5 Things Your Firm Can do Now to Protect Against Reg SHO Fines

Significant Reg SHO fines handed down by FINRA demonstrate the urgency for firms to review their Reg SHO policies, procedures and surveillance. Although the “Close-Out” requirement has been a focus, Marking requirements (Rule 200) and Locate requirements (Rule 203) have also been the source of recent fines.

Regulatory Background

The SEC launched Reg SHO in 2005, and the regulation has updated the multiple times since to eliminate certain exceptions, strengthen certain requirements and reintroduce the price test restriction.

Reg SHO has four general requirements:

• Rule 200: Marketing Requirements
• Rule 201: Short Sale Price Test Circuit Breaker
• Rule 203(b)(1) and (2): Locate Requirement
• Rule 204: Close Out Requirement

Rule 204, “requires firms to take affirmative action to close out ‘failure to deliver’ positions resulting from short sales in equity securities by borrowing or purchasing the securities by the beginning of regular trading hours the day after the settlement date. Limit orders or other delayed orders do not satisfy the close-out requirement.”

FINRA has specifically called out firms for their failure to comply with the close-out provision and concurrently addresses deficiencies with firm’s supervision, written supervisory procedures and supervisory systems.

What your firm should be doing:

• Review all written supervisory procedures relating to Reg SHO and determine if they reflect your firm’s business model, risks and controls
• Remediate gaps in your procedures
• Confirm “locates” are properly secured and documented
• Implement surveillance applications to ensure all close-out procedures are being executed as prescribed in the procedures
• Review and test any internal or third-party applications surveilling these activities

Regulations like Reg SHO, designed to protect the marketplace and its clients, continue to be enforced. Oyster’s trade supervision and execution experts will review your procedures, assess your risks and test your controls. Leverage our experience and get peace of mind knowing you have the proper testing, documentation and programs in place.