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Report to Congressional Requesters: 

United States Government Accountability Office: 
GAO: 

May 2009: 

Regulation SHO: 

Recent Actions Appear to Have Initially Reduced Failures to Deliver, 
but More Industry Guidance Is Needed: 

GAO-09-483: 

GAO Highlights: 

Highlights of GAO-09-483, a report to congressional requesters. 

Why GAO Did This Study: 

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. 

What GAO Found: 

To address FTD and curb the potential for manipulative naked short 
selling in equity securities, Regulation SHO required broker-dealers to 
(1) locate securities available for borrowing before effecting short 
sales in that security and (2) close out FTD lasting ten consecutive 
settlement days in securities for which a substantial number of FTD 
accumulated (threshold securities). SEC imposed the close-out 
requirement only on threshold securities because it believed high 
levels of FTD could indicate potential manipulative naked short 
selling. Increasing market volatility led SEC to issue a September 2008 
emergency order requiring broker-dealers to close out FTD resulting 
from short sales in any security the day after the settlement date. SEC 
extended this requirement until July 2009 in an interim final temporary 
rule. GAO found that the number of threshold securities declined after 
the implementation of the stricter close-out requirement, but it is not 
clear whether this trend can be sustained. 

Some market participants believe that the stricter close-out 
requirement does not prevent manipulative trading from occurring within 
the 3-day settlement period. They recommend that SEC address potential 
abuse by requiring all short sellers to borrow securities before a 
short sale. As the Commission considers whether to finalize the 
temporary rule, SEC staff said that they are continuing to evaluate the 
appropriateness of a preborrow requirement for addressing FTD and 
market manipulation related to naked short selling. However, SEC staff 
said that the costs of a preborrow requirement might outweigh the 
benefits because FTD represent 0.01 percent of the dollar value of 
trades, and that a small group of securities (small market 
capitalization, thinly traded, or illiquid) are likely to be the target 
of any manipulative scheme. 

SEC and SRO examiners have found that some broker-dealers do not 
monitor whether the source a broker-dealer uses to locate available 
securities is reasonable (i.e., does not result in FTD). The broker-
dealers may not have done so because firms do not expect that the 
source from which it obtained the locate will be used to obtain shares 
for settlement. In some cases, the executing broker-dealer may lack 
information needed to establish whether the locates were reasonable. 
SEC staff worked with the industry to draft guidance in 2007 to clarify 
communication responsibilities in such instances, but SEC has not 
finalized it. As a result, some firms may continue to be noncompliant 
with the locate requirement. Furthermore, SEC sometimes did not provide 
interpretive guidance for questions on the implementation of Regulation 
SHO and temporary rule-related requirements, or did so after lengthy 
delays. SEC does not have formal processes for determining which 
requests for guidance merit a formal response, nor does it have a 
process by which implementation issues that arise from temporary rules 
can be readily addressed. Without timely and clear guidance to the 
industry, SEC cannot ensure the consistent implementation of its rules 
or help address the unintended consequences of operational issues that 
occur while awaiting rule expiry or finalization. 

What GAO Recommends: 

GAO recommends that the SEC Chairman expedite the review and approval 
of the draft guidance and develop a process to respond to 
implementation issues that arise from temporary rules. SEC stated that 
it would consider addressing the intent of the draft guidance in the 
temporary rule and evaluate how it can further address implementation 
concerns raised by the industry. 

View [hyperlink, http://www.gao.gov/products/GAO-09-483] or key 
components. For more information, contact Orice M. Williams at (202)-
512-8678 or williamso@gao.gov. 

[End of section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

SEC Initially Focused on Large and Persistent FTD in Certain 
Securities, but Growing Concerns about Investor Confidence Led SEC to 
Address FTD across the Market: 

The 2008 Emergency Orders Appear to Have Reduced Threshold Securities 
and FTD from Record Highs, but the Sustainability of This Trend Is 
Unclear: 

Some Commenters Contend a Preborrow Requirement Is Needed to Address 
FTD and Market Manipulation, While SEC Is Still Considering Whether It 
Would Be Appropriate: 

Regulators Have Categorized Noncompliance with Regulation SHO as 
Nonsystemic, but the Regulation Presents Some Compliance Challenges: 

SEC Is Considering Finalizing the Temporary Rule by July 2009, but 
Implementation Issues and Inconsistent and Untimely Provision of 
Guidance Concern the Industry: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Scope and Methodology: 

Appendix II: Clearing Agencies Settle Equity Securities Trades through 
a 3-Day Settlement Cycle and Continuous Net Settlement: 

Appendix III: Additional Trend Data on FTD in Threshold Securities, and 
All Equity Securities: 

Appendix IV: Comments from the Securities and Exchange Commission: 

Appendix V: GAO Contact and Staff Acknowledgments: 

Table: 

Table 1: Number of Securities on the Threshold List for More Than 90 
Consecutive Settlement Days, from January 2005 through December 2008: 

Figures: 

Figure 1: Average Number of Threshold Securities, by Month, from 
January 2005 through December 2008: 

Figure 2: Average Outstanding FTD for Threshold Securities, by Month, 
from January 2005 through December 2008: 

Figure 3: Total New FTD for Threshold Securities, by Month, from 
January 2005 through December 2008: 

Figure 4: New FTD for NYSE, NASDAQ, and Amex Threshold Securities as a 
Percentage of Market Volume from January 2005 through December 2008: 

Figure 5: VIX; S&P 500 Total Return Index; and Outstanding FTD and 
Short Interest in NYSE, NASDAQ, and American Stock Exchange Securities, 
from April 2004 through December 2008: 

Figure 6: Average Daily Number of Securities with Outstanding and New 
FTD for All Securities, by Month, from April 2004 through December 
2008: 

Figure 7: Average Outstanding FTD for All Securities, by Month, from 
April 2004 through December 2008: 

Figure 8: Average Number of Threshold Securities, by Month, and Number 
of Days on the Threshold List, from January 2005 through December 2008: 

Figure 9: ETFs as a Percentage of Threshold Securities, by Month, from 
January 2005 through December 2008: 

Figure 10: Trading Day Transactions and Broker CNS Positions: 

Figure 11: Settlement Day and Broker CNS Positions: 

Figure 12: Clearance and Settlement Process for Equity Securities 
Trades in the United States: 

Figure 13: Average Number of NYSE-listed Threshold Securities, per 
Month, by Number of Days on the Threshold List, from January 2005 
through December 2008: 

Figure 14: Average Number of NASDAQ-listed Threshold Securities, per 
Month, by Number of Days on the Threshold List, from January 2005 
through December 2008: 

Figure 15: Average Number of Amex-listed Threshold Securities, per 
Month, by Number of Days on the Threshold List, from January 2005 
through December 2008: 

Figure 16: Average Number of Other Securities, per Month, by Number of 
Days on the Threshold List, from January 2005 through December 2008: 

Figure 17: Average Outstanding FTD, per Month, for NYSE-listed 
Threshold Securities, from January 2005 through December 2008: 

Figure 18: Average Outstanding FTD, per Month, for NASDAQ-listed 
Threshold Securities, from January 2005 through December 2008: 

Figure 19: Average Outstanding FTD, per Month, for Amex-listed 
Threshold Securities, from January 2005 through December 2008: 

Figure 20: Average Outstanding FTD, per Month, for Other Threshold 
Securities, from January 2005 through December 2008: 

Figure 21: Total New FTD, per Month, for NYSE-listed Threshold 
Securities, from January 2005 through December 2008: 

Figure 22: Total New FTD, per Month, for NASDAQ-listed Threshold 
Securities, from January 2005 through December 2008: 

Figure 23: Total New FTD, per Month, for Amex-listed Threshold 
Securities, from January 2005 through December 2008: 

Figure 24: Total New FTD, per Month, for Other Threshold Securities, 
from January 2005 through December 2008: 

Figure 25: Average Daily Number of Securities with Outstanding and New 
FTD, per Month, for NYSE-listed Securities, from April 2004 through 
December 2008: 

Figure 26: Average Daily Number of Securities with Outstanding and New 
FTD, per Month, for NASDAQ-listed Securities, from April 2004 through 
December 2008: 

Figure 27: Average Daily Number of Securities with Outstanding and New 
FTD, per Month, for Amex-listed Securities, from April 2004 through 
December 2008: 

Figure 28: Average Daily Number of Securities with Outstanding and New 
FTD, per Month, for Other Securities, from April 2004 through December 
2008: 

Figure 29: Total New FTD, per Month, for All NYSE-listed Securities, 
from April 2004 through December 2008: 

Figure 30: Total New FTD, per Month, for All NASDAQ-listed Securities, 
from April 2004 through December 2008: 

Figure 31: Total New FTD, per Month, for All Amex-listed Securities, 
from April 2004 through December 2008: 

Figure 32: Total New FTD, per Month, for All Other Securities, from 
April 2004 through December 2008: 

Figure 33: Average Outstanding FTD, per Month, for All NYSE-listed 
Securities, from April 2004 through December 2008: 

Figure 34: Average Outstanding FTD, per Month, for All NASDAQ-listed 
Securities, from April 2004 through December 2008: 

Figure 35: Average Outstanding FTD, per Month, for All Amex-listed 
Securities, from April 2004 through December 2008: 

Figure 36: Average Outstanding FTD, per Month, for All Other 
Securities, from April 2004 through December 2008: 

Abbreviations: 

Amex: American Stock Exchange: 

CBOE: Chicago Board Options Exchange: 

CNS: Continuous Net Settlement: 

DTC: Depository Trust Company: 

DTCC: Depository Trust and Clearing Corporation: 

ETF: exchange-traded funds: 

FINRA: Financial Industry Regulatory Authority: 

FTD: failures to deliver: 

FTR: failures to receive: 

NASD: National Association of Securities Dealers (now FINRA): 

NAV: net asset value: 

NSCC: National Securities Clearing Corporation: 

NYSE: New York Stock Exchange: 

OCIE: Office of Compliance Inspections and Examinations: 

OEA: Office of Economic Analysis: 

OTC: over the counter: 

OTCBB: Over-The-Counter Bulletin Board: 

SEC: Securities and Exchange Commission: 

SRO: self-regulatory organization: 

T: trade date: 

VIX: Chicago Board Options Exchange Volatility Index: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

May 12, 2009: 

The Honorable Carl Levin: 
Chairman: 
Permanent Subcommittee on Investigations: 
Committee on Homeland Security and Governmental Affairs: 
United States Senate: 

The Honorable Charles E. Grassley: 
Ranking Member Committee on Finance: 
United States Senate: 

The Honorable Arlen Specter: 
United States Senate: 

When investors agree to trade an equity security, the buyer promises to 
deliver cash to the seller, and the seller promises to deliver the 
security to the buyer. The process by which the seller receives payment 
and the buyer receives the security is known as clearance and 
settlement. Trade clearance and settlement in the United States 
operates on a standard 3-day settlement cycle. Trades are executed on 
trade date (T) and settled 3 days later (T+3).[Footnote 1] According to 
the Depository Trust and Clearing Corporation (DTCC), the holding 
company whose subsidiaries are responsible for clearing and settling 
broker-to-broker equity securities trades in the United States, 99.9 
percent of daily transactions, by dollar volume, clear and settle 
within the standard 3-day settlement period.[Footnote 2] In the 
remaining transactions (0.01 percent) the seller did not deliver the 
securities on time, resulting in failures to deliver (FTD). According 
to the Securities and Exchange Commission (SEC), FTD can be caused by 
mechanical error or processing delays, which are typically resolved in 
a few days. However, FTD also can result from naked short selling. 
While not defined in the federal securities laws or rules, according to 
SEC, naked short selling generally refers to selling short without 
having borrowed the securities to make delivery, potentially resulting 
in FTD.[Footnote 3] When FTD persist for days or months, they can reach 
a level that may affect the market for that security. They also may be 
indicative of an illegal trading strategy known as manipulative naked 
short selling, in which short sellers attempt to profit by using naked 
short selling to flood the market with sales of a security with the 
intent of lowering its price. For several years, and more recently in 
the financial crisis, investors, publicly traded companies, and others 
have expressed concerns about the level of FTD in specific securities 
and the potential for manipulative naked short selling. 

SEC has taken several actions in recent years intended to address FTD 
and the potential for manipulative naked short selling. In August 2004, 
SEC adopted Regulation SHO, which was intended to address large and 
persistent FTD and curb the potential for manipulative naked short 
selling.[Footnote 4] Among other things, the regulation imposed (1) 
uniform requirements on broker-dealers to locate a source of securities 
available for borrowing prior to effecting a short sale in any equity 
security (generally referred to as performing a locate) and (2) 
delivery requirements on broker-dealers for equity securities in which 
a substantial amount of FTD had occurred, which the regulation 
designated as threshold securities.[Footnote 5] Regulation SHO required 
broker-dealers that have FTD in these securities lasting for 10 
consecutive days to "close out" the FTD by the beginning of regular 
trading hours the next morning (T+14) by purchasing securities of like 
kind and quantity in the market, with some exceptions.[Footnote 6] As 
we discuss in this report, in 2008, SEC took further actions, which 
consisted of two emergency orders and an interim final temporary rule 
(temporary rule), to address the potential for manipulative naked short 
selling because of concerns about increasing market volatility. 

This report addresses your interest in the implementation and 
enforcement of Regulation SHO and subsequent regulatory actions and 
their effectiveness in curbing FTD and the potential for manipulative 
naked short selling. Specifically, this report: 

1. provides an overview of the actions SEC has taken to address 
potential manipulative naked short selling and FTD, including 
Regulation SHO and the recent emergency orders, and the factors SEC 
considered in taking them; 

2. discusses the potential impact of Regulation SHO on FTD in threshold 
and nonthreshold securities using trend analysis; 

3. discusses regulatory, industry, and other market participants' views 
on the effectiveness of Regulation SHO and the recent emergency orders 
in curbing the potential for manipulative naked short selling; 

4. analyzes SEC and self-regulatory organization (SRO) efforts to 
enforce industry compliance with Regulation SHO and detect manipulative 
naked short selling; and: 

5. discusses industry experience with the implementation of the new and 
enhanced delivery requirements. 

To address the first objective, we reviewed the regulatory actions SEC 
has taken to address naked short selling and FTD, including Regulation 
SHO, amendments to the regulation, the recent emergency orders, and the 
temporary rule relating to the delivery of equity securities. We also 
conducted interviews with staff from SEC's Division of Trading and 
Markets (Trading and Markets) to obtain information on the factors SEC 
considered in taking these actions.[Footnote 7] To address the second 
objective, we analyzed publicly available FTD data produced by the 
National Securities Clearing Corporation (NSCC), a clearing agency 
subsidiary of DTCC and the daily threshold lists published by the SROs. 
We analyzed these data to identify FTD trends in the threshold 
securities and across the market. We determined these data were 
reliable for our purposes. To make this determination, we reviewed a 
2005 Office of Compliance and Inspections and Examinations (OCIE) 
examination that, in part, assessed NSCC's processes for generating 
reports that are used to provide daily FTD data to SEC and the equities 
SROs. We also employed our own data reliability tests. For example, we 
reviewed the data for missing values and outliers as well as the 
accuracy of pricing information. In addition, we reviewed analyses of 
these data that SEC's Office of Economic Analysis (OEA) conducted. To 
address the third objective, we reviewed and analyzed the requirements 
of Regulation SHO, the relevant recent emergency orders, and the 
temporary rule and an OEA study. We also conducted interviews with 
staffs from Trading and Markets, OCIE, OEA, SEC's Division of 
Enforcement (Enforcement), and the Financial Industry Regulatory 
Authority, Inc. (FINRA); broker-dealers and two trade associations 
representing broker-dealers; an issuer, and a trade association 
representing issuers; securities lenders, and a trade association 
representing securities lenders; securities lending consultants; an 
investor; legal and subject area experts; and other market observers. 

To address the fourth objective, we reviewed a 2005 joint sweep 
examination that OCIE and the SROs conducted. In a sweep examination, 
OCIE probes specific activities of a sample of broker-dealers to 
identify emerging compliance problems in order that they may be 
remedied before becoming too severe or systemic. We reviewed a sample 
of subsequent OCIE and FINRA examinations, a 2006 sweep examination 
that the Chicago Board Options Exchange (CBOE) conducted of its option 
market making members, and FINRA examination guidance, and we 
interviewed OCIE, FINRA, and CBOE staffs. We obtained data from FINRA 
and CBOE on the numbers of Regulation SHO-related examinations 
conducted since the regulation became effective and the number of 
examinations that resulted in Regulation SHO deficiencies. To address 
the fifth objective, we obtained and summarized comment letters 
submitted to SEC on the temporary rule. We interviewed broker-dealers, 
a trade association representing broker-dealers, and staffs from 
Trading and Markets and an SRO. 

We conducted this performance audit from March 2008 through May 2009 in 
accordance with generally accepted government auditing standards. Those 
standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe that 
the evidence obtained provides a reasonable basis for our findings and 
conclusions based on our audit objectives. Appendix I provides a more 
detailed description of our scope and methodology. 

Results in Brief: 

A primary purpose of Regulation SHO is to curb the potential for 
manipulative naked short selling by addressing those FTD in equity 
securities that had accumulated to a level SEC considered high enough 
to potentially affect the market for these securities. Recently, 
growing concerns about volatile markets and declining investor 
confidence prompted SEC to take emergency actions in the summer and 
fall of 2008 to further address FTD and the potential for manipulative 
naked short selling by issuing both permanent and temporary amendments 
to Regulation SHO. For example, in July 2008, SEC issued an emergency 
order to temporarily restrict naked short selling and FTD in the 
publicly traded securities of 19 large financial firms, with limited 
exceptions.[Footnote 8] SEC did not have evidence that manipulative 
naked short selling was occurring in the securities of these 
institutions when it issued the order. Rather, SEC issued the order 
because it was concerned that rumors about the institutions may have 
fueled market volatility, and that naked short selling could accelerate 
a price decline in the securities of a firm targeted by any such rumor. 
In September 2008, SEC took more comprehensive action to curb the 
potential for manipulative naked short selling when, in consultation 
with the Board of Governors of the Federal Reserve System (Federal 
Reserve) and the Department of the Treasury (Treasury Department), SEC 
issued another emergency order that, among other things, temporarily 
enhanced close-out requirements on the sale of all equity securities. 
The September emergency order required broker-dealers to deliver 
securities resulting from short sales in any equity security (not just 
threshold securities) by the settlement date (T+3), or if they have FTD 
on the settlement date, to take action to purchase or borrow securities 
to close out the FTD by the beginning of regular trading hours the next 
morning (T+4), with limited exceptions.[Footnote 9] Broker-dealers who 
can show that the FTD resulted from a long sale were allowed until the 
beginning of regular trading hours on T+6 to close out the FTD. 
[Footnote 10] Upon expiration of the emergency order, SEC extended 
these requirements until July 31, 2009, as part of the temporary rule. 
[Footnote 11] 

Our analysis of FTD data from January 2005 to December 2008 showed that 
the number of threshold securities initially declined after the 
implementation of Regulation SHO in January 2005, but increased 
significantly later, concurrent with the onset and worsening of the 
financial crisis. The number of threshold securities initially declined 
by about 45 percent between January 2005 and August 2006, from an 
average of 423 per month to 231 per month, indicating that Regulation 
SHO may have had an initial impact of reducing the number of threshold 
securities soon after the regulation became effective, although other 
factors may have contributed to this initial decline.[Footnote 12] 
After July 2006, the average monthly number of threshold securities 
began climbing and reached a record high of 582 in July 2008. Staffs 
from OEA and Trading and Markets said that increased trading volume, 
volatility, and short interest during this period likely played a role 
in the increase in threshold securities during this period.[Footnote 
13] Threshold securities declined significantly after SEC issued the 
July and September emergency orders. While SEC issued the July 
emergency order at the time that the number of threshold securities 
reached their record high, it not clear whether this action had a 
causal effect in the subsequent decline in threshold securities, 
because only 1 of the 19 firms subject to the order was on the 
threshold list before the order took effect. OEA officials said that 
market uncertainty about whether SEC would take additional emergency 
actions may have affected short selling volume and caused the number of 
threshold securities to decline, but they did not have conclusive 
evidence. In contrast, these officials noted that the September 
emergency order appeared to have had a significant impact on threshold 
securities, although the sustainability of this trend is yet unclear. 
By November 2008, the average number of threshold securities had 
declined to 72. This number temporarily increased to 123 by December 
31, 2008, but subsequently declined. By May 5, 2009, there were 68 
securities on the threshold list.[Footnote 14] Our analysis of FTD data 
showed that the majority of securities on the threshold list graduated 
from the list in a timely manner, although 80 percent returned to the 
list at least once. Furthermore, until SEC issued the September 
emergency order, some threshold securities persisted for extended 
periods. About 300 unique securities persisted on the threshold list 
for more than 90 days from January 2005 through December 2008. From May 
2005, the first month that a security could have been on the threshold 
list for more than 90 days, through September 2008, the average daily 
number of such securities ranged from 12 to 63 per month, but after SEC 
implemented the September order, they declined to zero.[Footnote 15] 
About 50 percent of the remaining threshold securities in December 2008 
were exchange-traded funds (ETF).[Footnote 16] SEC and FINRA staffs 
believe that structural characteristics related to the creation and 
redemption of these products may make them more likely to experience 
FTD and appear on the threshold list. 

