Friday, October 25, 2013

Equity Trader Alert #2013 - 100
Completion of FINRA’s Analysis of Submitted Claims Pertaining to Facebook IPO

What is happening?

The Market Regulation Department of the Financial Industry Regulatory Authority (FINRA) has completed its assessment of all claims submitted by members of The NASDAQ Stock Market LLC (NASDAQ^®) under NASDAQ Rule 4626(b)(3), which pertains to the initial public offering (IPO) of Facebook, Inc. (FB) on May 18, 2012.

In the coming days, members that submitted claims will be receiving the FINRA staff analysis, which details the value of each member's claim (referred to herein and in Rule 4626(b)(3) as the "Member's Share").

NASDAQ has reviewed and accepts FINRA's assessment.

What claims are covered by the accommodation program?

Rule 4626(b)(3) covers the following categories of orders:

• Category I: SELL Cross orders submitted between 11:11 a.m. and 11:30 a.m. on May 18, 2012, priced at $42.00 or less, and that did not execute.
• Category II: SELL Cross orders submitted between 11:11 a.m. and 11:30 a.m. on May 18, 2012, priced at $42.00 or less, and that executed at a price below $42.00.
• Category III: BUY Cross orders priced at exactly $42.00 executed in the Cross but not immediately confirmed.
• Category IV: BUY Cross orders priced above $42.00 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.

What are the results of FINRA's analysis?

FINRA has determined the total value of valid submitted claims is $41,610,983.73. Accordingly, this will be the maximum amount payable under Rule 4626 with respect to the FB IPO.

For several reasons, this amount is less than the maximum accommodation pool of $62 million provided for in the rule. First, 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. Second, FINRA has determined that claims with respect to certain orders did not satisfy the requirements of the rule. Notably, in many instances, claims for compensation under Category III did not satisfy the rule because the member did not buy additional shares while awaiting confirmation, 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, in the case of Category III and Category IV claims, other actions by the member (i.e., duplicative BUYS or customer cancellations) are required for harm to exist. In conducting its analysis, FINRA fully evaluated claims to determine whether the member took such actions. Because many did not, FINRA determined that certain orders in the Cross did not actually provide a basis for a claim.

What information are members required to provide to receive accommodation?

NASDAQ Rule 4626(b)(3) provides that, in order for a member to receive accommodation thereunder, the member must submit to NASDAQ:

• 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 FB on May 18, 2012 ("Customer Compensation") and (ii) 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 ("Covered Proprietary Losses"). In the case of member firms that provided sponsored access, the sponsored firm is considered to be a customer for purposes of Attestation.
• 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 Facebook, Inc. on May 18, 2012.

Claimants with valid claims will be receiving copies of the required Attestation and Release, along with the analysis of their claims.

NASDAQ will be submitting to the Securities and Exchange Commission (SEC) a filing that provides a report on the results of the analysis of FINRA staff of claims filed under NASDAQ Rule 4626(b)(3) with respect to the FB IPO. After the filing becomes effective, members seeking accommodation will have seven (7) days to submit their Attestation and fourteen (14) days to submit their Release. Failure to submit the required documents within the required timeframes will void eligibility to receive accommodation.

Where must I send the required Attestation and Release documentation?

NASDAQ has established a dedicated email address for sending the executed Attestation and Release: IPOaccommodations@nasdaqomx.com.

The Release also contains a page to provide wire instructions. Following receipt of the Attestation and Release, payment of valid claims will be made in accordance with these wire instructions sixty (60) days following the effective date of the SEC filing. The delay is necessary because the SEC may suspend a rule change at any time within 60 days of its filing. By its terms, the Release will also be effective at that time.

Where can I find updates on the process?

NASDAQ will send updates to eligible claimants, and post alerts on NASDAQTrader.com, to let claimants know when the SEC filing becomes effective and the date of final deadlines for submission of the Attestation and the Release. Members are encouraged to submit their Attestation and Release in advance of the final deadline.

What if my claim is deemed ineligible for accommodation?

Some members will be receiving notification that FINRA staff has determined that their claims are not eligible for accommodation under the terms of Rule 4626, or that not all of their submitted claim is eligible. However, if a firm submitted FB orders to NASDAQ through another NASDAQ member that is receiving accommodation under Rule 4626, the other NASDAQ member may be obligated to provide compensation to the originating firm, as its customer. Accordingly, if a firm is in the position of having submitted orders through another member, the firm should contact that member.

Who should I contact if I have questions?

All questions should be directed to Christopher Cull, NASDAQ OMX Office of the General Counsel, at +1 301 978 8492.

Where can I find additional information?

Please reference ETA #2013-20.