Regulation SHO: Recent Actions Appear to Have Initially Reduced Failures to Deliver, but More Industry Guidance Is Needed
Highlights
The Securities and Exchange Commission (SEC) adopted Regulation SHO to, among other things, curb the potential for manipulative naked short selling in equity securities. Selling a security short without borrowing the securities needed to settle the trade within the standard 3-day period, can result in failures to deliver (FTD), and can be used to manipulate (drive down) the price of a security. To further address this concern, SEC recently issued an order amending Regulation SHO. This report (1) provides an overview of Regulation SHO and related SEC actions, (2) discusses regulators' and market participants' views on the effectiveness of the rule, and (3) analyzes regulators' efforts to enforce the rule. To address these objectives, GAO reviewed SEC rules and draft industry guidance, analyzed FTD data, reviewed SEC and self-regulatory organization (SRO) examinations, and interviewed SEC and SRO officials and market participants.
Recommendations
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| United States Securities and Exchange Commission | To address the current information gap in Regulation SHO for prime brokerage arrangements and mitigate the impact of any unintended consequences caused by SEC rules, as well as ensure consistent implementation of SEC rules by the industry, the Chairman of the Securities and Exchange Commission should finalize, in an expedited manner upon finalization of the temporary rule, the revised 1994 Prime Broker Letter. |
As of January 27, 2021, the revised Prime Broker letter has not been finalized. As this letter is a no-action letter, it must be prepared by industry representatives and submitted to SEC staff. SEC staff from the Reg SHO team in SEC's Trading and Markets division have followed up regularly with industry representatives over the years encouraging them to submit the letter, but the industry has not done so. Industry representatives confirmed with GAO staff in September 2020 that they have had periodic discussions with SEC staff regarding the no-action letter. They have not indicated a timeframe for submitting the letter in response to GAO's inquiry.
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| United States Securities and Exchange Commission | To address the current information gap in Regulation SHO for prime brokerage arrangements and mitigate the impact of any unintended consequences caused by SEC rules, as well as ensure consistent implementation of SEC rules by the industry, the Chairman of the Securities and Exchange Commission should develop a process that allows Commission staff to raise and resolve implementation issues that arise from SEC regulations, including interim final temporary rules, in a timely manner. |
Trading and Markets staff finalized a memorandum on 9/25/2013 that details a process that allows Trading and Markets staff to raise and resolve implementation issues and other concerns that arise from SEC regulations, including interim rules, in a timely manner. This process was developed in consultation with the Office of the Chairman, and the Commission approved it.
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