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 jacob.bunge@dowjones.com
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