§ 242.203 — Borrowing and delivery requirements.

(a) Long sales.

If a broker-dealer knows or has reasonable grounds to believe that the sale of an equity security will be executed pursuant to an order marked "long," the broker-dealer shall make delivery when due; and if such delivery is not made, the broker-dealer shall take action to close out the fail-to-deliver position in the security by purchasing like-kind securities of like quantity. See also Rule 204 below for the general close-out framework.

(b) "Locate" requirement for short sales.

(1) General.

A broker or dealer may not accept a short-sale order in an equity security from another person, or effect a short sale in an equity security for its own account, unless the broker or dealer has:

- (i) Borrowed the security, or entered into a bona-fide arrangement to borrow the security; or - (ii) Reasonable grounds to believe that the security can be borrowed so that it can be delivered on the date delivery is due; and - (iii) Documented compliance with this paragraph (b)(1).

(2) Exceptions.

The locate requirement does not apply to:

- (i) Short sales by a broker or dealer in connection with bona-fide market making activity in the security for which the short sale is effected; - (ii) Short sales effected by a broker or dealer for an account of a registered market maker, subject to the same bona-fide market-making condition; or - (iii) Short sales executed pursuant to specific exceptions set forth elsewhere in Regulation SHO or in Commission interpretive guidance.

"Bona-fide market making" does not include transactions engaged in by a broker-dealer that is ostensibly a market maker but whose activities do not reflect an intent to provide liquidity on a regular basis in the security being shorted.

(3) Documentation.

The broker-dealer must document, for each short-sale order, the identity of the source of the locate and the number of shares that were located. The documentation must be in a form reasonably accessible to the broker-dealer's supervisory and audit personnel and must be retained in accordance with § 240.17a-4.

"Easy-to-borrow" and "hard-to-borrow" lists maintained by the broker-dealer may, if reasonably current (i.e., typically updated no less than daily to reflect market conditions), be used to support a reasonable-grounds determination under paragraph (b)(1)(ii). The broker-dealer remains responsible for monitoring the lists and for updating them as appropriate.