Some market participants and others (commenters) believe that the 
current locate and close-out requirements are not sufficient to curb 
FTD resulting from short sales or to prevent manipulative trading. 
[Footnote 17] First, some noted that Regulation SHO does not require 
the entity on which a broker-dealer relied as a source of available 
securities on the trade date to have shares available on the settlement 
date. As a result, these commenters said that broker-dealers or other 
entities with securities available for borrowing could provide locates 
for more shares than they have available, which could lead to FTD. 
These commenters said that SEC should require broker-dealers to borrow 
securities prior to effecting short sales (preborrow), or at least 
require sources of securities to set aside (decrement) shares as they 
are providing locates, to ensure securities are available for 
settlement. Second, although most FTD resulting from naked short sales 
must be closed out on T+4, some commenters expressed concern that 
market manipulation could occur within that time frame. These 
commenters said that a short seller could still naked short sell 
without limit, flooding the market with sell orders and manipulating 
the price of a security downward, as long as the trader covered the 
short sales with purchases prior to settlement day. To mitigate the 
potential for this type of manipulation, these commenters also 
recommended a preborrow requirement. Trading and Markets staff and 
industry officials said that it is unlikely that broker-dealers provide 
locates for more shares than they have available, because only a small 
percentage of locate requests result in short sales.[Footnote 18] For 
example, they said that many customers choose not to proceed with the 
short sale order after obtaining or requesting a locate. Furthermore, 
they said that because broker-dealers settle transactions in each 
security on a net basis, the actual settlement obligation is often less 
than the number of shares sold short, making borrowing unnecessary or 
necessary only in limited quantities.[Footnote 19] To better understand 
industry practices regarding locates, we reviewed several broker-dealer 
examinations conducted by OCIE. We found that some of these firms 
practiced decrementing, or some other form of inventory management to 
help ensure that they did not provide locates for more securities than 
they could fill on settlement date. Others, however, did not follow 
these practices. Without such practices in place, it is unclear how 
these firms can ensure that they are not providing locates in excess of 
their available supply of securities. Regarding the potential for 
market manipulation within the T+4 time frame, Trading and Markets and 
FINRA staffs agreed that it is possible, but said that such 
manipulation is likely to occur successfully only in those securities 
that are highly illiquid, thinly traded, or have a relatively low 
number of total shares outstanding. Trading and Markets staff also told 
us that the costs of a marketwide preborrow requirement to address FTD, 
manipulative naked short selling, or market manipulation occurring 
within the T+4 time frame might outweigh any potential benefits, 
especially considering that the vast majority of trades settle on time. 
For example, an OEA analysis of the temporary preborrow requirement 
implemented through the July emergency order and discussions with 
market participants found that while the July order did reduce FTD in 
the securities of the 19 firms subject to the order, it also increased 
borrowing costs, resulted in fewer short sales, and affected liquidity 
for these securities. However, Trading and Markets staff said that they 
are continuing to evaluate the appropriateness of a preborrow 
requirement as the Commission considers whether to finalize the 
temporary rule. 

OCIE and SRO staffs generally categorize Regulation SHO noncompliance 
as nonsystemic deficiencies. After SEC implemented Regulation SHO, SEC 
and the SROs quickly took steps to enforce its requirements, first by 
conducting a joint sweep examination, and later through regular 
surveillances of FTD data and routine and other compliance 
examinations. Although these examinations have found a large number of 
firms with Regulation SHO compliance deficiencies, OCIE and SRO staffs 
told us these deficiencies generally were not indicative of systemic 
problems or attempts to manipulate a security. However, OCIE examiners 
also found that some broker-dealers were facing challenges in 
determining whether locates were reasonable and were not resulting in 
FTD. One way a firm may demonstrate that a locate source is reasonable 
is to have procedures or systems in place to monitor whether the 
related trades are resulting in FTD. However, according to OCIE 
examinations, some broker-dealers are not monitoring whether locates 
result in FTD because firms do not expect that the locate will be the 
source from which it will obtain shares for settlement. Furthermore, in 
the prime brokerage arrangement, while different broker-dealers may 
provide execution and clearance and settlement services and the 
customer can deliver the securities to the prime broker for settlement, 
Regulation SHO does not obligate the clearing firm--in this case, the 
prime broker--to provide trade settlement information to the executing 
broker. As a result, the executing broker may not know if, at 
settlement, the prime broker was unable to borrow shares to delivery, 
and thus not have the information necessary to determine whether it can 
rely on that customer's locates for future short sale transactions. 
[Footnote 20] In March 2007, staff from Trading and Markets working 
with the industry had considered revisions to the 1994 Prime Broker 
Letter to address this information gap. The 1994 Prime Broker Letter 
provided guidance that laid out the responsibilities of both the 
executing and prime brokers for trades they executed and settled on 
behalf of their clients, typically hedge funds.[Footnote 21] However, 
Trading and Markets has yet to finalize the draft revised letter. In 
the absence of the guidance, some firms may continue to be noncompliant 
with the locate requirement. Furthermore, the perception that this 
conduct may occur could undermine investor confidence in the markets. 
Finally, while examinations have detected compliance deficiencies of 
Regulation SHO, examiners stated that these deficiencies are not 
necessarily indicative of manipulative naked short selling. Generally 
speaking, SEC and the SROs also use other techniques, such as 
electronic market surveillance, to identify potential instances of 
manipulative naked short selling. 

Although generally supportive of SEC's efforts to prevent manipulative 
naked short selling, some industry officials said that the September 
emergency order and the temporary rule resulted in certain unintended 
negative consequences, such as increased market volatility and price 
spikes. For example, a large industry group submitted data to SEC 
suggesting that the temporary rule created significant, but temporary, 
upward pressure on the prices of securities because broker-dealers are 
required to close out their FTD at the opening of trading on the 
morning of T+4 or T+6. Industry officials and SRO staff also told us 
that throughout the implementation of Regulation SHO and the emergency 
orders, Trading and Markets staff were responsive to some requests for 
implementation guidance but did not answer other requests or did so 
only after lengthy delays. For example, it took an extended period of 
time for one SRO to receive and publish interpretive guidance from 
Trading and Markets on technical questions the SRO submitted in 2005 
about the implementation of Regulation SHO. Staff from this SRO said 
while they waited for a response, they could not provide further 
guidance on its implementation. Furthermore, a large industry group 
told us that they were unable to obtain answers to multiple questions 
on the implementation of the temporary rule. Trading and Markets can 
provide written interpretive guidance (i.e., a formal response) to the 
SROs and industry through exemptive orders, no-action letters, 
compliance guides, staff legal bulletins, and answers to frequently 
asked questions. Although Trading and Markets staff have discretion in 
determining which SRO and industry requests merit a formal response, 
SEC does not have formal processes or guidelines on which to base such 
determinations. SEC's current strategic plan states that regulations 
should be clearly written, flexible, and relevant and not impose 
unnecessary financial or reporting burdens. The plan also states that 
one potential measure for monitoring progress is the length of time 
taken to respond to no-action letters, exemptive applications, and 
interpretive requests. The strategic plan also states that to ensure 
compliance with federal securities laws, SEC should work to enhance the 
interpretive guidance process so that it meets the needs of staff, the 
public, and other external stakeholders. Trading and Markets staff said 
they have not always responded to industry requests for guidance 
because they believed the provisions of Regulation SHO were clear or 
because they believed that some of the requests reflected attempts to 
find loopholes, rather than to seek clarification. Trading and Markets 
staff also stated that with the temporary rule expiring at the end of 
July 2009, they have been focusing on reviewing and analyzing the 
comments for a recommendation for the Commission's consideration. 
Furthermore, responding to some of the implementation issues related to 
the temporary rule could have potentially required changes to the 
temporary rule, something that Trading and Markets told us they are not 
authorized to make. However, if the Commission does not take final 
action on this rule until the expiration date, the rule will have been 
in effect for 10 months. Without timely and clear interpretive guidance 
from SEC, the SROs may be unable to effectively enforce SEC rules and 
regulations, and SEC cannot ensure the consistent implementation of the 
rules and regulations. 

This report makes two recommendations to the SEC Chairman. 
Specifically, the chairman should (1) promptly finalize the draft 
revised 1994 Prime Broker Letter to address the current information gap 
in Regulation SHO for prime brokerage arrangements when the temporary 
rule becomes final and (2) develop a process that allows Commission 
staff to raise and resolve implementation issues that arise from SEC 
regulations, including emergency orders and temporary rules, in a 
timely manner. 

We provided a draft of this report to Chairman of the Securities and 
Exchange Commission, and the agency provided written comments that are 
reprinted in appendix IV. In its written comments, SEC stated that 
regarding our first recommendation, it will consider the need to 
clarify the communications between prime broker-dealers and executing 
broker-dealers that would facilitate Regulation SHO compliance in 
connection with its consideration of further action on the temporary 
rule. Regarding our second recommendation, SEC stated that it is 
committed to engaging in a deliberative process to develop meaningful 
regulation of short selling and providing interpretive guidance to the 
industry to facilitate implementation, as appropriate. SEC also stated 
that it will evaluate whether there are additional steps that it can 
take, consistent with the Administrative Procedure Act, to address 
implementation issues raised by industry. 

We provided relevant portions of the draft report to FINRA and CBOE for 
their review and comment. FINRA, CBOE, and SEC provided technical 
comments, which we have incorporated into the final report where 
appropriate. 

Background: 

According to SEC, short selling provides the market with at least two 
important benefits: market liquidity and pricing efficiency.[Footnote 
22] For example, market professionals, such as market makers (including 
specialists) may provide liquidity by naked short selling to offset 
temporary imbalances in the buying and selling interest for securities. 
[Footnote 23] Market makers generally stand ready to buy and sell the 
security on a regular and continuous basis at a publicly quoted price, 
even when there are no other buyers or sellers. Thus, market makers 
must sell a security to a buyer even when there are temporary shortages 
of sellers of that security available in the market. For the purposes 
of this report, we refer to both market makers and specialists as 
market makers. Efficient markets require that prices fully reflect all 
buy and sell interest. Market participants that believe a security is 
overvalued may engage in short sales to profit from a perceived 
divergence of prices from economic values. According to SEC, such short 
sellers contribute to pricing efficiency because their transactions 
inform the market of their evaluation of the future price performance 
of the security. This evaluation is reflected in the resulting market 
price of the security. 

Naked short selling may have negative effects on the market, 
particularly when it results in FTD and those FTD persist for an 
extended period and represent a significantly large unfulfilled 
delivery obligation at the clearing agency. Specifically, SEC stated 
that short sellers that fail to deliver securities on the trade 
settlement date may face fewer restrictions than if they were required 
to deliver the securities in a reasonable period. For example, SEC said 
that short sellers may sometimes intentionally fail to deliver 
securities to avoid borrowing costs, especially when the costs of 
borrowing security are high. Furthermore, SEC stated that such sellers 
could attempt to use this additional freedom to engage in trading 
activities that deliberately and improperly depress the price of a 
security. For example, SEC said that short sellers sometimes may 
intentionally fail to deliver securities in an attempt to 
manipulatively naked short sell a security. Issuers and investors have 
raised concerns to SEC in recent years about manipulative naked short 
selling, particularly in thinly capitalized securities that trade over 
the counter (OTC).[Footnote 24] To the extent that large and persistent 
FTD might indicate manipulative naked short selling, SEC stated that 
such FTD may undermine the confidence of investors. In turn, investors 
may be reluctant to commit capital to an issuer that they believe to be 
subject to such manipulative conduct. 

Due to the volume and value of trading in today's markets, NSCC nets 
trades and payments among its participants using its Continuous Net 
Settlement System (CNS System). This is a book-entry accounting system 
in which each participant's daily purchases and sales of securities, 
based on trade date, are automatically netted into one long position 
(right to receive) or one short position (obligation to deliver) for 
each securities issue purchased or sold. The participant's 
corresponding payment obligations are similarly netted into one 
obligation to pay money or into one obligation to receive money. If a 
member is unable to fulfill its delivery obligation on settlement date, 
FTD occurs and the CNS System maintains the net short position for that 
participant until the obligation is fulfilled.[Footnote 25] As we have 
previously discussed, while naked short selling may result in FTD, 
there are other legitimate reasons why FTD may occur. FTD may result 
from either a long sale or a short sale, and, according to SEC and 
FINRA, may result from mechanical error or processing delays. For 
example, processing delays can result from transferring securities in 
physical certificate, rather than in book-entry form. 

SEC oversees broker-dealers primarily through OCIE and Trading and 
Markets and in conjunction with FINRA and other SROs. FINRA is an SRO 
with statutory responsibilities to regulate its broker-dealer members. 
As part of its responsibilities, FINRA conducts examinations of its 
members to ensure compliance with SRO rules and federal securities 
laws. OCIE evaluates the quality of FINRA examinations by conducting 
oversight examinations of broker-dealers recently examined by FINRA as 
well as through inspections of SROs that review all aspects of the 
SRO's compliance, examination, and enforcement programs. OCIE also 
directly assesses broker-dealer compliance with federal securities laws 
through "special" and "cause" examinations. Special examinations 
include sweep examinations. OCIE conducts cause examinations when it 
has reason to believe something is wrong at a particular broker-dealer. 
Additionally, OCIE conducts examinations of clearing agencies, which 
are the SROs that clear and settle most securities trades in the United 
States. Trading and Markets administers and executes the agency's 
programs relating to the structure and operations of the securities 
markets. SEC also has delegated authority to Trading and Markets to 
administer the securities laws affecting broker-dealers and engage in 
related oversight activities, such as SRO rule filings.[Footnote 26] 
Where appropriate, SEC's Enforcement and the SROs' enforcement 
divisions are responsible for investigating and disciplining broker- 
dealers regarding violations of securities laws or regulations. 

SEC Initially Focused on Large and Persistent FTD in Certain 
Securities, but Growing Concerns about Investor Confidence Led SEC to 
Address FTD across the Market: 

When it initially promulgated Regulation SHO, SEC sought to curb the 
potential for manipulative naked short selling by imposing (1) uniform 
requirements on broker-dealers to locate a source of securities 
available for borrowing and (2) additional delivery requirements on 
broker-dealers for securities in which a substantial amount of FTD 
occurred.[Footnote 27] However, growing concerns about volatile markets 
and declining investor confidence prompted SEC to take emergency 
actions in the summer and fall of 2008 to address all FTD in all equity 
securities by issuing both permanent and temporary amendments to 
Regulation SHO. 

To Address Manipulative Naked Short Selling, SEC Initially Targeted 
Regulation SHO to Large and Persistent FTD in Certain Equity 
Securities, with Some Exceptions: 

The locate and delivery requirements in Regulation SHO, which required 
compliance beginning in January 2005, prohibited a broker-dealer from 
accepting a short sale order in any equity security from another 
person, or effecting a short sale order in any equity security for its 
own proprietary accounts, unless it first located securities available 
for borrowing. To satisfy this requirement, the broker-dealer must 
either borrow the security, enter into an arrangement to borrow the 
security, or have reasonable grounds to believe the security can be 
borrowed so that it can be delivered on the settlement date. Executing 
broker-dealers must obtain and document their source of borrowable 
stock (a locate) prior to effecting the short sale.[Footnote 28] 

Broker-dealers can demonstrate that they have reasonable grounds to 
believe a security can be borrowed in time for settlement by directly 
contacting a source for that security. Industry officials told us that 
a potential source for securities might include the securities lending 
desk of their own firm or that of another broker-dealer or the lending 
agents for large institutional investors, such as mutual funds, pension 
funds, or insurance companies. Regulation SHO also allows broker- 
dealers to rely on industry-generated lists of securities that are 
considered widely available, instead of contacting the source for those 
securities directly. These lists generally are known as "easy-to- 
borrow" lists.[Footnote 29] Regulation SHO also allows broker-dealers 
to rely on assurances from a customer that the customer can obtain 
securities from a third party in time to settle the trade (customer- 
provided locate). Broker-dealers must document compliance with the 
locate requirement. 

Regulation SHO included three exceptions to the locate requirement. 
First, it excepted market makers from having to obtain a locate when 
they effect short sales in connection with bona fide market making 
activities.[Footnote 30] SEC stated that this exception was necessary 
because market makers may need to facilitate customer orders in a fast- 
moving market without possible delays associated with complying with 
the locate requirement. According to SEC, market makers are unlikely to 
cause high levels of FTD, because most of them seek a net "flat" 
position in a security at the end of each day--offsetting short sales 
of a security with purchases of that security so that they do not have 
to deliver securities under the CNS System. Second, Regulation SHO 
allows an exception to the locate requirement when a broker-dealer 
receives a short sale order from another broker-dealer (introducing 
broker-dealer). In these cases, the introducing broker-dealer is 
required to comply with the locate requirement, unless the executing 
broker-dealer has entered into a contractual agreement to obtain 
locates on behalf of the introducing broker-dealer. Third, Regulation 
SHO provides an exception to the locate requirement in those cases 
where a broker-dealer effects a sale on behalf of a customer that owns 
a particular security, but through no fault of the customer or broker- 
dealer, the broker-dealer does not expect that the security will be 
delivered by the settlement date.[Footnote 31] An example of this 
exception would be sales of restricted securities--securities acquired 
in unregistered, private sales from the issuers through private 
placement offerings. The sale of such securities often involves 
processing delays that prevent the customer from obtaining and 
delivering the securities on time. Since Regulation SHO requires broker-
dealers to mark sales as short if the customer does not have possession 
of the securities at the time of the sale, broker dealers often must 
mark the sale of restricted securities as short sales, even though the 
customer owns the securities. 

