United States: SEC Makes Permanent Rule 204 Close-Out Requirements; Form SH Short Sale And Short Position Disclosure Requirements To Cease

This article was originally published 31 July, 2009

On July 27, 2009, the Securities and Exchange Commission ("SEC") issued a release ("Release") making permanent the close-out requirements of former interim final temporary Rule 204T, which are intended to address "naked" short selling and "fails to deliver" ("FTDs") in all equity securities. Rule 204 continues, largely unchanged, the prior requirements of Rule 204T to close-out FTD positions that result from either long sales or short sales. In other words, clearing firm participants ("Participants") are required to borrow or purchase securities if they have FTD positions. Rule 204, which is effective July 31, 2009, generally requires the following:

• FTDs Resulting From Short Sales - Participants are generally required to close-out FTD positions resulting from short sales by borrowing or purchasing securities, by no later than the beginning of regular trading hours (9:30), on the settlement day following the regular settlement date (T+4).
• FTDs Resulting From Long Sales And Bona-Fide Market Making Sales – Participants are generally required to close-out FTD positions resulting from long sales and bona-fide market making sales by registered market makers by purchasing or borrowing securities, by no later than the beginning of regular trading hours (9:30),on the third consecutive settlement day following the regular settlement date (T+6).
• Borrow Or Arrange To Borrow Requirements - To the extent that a Participant is not able to comply with the above close-out requirements, the Participant, and any broker-dealer from which it receives trades for clearance and settlement, is unable to effect further short sales in the particular security without first borrowing or arranging to borrow the security, until the FTD position is closed-out by the Participant purchasing securities, and such purchase has settled.
• Extension For Sales Of "Owned" Securities – If the Participant's FTD position results from a sale of a security that a person is deemed to "own," as defined under Regulation SHO, and such person intends to make delivery as soon as all restrictions on delivery have been removed, then the Participant is not required to close-out such FTD position until the 35th consecutive calendar day following the trade date for the sale.

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This article has been prepared by Sidley Austin LLP for informational purposes only and does not constitute legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Readers should not act upon this without seeking professional counsel.

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