SEC Grants Temporary Relief From Delivery of Physical Security Under Short Sale Rules

The SEC is temporarily exempting the securities industry from complying with certain requirements related to the sale and delivery of physical securities under short sale rules in Regulation SHO because of ongoing concerns related to COVID-19, a highly contagious respiratory disease caused by a novel coronavirus.

In order to contain the virus, many states have ordered lockdowns, leading many businesses and organizations to either suspend some operations or have employees work from home in the spring. Since then the restrictions have been eased.

Reg SHO established “locate” and “close-out” standards that are largely intended to prevent stock traders from engaging in naked short selling. Naked shorting is when a stock is traded without first borrowing the security or before making sure that the security can be borrowed.

The commission is providing certain exemptive relief from the locate and close-out requirements in Release No. 34-89659, Order Granting Exemptions from Certain Rules Related to the Sale and Delivery of Physical Securities under Regulation SHO Related to COVID-19, issued on Aug. 25, 2020.

The exemptive order expires on Dec. 31, 2020.

In explaining the exemption, the SEC said that the clearinghouse, Depository Trust & Clearing Corporation (DTCC), has intermittently suspended physical securities processing services by its subsidiary, Depository Trust Company (DTC), because of COVID-19 related safety and health concerns.

The DTCC has resumed limited services for new physical securities transactions, but the SEC said that there are likely to be delays in settlement for the sales of stocks that the seller is “deemed to own” under Rule 200(b) of Reg SHO, and for which settlement depends on the delivery of physical certificates. This may result in extended failures to deliver.

Rule 200(g) requires brokers to mark all sell orders as “long,” “short,” or “short exempt.”

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