As we have previously discussed, Regulation SHO requires clearing 
broker-dealers that have FTD in threshold securities persisting for 10 
days after the normal settlement date (T+13) to close out their FTD by 
purchasing securities of like kind and quantity by the beginning of 
regular trading hours the next day (T+14).[Footnote 32] For example, if 
a clearing broker-dealer has 100 FTD in threshold security XYZ for 13 
consecutive days, the participant is required to purchase 100 shares of 
XYZ by the next day to close out these FTD. Clearing broker-dealers 
that do not close out their FTD threshold securities by the morning of 
T+14 are required to preborrow, or arrange to borrow, securities of XYZ 
before effecting additional short sales for themselves or for any of 
their customers, until the FTD are closed out. In adopting these close- 
out requirements, SEC stated that it believed it was addressing those 
circumstances that warrant action to address the potential negative 
effects of large and persistent FTD.[Footnote 33] By narrowly targeting 
threshold securities, SEC stated that it would not burden the vast 
majority of securities without similar concerns for settlement. At the 
time SEC adopted the rule, OEA had calculated that approximately 4 
percent of all reporting securities would qualify as threshold 
securities.[Footnote 34] 

As adopted, Regulation SHO included three exceptions to the close-out 
requirement. First, the close-out requirement did not apply to any FTD 
that were established prior to the security becoming a threshold 
security.[Footnote 35] SEC included this exception, termed the 
grandfather exception, because it was concerned about creating 
volatility through short squeezes if large preexisting FTD had to be 
closed out quickly after a security became a threshold security. 
[Footnote 36] Second, SEC allowed a limited exception for FTD resulting 
from short sales effected by options market markers to establish or 
maintain a hedge on options created before the underlying security 
became a threshold security, as long as the short sales were effected 
as part of bona fide market making. SEC created this exception to 
address concerns expressed by market participants that the close-out 
requirement would affect the liquidity and pricing of options. These 
market participants had argued that without the ability to hedge their 
options through short sales, options market makers would cease options 
trading in securities considered hard to borrow, and thus, prone to 
FTD--in other words--securities most likely to enter the threshold 
list.[Footnote 37] Finally, SEC excepted FTD resulting from sales of 
customer-owned securities that the broker-dealer did not reasonably 
expect would be in its possession by the settlement date, such as the 
restricted securities that we previously discussed. Broker-dealers have 
35 days to close out FTD resulting from the sale of these securities. 
[Footnote 38] 

After Considering Data Showing the Continued Persistence of FTD in Some 
Securities, SEC Amended Regulation SHO in August 2007 to Eliminate a 
Grandfathering Exception: 

After considering data showing that substantial and persistent FTD in a 
small number of threshold securities were not being closed out due to 
reliance on the grandfather exception, SEC amended Regulation SHO in 
August 2007 to eliminate it.[Footnote 39] At the time it adopted 
Regulation SHO, the Commission stated that it would monitor its 
operation to determine whether grandfathered FTD were being cleared 
under the existing close-out requirement, or whether any further 
regulatory action was warranted. We reviewed data that SEC used in its 
deliberations to eliminate the grandfather exception. For example, we 
found that OEA had estimated that from January 7, 2005, through 
December 31, 2005, the average daily percentage of grandfathered FTD to 
total FTD for securities on the threshold list was about 48 percent. 
Furthermore, in 2005, OCIE conducted several examinations for 
Regulation SHO compliance that found that some broker-dealers were 
still carrying a significant amount of FTD in securities that they were 
not closing out because they were relying on the grandfather provision. 

In the 2007 rule amendment, SEC reiterated its concerns regarding the 
impact that large and persistent FTD can have on the market for a 
security.[Footnote 40] SEC also said that some issuers believed that 
they had suffered unwarranted reputational damage because of investors' 
negative perceptions about large and persistent FTD in their 
securities. According to one issuer's comment letter, its investors 
attributed the issuer's frequent reappearances on the threshold list to 
manipulative short selling and frequently demanded that the issuer take 
action to address this issue. SEC stated that any unwarranted 
reputational damage caused by large and persistent FTD might have an 
adverse impact on the security's price. We discuss the number of 
securities that reappeared on the threshold list during the period of 
our review in greater detail later in this report. 

In Response to Increasing Market Volatility, SEC Issued an Emergency 
Order in July 2008 to Temporarily Restrict Naked Short Selling in the 
Securities of 19 Firms: 

Increasing market volatility in the securities of financial 
institutions of significance prompted SEC to issue an emergency order 
on July 15, 2008, that temporarily restricted short sales in the 
publicly traded securities of 19 large financial firms, unless the 
seller had borrowed, or arranged to borrow, the security prior to 
effecting the short sale.[Footnote 41] The order also prohibited any 
FTD in these securities by requiring that the short seller deliver the 
security on the settlement date. The order was effective from July 21, 
2008, to August 12, 2008. SEC amended the order on July 18, 2008, to 
except market makers engaged in bona fide market making from the 
preborrow requirement.[Footnote 42] 

SEC issued the order because it was concerned that rumors about 
financial institutions of significance in the United States may have 
fueled market volatility in the securities of some of these 
institutions. Trading and Markets staff said that SEC's decision to 
issue the order was precipitated by the rapid decline and subsequent 
collapse in the price of the securities of the investment firm Bear 
Stearns.[Footnote 43] This event raised concerns at SEC about a type of 
market manipulation called short and distort (i.e., an individual short 
sells a particular security and then attempts to drive down its price 
by spreading false rumors about the company).[Footnote 44] Although a 
trader could engage in a short-and-distort scheme without naked short 
selling, SEC stated it was concerned that naked short selling could 
accelerate a price decline in the event of a false rumor. 

SEC chose the 19 financial firms because it believed that they were 
particularly susceptible to short-and-distort schemes. Trading and 
Markets staff said that they did not see evidence of naked short 
selling or increased FTD in these securities prior to the issuance of 
the emergency order. Instead, they said that the emergency order was an 
attempt by the Commission to reassure the investing public that SEC 
would not allow naked short selling to occur. 

Sudden and Unexplained Declines in the Prices of Equity Securities Led 
SEC to Issue Additional Emergency Orders in September 2008 That Address 
FTD across the Market: 

Citing concerns about sudden and unexplained declines in the prices of 
equity securities generally, SEC, in consultation with the Federal 
Reserve and the Treasury Department, issued an emergency order on 
September 17, 2008.[Footnote 45] This order (1) temporarily enhanced 
delivery requirements on the sale of all equity securities, (2) 
implemented an antifraud rule targeted to short sellers that lie about 
or misrepresent their intention to deliver securities in time for 
settlement, and (3) eliminated the options market maker exception to 
Regulation SHO's close-out requirement.[Footnote 46] 

First, SEC added a temporary amendment to Regulation SHO through the 
September order to enhance delivery requirements on sales of all equity 
securities. The temporary rule requires clearing broker-dealers to 
deliver securities resulting from any short sale by the settlement date 
(T+3), or, if they have FTD on the settlement date, to take action to 
purchase or borrow securities to close out the FTD by no later than the 
beginning of regular trading hours on T+4. Participants that do not 
close out their FTD on the morning of T+4 are required to borrow, or 
arrange to borrow, securities before effecting additional short sales. 
Clearing broker-dealers that can show that the FTD resulted from a long 
sale, or a short sale by a market maker engaged in bona fide market 
making, have until the beginning of trading hours on T+6 to close out 
the FTD by purchasing securities of like kind and quantity. Upon 
expiration of the emergency order, SEC adopted these requirements as an 
interim final temporary rule, with a request for comments, which is set 
to expire on July 31, 2009.[Footnote 47] 

In issuing the temporary rule, SEC stated it was concerned that the 
current locate and close-out requirements in Regulation SHO had not 
gone far enough to reduce FTD and address potential manipulative naked 
short selling, especially in light of the ongoing instability and lack 
of investor confidence in the financial markets. SEC also noted that 
because Regulation SHO's close-out requirement applied only to 
threshold securities, FTD in nonthreshold securities never had to be 
closed out. In addition, SEC noted that the current delivery 
requirement for threshold securities under Regulation SHO and the lack 
of any delivery requirement for nonthreshold securities enabled FTD to 
persist for many days beyond the settlement date. SEC stated that the 
temporary rule was needed to require earlier close outs of FTD so that 
more sales would settle by settlement date. SEC acknowledged that the 
temporary rule's delivery requirements may require the close out of 
some FTD that occur because of ordinary settlement delays and would 
ordinarily clear up within a few days, but SEC believes that these 
requirements were necessary to help ensure that all trades in all 
equity securities settled by settlement date and that FTD would be 
closed out promptly after being incurred. 

The September order also made effective SEC's proposed "naked" short 
selling antifraud rule. The rule is intended to clearly affirm the 
liability of individuals who deceive specified individuals about their 
intention or ability to deliver securities in time for settlement, 
including individuals who deceive their broker-dealer about their 
locate source or ownership of shares and fail to deliver securities by 
settlement date. Enforcement staff said that a rule highlighting the 
illegality of these activities would focus the attention of market 
participants on such activities. This rule does not provide SEC with 
any additional enforcement powers. Following the expiration of the 
order, SEC made the amendment permanent.[Footnote 48] 

Third, the September order made effective a proposed rule amendment to 
eliminate the options market maker exception from Regulation SHO's 
delivery requirement.[Footnote 49] SEC had proposed to eliminate this 
exception in August 2007, based in part on data it had obtained from 
SROs showing that substantial levels of FTD continued to persist in 
some threshold securities as a result of this exception.[Footnote 50] 
Following the expiration of the order, SEC made the amendment 
permanent.[Footnote 51] 

SEC issued a second emergency order on September 18, 2008, also in 
consultation with Federal Reserve and Treasury Department officials, 
that temporarily restricted all short sales in the publicly traded 
securities of about 800 financial institutions (short sale ban). 
[Footnote 52] In the order, SEC noted its continued concerns regarding 
recent market conditions, and noted that short selling in the 
securities of a wider range of financial institutions than those 
subject to the July emergency order may be causing sudden and excessive 
fluctuations of the prices of such securities that could threaten fair 
and orderly markets. The order expired on October 8, 2008. 

The 2008 Emergency Orders Appear to Have Reduced Threshold Securities 
and FTD from Record Highs, but the Sustainability of This Trend Is 
Unclear: 

We reviewed trends in threshold securities and their FTD from January 
2005 through December 2008 (the review period). These measures showed 
initial declines soon after the implementation of Regulation SHO, but 
subsequently increased during 2007, concurrent with increasing 
turbulence in the markets brought on by the financial crisis. We 
observed significant declines in threshold securities and their FTD 
after SEC implemented the July and September 2008 emergency orders, but 
the sustainability of this trend is unclear. 

Threshold Securities Initially Declined after Implementation of 
Regulation SHO, but They Increased Significantly in 2007 and 2008 as 
the Financial Crisis Worsened: 

We reviewed trends in threshold securities and their FTD between 
January 2005 and December 2008. Although definitive conclusions cannot 
be drawn from simple trend analysis, we had difficulty discerning an 
intermediate impact of Regulation SHO on these measures. Figure 1 shows 
the average number of securities on the threshold list, by month, over 
the review period. Although subject to volatility from month to month, 
the average monthly number of threshold securities declined from 423 to 
231, or by about 45 percent from January 2005 through August 2006. This 
decline was most pronounced in the first 6 months after the regulation 
became effective, and particularly in the first month, when the number 
of securities declined from 529 on January 10, 2005 (the date the SROs 
published the first threshold list), to 414 by January 31, 2005. After 
July 2006, however, the average monthly number of threshold securities 
per month began to trend upward, reaching a record high of 582 for the 
review period in July 2008. This upward trend corresponds to several 
indicators of the severity of the current financial crisis, including 
several bankruptcies involving mortgage lenders starting in December 
2006; announcements by the ratings agencies of downgrades and reviews 
for potential downgrade of mortgage-related assets starting in June 
2007; and negative announcements by Bear Stearns beginning in June 2007 
and its subsequent merger to avoid collapse in March of 2008, among 
others. Caution should be used in interpreting the trends in threshold 
FTD, especially since we do not have an appropriate measure of FTD 
prior to Regulation SHO.[Footnote 53] 

Figure 1: Average Number of Threshold Securities, by Month, from 
January 2005 through December 2008: 

[Refer to PDF for image: line graph] 

Month and Year: 2005, January (Compliance date); 
Average number of threshold securities: 423.13. 

Month and Year: 2005, February; 
Average number of threshold securities: 385.16. 

Month and Year: 2005, March; 
Average number of threshold securities: 359.32. 

Month and Year: 2005, April; 
Average number of threshold securities: 317.57. 

Month and Year: 2005, May; 
Average number of threshold securities: 296.9. 

Month and Year: 2005, June;
Average number of threshold securities: 288.36. 

Month and Year: 2005, July; 
Average number of threshold securities: 298.6. 

Month and Year: 2005, August;
Average number of threshold securities: 307.48. 

Month and Year: 2005, September; 
Average number of threshold securities: 289.9. 

Month and Year: 2005, October; 
Average number of threshold securities: 275.05. 

Month and Year: 2005, November; 
Average number of threshold securities: 270.6. 

Month and Year: 2005, December; 
Average number of threshold securities: 281.67. 

Month and Year: 2006, January; 
Average number of threshold securities: 274.3. 

Month and Year: 2006, February; 
Average number of threshold securities: 324.11. 

Month and Year: 2006, March; 
Average number of threshold securities: 324.61. 

Month and Year: 2006, April; 
Average number of threshold securities: 308.68. 

Month and Year: 2006, May; 
Average number of threshold securities: 297.5. 

Month and Year: 2006, June; 
Average number of threshold securities: 251.91. 

Month and Year: 2006, July; 	
Average number of threshold securities: 254.75. 

Month and Year: 2006, August; 
Average number of threshold securities: 230.87. 

Month and Year: 2006, September; 
Average number of threshold securities: 238.95. 

Month and Year: 2006, October; 
Average number of threshold securities: 264.62. 

Month and Year: 2006, November; 
Average number of threshold securities: 277.05. 

Month and Year: 2006, December; 
Average number of threshold securities: 294.75. 

Month and Year: 2007, January; 
Average number of threshold securities: 256.45. 

Month and Year: 2007, February; 
Average number of threshold securities: 270.89. 

Month and Year: 2007, March; 
Average number of threshold securities: 311.05. 

Month and Year: 2007, April; 
Average number of threshold securities: 317.6. 

Month and Year: 2007, May; 
Average number of threshold securities: 361.18. 

Month and Year: 2007, June; 
Average number of threshold securities: 373.05. 

Month and Year: 2007, July; 
Average number of threshold securities: 415.95. 

Month and Year: 2007, August; 
Average number of threshold securities: 459.52. 

Month and Year: 2007, September; 
Average number of threshold securities: 337.89. 

Month and Year: 2007, October (Elimination of grandfather exception); 
Average number of threshold securities: 367. 

Month and Year: 2007, November; 
Average number of threshold securities: 380.76. 

Month and Year: 2007, December; 
Average number of threshold securities: 395.3. 

Month and Year: 2008, January; 
Average number of threshold securities: 406.62. 

Month and Year: 2008, February;	
Average number of threshold securities: 404. 

Month and Year: 2008, March; 
Average number of threshold securities: 466.3. 

Month and Year: 2008, April; 
Average number of threshold securities: 532.41. 

Month and Year: 2008, May; 
Average number of threshold securities: 491.05. 

Month and Year: 2008, June; 
Average number of threshold securities: 503.52. 

Month and Year: 2008, July (July emergency order); 	
Average number of threshold securities: 581.59. 

Month and Year: 2008, August; 
Average number of threshold securities: 500. 

Month and Year: 2008, September (September emergency order); 
Average number of threshold securities: 413.38. 

Month and Year: 2008, October; 
Average number of threshold securities: 195.41. 

Month and Year: 2008, November; 
Average number of threshold securities: 72. 

Month and Year: 2008, December; 
Average number of threshold securities: 83.91. 

Sources: SEC (data); GAO (analysis). 

[End of figure] 

Average outstanding FTD per month in these securities also declined 
from 218.5 million to 104.2 million, or 52 percent, between January 
2005 and August 2006 (figure 2). However, there was greater volatility 
from month to month in this figure, and the direction and magnitude of 
the change are highly sensitive to the start and end points selected. 
[Footnote 54] After July 2006, outstanding FTD increased considerably. 
As we discuss in the text that follows, an increase in threshold 
security FTD does not necessarily imply ineffectiveness since it is 
difficult to determine what would have happened in the absence of 
Regulation SHO. 

Figure 2: Average Outstanding FTD for Threshold Securities, by Month, 
from January 2005 through December 2008 (shares in millions): 

[Refer to PDF for image: line graph] 

Month and Year: 2005, January (Compliance date); 
Average outstanding FTD for threshold securities: 218.47. 

Month and Year: 2005, February; 
Average outstanding FTD for threshold securities: 225.97. 

Month and Year: 2005, March; 
Average outstanding FTD for threshold securities: 196.65. 

Month and Year: 2005, April; 
Average outstanding FTD for threshold securities: 170.22. 

Month and Year: 2005, May; 
Average outstanding FTD for threshold securities: 204.32. 

Month and Year: 2005, June;
Average outstanding FTD for threshold securities: 227.19. 

Month and Year: 2005, July; 
Average outstanding FTD for threshold securities: 153. 

Month and Year: 2005, August;
Average outstanding FTD for threshold securities: 172.79. 

Month and Year: 2005, September; 
Average outstanding FTD for threshold securities: 171.01. 

Month and Year: 2005, October; 
Average outstanding FTD for threshold securities: 134.63. 

Month and Year: 2005, November; 
Average outstanding FTD for threshold securities: 129.04. 

Month and Year: 2005, December; 
Average outstanding FTD for threshold securities: 190.96. 

Month and Year: 2006, January; 
Average outstanding FTD for threshold securities: 162.37. 

Month and Year: 2006, February; 
Average outstanding FTD for threshold securities: 202.73. 

Month and Year: 2006, March; 
Average outstanding FTD for threshold securities: 287.81. 

Month and Year: 2006, April; 
Average outstanding FTD for threshold securities: 148.71. 

Month and Year: 2006, May; 
Average outstanding FTD for threshold securities: 200.63. 

Month and Year: 2006, June; 
Average outstanding FTD for threshold securities: 183.47. 

Month and Year: 2006, July; 	
Average outstanding FTD for threshold securities: 193.75. 

Month and Year: 2006, August; 
Average outstanding FTD for threshold securities: 104.19. 

Month and Year: 2006, September; 
Average outstanding FTD for threshold securities: 126.06. 

Month and Year: 2006, October; 
Average outstanding FTD for threshold securities: 226.63. 

Month and Year: 2006, November; 
Average outstanding FTD for threshold securities: 209.43. 

Month and Year: 2006, December; 
Average outstanding FTD for threshold securities: 172.41. 

Month and Year: 2007, January; 
Average outstanding FTD for threshold securities: 122.73. 

Month and Year: 2007, February; 
Average outstanding FTD for threshold securities: 198.99. 

Month and Year: 2007, March; 
Average outstanding FTD for threshold securities: 238.55. 

Month and Year: 2007, April; 
Average outstanding FTD for threshold securities: 303.11. 

Month and Year: 2007, May; 
Average outstanding FTD for threshold securities: 246.66. 

Month and Year: 2007, June; 
Average outstanding FTD for threshold securities: 340.02. 

Month and Year: 2007, July; 
Average outstanding FTD for threshold securities: 464.02. 

Month and Year: 2007, August; 
Average outstanding FTD for threshold securities: 608.25. 

Month and Year: 2007, September; 
Average outstanding FTD for threshold securities: 417.07. 

Month and Year: 2007, October (Elimination of grandfather exception); 
Average outstanding FTD for threshold securities: 536.37. 

Month and Year: 2007, November; 
Average outstanding FTD for threshold securities: 532.97. 

Month and Year: 2007, December; 
Average outstanding FTD for threshold securities: 340.79. 

Month and Year: 2008, January; 
Average outstanding FTD for threshold securities: 310.11. 

Month and Year: 2008, February;	
Average outstanding FTD for threshold securities: 483.47. 

Month and Year: 2008, March; 
Average outstanding FTD for threshold securities: 575.49. 

Month and Year: 2008, April; 
Average outstanding FTD for threshold securities: 455.07. 

Month and Year: 2008, May; 
Average outstanding FTD for threshold securities: 446.66. 

Month and Year: 2008, June; 
Average outstanding FTD for threshold securities: 398.98. 

Month and Year: 2008, July (July emergency order); 	
Average outstanding FTD for threshold securities: 939.57. 

Month and Year: 2008, August; 
Average outstanding FTD for threshold securities: 387.45. 

Month and Year: 2008, September (September emergency order); 
Average outstanding FTD for threshold securities: 428.43. 

Month and Year: 2008, October; 
Average outstanding FTD for threshold securities: 192.77. 

Month and Year: 2008, November; 
Average outstanding FTD for threshold securities: 145.65. 

Month and Year: 2008, December; 
Average outstanding FTD for threshold securities: 150.84. 
	
Sources: SEC (data); GAO (analysis). 

[End of figure] 

We also generated the total number of new FTD, per month, in threshold 
securities over the review period (figure 3). New FTD are the number of 
FTD that occur each day. Total new FTD from January 2005 through August 
2006 declined by about 43 percent, from 264.3 million to 151.7 million, 
again subject to considerable volatility. For example, when we measured 
the difference in new FTD from January 2005 through June 2006, we found 
that new FTD increased 103 percent, to 535.3 million. This was largely 
due to a significant increase in new FTD in June 2006.[Footnote 55] 
This measure also began to increase in 2007. 

