Sellers who entered 
orders priced at $42.00 or less between 11:11 a.m. and 11:30 a.m. would 
have expected their orders to execute in the Cross, because the Net 
Order Imbalance Indicator (``NOII'') disseminated by Nasdaq indicated 
that the relative proportion of buy and sell interest would allow the 
execution, at a price of $42, of all sell orders priced at $42 or less. 
Accordingly, if such orders did not execute due to Nasdaq's system 
difficulties, the member entering the order would incur a loss. Under 
Rule 4626(b)(3)(B), the measure of loss for such orders is the lesser 
of (i) the differential between the expected execution price of $42 and 
the actual execution price received, or (ii) the differential between 
the expected execution price of $42 and a benchmark price of $40.527, 
which constitutes the volume-weighted average price of FB stock on May 
18, 2012, between 1:50 p.m. and 2:35 p.m. (the ``Benchmark Price'').
    Nasdaq received claims with respect to 791 orders in Category I. 
FINRA's analysis has determined that claims with respect to 784 of 
these orders were valid under the terms of the rule, and Nasdaq concurs 
in this determination. The aggregate value of the valid claims is 
$20,364,741.96.
    The second category of covered claims, as provided in Rule 
4626(b)(3)(A)(ii), is SELL Cross orders that were submitted between 
11:11 a.m. and 11:30 a.m. on May 18, 2012, that were priced at $42 or 
less, and that executed at a price below $42 (``Category II''). Sellers 
who entered orders priced at $42.00 or less between 11:11 a.m. and 
11:30 a.m. would have expected their orders to execute in the Cross. 
Accordingly, if such orders executed at a price less than $42 due to 
Nasdaq's system difficulties, the member entering the order would incur 
a loss. Under Rule 4626(b)(3)(B), the measure of loss for such orders 
is the differential between the expected execution price of $42 and the 
actual execution price received.
    Nasdaq received claims with respect to 242 orders in Category II. 
FINRA's analysis has determined that claims with respect to 238 of 
these orders were valid under the terms of the rule, and Nasdaq concurs 
in this determination. The aggregate value of the valid claims is 
$9,990,901.52.
    The third category of covered claims, as provided in Rule 
4626(b)(3)(A)(iii), is BUY Cross orders priced at exactly $42 and that 
were executed in the Cross but not immediately confirmed (``Category 
III''). Buyers who entered orders priced at exactly $42 would not have 
an expectation as to whether their orders would execute in the Cross, 
since the NOII disseminated by Nasdaq indicated that the relative 
proportion of buy and sell interest would not allow the execution of 
all buy orders priced at $42. Accordingly, due to the delay of the 
dissemination of confirmations until 1:50 p.m., such buyers may have 
placed and received fills of orders to buy additional FB stock. 
Alternatively, given the uncertainty as to whether these orders would 
be executed in the Cross, a member may have allowed its customer to 
cancel before 1:50 p.m., such that the member would have excess shares 
when confirmation that the order was filled was provided at 1:50 p.m.
    The text of Rule 4626(b)(3)(A)(iii) does not directly state that 
having excess shares through a duplicative buy order or a cancel is a 
necessary condition for compensation to be received under this 
category. The examples provided in explaining the purpose of SR-NASDAQ-
2012-090 make this condition clear, however.\9\ Specifically, in the 
absence of one of these conditions resulting in an unexpected long 
position, the member would either have been able to buy FB at a lower 
price, if it was not filled in the Cross, or would have received the 
price it sought in the Cross, and therefore any loss would be purely 
speculative in nature. See Rule 4626(b)(3)(C) (excluding coverage for 
``alleged or speculative lost trading opportunities''). Accordingly, 
Nasdaq has instructed FINRA to apply the rule

[[Page 77543]]

in a manner that requires cancellations or additional purchase(s) 
during the period prior to 1:50 p.m. for the claim to be compensable. 
