Regulation SHO

A representative enters a short sale order for a customer without the firm having reasonable grounds to believe the security can be borrowed for delivery. What Regulation SHO requirement does this implicate?

1. A.This implicates Rule 203's locate requirement, and the principal must ensure a proper locate is obtained before the order is acceptedCorrect. Rule 203 requires reasonable grounds to believe the security can be borrowed before accepting or effecting a short sale, not merely by settlement.
2. B.Nothing, since locate requirements apply only to market maker short salesWrong. The locate requirement is not limited to market maker transactions; it generally applies to short sale orders broadly, subject to specific exceptions.
3. C.Nothing, as long as the security is not on a threshold securities listWrong. The general locate requirement under Rule 203 is not limited only to securities on a threshold list; that list relates to additional close-out requirements.
4. D.Nothing, since the borrow only needs to be arranged before settlement date, not before the order is acceptedWrong. Reg SHO's locate requirement generally applies before the short sale order is accepted or effected, not merely by settlement.

Why: Rule 203 of Regulation SHO generally requires a firm to have reasonable grounds to believe a security can be borrowed and delivered by settlement date before accepting or effecting a short sale order -- the "locate" requirement. The principal must ensure this locate is obtained before the order is accepted, not after.

A trader enters a sell order but marks it as "long" when the trader's account does not actually own the security being sold. What is the concern under Rule 200 of Regulation SHO?

1. A.None, as long as the trader intends to cover the position before settlementWrong. Intent to cover later does not make an inaccurate marking of the order's current status acceptable.
2. B.None, because marking requirements apply only to institutional accountsWrong. Rule 200's marking requirements are not limited to institutional accounts.
3. C.None, since order marking is an administrative detail with no substantive compliance impactWrong. This understates the significance of order marking, which is foundational to how Reg SHO's other requirements are applied.
4. D.This is an inaccurate order marking under Rule 200 and must be treated as a serious compliance violationCorrect. Rule 200 requires accurate marking of orders as long, short, or short exempt based on the seller's actual position.

Why: Rule 200 requires orders to be properly marked as long, short, or short exempt based on the seller's actual position. Marking a sale as long when the account does not own the security is an inaccurate order marking, which the principal must treat as a serious compliance violation, not a minor clerical error.

A market maker engaged in bona fide market making activity in a security enters a short sale as part of that activity. Does the market maker automatically bypass Regulation SHO's locate requirement simply because it is acting as a market maker?

1. A.Yes, but only for market makers in exchange-listed securitiesWrong. This invents a distinction based on listing status that is not the relevant basis for how market making provisions apply.
2. B.Yes, bona fide market makers are entirely exempt from all Regulation SHO requirementsWrong. This overstates the exemption; market maker status does not eliminate all locate-related obligations without confirming how specific provisions apply.
3. C.Not automatically -- the principal must confirm how the specific activity and applicable provisions actually apply, rather than assume a blanket exemptionCorrect. Market maker status is relevant to certain Reg SHO provisions but does not automatically eliminate all locate-related obligations without confirmation.
4. D.No, market makers are subject to identical locate requirements as any other short seller in every respectWrong. This overstates the opposite extreme; Reg SHO does include provisions specifically relevant to bona fide market making that must be properly applied.

Why: Not automatically. While Regulation SHO includes certain provisions relevant to bona fide market making activity, the principal cannot assume market maker status alone eliminates all locate-related obligations without confirming how the specific activity and applicable provisions actually apply.

A security experiences a significant intraday price decline that triggers Regulation SHO's short sale price test restriction. A trader continues accepting and executing short sale orders for the security at prices at or below the current national best bid, without applying the restriction. What is the concern?

1. A.There is no concern, since the price test restriction only applies to the specific order that caused the triggering decline.Wrong. Once triggered, the restriction applies to short sale orders generally for the remainder of the period, not only to the triggering order.
2. B.Once triggered, short sale orders generally may not be executed at or below the current national best bid, and the desk failed to apply that restriction.Correct. The triggered price test restriction actively limits where short sale orders may be executed.
3. C.The concern only applies if the customer placing the short sale orders was aware the restriction had been triggered.Wrong. The restriction applies to the orders themselves once triggered, regardless of the customer's awareness.
4. D.The restriction only applies to market maker accounts, not customer short sale orders.Wrong. The triggered price test restriction applies broadly to short sale orders, not only to market maker accounts.

Why: Once the short sale price test restriction is triggered for a security, short sale orders generally may not be executed at or below the current national best bid for the remainder of that period; continuing to execute short sales at or below the bid without applying the restriction fails to comply with the triggered requirement.