Figure 3: Total New FTD for Threshold Securities, by Month, from 
January 2005 through December 2008: 

[Refer to PDF for image: line graph] 

Month and Year: 2005, January (Compliance date); 
Total new FTD for threshold securities: 264.29. 

Month and Year: 2005, February; 
Total new FTD for threshold securities: 198.46. 

Month and Year: 2005, March; 
Total new FTD for threshold securities: 179.09. 

Month and Year: 2005, April; 
Total new FTD for threshold securities: 196.83. 

Month and Year: 2005, May; 
Total new FTD for threshold securities: 230.98. 

Month and Year: 2005, June;
Total new FTD for threshold securities: 312.44. 

Month and Year: 2005, July; 
Total new FTD for threshold securities: 339.12. 

Month and Year: 2005, August;
Total new FTD for threshold securities: 234.2. 

Month and Year: 2005, September; 
Total new FTD for threshold securities: 217.99. 

Month and Year: 2005, October; 
Total new FTD for threshold securities: 211.62. 

Month and Year: 2005, November; 
Total new FTD for threshold securities: 192.80. 

Month and Year: 2005, December; 
Total new FTD for threshold securities: 250.88. 

Month and Year: 2006, January; 
Total new FTD for threshold securities: 251.42. 

Month and Year: 2006, February; 
Total new FTD for threshold securities: 389.03. 

Month and Year: 2006, March; 
Total new FTD for threshold securities: 387.47. 

Month and Year: 2006, April; 
Total new FTD for threshold securities: 178.55. 

Month and Year: 2006, May; 
Total new FTD for threshold securities: 220.46. 

Month and Year: 2006, June; 
Total new FTD for threshold securities: 535.29. 

Month and Year: 2006, July; 	
Total new FTD for threshold securities: 158.36. 

Month and Year: 2006, August; 
Total new FTD for threshold securities: 151.72. 

Month and Year: 2006, September; 
Total new FTD for threshold securities: 226.59. 

Month and Year: 2006, October; 
Total new FTD for threshold securities: 286.04. 

Month and Year: 2006, November; 
Total new FTD for threshold securities: 330.31. 

Month and Year: 2006, December; 
Total new FTD for threshold securities: 115.29. 

Month and Year: 2007, January; 
Total new FTD for threshold securities: 169.33. 

Month and Year: 2007, February; 
Total new FTD for threshold securities: 443.71. 

Month and Year: 2007, March; 
Total new FTD for threshold securities: 394.04. 

Month and Year: 2007, April; 
Total new FTD for threshold securities: 830.98. 

Month and Year: 2007, May; 
Total new FTD for threshold securities: 980.48. 

Month and Year: 2007, June; 
Total new FTD for threshold securities: 1335.83. 

Month and Year: 2007, July; 
Total new FTD for threshold securities: 1378.14. 

Month and Year: 2007, August; 
Total new FTD for threshold securities: 1807.01. 

Month and Year: 2007, September; 
Total new FTD for threshold securities: 1206.09. 

Month and Year: 2007, October (Elimination of grandfather exception); 
Total new FTD for threshold securities: 1558.06. 

Month and Year: 2007, November; 
Total new FTD for threshold securities: 1541.71. 

Month and Year: 2007, December; 
Total new FTD for threshold securities: 1107.5. 

Month and Year: 2008, January; 
Total new FTD for threshold securities: 1080.61. 

Month and Year: 2008, February;	
Total new FTD for threshold securities: 1862.61. 

Month and Year: 2008, March; 
Total new FTD for threshold securities: 1522.58. 

Month and Year: 2008, April; 
Total new FTD for threshold securities: 1481.62. 

Month and Year: 2008, May; 
Total new FTD for threshold securities: 1056.76. 

Month and Year: 2008, June; 
Total new FTD for threshold securities: 1425.5. 

Month and Year: 2008, July (July emergency order); 	
Total new FTD for threshold securities: 3346.26. 

Month and Year: 2008, August; 
Total new FTD for threshold securities: 846.441. 

Month and Year: 2008, September (September emergency order); 
Total new FTD for threshold securities: 1304.82. 

Month and Year: 2008, October; 
Total new FTD for threshold securities: 774.59. 

Month and Year: 2008, November; 
Total new FTD for threshold securities: 438.25. 

Month and Year: 2008, December; 
Total new FTD for threshold securities: 757.50. 

Sources: SEC (data); GAO (analysis). 

[End of figure] 

The initial decline in threshold securities, particularly in the first 
few months of 2005, may indicate that Regulation SHO had some impact on 
reducing the number of threshold securities soon after the regulation 
became effective. However, other market factors also may have 
contributed to this initial decline. We found that the overall level of 
FTD across the market appeared to have been declining since at least 
April 2004 (the earliest date we could obtain FTD data), almost 8 
months before the effective date of Regulation SHO's locate and 
delivery requirements, and continued after the adoption and 
implementation of Regulation SHO.[Footnote 56] Regulation SHO may have 
accelerated this trend for the threshold securities, and it is possible 
that a portion of this decline can be attributed to an early impact of 
Regulation SHO through an announcement effect.[Footnote 57] 

The subsequent increase in threshold securities, outstanding FTD, and 
new FTD culminated in record highs for the review period in July 2008. 
It is unclear whether the number of threshold securities and their FTD 
would have increased further in the absence of Regulation SHO. We note 
that Regulation SHO did not intend to prohibit FTD in threshold 
securities. Rather, it was intended to address FTD once they had 
accumulated to a substantial level and persisted for 13 consecutive 
days. Moreover, SEC also intended for the locate requirement to limit 
naked short selling by better ensuring that broker-dealers that effect 
short sales have a source of securities they can borrow in time for 
settlement. If Regulation SHO acted to curb FTD resulting from short 
sales, we would generally expect to see declines in new FTD. Our data, 
however, indicate overall increases in new FTD during 2007 and up until 
July 2008, subject to considerable volatility. 

As we have previously discussed, SEC eliminated the grandfather 
exception in August 2007 after data showed that persistent FTD in some 
threshold securities were due to reliance on this exception. Our data 
show that despite the elimination of this exception, threshold 
securities and their FTD levels continued to increase. OEA examined FTD 
before and after the elimination of the grandfather exception in the 
threshold securities to determine the impact of its removal. According 
to OEA, FTD shifted from nonoptionable to optionable securities after 
the elimination of the grandfather exception. OEA staff said that one 
explanation of these results could be short sellers that previously 
failed to deliver in the equity market moved to the options market, 
where option market makers still had an exception to the close-out 
requirement, to establish a synthetic short position.[Footnote 58] In 
proposing to eliminate the options market maker exception, SEC analyzed 
2006 data and found that some threshold securities were persisting on 
the threshold list due to option market makers claiming an exception to 
the close-out requirement. However, CBOE examiners said that by the 
time SEC eliminated the options market maker exception, it was their 
understanding that option market makers may have modified their hedging 
strategies and stopped relying on the exception. They explained that, 
since SEC began seeking comments on eliminating the exception in July 
2006, options market makers had anticipated that SEC would eventually 
eliminate the exception. 

OEA staff said that changes in FTD may be influenced also by factors 
other than Regulation SHO, such as changes in the mix of securities 
being traded. For example, they noted that the mix of securities with 
FTD tilted toward higher-priced stocks after the elimination of the 
grandfather exception (higher-priced stocks also tend to be optionable 
stocks), reflecting the financial sector and other industries 
undergoing turbulence at that time. OEA and Trading and Markets staffs 
said that changes in market conditions, including overall increases in 
trading volume, volatility, and short interest, were also likely 
factors contributing to the increase in FTD. According to these staff, 
increases in trading volume and volatility are likely to correlate with 
increases in FTD because the higher the volume of trades, the more 
likely errors and other processing delays will occur.[Footnote 59] To 
the extent that FTD are due to errors or other processing delays, we 
would expect to see an increase in FTD proportional to an increase in 
trading volume. In figure 4, we show that the upward trend in FTD for 
NYSE, NASDAQ, and Amex threshold securities persisted even when 
expressed as a percentage of market volume. Thus, increased trading 
volume may not entirely explain the increase in FTD for threshold 
securities. 

Figure 4: New FTD for NYSE, NASDAQ, and Amex Threshold Securities as a 
Percentage of Market Volume from January 2005 through December 2008: 

[Refer to PDF for image: line graph] 

Month and Year: 2005, January (Compliance date); 
Percentage of market volume (new FTD): 0.104. 

Month and Year: 2005, February; 
Percentage of market volume (new FTD): 0.123. 

Month and Year: 2005, March; 
Percentage of market volume (new FTD): 0.128. 

Month and Year: 2005, April; 
Percentage of market volume (new FTD): 0.121. 

Month and Year: 2005, May; 
Percentage of market volume (new FTD): 0.182. 

Month and Year: 2005, June;
Percentage of market volume (new FTD): 0.167. 

Month and Year: 2005, July; 
Percentage of market volume (new FTD): 0.074. 

Month and Year: 2005, August;
Percentage of market volume (new FTD): 0.097. 

Month and Year: 2005, September; 
Percentage of market volume (new FTD): 0.133. 

Month and Year: 2005, October; 
Percentage of market volume (new FTD): 0.067. 

Month and Year: 2005, November; 
Percentage of market volume (new FTD): 0.075. 

Month and Year: 2005, December; 
Percentage of market volume (new FTD): 0.091. 

Month and Year: 2006, January; 
Percentage of market volume (new FTD): 0.053. 

Month and Year: 2006, February; 
Percentage of market volume (new FTD): 0.091. 

Month and Year: 2006, March; 
Percentage of market volume (new FTD): 0.095. 

Month and Year: 2006, April; 
Percentage of market volume (new FTD): 0.073. 

Month and Year: 2006, May; 
Percentage of market volume (new FTD): 0.1. 

Month and Year: 2006, June; 
Percentage of market volume (new FTD): 0.087. 

Month and Year: 2006, July; 	
Percentage of market volume (new FTD): 0.113. 

Month and Year: 2006, August; 
Percentage of market volume (new FTD): 0.053. 

Month and Year: 2006, September; 
Percentage of market volume (new FTD): 0.05. 

Month and Year: 2006, October; 
Percentage of market volume (new FTD): 0.058. 

Month and Year: 2006, November; 
Percentage of market volume (new FTD): 0.062. 

Month and Year: 2006, December; 
Percentage of market volume (new FTD): 0.066. 

Month and Year: 2007, January; 
Percentage of market volume (new FTD): 0.058. 

Month and Year: 2007, February; 
Percentage of market volume (new FTD): 0.102. 

Month and Year: 2007, March; 
Percentage of market volume (new FTD): 0.174. 

Month and Year: 2007, April; 
Percentage of market volume (new FTD): 0.23. 

Month and Year: 2007, May; 
Percentage of market volume (new FTD): 0.295. 

Month and Year: 2007, June; 
Percentage of market volume (new FTD): 0.33. 

Month and Year: 2007, July; 
Percentage of market volume (new FTD): 0.309. 

Month and Year: 2007, August; 
Percentage of market volume (new FTD): 0.346. 

Month and Year: 2007, September; 
Percentage of market volume (new FTD): 0.25. 

Month and Year: 2007, October (Elimination of grandfather exception); 
Percentage of market volume (new FTD): 0.261. 

Month and Year: 2007, November; 
Percentage of market volume (new FTD): 0.306. 

Month and Year: 2007, December; 
Percentage of market volume (new FTD): 0.372. 

Month and Year: 2008, January; 
Percentage of market volume (new FTD): 0.252. 

Month and Year: 2008, February;	
Percentage of market volume (new FTD): 0.317. 

Month and Year: 2008, March; 
Percentage of market volume (new FTD): 0.376. 

Month and Year: 2008, April; 
Percentage of market volume (new FTD): 0.298. 

Month and Year: 2008, May; 
Percentage of market volume (new FTD): 0.303. 

Month and Year: 2008, June; 
Percentage of market volume (new FTD): 0.433. 

Month and Year: 2008, July (July emergency order); 	
Percentage of market volume (new FTD): 0.4. 

Month and Year: 2008, August; 
Percentage of market volume (new FTD): 0.288. 

Month and Year: 2008, September (September emergency order); 
Percentage of market volume (new FTD): 0.256. 

Month and Year: 2008, October; 
Percentage of market volume (new FTD): 0.084. 

Month and Year: 2008, November; 
Percentage of market volume (new FTD): 0.008. 

Month and Year: 2008, December; 
Percentage of market volume (new FTD): 0.025. 

Sources: SEC and FINRA (data); GAO (analysis). 

[End of figure] 

Figure 5 compares trends in volatility, market performance, and short 
interest with the trends in FTD outstanding across NYSE, NASDAQ, and 
Amex securities over the review period. The first graphic in figure 5 
shows market volatility, as measured by changes in the CBOE Volatility 
Index (VIX), beginning to trend upward by January 2007.[Footnote 60] We 
measured market performance using the S&P 500 Total Return Index 
(second graphic), and we use short interest--the total number of shares 
of a security that have been sold short, but not yet covered or closed 
out--as a proxy for the volume of short selling occurring in the market 
(third graphic). We expected declining market performance during 2007 
and 2008 to correlate with an increase in short interest as market 
sentiment declined. The third graphic shows that after January 2007, 
short interest highly correlated with FTD, suggesting that increased 
short selling activity partially explains the rise in FTD. In 
particular, the July 2008 high in FTD correlated closely with the peak 
in short interest over the review period. 

Figure 5: VIX; S&P 500 Total Return Index; and Outstanding FTD and 
Short Interest in NYSE, NASDAQ, and Amex Securities, from April 2004 
through December 2008: 

[Refer to PDF for image: three line graphs] 

VIX: 

Month and Year: 2004, April; 
Index: 17.19. 

Month and Year: 2004, May; 
Index: 15.5. 

Month and Year: 2004, June;
Index: 114.34. 

Month and Year: 2004, July; 
Index: 15.32. 

Month and Year: 2004, August;
Index: 15.29. 

Month and Year: 2004, September; 
Index: 13.34. 

Month and Year: 2004, October; 
Index: 16.27. 

Month and Year: 2004, November; 
Index: 13.24. 

Month and Year: 2004, December; 
Index: 13.29. 

Month and Year: 2005, January (Compliance date); 
Index: 12.82. 

Month and Year: 2005, February; 
Index: 12.08. 

Month and Year: 2005, March; 
Index: 14.02. 

Month and Year: 2005, April; 
Index: 15.31. 

Month and Year: 2005, May; 
Index: 13.29. 

Month and Year: 2005, June;
Index: 12.04. 

Month and Year: 2005, July; 
Index: 11.57. 

Month and Year: 2005, August;
Index: 12.6. 

Month and Year: 2005, September; 
Index: 11.92. 

Month and Year: 2005, October; 
Index: 15.32. 

Month and Year: 2005, November; 
Index: 12.06. 

Month and Year: 2005, December; 
Index: 12.07. 

Month and Year: 2006, January; 
Index: 12.95. 

Month and Year: 2006, February; 
Index: 12.34. 

Month and Year: 2006, March; 
Index: 11.39. 

Month and Year: 2006, April; 
Index: 11.59. 

Month and Year: 2006, May; 
Index: 16.44. 

Month and Year: 2006, June; 
Index: 13.08. 

Month and Year: 2006, July; 	
Index: 14.95. 

Month and Year: 2006, August; 
Index: 12.31. 

Month and Year: 2006, September; 
Index: 11.98. 

Month and Year: 2006, October; 
Index: 11.1. 

Month and Year: 2006, November; 
Index: 10.91. 

Month and Year: 2006, December; 
Index: 11.56. 

Month and Year: 2007, January; 
Index: 10.42. 

Month and Year: 2007, February; 
Index: 15.42. 

Month and Year: 2007, March; 
Index: 14.64. 

Month and Year: 2007, April; 
Index: 14.22. 

Month and Year: 2007, May; 
Index: 13.05. 

Month and Year: 2007, June; 
Index: 16.23. 

Month and Year: 2007, July; 
Index: 23.52. 

Month and Year: 2007, August; 
Index: 23.38. 

Month and Year: 2007, September; 
Index: 18.0. 

Month and Year: 2007, October (Elimination of grandfather exception); 
Index: 18.53. 

Month and Year: 2007, November; 
Index: 22.87. 

Month and Year: 2007, December; 
Index: 22.5. 

Month and Year: 2008, January; 
Index: 26.2. 

Month and Year: 2008, February;	
Index: 26.54. 

Month and Year: 2008, March; 
Index: 25.61. 

Month and Year: 2008, April; 
Index: 20.79. 

Month and Year: 2008, May; 
Index: 17.83. 

Month and Year: 2008, June; 
Index: 23.95. 

Month and Year: 2008, July (July emergency order); 	
Index: 22.94. 

Month and Year: 2008, August; 
Index: 29.65. 

Month and Year: 2008, September (September emergency order); 
Index: 39.39. 

Month and Year: 2008, October; 
Index: 59.89. 

Month and Year: 2008, November; 
Index: 55.28. 

Month and Year: 2008, December; 
Index: 40.0. 

S&P 500 Total Return Index: 

Month and Year: 2004, April; 
Percentage change (year over year): 22.88. 

Month and Year: 2004, May; 
Percentage change (year over year): 18.33. 

Month and Year: 2004, June;
Percentage change (year over year): 19.11. 

Month and Year: 2004, July; 
Percentage change (year over year): 13.17. 

Month and Year: 2004, August;
Percentage change (year over year): 11.46. 

Month and Year: 2004, September; 
Percentage change (year over year): 13.87. 

Month and Year: 2004, October; 
Percentage change (year over year): 9.42. 

Month and Year: 2004, November; 
Percentage change (year over year): 12.86. 

Month and Year: 2004, December; 
Percentage change (year over year): 10.88. 

Month and Year: 2005, January (Compliance date); 
Percentage change (year over year): 6.23. 

Month and Year: 2005, February; 
Percentage change (year over year): 6.98. 

Month and Year: 2005, March; 
Percentage change (year over year): 6.69. 

Month and Year: 2005, April; 
Percentage change (year over year): 6.34. 

Month and Year: 2005, May; 
Percentage change (year over year): 8.24. 

Month and Year: 2005, June;
Percentage change (year over year): 6.32. 

Month and Year: 2005, July; 
Percentage change (year over year): 14.05. 

Month and Year: 2005, August;
Percentage change (year over year): 12.56. 

Month and Year: 2005, September; 
Percentage change (year over year): 12.25. 

Month and Year: 2005, October; 
Percentage change (year over year): 8.72. 

Month and Year: 2005, November; 
Percentage change (year over year): 8.44. 

Month and Year: 2005, December; 
Percentage change (year over year): 4.91. 

Month and Year: 2006, January; 
Percentage change (year over year): 10.38. 

Month and Year: 2006, February; 
Percentage change (year over year): 8.4. 

Month and Year: 2006, March; 
Percentage change (year over year): 11.73. 

Month and Year: 2006, April; 
Percentage change (year over year): 15.42. 

Month and Year: 2006, May; 
Percentage change (year over year): 8.64. 

Month and Year: 2006, June; 
Percentage change (year over year): 8.63. 

Month and Year: 2006, July; 	
Percentage change (year over year): 5.38. 

Month and Year: 2006, August; 
Percentage change (year over year): 8.88. 

Month and Year: 2006, September; 
Percentage change (year over year): 10.79. 

Month and Year: 2006, October; 
Percentage change (year over year): 16.34. 

Month and Year: 2006, November; 
Percentage change (year over year): 14.23. 

Month and Year: 2006, December; 
Percentage change (year over year): 15.79. 

Month and Year: 2007, January; 
Percentage change (year over year): 14.51. 

Month and Year: 2007, February; 
Percentage change (year over year): 11.97. 

Month and Year: 2007, March; 
Percentage change (year over year): 11.83. 

Month and Year: 2007, April; 
Percentage change (year over year): 15.24. 

Month and Year: 2007, May; 
Percentage change (year over year): 22.79. 

Month and Year: 2007, June; 
Percentage change (year over year): 20.59. 

