Broker-Dealers Urge No Immunity for Nasdaq in Facebook IPO

   By Jacob Bunge 
 

Nasdaq OMX Group Inc. (NDAQ) shouldn't be afforded legal protections enjoyed by exchanges in connection with its mishandling of the Facebook Inc. (FB) stock-market debut, according to a trade group representing banks and financial institutions.

The New York-based exchange company was acting in its capacity as a for-profit concern--rather than as a regulatory entity--when it confronted problems with the eagerly anticipated opening of trading in Facebook shares on May 18, according to a letter sent to regulators by the Securities Industry and Financial Markets Association.

Stock exchanges in the U.S. enjoy legal shields against lawsuits from member firms seeking to recoup losses suffered due to exchange system outages. The limited liability is tied to exchanges' historic function as regulatory bodies, enforcing rules for their markets and listed companies.

Such protections are seen providing a robust defense for Nasdaq OMX as Wall Street firms, which suffered some $500 million in trading losses during Facebook's marred flotation. Some firms, including Citigroup Inc. (C) and Credit Suisse (CS), have suggested that such status should be reconsidered given exchange companies in the past decade have largely converted to for-profit entities set on securing revenues. Meanwhile, some regulatory functions have been shifted to the Financial Industry Regulatory Authority, and independent agency.

In its letter to the Securities and Exchange Commission, which is weighing Nasdaq OMX's proposal for a $62 million compensation package for damaged members, Sifma said Nasdaq OMX has a "commercial objective" to earn money from trading and listing fees.

"In SIFMA's view, Nasdaq's actions in connection with the Facebook IPO were solely in its role as a market participant, not as a market regulator, because Nasdaq's purpose in competing for the Facebook listing, serving as Facebook's primary exchange, and opening trading in the Facebook IPO was to further its business objectives as a for-profit corporation," wrote Theodore Lazo, a lawyer for Sifma, in the letter. It was submitted to the SEC on Wednesday.

A spokesman for Nasdaq OMX declined comment.

Courts have afforded such legal protections to exchanges "only because they 'stand in the shoes' of the [SEC] to perform a variety of functions that would otherwise be performed by the Commission," Mr. Lazo wrote.

Sifma, in the letter, took no position on whether or not Nasdaq OMX's plan would make up enough of firms' losses stemming from the Facebook IPO. Should the SEC approve Nasdaq OMX's proposed payout package, Sifma asked that regulators not make any legal determination regarding the company's role in the Facebook IPO, according to the group's letter.

Write to Jacob Bunge at [e-mail]

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