Under Rule 4626(b)(3)(B), the applicable measure of loss is the lesser 
of (i) the differential between the expected execution price of $42 and 
the actual execution price received, or (ii) the differential between 
the expected execution price of $42 and the Benchmark Price.\10\
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    \9\ ``Market participants who entered Cross-only eligible buy 
orders priced exactly at $42.00 that executed in the Cross but that 
were not confirmed until 1:50 p.m. could not have been sure whether 
their orders had been executed because the number of buy and sell 
limit shares priced at the clearing price and wishing to be matched 
in the Cross is never exactly equal. Consequently, in the interval 
between 11:30 a.m. and 1:50 p.m., these buyers may have purchased 
shares in the continuous market, and upon receiving Cross execution 
messages at 1:50 p.m., they may have experienced an unexpected long 
position. The sale of such an unexpected long position at a lower 
price would have occasioned a loss.'' Proposing Release, 77 FR at 
45710. See also Proposing Release, 77 FR at 47511 (Example 6 and 
Example 7).
    \10\ The measure is premised on the expectation that the 
customer or proprietary account on whose behalf the trade was made 
received a fill or submitted a cancellation prior to 1:50 p.m., 
making the fill of the Cross order at 1:50 p.m. the unexpected long 
position that needed to be covered. Thus, the difference between the 
$42 price of the Cross order and the lesser of the actual execution 
price associated with selling this position or the Benchmark Price 
is an appropriate measure of the member's covered loss.
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    Following the completion of initial assessments of members' claims, 
Nasdaq concluded that there may have been some confusion regarding the 
conditions associated with Category III. Accordingly, in an effort to 
ensure that all potential valid claims were fully considered, on 
November 4, 2013, Nasdaq contacted all claimants to provide them the 
opportunity to provide FINRA with additional information to support 
claims with regard to these orders. Nasdaq received claims with respect 
to 13,123 orders. FINRA's analysis has determined that claims with 
respect to 6,644 of these orders were valid under the terms of the 
rule,\11\ and Nasdaq concurs in this determination. The aggregate value 
of the valid claims is $2,971,394.13.
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    \11\ Claims reviewed in the supplemental process were considered 
under Category III.
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    The fourth category of covered claims, as provided in Rule 
4626(b)(3)(A)(iv), is BUY Cross orders priced above $42 and that were 
executed in the Cross but not immediately confirmed, but only to the 
extent entered with respect to a customer 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 by the member, also prior to 1:50 
p.m. (``Category IV''). Nasdaq believes that members that took such 
actions were reasonably attempting to assist their own customers in 
responding to the delayed dissemination of Cross transaction reports, 
and that such members further attempted to communicate their actions to 
Nasdaq through the submission of cancellations. When the member 
received confirmation of the execution of the customer's order at 1:50 
p.m., the member held shares for which it no longer had a recipient. 
Under Rule 4626(b)(3)(B), the applicable measure of loss is the lesser 
of (i) the differential between the expected execution price of $42 and 
the actual execution price received, or (ii) the differential between 
the expected execution price of $42 and the Benchmark Price. In this 
category, however, the outcome was affected not only by Nasdaq system 
issues, but also by the member's affirmative decision not to await the 
dissemination of confirmations, despite the fact that the member should 
reasonably have expected the order to be filled. Accordingly, Rule 
4626(b)(3)(B) provides that a portion of the associated losses will be 
borne by the members, with the amount of compensable loss reduced by 
30%.
    Nasdaq received claims with respect to 44,966 orders in Category 
IV. FINRA's analysis has determined that claims with respect to 40,397 
of these orders were valid under the terms of the rule, and Nasdaq 
concurs in this determination. The aggregate value of the valid claims, 
as reduced by 30% for the reasons described above, is $10,702,864.00.
    For a particular member, the total of valid claims under Category 
I, Category II, Category III, and Category IV is referred to as the 
``Member's Share''. The sum of the Member's Share for all members, 
which constitutes the maximum amount payable under Rule 4626 with 
respect to the FB IPO, is $44,029,901.61.
