Facebook IPO Aftermath: Nasdaq-FINRA Relationship Faces Scrutiny

By David Cohen 

Nasdaq continues to catch heat for its role in Facebook’s troubled initial public offering, but the glare is starting to shine on the Financial Industry Regulatory Authority, as well.

Reuters reported that the relationship between the exchange and the regulator is being called into question on Wall Street due to Nasdaq asking FINRA to review its proposed payouts to traders and investors to make good for its technical issues when the Facebook IPO launched May 18.

Traders are seeking at least $115 million to cover investor delays due to Nasdaq’s delays in processing orders for Facebook shares, while the exchange countered with an offer of $40 million.

Wall Street sources told Reuters FINRA should have declined Nasdaq’s request, pointing out that Nasdaq pays FINRA fees to be regulated, and that the relationship between the two organizations is “heavily conflicted,” going back to when Nasdaq was owned by FINRA’s predecessor, the National Association of Securities Dealers.

The sourced also pointed out that FINRA is a Nasdaq customer, as it uses the exchange’s technology to operate a unit that provides various trade and quote data to brokerages so that they can comply with reporting rules, and Nasdaq subleases roughly 115,000 square feet of its downtown New York headquarters space from FINRA.

Nasdaq would not comment on the potential conflict of interest, but FINRA Spokeswoman Nancy Condon told Reuters:

(FINRA’s review is a) natural extension of the services we provide to Nasdaq under our regulatory agreement. We make decisions every day that could have an impact on Nasdaq.

George Brunelle, a New York-based lawyer who advises brokerages, told Reuters FINRA should not conduct the review, adding:

It doesn’t pass the smell test. The Securities and Exchange Commission is fully qualified to handle this thing on its own, and it should.

James Angel, associate professor of finance at Georgetown University, provided a counterpoint to Reuters, saying that the SEC’s involvement and the fact that nearly “every law firm in the industry is gearing up for litigation,” and adding, “FINRA is such a major player in the industry, it would be very hard for them not to be involved.”

Readers: Do you think there is a conflict of interest between Nasdaq and FINRA?