Regulation SHO — Short Sales

Regulation SHO governs short sales of equity securities. It establishes:

1. Definitions used throughout the short-sale regulatory framework (Rule 200); 2. Order-marking requirements (Rule 200(g)); 3. The "locate" requirement (Rule 203(b)(1)); 4. Long-sale documentation (Rule 200(g), Rule 203); 5. Close-out requirements for fail-to-deliver positions (Rule 204); and 6. The alternative uptick rule for circuit-breaker-triggered securities (Rule 201 — not reproduced in this excerpt but noted below).

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§ 242.200 — Definition of "short sale" and marking requirements.

(a) The term "short sale."

A "short sale" means any sale of a security which the seller does not own or any sale which is consummated by the delivery of a security borrowed by, or for the account of, the seller.

(b) A person is deemed to own a security only to the extent that:

1. The person has title to it; 2. The person has purchased, or has entered into an unconditional contract, binding on both parties, to purchase it, but has not yet received it; 3. The person owns a security convertible into or exchangeable for it and has tendered such security for conversion or exchange; 4. The person has an option to purchase or acquire it and has exercised such option; 5. The person has rights or warrants to subscribe to it and has exercised such rights or warrants; or 6. The person holds a security futures contract to purchase it and has received notice that the position will be physically settled and is irrevocably bound to receive the underlying security.

(c) Net-long position.

A person shall be deemed to own securities only to the extent that the person has a net long position in such securities.

(d) Aggregation unit.

A broker-dealer shall be deemed to own a security, for purposes of paragraphs (a) through (c), if the security is held in any aggregation unit of the broker-dealer and the broker-dealer satisfies the requirements of paragraph (f). Aggregation units allow a broker-dealer to track ownership of a security on a unit-by-unit basis, rather than firm-wide.

(e) [Reserved.]

(f) Aggregation unit conditions.

For purposes of paragraph (d), an aggregation unit is a trading unit within a broker-dealer that meets all of the following conditions:

1. The aggregation unit has a well-defined and identifiable trading objective or strategy; 2. The aggregation unit maintains its positions separately from other aggregation units; 3. The supervision and the trading activity of the aggregation unit are conducted by individuals who are independent of the trading activity in other aggregation units; and 4. The broker-dealer maintains, and enforces, written policies and procedures documenting the structure and operation of each aggregation unit, including the internal controls used to identify and track positions within the aggregation unit.

(g) Order marking.

A broker or dealer must mark all sell orders of any equity security as "long," "short," or "short exempt":

1. "Long" — the seller is deemed to own the security under paragraphs (a) through (f) and, in the case of a broker-dealer, the security is held by the broker-dealer or is reasonably expected to be in the possession or control of the broker-dealer by settlement date; or, if the security is not then in the possession or control of the broker-dealer, the seller has a documented right to receive delivery. 2. "Short" — the seller is not deemed to own the security under paragraphs (a) through (f). 3. "Short exempt" — the order meets one of the narrow exceptions to the alternative uptick rule of Rule 201 (e.g., certain bona fide market making, odd-lot transactions, or riskless-principal transactions in which the unmarked component is a qualified customer long sale).

Long-sale documentation.

A broker-dealer must, before executing a sale order marked "long," either:

1. Have possession or control of the security; or 2. Have reasonably located the security in the customer's possession or control or in the broker-dealer's inventory or in the omnibus account of another broker-dealer with which the selling broker-dealer has a reasonable arrangement, and reasonably determined that such security will be available by settlement date.