    For several reasons, this amount is less than the maximum 
accommodation pool of $62 million provided for in the rule. First, as 
has been widely reported in the press, one member that was eligible to 
file a claim under Rule 4626 opted to forego participation in the 
program and instituted an arbitration proceeding against Nasdaq.\12\ 
Second, as detailed above, claims with respect to certain orders did 
not satisfy the requirements of the rule. Notably, in some instances, 
claims for compensation under Category III did not satisfy the rule 
because there were not excess shares at 1:50 p.m., and claims for 
compensation under Category IV did not satisfy the rule because the 
member did not permit its customer to cancel its order prior to 1:50 
p.m. or did not submit a request to cancel to Nasdaq prior to 1:50 p.m. 
Although Nasdaq's systems provided it with information about the size, 
price, and entry time of orders submitted to the Cross, as well as the 
ultimate disposition of those orders, Nasdaq did not have information 
about the customer-facing activities of its members. Accordingly, in 
establishing the maximum value of an accommodation pool, Nasdaq needed 
to assume that all orders in the Cross with the price and entry times 
specified by the rule might provide the basis for a valid claim. 
However, for the reasons described above, other actions (i.e., 
duplicative BUYS or customer cancellations) are required for harm to 
exist. In conducting its analysis, FINRA fully evaluated claims to 
determine whether such actions were taken. Accordingly, certain orders 
in the Cross did not actually provide a basis for a claim. Finally, 
Nasdaq believes that some members with BUY orders in the Cross did not 
file claims with respect to such orders because they understood that 
they had not taken actions that would provide the basis for a valid 
claim, while other members with de minimis potential claims also chose 
not to file.
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    \12\ See ``UBS Challenges Nasdaq's Facebook IPO Plan'' (March 
25, 2013) (available at http://blogs.wsj.com/deals/2013/03/25/ubs-challenges-nasdaqs-facebook-ipo-plan).
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IV. Payment Process

    As discussed in the Proposing Release, Nasdaq's business and legal 
relationships are with its members, not its members' customers. Nasdaq 
has no contractual or other relationships with its members' customers, 
and generally does not possess information about interactions between a 
member and its customer that may underlie members' trading activity. 
Nevertheless, in adopting the FB accommodation rule, Nasdaq was mindful 
that member's customers were impacted by the processing of member 
orders in the FB Cross. Accordingly, Rule 4626 requires that to the 
extent that a member receiving accommodation thereunder had customers 
that incurred losses, accommodation payments received by members from 
Nasdaq must be used for the benefit of such customers.
    Accordingly, as provided in Rule 4626(b)(3)(F), all accommodation 
payments are contingent upon a member's submission to Nasdaq, not later 
than seven days after the effective date of this proposed rule change, 
an attestation detailing:
    (i) 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 Inc. on May 18, 2012 
(``Customer Compensation''), and
    (ii) the extent to which the losses reflected in the Member's Share 
\13\ were incurred by the member trading for its

[[Page 77544]]

own account or for the account of a customer that was a broker or 
dealer trading for its own account (``Covered Proprietary Losses'').
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    \13\ Defined specifically as a member's direct trading losses 
calculated in accordance with paragraphs (b)(3)(A) and (B) of the 
proposed rule.
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    As of October 25, 2013, Nasdaq provided each member that submitted 
a claim with an initial analysis of the value of its claim, i.e., the 
value of its Member's Share, along with the required form of 
attestation. Thereafter, in an effort to ensure that all potential 
valid claims were fully considered, on November 4, 2013, Nasdaq 
contacted all claimants to provide them the opportunity to provide 
FINRA with additional information to support claims, as discussed 
above. As a result of this process, FINRA prepared supplemental review 
summary memos with respect to several claims, and the supplemental 
review summary memos were transmitted to affected members on December 
6, 2013. Accordingly, all claimants are in a position to provide the 
required attestation by December 16, 2013, the deadline mandated by the 
rule. As provided in Rule 4626(b)(3)(F), failure to provide the 
required attestation within the specified time limit will void the 
member's eligibility to receive an accommodation under the rule. Each 
member is also required to maintain books and records that detail the 
nature and amount of Customer Compensation and Covered Proprietary 
Losses. Nasdaq, through FINRA, its regulatory services provider, will 
examine the accuracy of member's attestation at a later date.
