Regulatory Notice 08-38

FINRA Provides Clarification on SEC Guidance Regarding Emergency Orders Concerning Short Selling

On July 15, 2008, the Securities and Exchange Commission (SEC) issued an Emergency Order concerning short selling and on July 18, 2008, issued an Amendment to Emergency Order (Orders). On July 18, 2008, the SEC staff of the Division of Trading and Markets issued Guidance Regarding the Commission's Emergency Order Concerning Short Selling (Guidance). The Orders and Guidance address the naked short selling of 19 public companies.

In part, the Orders provided that "no person may effect a short sale in these securities using the means or instrumentalities of interstate commerce unless such person or its agent has borrowed or arranged to borrow the security or otherwise has the security available to borrow in its inventory prior to effecting such short sale and delivers the security on settlement date." Questions have arisen as to how to document and operationally handle these pre-borrows, especially in light of the possession and control requirement under Securities Exchange Act (SEA) Rule 15c3-3.

This Regulatory Notice explains that when using pre-borrowed shares to make delivery on a short sale of a security covered by the Orders, the firm must clearly document the link between the borrow, the short sale and the related delivery, so as to demonstrate that it has not otherwise violated possession or control requirements of SEA Rules 15c3-3(b) and (d). Failure to follow these steps will likely cause violations of the Orders or SEA Rule 15c3-3.

Questions regarding this Notice should be directed to Yui Chan, Managing Director, Risk Oversight & Operational Regulation, at (646) 315-8426.