Both the SEC and FINRA recently released their 2019 Examination priorities, (available here and here) highlighting primary areas of focus for 2019. While there are no surprises, there are some items that have a unique twist that warrant attention. In this post we provide an overview of the regulators focus on Reg SHO and short selling.
Both regulators will continue to focus on aspects of Reg SHO compliance. FINRA will be focused on the exception to the netting required in Rule 200(c). Rule 200(c) states that a person shall be deemed to own securities only to the extent that he has a net long position in such securities. Rule 200(f) grants an exception to the netting requirement by allowing broker-dealers to break into independent aggregation units for purposes of determining the trading unit’s net position. To take advantage of the exception, broker-dealers must demonstrate four criteria to establish separateness and independence. Of note, only broker-dealers can rely on 200(f). During the adoption of Reg SHO Rule 200, commenters requested that the SEC extend the relief beyond broker-dealers, and the SEC declined to do so, stating that the lack of oversight by a self-regulatory organization might facilitate the creation of units that are not truly independent or separate. The SEC will be looking at Reg SHO compliance more broadly in the context of microcap securities.
FINRA is also focused on Exchange Act Rule 14e-4, the short tender rule. Specifically, FINRA will be reviewing how firms account for their options positions when tendering shares in the offer. Of note, a firm should carefully review the language of Rule 14e-4 and calculate its net position consistent with the rules requirements. There have been some firms that have attempted to use their net position calculation in the Reg SHO context for Rule 14e-4 compliance. The net position calculations are different and often lead to different outcomes.
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