    Rule 4626(b)(3)(G) provides that accommodation payments will be 
made in two tranches of priority:
    (i) First, if a member has provided Customer Compensation, the 
member will receive an amount equal to the lesser of the Member's Share 
or the amount of Customer Compensation. For example, if a Member's 
Share was $1 million, and the member had paid, or had committed to pay, 
compensation to its customers of at least $1 million, the member's 
expected accommodation would be $1 million. On the other hand, if the 
Member's Share was $1 million, but the member had paid, or committed to 
pay, only $500,000 in compensation to its customers, the member's 
accommodation in the first tranche would be only $500,000.
    (ii) Second, the member will receive an amount with respect to 
Covered Proprietary Losses; provided, however, that the sum of payments 
to a member under the rule shall not exceed the Member's Share. If a 
member had both Covered Proprietary Losses and losses associated with 
customer business, it may receive distributions under both tranches. 
For example, if a Member's Share was $1 million, the member had 
$300,000 in Covered Proprietary Losses, and the member had provided 
$300,000 in Customer Compensation, the member's expected accommodation 
would be $600,000 in total. Alternatively, if the member had $300,000 
in Covered Proprietary Losses and had provided $700,000 or more in 
Customer Compensation, the member's expected accommodation would be $1 
million.
    Rule 4626(b)(3)(G) further provides that in the event the amounts 
calculated under the tranches exceed the maximum accommodation pool of 
$62 million, amounts paid would be prorated in accordance with the 
formula described in the rule. Because the total amount of valid claims 
as determined by FINRA does not exceed $62 million, Nasdaq expects to 
pay both tranches simultaneously without proration of claims.
    One notable issue that arose in the application of the Rule to 
certain claims was the appropriate treatment of claims for orders 
entered into Nasdaq under a sponsored access arrangement. Rule 
4626(b)(3)(A) provides that ``the term `customer' shall be construed to 
include any unaffiliated entity upon whose behalf an order is entered, 
including any unaffiliated broker or dealer.'' Nasdaq rules permit the 
existence of sponsored access arrangements, but require oversight by 
the sponsor, which is required to be a member. See Nasdaq Rule 4611(d). 
An order entered under a sponsored access arrangement is entered 
through an MPID belonging to the sponsor, even though it originates 
from the sponsoree. Thus, the order may be construed as being entered 
by the sponsor on behalf of the sponsoree, causing the sponsoree to fit 
within the definition of ``customer.'' A claim with respect to orders 
entered under a sponsored access arrangement would be paid to the 
sponsor, subject to its certification that it would provide the funds 
as Customer Compensation to the sponsoree.\14\
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    \14\ For Category IV claims, if the sponsoree itself had 
customer(s) permitted to cancel order(s) prior to 1:50 p.m., and the 
sponsoree in fact submitted a cancellation to NASDAQ prior to 1:50 
p.m., the claim would be construed as valid. This fact pattern did 
not occur in any of the filed claims, however.
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    Rule 4626(b)(3)(H) provides that final payment of any accommodation 
payment is 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 FB IPO Cross or to any actions or 
omissions related in any way to that Cross, including but not limited 
to the execution or confirmation of orders in FB on May 18, 2012. 
Failure to provide the release within 14 days after the effective date 
of this proposed rule change (i.e., by December 23, 2013) will void the 
member's eligibility to receive an accommodation under the Rule. The 
release also includes an attachment whereby the claimant may provide 
Nasdaq with payment instructions. Nasdaq will pay all valid claims in 
accordance with the payment instructions provided, immediately upon the 
expiration of the 60-day time period during which this filing is 
subject to suspension by the Commission. By its terms, the release will 
be effective on the date on which payment to the member is provided in 
accordance with the payment instructions provided.