Month and Year: 2007, July; 
Percentage change (year over year): 16.13. 

Month and Year: 2007, August; 
Percentage change (year over year): 15.13. 

Month and Year: 2007, September; 
Percentage change (year over year): 16.44. 

Month and Year: 2007, October (Elimination of grandfather exception); 
Percentage change (year over year): 14.56. 

Month and Year: 2007, November; 
Percentage change (year over year): 7.72. 

Month and Year: 2007, December; 
Percentage change (year over year): 5.49. 

Month and Year: 2008, January; 
Percentage change (year over year): -2.31. 

Month and Year: 2008, February;	
Percentage change (year over year): -3.6. 

Month and Year: 2008, March; 
Percentage change (year over year): -5.08. 

Month and Year: 2008, April; 
Percentage change (year over year): -4.68. 

Month and Year: 2008, May; 
Percentage change (year over year): -6.7. 

Month and Year: 2008, June; 
Percentage change (year over year): -13.12. 

Month and Year: 2008, July (July emergency order); 	
Percentage change (year over year): -11.09. 

Month and Year: 2008, August; 
Percentage change (year over year): -11.14. 

Month and Year: 2008, September (September emergency order); 
Percentage change (year over year): -21.98. 

Month and Year: 2008, October; 
Percentage change (year over year): -36.1. 

Month and Year: 2008, November; 
Percentage change (year over year): -38.09. 

Month and Year: 2008, December; 
Percentage change (year over year): -37.0. 

Outstanding FTD and short interest in NYSE, NASDAQ, and Amex securities 
(in billions): 

Month and Year: 2004, April; 
FTD: 5.10;
Short interest: 13.35. 

Month and Year: 2004, May; 
FTD: 4.89;
Short interest: 13.27. 

Month and Year: 2004, June;
FTD: 5.00;
Short interest: 13.64. 

Month and Year: 2004, July; 
FTD: 4.43;
Short interest: 13.55. 

Month and Year: 2004, August;
FTD: 4.42;
Short interest: 13.71. 

Month and Year: 2004, September; 
FTD: 4.22;
Short interest: 13.84. 

Month and Year: 2004, October; 
FTD: 4.24;
Short interest: 13.92. 

Month and Year: 2004, November; 
FTD: 3.88;
Short interest: 13.48. 

Month and Year: 2004, December; 
FTD: 5.50;
Short interest: 13.43. 

Month and Year: 2005, January (Compliance date); 
FTD: 3.64;
Short interest: 13.38. 

Month and Year: 2005, February; 
FTD: 3.18;
Short interest: 14.02. 

Month and Year: 2005, March; 
FTD: 3.70;
Short interest: 14.71. 

Month and Year: 2005, April; 
FTD: 3.15;
Short interest: 14.81. 

Month and Year: 2005, May; 
FTD: 3.41;
Short interest: 15.15. 

Month and Year: 2005, June;
FTD: 3.36;
Short interest: 15.05. 

Month and Year: 2005, July; 
FTD: 2.44;
Short interest: 14.91. 

Month and Year: 2005, August;
FTD: 3.23;
Short interest: 15.20. 

Month and Year: 2005, September; 
FTD: 2.98;
Short interest: 15.22. 

Month and Year: 2005, October; 
FTD: 2.66;
Short interest: 15.47. 

Month and Year: 2005, November; 
FTD: 2.69;
Short interest: 15.49. 

Month and Year: 2005, December; 
FTD: 2.99;
Short interest: 15.16. 

Month and Year: 2006, January; 
FTD: 2.66;
Short interest: 15.14. 

Month and Year: 2006, February; 
FTD: 2.74;
Short interest: 14.70. 

Month and Year: 2006, March; 
FTD: 3.42;
Short interest: 15.27. 

Month and Year: 2006, April; 
FTD: 2.80;
Short interest: 15.50. 

Month and Year: 2006, May; 
FTD: 3.37;
Short interest: 15.97. 

Month and Year: 2006, June; 
FTD: 3.08;
Short interest: 17.26. 

Month and Year: 2006, July; 	
FTD: 3.22;
Short interest: 17.37. 

Month and Year: 2006, August; 
FTD: 2.74;
Short interest: 17.85. 

Month and Year: 2006, September; 
FTD: 2.44;
Short interest: 18.05. 

Month and Year: 2006, October; 
FTD: 2.53;
Short interest: 17.92. 

Month and Year: 2006, November; 
FTD: 2.70;
Short interest: 17.40. 

Month and Year: 2006, December; 
FTD: 2.75;
Short interest: 17.34. 

Month and Year: 2007, January; 
FTD: 2.63;
Short interest: 17.33. 

Month and Year: 2007, February; 
FTD: 3.21;
Short interest: 17.42. 

Month and Year: 2007, March; 
FTD: 5.28;
Short interest: 19.28. 

Month and Year: 2007, April; 
FTD: 4.14;
Short interest: 19.86. 

Month and Year: 2007, May; 
FTD: 4.88;
Short interest: 21.08. 

Month and Year: 2007, June; 
FTD: 4.96;
Short interest: 22.73. 

Month and Year: 2007, July; 
FTD: 4.96;
Short interest: 23.38. 

Month and Year: 2007, August; 
FTD: 6.91;
Short interest: 22.66. 

Month and Year: 2007, September; 
FTD: 3.58;
Short interest: 21.18. 

Month and Year: 2007, October (Elimination of grandfather exception); 
FTD: 4.53;
Short interest: 20.55. 

Month and Year: 2007, November; 
FTD: 5.11;
Short interest: 21.67. 

Month and Year: 2007, December; 
FTD: 4.88;
Short interest: 22.01. 

Month and Year: 2008, January; 
FTD: 5.34;
Short interest: 23.66. 

Month and Year: 2008, February;	
FTD: 5.10;
Short interest: 24.58. 

Month and Year: 2008, March; 
FTD: 6.92;
Short interest: 27.09. 

Month and Year: 2008, April; 
FTD: 6.38;
Short interest: 26.46. 

Month and Year: 2008, May; 
FTD: 6.13;
Short interest: 26.97. 

Month and Year: 2008, June; 
FTD: 7.33;
Short interest: 29.58. 

Month and Year: 2008, July (July emergency order); 	
FTD: 9.75;
Short interest: 31.25. 

Month and Year: 2008, August; 
FTD: 6.54;
Short interest: 29.37. 

Month and Year: 2008, September (September emergency order); 
FTD: 8.05;
Short interest: 28.58. 

Month and Year: 2008, October; 
FTD: 3.64;
Short interest: 22.83. 

Month and Year: 2008, November; 
FTD: 1.07;
Short interest: 22.20. 

Month and Year: 2008, December; 
FTD: 1.24;
Short interest: 21.38. 

Sources: Yahoo! Finance, Global Insight, NYSE, NASDAQ, Amex, and SEC 
(data); GAO (analysis). 

[End of figure] 

The strong correlation between short interest and FTD suggests that the 
effectiveness of the locate requirement during this period of market 
turbulence may have been limited. OEA staff told us that a significant 
increase in short selling may result in increased FTD as the current 
processes for locating and obtaining securities may be temporarily 
overwhelmed. Furthermore, they said that as short interest increases, 
more securities--particularly those that are less liquid--face a 
binding borrowing constraint. As a result, borrowing becomes more 
difficult for more securities, potentially resulting in more FTD. 
[Footnote 61] Other factors may also have contributed to the increased 
number of threshold securities and FTD observed during this period. For 
example, OEA staff noted the increasing presence of ETFs on the 
threshold list during this period. We discuss ETFs in greater detail 
later in this report. Furthermore, industry officials with whom we 
spoke also said that several threshold securities had ceased trading or 
were trading at very low prices, making it difficult to resolve any FTD 
in those securities. 

After reaching a high on July 17, 2008, the number of threshold 
securities and their FTD began to decline. OEA staff pointed to the 
corresponding decline in short interest as one potential factor. While 
the SEC's emergency order restricting naked short selling in the 
securities of 19 large financial firms was issued about the same time 
(July 15, 2008), OEA staff said that they do not know to what extent 
the order was responsible for the subsequent decline in threshold 
securities and their FTD. Only 1 of the 19 firms that were subject to 
the order was on the threshold list before the order went into effect, 
and the other securities had low FTD levels. However, these staff said 
that market uncertainty about whether SEC would take additional 
emergency actions may have affected the amount of short selling in 
which the market engaged. 

OEA staff said that the September emergency orders--which eliminated 
the options market makers exception, imposed stricter close-out 
requirements on FTD in all equity securities, and temporarily banned 
short selling in the securities of financial firms--had a significant 
impact on the number of threshold securities and their FTD levels. Our 
data show that the number of threshold securities continued to decline 
after the September 2008 emergency orders became effective. Although 
the elimination of the options market maker exception and the 
provisions of the temporary rule were not fully in effect until mid- 
November when compliance grace periods expired, the average number of 
threshold securities declined to 72 in November--the lowest number 
during our review period since the effective date of Regulation SHO. 
The number of threshold securities temporarily increased to 123 by 
December 31, 2008, but subsequently declined. By May 5, 2009, there 
were 68 securities on the threshold list. 

Similarly, outstanding FTD and total new FTD in threshold securities 
also continued to decline after the September 2008 emergency order, 
although these declines had slowed by the end of 2008, when the level 
of outstanding FTD had declined to slightly below their January 2005 
level. Total new FTD also declined, but by the end of 2008 were still 
above their January 2005 level. One explanation for continued 
outstanding FTD may be that the enhanced delivery requirements of the 
temporary rule apply only to FTD from trades that occurred after the 
September emergency order became effective on September 18, 2008. 
Preexisting FTD in any equity security do not have be closed out, 
unless the security enters the threshold list. In that case, the close 
out provision for threshold securities applies, and the clearing broker-
dealer has 13 consecutive days to close out the FTD. As a result, 
outstanding FTD may be due to new securities entering the threshold 
list. We discuss characteristics of the remaining threshold securities 
later in this section of our report. Furthermore, while the temporary 
rule imposes close-out requirements on FTD in all equity securities, it 
does not prohibit them from occurring. Levels of new FTD can continue 
to fluctuate, although the overall decline since the September 2008 
emergency order suggests that the close-out requirements of the 
temporary rule have curbed the number of threshold securities and new 
FTD in these securities.[Footnote 62] 

Similar to Threshold Securities, FTD across the Market Showed a 
Noticeable Decline after the 2008 Emergency Orders: 

Figure 6 shows the number of equity securities across the market with 
outstanding FTD and those with new FTD over the review period. As with 
the threshold securities, the number of these securities began to 
decline after the July order, concurrent with the decline in short 
interest, and continued to decline after the implementation of the 
September emergency order. As we have previously discussed, the close- 
out requirements of the temporary rule applied to FTD resulting from 
trades in any equity security, not just threshold securities. Most 
notably, we found that the gap between securities with outstanding FTD 
and those with new FTD narrowed considerably by December 2008, again 
suggesting that the close-out requirements were resulting in more 
prompt close outs. The overall decline in securities with new FTD also 
suggests the new requirements may be having the effect of curbing new 
FTD. 

Figure 6: Average Daily Number of Securities with Outstanding and New 
FTD for All Securities, by Month, from April 2004 through December 
2008: 

[Refer to PDF for image: line graph] 

Month and Year: 2004, April; 
Average daily number of securities, Outstanding FTD: 2,749.43; 
Average daily number of securities, New FTD: 1,515.43. 

Month and Year: 2004, May; 
Average daily number of securities, Outstanding FTD: 2,782.15; 
Average daily number of securities, New FTD: 1,546.45. 

Month and Year: 2004, June;
Average daily number of securities, Outstanding FTD: 2,729.77; 
Average daily number of securities, New FTD: 1,487.86. 

Month and Year: 2004, July; 
Average daily number of securities, Outstanding FTD: 2,747.95; 
Average daily number of securities, New FTD: 1,537.81. 

Month and Year: 2004, August;
Average daily number of securities, Outstanding FTD: 2,677.05; 
Average daily number of securities, New FTD: 1,475.67. 

Month and Year: 2004, September; 
Average daily number of securities, Outstanding FTD: 2,704.81; 
Average daily number of securities, New FTD: 1,480.1. 

Month and Year: 2004, October; 
Average daily number of securities, Outstanding FTD: 2,685.7;
Average daily number of securities, New FTD: 1,498.5. 

Month and Year: 2004, November; 
Average daily number of securities, Outstanding FTD: 2,703.89;
Average daily number of securities, New FTD: 1,532.78. 

Month and Year: 2004, December; 
Average daily number of securities, Outstanding FTD: 2,843.68;
Average daily number of securities, New FTD: 1,603.59. 

Month and Year: 2005, January (Compliance date); 
Average daily number of securities, Outstanding FTD: 2,631.55;
Average daily number of securities, New FTD: 1,465.95. 

Month and Year: 2005, February; 
Average daily number of securities, Outstanding FTD: 2,541.21;
Average daily number of securities, New FTD: 1,479.95. 

Month and Year: 2005, March; 
Average daily number of securities, Outstanding FTD: 2,626.09;
Average daily number of securities, New FTD: 1,512.41. 

Month and Year: 2005, April; 
Average daily number of securities, Outstanding FTD: 2,468.91;
Average daily number of securities, New FTD: 1,386.33. 

Month and Year: 2005, May; 
Average daily number of securities, Outstanding FTD: 2,406.95;
Average daily number of securities, New FTD: 1,360.81. 

Month and Year: 2005, June;
Average daily number of securities, Outstanding FTD: 2,489.96;
Average daily number of securities, New FTD: 1,417.77. 

Month and Year: 2005, July; 
Average daily number of securities, Outstanding FTD: 2,455.2;
Average daily number of securities, New FTD: 1,367.05. 

Month and Year: 2005, August;
Average daily number of securities, Outstanding FTD: 2,506.52;
Average daily number of securities, New FTD: 1,413. 

Month and Year: 2005, September; 
Average daily number of securities, Outstanding FTD: 2,425.05;
Average daily number of securities, New FTD: 1,370.19. 

Month and Year: 2005, October; 
Average daily number of securities, Outstanding FTD: 2,433.8;
Average daily number of securities, New FTD: 1,404.8. 

Month and Year: 2005, November; 
Average daily number of securities, Outstanding FTD: 2,359.85;
Average daily number of securities, New FTD: 1,337.2. 

Month and Year: 2005, December; 
Average daily number of securities, Outstanding FTD: 2,514.52;
Average daily number of securities, New FTD: 1,439.1. 

Month and Year: 2006, January; 
Average daily number of securities, Outstanding FTD: 2,557.3;
Average daily number of securities, New FTD: 1,479.4. 

Month and Year: 2006, February; 
Average daily number of securities, Outstanding FTD: 2,681.42;	
Average daily number of securities, New FTD: 1,581.32. 

Month and Year: 2006, March; 
Average daily number of securities, Outstanding FTD: 2,657.26;
Average daily number of securities, New FTD: 1,537.57. 

Month and Year: 2006, April; 
Average daily number of securities, Outstanding FTD: 2,788.79;
Average daily number of securities, New FTD: 1,636.47. 

Month and Year: 2006, May; 
Average daily number of securities, Outstanding FTD: 2,924.59;
Average daily number of securities, New FTD: 1,732.14. 

Month and Year: 2006, June; 
Average daily number of securities, Outstanding FTD: 2,702.77;
Average daily number of securities, New FTD: 1,578.55. 

Month and Year: 2006, July; 	
Average daily number of securities, Outstanding FTD: 2,617.3;
Average daily number of securities, New FTD: 1,536.45. 

Month and Year: 2006, August; 
Average daily number of securities, Outstanding FTD: 2,444.22;
Average daily number of securities, New FTD: 1,382.96. 

Month and Year: 2006, September; 
Average daily number of securities, Outstanding FTD: 2,434;
Average daily number of securities, New FTD: 1,397.95. 

Month and Year: 2006, October; 
Average daily number of securities, Outstanding FTD: 2,525.1;
Average daily number of securities, New FTD: 1,454.86. 

Month and Year: 2006, November; 
Average daily number of securities, Outstanding FTD: 2,616.14;
Average daily number of securities, New FTD: 1,539.52. 

Month and Year: 2006, December; 
Average daily number of securities, Outstanding FTD: 2,737.32;
Average daily number of securities, New FTD: 1,640.9. 

Month and Year: 2007, January; 
Average daily number of securities, Outstanding FTD: 2,524;
Average daily number of securities, New FTD: 1,463.48. 

Month and Year: 2007, February; 
Average daily number of securities, Outstanding FTD: 2,691.11;
Average daily number of securities, New FTD: 1,641.42. 

Month and Year: 2007, March; 
Average daily number of securities, Outstanding FTD: 2,823.27;
Average daily number of securities, New FTD: 1,719.05. 

Month and Year: 2007, April; 
Average daily number of securities, Outstanding FTD: 2,755.75;
Average daily number of securities, New FTD: 2,026.2. 

Month and Year: 2007, May; 
Average daily number of securities, Outstanding FTD: 3,122.91;
Average daily number of securities, New FTD: 2,409.77. 

Month and Year: 2007, June; 
Average daily number of securities, Outstanding FTD: 3,047.95;
Average daily number of securities, New FTD: 2,364.95. 

Month and Year: 2007, July; 
Average daily number of securities, Outstanding FTD: 2,976.52;
Average daily number of securities, New FTD: 2,300.38. 

Month and Year: 2007, August; 
Average daily number of securities, Outstanding FTD: 3,340.7;
Average daily number of securities, New FTD: 2,610.83. 

Month and Year: 2007, September; 
Average daily number of securities, Outstanding FTD: 2,838;
Average daily number of securities, New FTD: 2,175.37. 

Month and Year: 2007, October (Elimination of grandfather exception); 
Average daily number of securities, Outstanding FTD: ,853.23;
Average daily number of securities, New FTD: 2,175.55. 

Month and Year: 2007, November; 
Average daily number of securities, Outstanding FTD: 3,178.55;
Average daily number of securities, New FTD: 2,459.55. 

Month and Year: 2007, December; 
Average daily number of securities, Outstanding FTD: 3,029.6;
Average daily number of securities, New FTD: 2,339.75. 

Month and Year: 2008, January; 
Average daily number of securities, Outstanding FTD: 3,091.62;
Average daily number of securities, New FTD: 2,424.76. 

Month and Year: 2008, February;	
Average daily number of securities, Outstanding FTD: 3,113.15;
Average daily number of securities, New FTD: 2,424.4. 

Month and Year: 2008, March; 
Average daily number of securities, Outstanding FTD: 3,482.6;
Average daily number of securities, New FTD: 2,738. 

Month and Year: 2008, April; 
Average daily number of securities, Outstanding FTD: 3,163.77;
Average daily number of securities, New FTD: 2,411.91. 

Month and Year: 2008, May; 
Average daily number of securities, Outstanding FTD: 3,197.14;
Average daily number of securities, New FTD: 2,471.52. 

Month and Year: 2008, June; 
Average daily number of securities, Outstanding FTD: 3,316.86;
Average daily number of securities, New FTD: 2,543.71. 

Month and Year: 2008, July (July emergency order); 	
Average daily number of securities, Outstanding FTD: 3,403.86;
Average daily number of securities, New FTD: 2,603.05. 

Month and Year: 2008, August; 
Average daily number of securities, Outstanding FTD: 3,110;
Average daily number of securities, New FTD: 2,267.62. 

Month and Year: 2008, September (September emergency order); 
Average daily number of securities, Outstanding FTD: 3,291.76;
Average daily number of securities, New FTD: 2,423.43. 

Month and Year: 2008, October; 
Average daily number of securities, Outstanding FTD: 1,775.64;
Average daily number of securities, New FTD: 1,325.27. 

Month and Year: 2008, November; 
Average daily number of securities, Outstanding FTD: 1,331.94;
Average daily number of securities, New FTD: 1,021.17. 

Month and Year: 2008, December; 
Average daily number of securities, Outstanding FTD: 1,290.86;
Average daily number of securities, New FTD: 969.68. 

Sources: SEC (data); GAO (analysis). 

Note: Prior to September 16, 2008, SEC received FTD data on equity 
securities with aggregate FTD of 10,000 or more. After this date, SEC 
began receiving data on all FTD in every equity security. For a 
consistent comparison, our sample includes securities with aggregate 
FTD of 10,000 or more for the entire review period. 

