Keeping an eye on the SHO

By: Ray Pellecchia

File Under: NYSE

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More news on the reg front:

NYSE Regulation, Inc. announced it has censured and fined Daiwa Securities America Inc. (“DSA”), Goldman Sachs Execution & Clearing, L.P. (“GSEC”), Citigroup Global Markets, Inc. (“CGMI”), and Credit Suisse Securities (USA) LLC (“CS”), each a member firm, for operational deficiencies and supervisory violations concerning Regulation SHO. The scale of the violations resulted in fines ranging from $400,000 to $250,000.

Additional excerpt from the press release:

“Regulation SHO is an important federal securities rule meant to protect the market and investors from short sale abuses,” said Susan L. Merrill, Chief of Enforcement, NYSE Regulation. “As these cases demonstrate, firms that fail to enact effective procedures and systems by the compliance date threaten to undermine the important policies served by this rule.”

The U.S. Securities and Exchange Commission adopted Regulation SHO (“Reg. SHO”) effective September 7, 2004 in connection with the sales of equity securities. Among other things, Reg. SHO was designed to establish uniform locate and buy-in requirements in order to address problems associated with failures to deliver. The Member Firm Regulation Division of NYSE Regulation (“MFR”) first detected the violations at each firm during special examinations conducted within six months of January 3, 2005, the date for compliance with Reg. SHO. MFR referred its findings to the Division of Enforcement for further investigation.

A “failure to deliver” occurs when a seller does not deliver the securities by the settlement date. Reg. SHO attempts to reduce the number of potential “failures to deliver” by, among other things, the application of a “locate” requirement. Prior to effecting a short sale, a broker-dealer must obtain a “locate” by borrowing the security, entering into an arrangement to borrow, or having reasonable grounds to believe that the security can be borrowed and delivered by settlement date.

Reg. SHO also limits the time in which a broker-dealer can permit “failures to deliver” to persist in securities in which a substantial number of fails have occurred (“threshold securities”) by requiring a broker-dealer to “buy-in” the securities in the open market in order to make the required delivery. The NYSE and other self-regulatory organizations daily disseminate a list of threshold securities.