    This proposed rule change is not intended to and does not affect 
the limitations of liability set forth in Nasdaq's agreements or SEC-
sanctioned rules,\15\ or those limitations or immunities that bar 
claims for damages against Nasdaq as a matter of law. Rather, they 
reflect Nasdaq's determination to implement a fair and equitable 
accommodation policy that takes into account the impacts of Nasdaq's 
system issues on the investing public and members.
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    \15\ Notably, the Commission has repeatedly determined that 
rules limiting SRO liability, such as Rule 4626(a), are consistent 
with the Act. See, e.g., BATS Exchange and BATS-Y Exchange Rules 
11.16; C2 Options Exchange Rule 6.42; CBOE Options Exchange Rule 
6.7; CME Rule 578; EDGA and EDGX Rules 11.12; ISE Rule 705; NASDAQ 
OMX PHLX Rule 3226; NASDAQ OMX BX Rule 4626; NYSE Rules 17 and 18; 
NYSE MKT Rule 905NY; NYSE Arca (Options) Rule 14.2; NYSE Arca 
(Equity) Rule 13.2; One Chicago Rule 421.
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2. Statutory Basis
    Nasdaq believes that the accommodation proposal is consistent with 
Section 6(b) of the Act \16\ in general, and furthers the objectives of 
Section 6(b)(5) of the Act \17\ in particular, because the proposal is

[[Page 77545]]

designed to promote just and equitable principles of trade, 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. In the Approval Order, the Commission found that Rule 
4626(b)(3) is consistent with the Act because it ``sets forth objective 
and transparent processes to determine eligible claims and how such 
claims would be paid to Nasdaq members that elect to participate in the 
accommodation plan.'' The Commission further determined that providing 
compensation pursuant to the rule would be in the public interest and 
that the rule would encourage members to compensate their customers. 
Similarly, Nasdaq believes that this proposed rule change is consistent 
with the Act because it will allow Nasdaq to accomplish the approved 
objectives of the Rule 4626(b)(3) through final payment of eligible 
claims. As described above, FINRA, in its role as a neutral third 
party, has conducted an exhaustive analysis of submitted claims, 
measuring relevant data against the rule's objective benchmarks to 
ascertain the value of each member's claims, and Nasdaq has reviewed 
and concurs in FINRA's analysis. Based on this analysis, and subject to 
completion by claimants of the remaining conditions to payment, Nasdaq 
will be able to pay the full amount of valid claims immediately upon 
the expiration of the 60-day time period during which this filing is 
subject to suspension by the Commission.
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    \16\ 15 U.S.C. 78f(b) (setting forth the prerequisites for 
registration as a national securities exchange).
    \17\ 15 U.S.C. 78f(b)(5) (requiring that an exchange's rules be 
``designed 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, or 
to regulate by virtue of any authority conferred by this chapter 
matters not related to the purposes of this chapter or the 
administration of the exchange'').
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq believes that the proposed rule change will not impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. Specifically, the proposed rule 
change does not relate to the provision of goods or services, nor does 
it impose regulatory restrictions on the ability of members to compete. 
Accordingly, the change does not affect competition in any respect.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A)(ii) of the Act \18\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\19\ At any time within 60 
days of the filing of the proposed rule change, the Commission 
summarily may temporarily suspend such rule change if it appears to the 
Commission that such action is: (i) Necessary or appropriate in the 
public interest; (ii) for the protection of investors; or (iii) 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or disapproved.
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    \18\ 15 U.S.C. 78s(b)(3)(a)(ii).
    \19\ 17 CFR 240.19b-4(f)(6).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. 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-2013-152 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-2013-152. 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 proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change 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 20549-1090, on official business days between the hours 
of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be 
available for inspection and copying at the principal offices 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-2013-152, and should be submitted on or before January 13, 2014.
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    \20\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-30448 Filed 12-20-13; 8:45 am]
BILLING CODE 8011-01-P