[End of figure] 

Figure 7 shows the monthly average outstanding FTD for all securities, 
and indicates a similar declining trend in threshold securities after 
July 2008. By the end of 2008, outstanding FTD did not appear to have 
declined below the earlier low point (late-2005). As we have previously 
discussed, FTD existing prior to the effective date of the September 
emergency order do not have to be closed out, unless the security 
enters the threshold list. In addition, although the temporary rule 
appeared to have curbed the number of securities with new FTD by the 
end of 2008, it does not prohibit new FTD. The potential exists that 
market events, such as increased trading volume or short interest, 
could again lead to increased FTD. It remains to be seen whether the 
stricter close-out requirements are having the effect of encouraging 
improvements in locating and delivery processes that would help 
mitigate increases in new FTD under such circumstances. 

Figure 7: Average Outstanding FTD for All Securities, by Month, from 
April 2004 through December 2008 (shares in millions): 

[Refer to PDF for image: line graph] 

Month and Year: 2004, April; 
Average outstanding FTD for all securities: 827.1. 

Month and Year: 2004, May; 
Average outstanding FTD for all securities: 631.2. 

Month and Year: 2004, June;
Average outstanding FTD for all securities: 613.1. 

Month and Year: 2004, July; 
Average outstanding FTD for all securities: 649.9. 

Month and Year: 2004, August;
Average outstanding FTD for all securities: 1152. 

Month and Year: 2004, September; 
Average outstanding FTD for all securities: 1088.6. 

Month and Year: 2004, October; 
Average outstanding FTD for all securities: 853.5. 

Month and Year: 2004, November; 
Average outstanding FTD for all securities: 678.3. 

Month and Year: 2004, December; 
Average outstanding FTD for all securities: 781.3. 

Month and Year: 2005, January (Compliance date); 
Average outstanding FTD for all securities: 672.7. 

Month and Year: 2005, February; 
Average outstanding FTD for all securities: 576.5. 

Month and Year: 2005, March; 
Average outstanding FTD for all securities: 508.4. 

Month and Year: 2005, April; 
Average outstanding FTD for all securities: 524.5. 

Month and Year: 2005, May; 
Average outstanding FTD for all securities: 480.6. 

Month and Year: 2005, June;
Average outstanding FTD for all securities: 511.9. 

Month and Year: 2005, July; 
Average outstanding FTD for all securities: 473.6. 

Month and Year: 2005, August;
Average outstanding FTD for all securities: 422.4. 

Month and Year: 2005, September; 
Average outstanding FTD for all securities: 443.1. 

Month and Year: 2005, October; 
Average outstanding FTD for all securities: 464.4. 

Month and Year: 2005, November; 
Average outstanding FTD for all securities: 412.6. 

Month and Year: 2005, December; 
Average outstanding FTD for all securities: 533.7. 

Month and Year: 2006, January; 
Average outstanding FTD for all securities: 475.1. 

Month and Year: 2006, February; 
Average outstanding FTD for all securities: 675.4. 

Month and Year: 2006, March; 
Average outstanding FTD for all securities: 752.3. 

Month and Year: 2006, April; 
Average outstanding FTD for all securities: 518.1. 

Month and Year: 2006, May; 
Average outstanding FTD for all securities: 640.2. 

Month and Year: 2006, June; 
Average outstanding FTD for all securities: 560.5. 

Month and Year: 2006, July; 	
Average outstanding FTD for all securities: 576.6. 

Month and Year: 2006, August; 
Average outstanding FTD for all securities: 550.9. 

Month and Year: 2006, September; 
Average outstanding FTD for all securities: 598.2. 

Month and Year: 2006, October; 
Average outstanding FTD for all securities: 730.4. 

Month and Year: 2006, November; 
Average outstanding FTD for all securities: 757.9. 

Month and Year: 2006, December; 
Average outstanding FTD for all securities: 640.9. 

Month and Year: 2007, January; 
Average outstanding FTD for all securities: 562.1. 

Month and Year: 2007, February; 
Average outstanding FTD for all securities: 882.1. 

Month and Year: 2007, March; 
Average outstanding FTD for all securities: 735.5. 

Month and Year: 2007, April; 
Average outstanding FTD for all securities: 775.1. 

Month and Year: 2007, May; 
Average outstanding FTD for all securities: 969.4. 

Month and Year: 2007, June; 
Average outstanding FTD for all securities: 960.2. 

Month and Year: 2007, July; 
Average outstanding FTD for all securities: 1074.3. 

Month and Year: 2007, August; 
Average outstanding FTD for all securities: 1295.5. 

Month and Year: 2007, September; 
Average outstanding FTD for all securities: 1084.3. 

Month and Year: 2007, October (Elimination of grandfather exception); 
Average outstanding FTD for all securities: 1071.3. 

Month and Year: 2007, November; 
Average outstanding FTD for all securities: 1070.4. 

Month and Year: 2007, December; 
Average outstanding FTD for all securities: 863.9. 

Month and Year: 2008, January; 
Average outstanding FTD for all securities: 829.3. 

Month and Year: 2008, February;	
Average outstanding FTD for all securities: 1009.4. 

Month and Year: 2008, March; 
Average outstanding FTD for all securities: 1303.0. 

Month and Year: 2008, April; 
Average outstanding FTD for all securities: 1017.8. 

Month and Year: 2008, May; 
Average outstanding FTD for all securities: 1018.3. 

Month and Year: 2008, June; 
Average outstanding FTD for all securities: 1071.1. 

Month and Year: 2008, July (July emergency order); 	
Average outstanding FTD for all securities: 1573.2. 

Month and Year: 2008, August; 
Average outstanding FTD for all securities: 1040.7. 

Month and Year: 2008, September (September emergency order); 
Average outstanding FTD for all securities: 1028.1. 

Month and Year: 2008, October; 
Average outstanding FTD for all securities: 581.7. 

Month and Year: 2008, November; 
Average outstanding FTD for all securities: 497.7. 

Month and Year: 2008, December; 
Average outstanding FTD for all securities: 501.4. 

Sources: SEC (data); GAO (analysis). 

Note: Prior to September 16, 2008, SEC received FTD data on equity 
securities with aggregate FTD of 10,000 or more. After this date, SEC 
began receiving data on all FTD in every equity security. For a 
consistent comparison, our sample includes securities with aggregate 
FTD of 10,000 or more for the entire review period. 

[End of figure] 

Although the Majority of Threshold Securities Graduated from the List 
in a Timely Manner, Some Securities Persisted for Extended Periods: 

Our review of FTD data showed that the majority of threshold securities 
"graduated" from the threshold list in a timely manner over the review 
period, although most returned to the threshold list at least once. 
Furthermore, until the September emergency order became effective, some 
threshold securities persisted on the list for extended periods. A 
majority of the threshold securities (83 percent) graduated from the 
list within 22 days, the earliest we expected given the implementation 
of the close-out requirement, and many graduated sooner--25 percent 
within 6 days.[Footnote 63] The timely graduation of threshold 
securities, in most instances, indicates that the regulation worked as 
intended to reduce FTD to below the threshold level once securities 
appeared on the threshold list. However, in many instances, this effect 
was not permanent, as FTD in these securities eventually increased 
again. From January 10, 2005, the day the first threshold list was 
published, until December 31, 2008, about 21,400 securities graduated 
from the threshold list. Of these securities, about 17,000, or 80 
percent, returned to the threshold list at least once, and about 1,200, 
or 6 percent, returned to the list more than 10 times. 

In addition to showing the average monthly number of threshold 
securities over the review period, figure 8 includes data on the number 
of days these securities persisted on the threshold list. We found that 
the average daily number of securities per month that were on the 
threshold list for 22 days or less ranged from 50 percent (October 
2008) to 91 percent (December 2008). However, some securities persisted 
for considerably longer periods. Figure 8 also indicates the number of 
securities that persisted on the list for more than 22, 30, 60, and 90 
days, respectively, during the review period. 

Figure 8: Average Number of Threshold Securities, by Month, and Number 
of Days on the Threshold List, from January 2005 through December 2008: 

[Refer to PDF for image: multiple line graph] 

Month and Year: 2005, January (Compliance date); 
Average number of threshold securities, all securities: 423.13. 

Month and Year: 2005, February; 
Average number of threshold securities, all securities: 385.16; 
Average number of threshold securities, 22 days or more: 82.89; 
Average number of threshold securities, 30 days or more: 23.42. 

Month and Year: 2005, March; 
Average number of threshold securities, all securities: 359.32; 
Average number of threshold securities, 22 days or more: 137.55; 
Average number of threshold securities, 30 days or more: 107. 

Month and Year: 2005, April; 
Average number of threshold securities, all securities: 317.57; 
Average number of threshold securities, 22 days or more: 121.76; 
Average number of threshold securities, 30 days or more: 96.71; 
Average number of threshold securities, 60 days or more: 45.95. 

Month and Year: 2005, May; 
Average number of threshold securities, all securities: 296.9; 
Average number of threshold securities, 22 days or more: 112.38
Average number of threshold securities, 30 days or more: 93.19
Average number of threshold securities, 60 days or more: 60.33
Average number of threshold securities, 90 days or more: 13.38 

Month and Year: 2005, June;
Average number of threshold securities, all securities: 288.36; 
Average number of threshold securities, 22 days or more: 103.45; 
Average number of threshold securities, 30 days or more: 86.09; 
Average number of threshold securities, 60 days or more: 56.18; 
Average number of threshold securities, 90 days or more: 43.59. 

Month and Year: 2005, July; 
Average number of threshold securities, all securities: 298.6; 
Average number of threshold securities, 22 days or more: 93.7; 
Average number of threshold securities, 30 days or more: 76.9; 
Average number of threshold securities, 60 days or more: 49.85; 
Average number of threshold securities, 90 days or more: 40.75. 

Month and Year: 2005, August;
Average number of threshold securities, all securities: 307.48; 
Average number of threshold securities, 22 days or more: 101.61
Average number of threshold securities, 30 days or more: 77.78
Average number of threshold securities, 60 days or more: 48.48
Average number of threshold securities, 90 days or more: 40.26 

Month and Year: 2005, September; 
Average number of threshold securities, all securities: 289.9; 
Average number of threshold securities, 22 days or more: 98.48; 
Average number of threshold securities, 30 days or more: 79.95; 
Average number of threshold securities, 60 days or more: 48.1; 
Average number of threshold securities, 90 days or more: 37.14. 

Month and Year: 2005, October; 
Average number of threshold securities, all securities: 275.05;	
Average number of threshold securities, 22 days or more: 91.5; 
Average number of threshold securities, 30 days or more: 71.6; 
Average number of threshold securities, 60 days or more: 45.65; 
Average number of threshold securities, 90 days or more: 32.65. 

Month and Year: 2005, November; 
Average number of threshold securities, all securities: 270.6; 
Average number of threshold securities, 22 days or more: 67.45; 
Average number of threshold securities, 30 days or more: 53.55; 
Average number of threshold securities, 60 days or more: 36.2; 
Average number of threshold securities, 90 days or more: 27.7. 

Month and Year: 2005, December; 
Average number of threshold securities, all securities: 281.67; 
Average number of threshold securities, 22 days or more: 74.71; 
Average number of threshold securities, 30 days or more: 53.57; 
Average number of threshold securities, 60 days or more: 30.48; 
Average number of threshold securities, 90 days or more: 24.76. 

Month and Year: 2006, January; 
Average number of threshold securities, all securities: 274.3; 
Average number of threshold securities, 22 days or more: 83.85; 
Average number of threshold securities, 30 days or more: 63.6; 
Average number of threshold securities, 60 days or more: 31; 
Average number of threshold securities, 90 days or more: 23.1. 

Month and Year: 2006, February; 
Average number of threshold securities, all securities: 324.11;	
Average number of threshold securities, 22 days or more: 90.16; 
Average number of threshold securities, 30 days or more: 69.74; 
Average number of threshold securities, 60 days or more: 39.63; 
Average number of threshold securities, 90 days or more: 22.84. 

Month and Year: 2006, March; 
Average number of threshold securities, all securities: 324.61; 
Average number of threshold securities, 22 days or more: 104.09; 
Average number of threshold securities, 30 days or more: 77.74; 
Average number of threshold securities, 60 days or more: 38.7; 
Average number of threshold securities, 90 days or more: 26.74. 

Month and Year: 2006, April; 
Average number of threshold securities, all securities: 308.68; 
Average number of threshold securities, 22 days or more: 90.47; 
Average number of threshold securities, 30 days or more: 70.84; 
Average number of threshold securities, 60 days or more: 39.26; 
Average number of threshold securities, 90 days or more: 26.58. 

Month and Year: 2006, May; 
Average number of threshold securities, all securities: 297.5; 
Average number of threshold securities, 22 days or more: 79.64; 
Average number of threshold securities, 30 days or more: 60; 
Average number of threshold securities, 60 days or more: 34.55; 
Average number of threshold securities, 90 days or more: 22.5. 

Month and Year: 2006, June; 
Average number of threshold securities, all securities: 251.91; 
Average number of threshold securities, 22 days or more: 70.91; 
Average number of threshold securities, 30 days or more: 53.64; 
Average number of threshold securities, 60 days or more: 28; 
Average number of threshold securities, 90 days or more: 22.68. 

Month and Year: 2006, July; 	
Average number of threshold securities, all securities: 254.75; 
Average number of threshold securities, 22 days or more: 64.15; 
Average number of threshold securities, 30 days or more: 46.15; 
Average number of threshold securities, 60 days or more: 21.15; 
Average number of threshold securities, 90 days or more: 15.2. 

Month and Year: 2006, August; 
Average number of threshold securities, all securities: 230.87; 
Average number of threshold securities, 22 days or more: 61.43; 
Average number of threshold securities, 30 days or more: 48.26; 
Average number of threshold securities, 60 days or more: 22.22; 
Average number of threshold securities, 90 days or more: 15.87. 

Month and Year: 2006, September; 
Average number of threshold securities, all securities: 238.95;	
Average number of threshold securities, 22 days or more: 66.4; 
Average number of threshold securities, 30 days or more: 47.6; 
Average number of threshold securities, 60 days or more: 24.25; 
Average number of threshold securities, 90 days or more: 13.75. 

Month and Year: 2006, October; 
Average number of threshold securities, all securities: 264.62; 
Average number of threshold securities, 22 days or more: 73.62;
Average number of threshold securities, 30 days or more: 55.86;
Average number of threshold securities, 60 days or more: 26.52;
Average number of threshold securities, 90 days or more: 15. 

Month and Year: 2006, November; 
Average number of threshold securities, all securities: 277.05;		
Average number of threshold securities, 22 days or more: 73; 
Average number of threshold securities, 30 days or more: 54.86; 
Average number of threshold securities, 60 days or more: 27.1; 
Average number of threshold securities, 90 days or more: 16.38. 

Month and Year: 2006, December; 
Average number of threshold securities, all securities: 294.75; 
Average number of threshold securities, 22 days or more: 72.8; 
Average number of threshold securities, 30 days or more: 54.95; 
Average number of threshold securities, 60 days or more: 26.65; 
Average number of threshold securities, 90 days or more: 15.6. 

Month and Year: 2007, January; 
Average number of threshold securities, all securities: 256.45;	
Average number of threshold securities, 22 days or more: 60; 
Average number of threshold securities, 30 days or more: 43.5; 
Average number of threshold securities, 60 days or more: 25.2; 
Average number of threshold securities, 90 days or more: 15.8. 

Month and Year: 2007, February; 
Average number of threshold securities, all securities: 270.89; 
Average number of threshold securities, 22 days or more: 51.68; 
Average number of threshold securities, 30 days or more: 35.89; 
Average number of threshold securities, 60 days or more: 17.05; 
Average number of threshold securities, 90 days or more: 13.26. 

Month and Year: 2007, March; 
Average number of threshold securities, all securities: 311.05; 
Average number of threshold securities, 22 days or more: 75.55; 
Average number of threshold securities, 30 days or more: 51.86; 
Average number of threshold securities, 60 days or more: 18.86; 
Average number of threshold securities, 90 days or more: 13.14. 

Month and Year: 2007, April; 
Average number of threshold securities, all securities: 317.6; 
Average number of threshold securities, 22 days or more: 87.15; 
Average number of threshold securities, 30 days or more: 62.05; 
Average number of threshold securities, 60 days or more: 22.85; 
Average number of threshold securities, 90 days or more: 12.3. 

Month and Year: 2007, May; 
Average number of threshold securities, all securities: 361.18; 
Average number of threshold securities, 22 days or more: 89.41; 
Average number of threshold securities, 30 days or more: 68.41; 
Average number of threshold securities, 60 days or more: 31.77; 
Average number of threshold securities, 90 days or more: 13.95. 

Month and Year: 2007, June; 
Average number of threshold securities, all securities: 373.05; 
Average number of threshold securities, 22 days or more: 110.19; 
Average number of threshold securities, 30 days or more: 83; 
Average number of threshold securities, 60 days or more: 44.05; 
Average number of threshold securities, 90 days or more: 22.86. 

Month and Year: 2007, July; 
Average number of threshold securities, all securities: 415.95; 
Average number of threshold securities, 22 days or more: 125.38; 
Average number of threshold securities, 30 days or more: 95.86; 
Average number of threshold securities, 60 days or more: 46.52; 
Average number of threshold securities, 90 days or more: 27.62. 

Month and Year: 2007, August; 
Average number of threshold securities, all securities: 459.52;		
Average number of threshold securities, 22 days or more: 134.52; 
Average number of threshold securities, 30 days or more: 103.17; 
Average number of threshold securities, 60 days or more: 49.87; 
Average number of threshold securities, 90 days or more: 28.52. 

Month and Year: 2007, September; 
Average number of threshold securities, all securities: 337.89; 
Average number of threshold securities, 22 days or more: 122.47; 
Average number of threshold securities, 30 days or more: 95.21; 
Average number of threshold securities, 60 days or more: 49.84; 
Average number of threshold securities, 90 days or more: 32.84. 

Month and Year: 2007, October (Elimination of grandfather exception); 
Average number of threshold securities, all securities: 367; 
Average number of threshold securities, 22 days or more: 129.41; 
Average number of threshold securities, 30 days or more: 103.73; 
Average number of threshold securities, 60 days or more: 57.09; 
Average number of threshold securities, 90 days or more: 35.73. 

Month and Year: 2007, November; 
Average number of threshold securities, all securities: 380.76;	
Average number of threshold securities, 22 days or more: 117.29; 
Average number of threshold securities, 30 days or more: 94.48; 
Average number of threshold securities, 60 days or more: 55.48; 
Average number of threshold securities, 90 days or more: 36.86. 

Month and Year: 2007, December; 
Average number of threshold securities, all securities: 395.3; 	
Average number of threshold securities, 22 days or more: 108.85; 
Average number of threshold securities, 30 days or more: 84.75; 
Average number of threshold securities, 60 days or more: 51.2; 
Average number of threshold securities, 90 days or more: 37.55; 

Month and Year: 2008, January; 
Average number of threshold securities, all securities: 406.62; 
Average number of threshold securities, 22 days or more: 116.33; 
Average number of threshold securities, 30 days or more: 87.76; 
Average number of threshold securities, 60 days or more: 49.67; 
Average number of threshold securities, 90 days or more: 32.14. 

Month and Year: 2008, February;	
Average number of threshold securities, all securities: 404; 
Average number of threshold securities, 22 days or more: 127.7; 
Average number of threshold securities, 30 days or more: 98.35; 
Average number of threshold securities, 60 days or more: 51.75; 
Average number of threshold securities, 90 days or more: 34.35. 

Month and Year: 2008, March; 
Average number of threshold securities, all securities: 466.3; 
Average number of threshold securities, 22 days or more: 147.2; 
Average number of threshold securities, 30 days or more: 118.3; 
Average number of threshold securities, 60 days or more: 59.1; 
Average number of threshold securities, 90 days or more: 33.85. 

Month and Year: 2008, April; 
Average number of threshold securities, all securities: 532.41;	
Average number of threshold securities, 22 days or more: 179.59; 
Average number of threshold securities, 30 days or more: 132.45; 
Average number of threshold securities, 60 days or more: 74.41; 
Average number of threshold securities, 90 days or more: 44.05. 

Month and Year: 2008, May; 
Average number of threshold securities, all securities: 491.05; 
Average number of threshold securities, 22 days or more: 212.9; 
Average number of threshold securities, 30 days or more: 177.62; 
Average number of threshold securities, 60 days or more: 81.67; 
Average number of threshold securities, 90 days or more: 54. 

Month and Year: 2008, June; 
Average number of threshold securities, all securities: 503.52; 
Average number of threshold securities, 22 days or more: 201.62; 
Average number of threshold securities, 30 days or more: 169.67; 
Average number of threshold securities, 60 days or more: 104; 
Average number of threshold securities, 90 days or more: 59.86. 

Month and Year: 2008, July (July emergency order); 	
Average number of threshold securities, all securities: 581.59;	
Average number of threshold securities, 22 days or more: 184.23; 
Average number of threshold securities, 30 days or more: 152.73; 
Average number of threshold securities, 60 days or more: 92.55; 
Average number of threshold securities, 90 days or more: 59.05. 

Month and Year: 2008, August; 
Average number of threshold securities, all securities: 500; 
Average number of threshold securities, 22 days or more: 223.67; 
Average number of threshold securities, 30 days or more: 166.33; 
Average number of threshold securities, 60 days or more: 88.24; 
Average number of threshold securities, 90 days or more: 63.05. 

Month and Year: 2008, September (September emergency order); 
Average number of threshold securities, all securities: 413.38; 
Average number of threshold securities, 22 days or more: 186.14; 
Average number of threshold securities, 30 days or more: 164.29; 
Average number of threshold securities, 60 days or more: 88.71; 
Average number of threshold securities, 90 days or more: 61. 

Month and Year: 2008, October; 
Average number of threshold securities, all securities: 195.41;	
Average number of threshold securities, 22 days or more: 97.68; 
Average number of threshold securities, 30 days or more: 84.77; 
Average number of threshold securities, 60 days or more: 66.5; 
Average number of threshold securities, 90 days or more: 43.09. 

Month and Year: 2008, November; 
Average number of threshold securities, all securities: 72; 
Average number of threshold securities, 22 days or more: 12.06; 
Average number of threshold securities, 30 days or more: 9.72; 
Average number of threshold securities, 60 days or more: 6.17; 
Average number of threshold securities, 90 days or more: 4.39. 

Month and Year: 2008, December; 
Average number of threshold securities, all securities: 83.91; 
Average number of threshold securities, 22 days or more: 7.27; 
Average number of threshold securities, 30 days or more: 4.86; 
Average number of threshold securities, 60 days or more: 2.27; 
Average number of threshold securities, 90 days or more: 0.73. 

Sources: SEC (data); GAO (analysis). 
		
[End of figure] 

Securities legitimately could have persisted on the threshold list 
during the review period for several reasons: 

* FTD in these securities could have been exempt from the close-out 
requirement under the former grandfather and option market maker 
exceptions, at least until these exceptions were eliminated. FTD in 
these securities also could have fallen under the third exception from 
the Regulation SHO delivery requirement if they resulted from long 
sales of formerly restricted securities. As we have previously 
discussed, Regulation SHO allows owners of formerly restricted 
securities 35 days to complete processing of these securities and 
deliver them to their clearing broker-dealer. 

* Clearing broker-dealers may have closed out their FTD in compliance 
with Regulation SHO, but as old FTD were cleared up, new ones were 
created that kept the security on the threshold list. 

* Clearing broker-dealers may have been unable to close out their FTD 
after 13 consecutive settlement days, because, for example, of a lack 
of liquidity in a specific security. In that case, until the relevant 
clearing broker-dealer was able to obtain securities and close out its 
FTD, it would be required to preborrow, or arrange to preborrow, 
securities before effecting additional short sales. 

Examination and enforcement staff at FINRA and SEC told us that until 
they conduct an examination or inquiry into persistent FTD in a 
threshold security, they do not know whether they were legitimate 
(e.g., based on an exception) or whether the firm violated Regulation 
SHO's delivery requirements in those securities.[Footnote 64] 

We reviewed securities that persisted for more than 90 days over the 
review period and found they comprised about 300 unique securities. 
Table 1 shows the number of securities that persisted on the threshold 
list for more than 90 days, by the number of days. The table reflects a 
total of 365 because some securities appeared on the list more than 
once. We found 1 security that persisted on the threshold list for more 
than 700 consecutive days. For those securities that returned to the 
threshold list more than once, we found that the total number of days 
they could persist on the list could be greater. For example, 1 
security that returned to the threshold list 5 times persisted for a 
total of 862 days. 

Table 1: Number of Securities on the Threshold List for More Than 90 
Consecutive Settlement Days, from January 2005 through December 2008: 

Number of securities appearing on the threshold list for more than 90 
days: 
Number of consecutive settlement days: 90-100: 59; 
Number of consecutive settlement days: 101-200: 229; 
Number of consecutive settlement days: 201-300: 44; 
Number of consecutive settlement days: 301-400: 23; 
Number of consecutive settlement days: 401-500: 7; 
Number of consecutive settlement days: 501-600: 2; 
Number of consecutive settlement days: 601-700: 0; 
Number of consecutive settlement days: 701-800: 1. 

Sources: SEC (data); GAO (analysis). 

[End of table] 

The September emergency order appeared to significantly reduce the 
ability of securities to persist for extended periods. From May 2005, 
the first month that a security could be on the threshold list for more 
than 90 days, through September 2008, the average daily number of 
securities persisting for more than 90 days ranged from a low of 12 per 
month (April 2007) to a high of 63 per month (August 2008). Our data 
showed that the number of such securities did not begin to decline 
significantly from their record high until after the September order 
became effective. By the end of 2008, no securities on the threshold 
list had persisted for more than 90 days. 

ETFs Accounted for Half of the Remaining Threshold Securities at the 
End of 2008: 

The percentage of ETFs on the threshold list increased over the review 
period (figure 9) as the number of these products trading in the 
financial markets also grew.[Footnote 65] By December 2008, about 50 
percent of the securities remaining on the threshold list were ETFs. 
Trading and Markets and OEA staffs said that, at this time, they do not 
believe ETFs are persistently failing due to manipulation, and noted 
that ETFs are characteristically less prone to manipulation than common 
stock since the ETF price is based generally on large baskets of 
underlying securities.[Footnote 66] 

Instead, Trading and Markets, OEA, and FINRA staffs believe that 
structural characteristics associated with ETFs make them more likely 
to experience FTD. This is primarily because ETFs can only be created 
and redeemed in large blocks of shares (e.g., 50,000) called creation 
units.[Footnote 67] For example, OEA staff said that, given the costs 
associated with creating and redeeming units, broker-dealers may have 
little incentive to create additional units until the number of FTD is 
at least as great as the creation unit size. As a result, ETFs are more 
prone to inclusion on the threshold list than other securities. OEA 
staff said that because many ETFs have a low number of total shares 
outstanding, FTD in ETFs can easily trigger the 10,000 share FTD and 
0.5 percent of total shares outstanding criterion for becoming a 
threshold security. In addition, the creation unit size may far exceed 
the 10,000 share FTD trigger level for becoming a threshold security. 
FINRA staff told us that when newly listed ETFs begin trading, there is 
uncertainty in the marketplace regarding the level of demand. If demand 
for the specific ETF exceeds contemporaneous sell-side supply, FINRA 
staff said that market makers will short sell the ETF pursuant to 
existing exemptions, causing FTD. However, these staff said that the 
resulting FTD are typically short term and resolved through the 
issuance of additional creation units. 

Trading and Markets and OEA staffs said that they are continuing to 
review ETFs to further understand the reasons for FTD in the products, 
and to monitor any potential changes to ETF products for manipulation 
or other concerns. 

Figure 9: ETFs as a Percentage of Threshold Securities, by Month, from 
January 2005 through December 2008: 

[Refer to PDF for image: line graph] 

Month and Year: 2005, January (Compliance date); 
Percentage of threshold securities (ETF): 7.72. 

Month and Year: 2005, February; 
Percentage of threshold securities (ETF): 5.62. 

Month and Year: 2005, March; 
Percentage of threshold securities (ETF): 7.36. 

Month and Year: 2005, April; 
Percentage of threshold securities (ETF): 8.08. 

Month and Year: 2005, May; 
Percentage of threshold securities (ETF): 9.56. 

Month and Year: 2005, June;
Percentage of threshold securities (ETF): 6.72. 

Month and Year: 2005, July; 
Percentage of threshold securities (ETF): 6.17. 

Month and Year: 2005, August;
Percentage of threshold securities (ETF): 7.64. 

Month and Year: 2005, September; 
Percentage of threshold securities (ETF): 6.48. 

Month and Year: 2005, October; 
Percentage of threshold securities (ETF): 8.33. 

Month and Year: 2005, November; 
Percentage of threshold securities (ETF): 9.79. 

Month and Year: 2005, December; 
Percentage of threshold securities (ETF): 9.16. 

Month and Year: 2006, January; 
Percentage of threshold securities (ETF): 9.52. 

Month and Year: 2006, February; 
Percentage of threshold securities (ETF): 10.51. 

Month and Year: 2006, March; 
Percentage of threshold securities (ETF): 10.47. 

Month and Year: 2006, April; 
Percentage of threshold securities (ETF): 8.65. 

Month and Year: 2006, May; 
Percentage of threshold securities (ETF): 9.44. 

Month and Year: 2006, June; 
Percentage of threshold securities (ETF): 9.56. 

Month and Year: 2006, July; 	
Percentage of threshold securities (ETF): 10.83. 

Month and Year: 2006, August; 
Percentage of threshold securities (ETF): 12.76. 

Month and Year: 2006, September; 
Percentage of threshold securities (ETF): 15.46. 

Month and Year: 2006, October; 
Percentage of threshold securities (ETF): 18.78. 

Month and Year: 2006, November; 
Percentage of threshold securities (ETF): 15.82. 

Month and Year: 2006, December; 
Percentage of threshold securities (ETF): 15.71. 

Month and Year: 2007, January; 
Percentage of threshold securities (ETF): 17.63. 

Month and Year: 2007, February; 
Percentage of threshold securities (ETF): 16.33. 

Month and Year: 2007, March; 
Percentage of threshold securities (ETF): 16.98. 

Month and Year: 2007, April; 
Percentage of threshold securities (ETF): 13.96. 

Month and Year: 2007, May; 
Percentage of threshold securities (ETF): 16.52. 

Month and Year: 2007, June; 
Percentage of threshold securities (ETF): 20.81. 

Month and Year: 2007, July; 
Percentage of threshold securities (ETF): 20.30. 

Month and Year: 2007, August; 
Percentage of threshold securities (ETF): 16.29. 

Month and Year: 2007, September; 
Percentage of threshold securities (ETF): 19.69. 

Month and Year: 2007, October (Elimination of grandfather exception); 
Percentage of threshold securities (ETF): 19.51. 

Month and Year: 2007, November; 
Percentage of threshold securities (ETF): 20.16. 

Month and Year: 2007, December; 
Percentage of threshold securities (ETF): 24.50. 

Month and Year: 2008, January; 
Percentage of threshold securities (ETF): 23.71. 

Month and Year: 2008, February;	
Percentage of threshold securities (ETF): 24.14. 

Month and Year: 2008, March; 
Percentage of threshold securities (ETF): 22.17. 

Month and Year: 2008, April; 
Percentage of threshold securities (ETF): 19.31. 

Month and Year: 2008, May; 
Percentage of threshold securities (ETF): 20.25. 

Month and Year: 2008, June; 
Percentage of threshold securities (ETF): 24.10. 

Month and Year: 2008, July (July emergency order); 	
Percentage of threshold securities (ETF): 20.35. 

Month and Year: 2008, August; 
Percentage of threshold securities (ETF): 19.42. 

Month and Year: 2008, September (September emergency order); 
Percentage of threshold securities (ETF): 21.68. 

Month and Year: 2008, October; 
Percentage of threshold securities (ETF): 17.12. 

Month and Year: 2008, November; 
Percentage of threshold securities (ETF): 34.89. 

Month and Year: 2008, December; 
Percentage of threshold securities (ETF): 50.92. 

Sources: SEC, Bloomberg, Yahoo! Finance, MSN Money, and Morningstar 
(data); GAO (analysis). 

[End of figure] 

Some Commenters Contend a Preborrow Requirement Is Needed to Address 
FTD and Market Manipulation, While SEC Is Still Considering Whether It 
Would Be Appropriate: 

Some market participants and others (commenters) expressed concern that 
under the current locate requirement, broker-dealers with available 
shares may provide more locates than they have shares available. 
[Footnote 68] Furthermore, they said that the current close-out 
requirements do not address manipulation that can occur within the 3-
day settlement period. To mitigate this potential, these commenters 
advocate requiring short sellers to first borrow securities before 
effecting their short sales. Trading and Markets and FINRA staffs 
agreed that market manipulation within the T+3 settlement period is 
possible. Meanwhile, Trading and Markets staff said that they are still 
considering whether a preborrow requirement is an appropriate 
regulatory response. 

Some Commenters Believe That the Current Locate and Close-out 
Requirements Are Not Sufficient to Prevent FTD and Market Manipulation: 

Some commenters believe that the current locate requirement is not 
sufficient to curb FTD resulting from short sales or prevent 
manipulative trading. As we have previously discussed, Regulation SHO 
allows broker-dealers to rely on industry easy-to-borrow lists, instead 
of directly contacting the source of the securities. According to OCIE 
and FINRA staffs and industry officials, the industry generally relies 
on these lists, to satisfy the locate requirement when effecting short- 
sales in securities considered widely available.[Footnote 69] For 
securities that are not on an easy-to-borrow list, the customer or the 
broker-dealer typically calls the securities lending department of the 
broker-dealer to determine the availability of the securities for 
borrowing.[Footnote 70] However, Regulation SHO does not require the 
entity on which a broker-dealer relied as a source of available 
securities to have the securities available on settlement date. Some 
commenters have expressed concern that unless SEC requires broker- 
dealers to borrow securities prior to effecting short sales, or at 
least requires sources of securities to set aside securities as they 
are providing locates, broker-dealers could provide more locates than 
they could fill, which could lead to FTD if they are not able to obtain 
sufficient shares for delivery from another source on settlement day. 
One securities lending consultant with whom we spoke said that the 
process of providing locates for hard-to-borrow stocks generally is 
informal, with locates at times provided verbally. This consultant said 
that such informal conversations can result in the securities not being 
available on settlement day if the parties misunderstand the type and 
amount of securities available. Another consultant in financial 
services said that because broker-dealers could rely on telephone 
calls, they may not actually check whether the source was valid. 

Although the temporary rule requires most FTD resulting from short 
sales to be closed out on T+4, several commenters expressed concern 
that market manipulation could occur within the T+4 time frame. These 
commenters said that under the current locate and close-out 
requirements, a trader could still naked short sell a security and 
cover the sales with purchase orders prior to settlement day. Because 
the trader does not have to incur the cost of borrowing shares, these 
commenters said that the trader could naked short sell without limit-- 
thus, flooding the market with sell orders to potentially depress the 
price of the security and realize greater profits. To mitigate this 
type of market manipulation, the commenters recommended that SEC 
require broker-dealers to preborrow securities prior to effecting a 
short sale on behalf of a customer, which they said would eliminate the 
potential for manipulative short selling within the 3-day settlement 
period and more generally provide greater assurance that short sales do 
not result in FTD. 

Although Regulatory Staff Said That Overlocating Is Unlikely, 
Inconsistent Industry Practices in Managing Easy-to-Borrow Lists Could 
Raise Concerns: 

Trading and Markets staff said that they have not conducted any 
empirical studies to assess the effectiveness of the locate requirement 
for reducing FTD. However, they and industry officials said that 
overlocating is unlikely to occur because only an estimated 5 percent 
to 10 percent of locates result in the actual borrowing and delivery of 
shares. For example, many customers choose not to proceed with the 
short sale order after obtaining or requesting a locate.[Footnote 71] 
Industry officials noted that there is a key difference between a 
locate, which occurs prior to the short sale being effected, and a 
borrow, which occurs at settlement. Because broker-dealers settle 
transactions in each security on a net basis, these officials and the 
regulators said that the actual settlement obligation is often less 
than the number of shares sold short, making borrowing unnecessary or 
necessary only in limited quantities. 

Industry officials told us that as a result of the standardization of 
the locate requirement under Regulation SHO, they have developed 
policies and procedures that help them to better manage their 
securities lending operations. More specifically, these officials said 
that the locate requirement, and the new T+4 close-out requirement for 
FTD resulting from short sales, has resulted in increased and improved 
communication with customers prior to effecting a short sale. For 
example, some industry officials said that as a result of the locate 
requirement of Regulation SHO, they are denying customers' requests to 
effect short sales in hard-to-borrow securities because a source of 
available and sufficient securities cannot be located. They said that 
the customer has a vested interest in making sure that the broker- 
dealer can deliver the securities in time for settlement. If securities 
cannot be borrowed and delivered in time for settlement, the broker- 
dealer will be required to close out the FTD under the temporary rule, 
thus increasing the chance that the customer may be bought-in at a loss 
or will be required to close out its short position earlier than 
desired.[Footnote 72] Industry officials said that, consequently, when 
customers call the securities lending department to obtain a locate for 
hard-to-borrow securities, the customer and staff from the securities 
lending department are more likely to discuss the availability of the 
security, the cost to borrow it, and the length of time it can be 
borrowed. Furthermore, industry officials said that broker-dealers also 
are motivated to manage their inventory effectively to avoid FTD, which 
otherwise trigger the close-out obligations of the temporary rule. 

To better understand industry practices regarding locates, we reviewed 
several broker-dealer examinations conducted by OCIE that focused on 
Regulation SHO compliance. We found that four of the five broker- 
dealers that were examined either generated their own easy-to-borrow 
lists or used the easy-to-borrow lists of other broker-dealers with 
which they had stock borrow arrangements, to determine whether a 
security was widely available for borrowing prior to effecting a short 
sale.[Footnote 73] We found that some of these firms decremented their 
easy-to-borrow lists as they provided locates, or practiced some other 
form of inventory management to help ensure that they did not provide 
locates for more securities than they could fill at settlement date. 
Others, however, did not follow these practices. We note that without 
such practices in place, it is unclear how these firms could ensure 
that they are not providing locates in excess of their available supply 
of securities and thereby limiting the potential for FTD. As we have 
previously discussed, Regulation SHO does not require firms to 
decrement their easy-to-borrow lists as they provide locates to their 
customers or traders, nor does it include definitive criteria regarding 
what constitutes an easy-to-borrow security other than a reasonableness 
requirement. Without such criteria, it is unclear how SEC could ensure 
that firms prepare these lists in a consistent manner and contain an 
appropriate range of securities that are available for borrowing. 

Regulators and Industry Officials Said That the Current Locate and 
Close-out Requirements Make Manipulative Naked Short Selling More 
Difficult: 

Although short sellers and broker-dealers could still potentially 
collude to effect a manipulative short selling scheme, Trading and 
Markets and FINRA staffs said that under the current locate and close- 
out requirements, it is less likely traders would effect short sales 
resulting in persistent FTD. FINRA staff said that this is because the 
locate and close-out requirements mandate the broker-dealer to settle 
the trade or to resolve the FTD created when the trade was not settled 
on time. Customers, on the other hand, do not have any role in the 
settlement of trades. For example, these staffs said that it would not 
be very likely that a retail customer, who generally relies on the same 
broker-dealer to obtain a locate, execute, and settle a trade, could 
implement a manipulative naked short selling scheme.[Footnote 74] To do 
so, FINRA staff said that the broker-dealer would in all likelihood 
have to collude with the customer and agree to allow a short sale to be 
effected without a locate being obtained, fail to deliver securities, 
and keep the FTD open while the customer attempted to fraudulently 
drive down the price of the security. 

Industry officials told us that the customers who are allowed to 
provide their own locates to executing brokers and arrange for 
securities to be delivered to the clearing broker-dealer for settlement 
generally are institutional investors, such as hedge funds. They said 
that institutional investors may choose to execute and settle the trade 
with one broker-dealer, or they may choose to execute the trade with 
one broker-dealer and settle it with another broker-dealer (a prime 
brokerage arrangement), where the clearing broker-dealer is called a 
prime broker. When a customer uses a prime broker to clear and settle 
his trades, the executing broker remains responsible for obtaining a 
locate, marking the trade long or short, and executing the trade. The 
prime broker is responsible for delivering securities in time for 
settlement, whether or not it relies on the customer's source of 
securities. Therefore, according to FINRA and industry officials, 
manipulative naked short selling is likely to occur only to the extent 
that the prime broker agrees to fail to deliver securities on time and 
keep FTD open. According to industry officials, prime brokers will only 
look to the customer's source of a locate for delivery if the prime 
broker cannot otherwise obtain the necessary shares for delivery. 

Both Trading and Markets and FINRA staffs said that the preborrow 
penalty specified in Regulation SHO and the temporary rule provides the 
clearing broker-dealer with a strong financial incentive to close out 
FTD as required by the rules. However, before SEC issued the temporary 
rule in September 2008, Regulation SHO's close-out requirement applied 
only to threshold securities (and only after the FTD had been open for 
13 consecutive days). Furthermore, FTD in nonthreshold securities never 
had to be closed out. As a result, under Regulation SHO, FTD resulting 
from naked short sales could persist for many days. Under the temporary 
rule, subject to certain exceptions, if a clearing firm is unable to 
close out FTD resulting from a short sale on the morning of T+4 in any 
security, or, for FTD resulting from long sales or bona fide market 
making on T+6, the clearing firm cannot execute additional short sales 
in that security for any of its customers or its proprietary account, 
unless it first preborrows (or arranges to borrow) the security. The 
temporary rule allows the clearing firm to avoid the preborrow penalty 
to the extent that it can identify any introducing broker-dealer(s) 
that have contributed to the FTD, by allocating the close-out and 
preborrow obligations to those broker-dealers. Industry officials and 
FINRA staff told us that clearing broker-dealers generally do not 
allocate FTD in this manner.[Footnote 75] Instead, they told us that 
clearing broker-dealers may choose to finance the costs of closing out 
FTD, or preborrow the securities if they cannot, and allocate those 
costs among their customers. Several clearing broker-dealers told us 
that they allocate these costs to their customers with open short 
positions.[Footnote 76] 

Hedge fund officials with whom we spoke said that FTD create friction 
with prime brokers because the hedge funds rely on the prime brokers to 
obtain and deliver shares on time. They said that resolving FTD is 
costly and time-consuming because traders must spend time with the 
hedge fund's operations group to reconcile the trade. To the extent 
that the prime broker cannot identify the customer responsible for the 
FTD, hedge fund officials said that at times they have been allocated 
the costs of closing out FTD for which they believe they were not 
responsible. These officials said that if a hedge fund identifies 
settlement failures at a particular prime broker, it typically will 
reduce its activity at that prime broker or stop using it altogether. 

Regulators Acknowledge the Potential for Intrasettlement Manipulation, 
and Are Continuing to Assess Whether a Preborrow Requirement Would Be 
Appropriate: 

Trading and Markets and FINRA staffs acknowledged the potential for 
market manipulation within the T+4 time frame. FINRA officials 
explained that a fraudulent short selling scheme could occur even in 
situations where market participants or customers are fully compliant 
with the locate rule and no FTD develop on settlement day. In such 
intraday manipulations, the customer or market participant, after 
having made a valid locate, engages in a pattern of short selling 
activity during a concentrated period of time, with the specific intent 
of driving down the price of a stock for a specific period. The 
customer or market participant then purchases shares after the price 
decline occurs to cover its short position for a profit. Because the 
purchase and sale activity nets out to zero, no FTD develop on 
settlement day as a result of this activity. 

Trading and Markets and FINRA staffs said that those securities that 
are most vulnerable to such short selling abuse would be thinly traded, 
highly illiquid, and have a relatively low number of total shares 
outstanding. They said that securities that have many total shares 
outstanding and are very liquid are more difficult to manipulate, 
because the trader would have to effect very large and numerous short 
sale orders to create downward pressure on the price. FINRA staff said 
that a marketwide preborrow requirement would likely increase the 
overall costs of short selling, including the costs to effect an 
intraday market manipulation, but it would not necessarily eliminate 
this type of misconduct. 

Trading and Markets staff also told us that the costs of a marketwide 
preborrow requirement to address FTD, manipulative naked short selling, 
or market manipulation occurring within the T+4 time frame might 
outweigh any potential benefits, especially considering that the vast 
majority of trades settle on time. After the July emergency order, OEA 
staff conducted an analysis of the impact of the order to understand 
the potential economic trade-offs of a preborrow requirement. To 
address these questions, OEA examined how various measures hypothesized 
to be affected by the order evolved over time for the securities of the 
19 financial firms subject to the order.[Footnote 77] OEA then compared 
the experience of these securities with that of two control samples 
that were not subject to the order: one control sample consisted of 
other financial securities, and the other sample consisted of large 
nonfinancial securities. OEA's results suggested that imposing a 
preborrow requirement may have had the intended effect of reducing FTD, 
but also may have resulted in significant costs to short sellers. 
[Footnote 78] 

First, OEA found that short selling declined more for the securities in 
the July emergency order than for securities in the two control groups-
-by almost 9 percent of volume. Second, OEA's analysis showed large, 
but temporary, initial increases in securities lending rates, as 
measured by rebate rates, followed by rates still higher than before 
the order.[Footnote 79] The rebate rate reflects the portion of 
interest the lender earns on the borrower's collateral that the lender 
agrees to pay the borrower. The lower the rebate rate, the higher the 
securities lending rate.[Footnote 80] OEA found that rebate rates for 
these securities over the review period declined by 1.56 percent, from 
1.8 percent to 0.24 percent. However, OEA found that the rebate rates 
dropped significantly in the first day of the July order, on average 
below negative 1 percent. Rates recovered to above zero before the end 
of the order, but were still well below their preorder levels by the 
end of the review period.[Footnote 81] 

OEA also found that significant reductions in FTD were associated with 
the emergency order--the level of FTD in the securities of the 19 firms 
declined from 2.8 million to 1.0 million during the order, or about 64 
percent. New FTD in these securities declined by about 78 percent, from 
an average of 1.8 million shares per day to 0.4 million shares per day. 

OEA concluded that the order appeared to have been effective at 
reducing and preventing FTD, but it noted that the success came with 
significant trade-offs, most notably a large increase in lending fees 
and a large decline in short sales. OEA also noted that the securities 
included in the order had relatively large market capitalization, 
traded in a liquid market, and tended to be easy to borrow. 
Consequently, OEA cautioned that the results may not be fully 
indicative of how a preborrow requirement might affect markets if 
applied on a broader scale. Specifically, OEA said that similar 
requirements imposed on smaller, more illiquid, or hard-to-borrow 
securities might cause a significantly larger disruption to short 
selling and to liquidity. 

Trading and Markets staff said that they had received feedback from the 
industry on the impact of the temporary preborrow requirement. The 
industry commented that the order had a number of unintended 
consequences, including forcing shares to be borrowed even when they 
are not needed for delivery, thereby decreasing the liquidity of the 
securities lending market and resulting in the supply of borrowable 
shares being allocated to large broker-dealers, leaving smaller broker- 
dealers in certain situations with less ability to borrow shares to 
effect short sales. Furthermore, the industry commented that the order 
impacted the efficient use of capital because firms were forced to 
commit their own capital to preborrow securities. More specifically, 
according to an industry trade association, several of its broker- 
dealer members reported a reduction in the loan liquidity in some of 
the securities of the 19 firms, ranging from an estimated 10 percent to 
85 percent, depending on the security. Instead of borrowing securities 
on a net basis when they were required for the settlement date, the 
preborrow requirement caused broker-dealers to borrow gross volumes of 
securities when the securities were located, resulting in significant 
overborrowing. According to the industry trade association, some firms 
reported additional balance sheet costs related to financing 
preborrows, which affected such firms' efficient use of capital. The 
size of such increases to balance sheet costs varied, with high-end 
costs of close to $2 billion per day to preborrow securities. These 
firms reported that increases to balance sheet costs were lower for 
firms that were arranging to borrow (i.e., hold) rather than to 
actually preborrow securities prior to effecting the short sales. 
[Footnote 82] 

As the Commission considers whether to finalize the temporary rule, 
Trading and Markets staff said that they are continuing to evaluate the 
appropriateness of a preborrow requirement for addressing FTD and 
market manipulation related to naked short selling. Separately, SEC is 
currently considering other measures that are intended to address 
abusive short selling concerns. In April 2009, SEC voted to propose two 
approaches to restrictions on short selling. One approach would apply 
on a marketwide and permanent basis (short sale price restrictions), 
while the other approach would apply only to a particular security 
during severe market declines in that security (circuit breaker 
restrictions).[Footnote 83] SEC is currently seeking public comments on 
these two approaches. 

Regulators Have Categorized Noncompliance with Regulation SHO as 
Nonsystemic, but the Regulation Presents Some Compliance Challenges: 

After SEC implemented Regulation SHO, SEC and the SROs took steps to 
enforce its requirements--first by conducting a joint sweep 
examination, and later by conducting routine and other compliance 
examinations and regular surveillances of FTD data. While these 
examinations have found a significant number of firms with Regulation 
SHO compliance deficiencies, OCIE and SRO staffs told us these 
deficiencies generally were not indicative of systemic problems or 
attempts to manipulate a security. However, broker-dealers are facing 
challenges in complying with Regulation SHO's requirement to determine 
whether the locates they obtain prior to effecting a short sale are 
reasonable sources for securities needed at settlement. 

Although SEC and the SROs Found Noncompliance with Regulation SHO, They 
Characterized It as Technical and Brought Few Enforcement Actions: 

SEC and SRO examinations have found that most Regulation SHO 
deficiencies by broker-dealers and options market makers appear to be 
nonsystemic deficiencies. As of April 1, 2009, two SROs have brought 
several compliance actions. Within months of Regulation SHO's 
compliance date and in coordination with Trading and Markets, OCIE, 
NYSE, and the former NASD conducted a coordinated sweep examination of 
19 clearing broker-dealers that execute and clear short-sale 
transactions.[Footnote 84] The 19 firms were selected from NASD-and 
NYSE-generated lists of firms that had aged FTD in threshold 
securities. The purpose of the sweep examination was to determine 
whether firms were in compliance with Regulation SHO's locate, close- 
out, or order-marking requirements, along with other Regulation SHO 
requirements.[Footnote 85] Examiners also reviewed the adequacy of the 
firms' written supervisory procedures for ensuring compliance with 
these requirements. These joint sweep examinations found deficiencies 
with Regulation SHO requirements at all 19 broker-dealers. 

OCIE and SRO examiners told us that they generally did not find 
evidence that these deficiencies were part of a deliberate problem or 
part of attempts to manipulate a security. For example, deficiencies 
related to the close-out requirement generally involved limited 
instances with a majority of the firms having failed to deliver in only 
one or two securities. As a result of the sweep examination, NYSE 
brought formal enforcement actions against four of its members. 
According to examiners who had participated in the examinations of 
these firms, NYSE brought these enforcement actions because it believed 
that the firms had been given adequate time before Regulation SHO went 
into effect to develop processes and procedures for compliance with the 
requirements. OCIE also found that the most serious finding was that 
most of the firms did not have adequate written supervisory procedures 
to ensure compliance with Regulation SHO. 

Although OCIE does not conduct routine examinations of SRO member firms 
for Regulation SHO compliance, OCIE officials stated that between 
January 2005 and October 2008, OCIE conducted approximately 90 cause or 
broker-dealer oversight examinations that included a review of the 
firm's compliance with Regulation SHO.[Footnote 86] Of these 
examinations, 41 had Regulation SHO-related findings. We reviewed 12 of 
the 41 examinations with Regulation SHO findings and found that the 
findings reported were similar to those of the 2005 sweep examination. 
[Footnote 87] For example, examiners generally found deficiencies in 
marking trades or performing an appropriate locate prior to effecting a 
short sale in some firms. To assist OCIE in their examinations, we 
found that OEA conducted multiple analyses using NSCC-provided FTD and 
threshold list data to analyze data on particular firms. Most recently, 
as part of a sweep examination, OCIE stated that it has initiated 4 
examinations to assess compliance with the October 2008 rule changes. 
To date, SEC has not charged violations of Regulation SHO in any 
enforcement actions.[Footnote 88] However, according to SEC Enforcement 
staff, Regulation SHO is largely enforced by the SROs because of the 
regulation's focus on broker-dealer operations. 

After the initial 2005 sweep examinations were completed, the SROs 
continued to monitor the industry for compliance with Regulation SHO 
through routine examinations and electronic surveillance. FINRA 
continued to monitor firms for Regulation SHO compliance by 
incorporating an assessment of Regulation SHO compliance into three of 
its routine examination programs: the Risk Oversight and Operational 
Regulation Program, which focuses on clearing firms; the Sales Practice 
Examination Program, which focuses on introducing firms; and the 
Trading and Market Surveillance Program, which complements existing 
automated surveillance.[Footnote 89] 

We reviewed the examination modules for each of the three FINRA 
programs. To assess compliance with the locate and order-marking 
requirements, the modules direct examiners to use various methods to 
select samples of trades for review. For the selected sample, examiners 
are directed to review a firm's supporting documentation--such as 
locate logs, trade blotters, position records, and FTD ledgers. 
[Footnote 90] Similarly, to assess whether a clearing broker-dealer 
appropriately closed out FTD in threshold securities, examiners are 
directed to select and analyze a sample of FTD from the firm's FTD 
ledgers. We found that FINRA had taken steps to update the examination 
modules to reflect the stricter close-out requirements of the temporary 
rule. 

According to FINRA data, between January 1, 2005, and December 31, 
2008, FINRA conducted 1,124 routine examinations of its members through 
the 3 programs. Of these examinations, 302 contained Regulation SHO 
deficiencies. FINRA staff stated that they have not detected any 
particular trends or patterns in the types of violations that would 
indicate systemic abuse, and do not consider the deficiencies found in 
these examinations to be egregious. For example, staff found in 1 
examination that locates were not performed for 4 trades out of a 
sample of 60 trades. In another example, examiners sampled 10 short 
sale transactions and found 1 instance where the amount sold short 
exceeded the amount located by 1,000 shares. 

In addition to its examination programs, FINRA also uses automated 
surveillance to identify firms with close-out obligations for all 
threshold securities within a specified period. Specifically, we found 
that FINRA runs quarterly reports using FTD data obtained from NSCC to 
identify all threshold securities for that quarter and those clearing 
firms with potential close-out obligations in those securities--that 
is, aged FTD in threshold securities. FINRA staff then contact these 
firms to determine why the potential close-out obligation has not been 
met, and to determine whether there are any violations of Regulation 
SHO or whether the aged FTD were due to legal exceptions. Since the 
adoption of the temporary rule, FINRA staff stated that FINRA has 
updated its surveillances to monitor for FTD in all securities, and 
that it runs the surveillance on a bimonthly basis. FINRA then selects 
firms identified by this surveillance to contact to determine why the 
potential close-out obligation has not been met and to determine 
whether there are any violations of Regulation SHO. 

CBOE also monitors its membership for compliance with Regulation SHO 
through its member firm examinations and surveillances. Between January 
1, 2005, and December 31, 2008, CBOE conducted 326 examinations that 
included a review of Regulation SHO requirements. Of these 
examinations, 152 contained some level of apparent Regulation SHO 
violations (i.e., 140 marking violations, 65 locate violations, and 26 
close-out violations).[Footnote 91] Due to their nature, the majority 
of these violations were resolved through nonformal disciplinary 
action. CBOE also participated in a 2006 sweep examination that focused 
on the options market maker exception to the close-out requirement for 
aged FTD in threshold securities that were open for 13 consecutive 
days. CBOE staff also have developed surveillance to help detect 
noncompliance with the close-out requirements of Regulation SHO. 

Moreover, beginning in early 2005, SRO staff identified multiple 
traders that appeared to be using an illegal trading strategy to 
inappropriately avoid the close-out requirement of Regulation SHO. 
These traders were identified through SRO surveillance and complaints 
that the SRO received. As a result of FINRA's surveillances and 
investigations, which were conducted on behalf of the American Stock 
Exchange (Amex), the exchange brought two formal disciplinary actions 
for violations of Regulation SHO against two options traders.[Footnote 
92] Amex alleged that the options traders improperly used the market 
maker exception to engage in naked short selling without first 
obtaining a locate, and circumvented the delivery obligation through 
various trading schemes. CBOE has also initiated 26 investigations 
against member firms for similar apparent activity. As of February 19, 
2009, 7 cases have been presented to the CBOE's Business Conduct 
Committee. CBOE and FINRA staffs stated that since the above Amex 
actions regarding two traders became public, this type of activity 
appears to have ceased. 

In Part Because SEC Has Not Finalized Guidance, the Industry Has 
Experienced Some Challenges in Complying with the Locate Requirement: 

Regulation SHO requires broker-dealers to demonstrate that the sources 
on which they rely for locates are reasonable--that is, the broker- 
dealer does not have reason to believe that the source will be unable 
to deliver shares in time for settlement. Firms are also required to 
have procedures or systems in place to determine whether it is 
reasonable to rely on customer assurances or an easy-to-borrow list. 
However, in both the initial sweep examinations and subsequent 
oversight and sweep examinations, OCIE has found that some firms do not 
have procedures or systems in place to monitor whether the locate 
source was reasonable. According to OCIE examinations, some broker- 
dealers are not monitoring to determine whether locates are resulting 
in FTD because firms do not expect that the source from which the firm 
obtained the locate will be the source from which the firm will obtain 
shares for settlement. As a result, it may be difficult for broker- 
dealers and regulators to determine whether a locate source is 
reasonable because the source that provided the locate for past trades 
may or may not have been the source from which the clearing broker- 
dealer attempted to obtain shares for settlement. 

According to SEC and SRO staffs and industry officials the source used 
to borrow shares and make delivery can differ from the locate source 
for several reasons. The clearing broker-dealer may simply decide to 
use a source other than the source used to obtain the locate. For 
example, a broker-dealer may decide to use shares from its own 
inventory instead of going to the source of its locate, or the locate 
source provided by the customer. In addition, the netting process of 
the clearance and settlement system may result in a broker-dealer not 
being required to deliver any shares or only a portion of the total 
sold short, thus eliminating the need to borrow securities or reducing 
the amount required and potentially eliminating the need to borrow from 
the source used to obtain a locate for a specific trade. The source 
used to borrow shares also may be different than the locate source 
because securities that are available on trade date may not be 
available on the settlement date from that locate source, when 
borrowing is effected to settle the short sale. Conversely, a source 
that may not be able to provide a locate on trade date may have the 
securities available to be loaned on the settlement date. 

We also found that executing broker-dealers may not always have the 
information necessary to make a determination that the locate source 
provided by the customer is reasonable. According to FINRA staff and 
industry officials, this is most common in prime brokerage transactions 
where the customer delivers the securities to the prime broker rather 
than to the executing broker for settlement of sell orders. As we have 
previously discussed, Regulation SHO requires the executing broker- 
dealer to locate shares available for borrowing prior to effecting a 
short sale. An executing broker may fulfill this requirement by relying 
on a customer's representation that it has obtained the locate from 
another source. However, because Regulation SHO does not obligate the 
clearing firm--in this case, the prime broker--to provide trade 
settlement information to the executing broker, the executing broker 
may not know if, at settlement, the prime broker was unable to borrow 
shares to delivery, and thus may not have the information necessary to 
determine whether it can rely on that customer's locates for future 
short sale transactions. 

Industry, Trading and Markets, and FINRA staffs said that this 
information gap in Regulation SHO could be addressed by clarifying the 
responsibilities of the prime broker and executing broker to ensure 
compliance with Regulation SHO. In March 2007, Trading and Markets and 
industry representatives helped provide this clarification by drafting 
revisions to the Prime Broker Letter issued by SEC staff in 1994. 
According to the industry officials working with Trading and Markets, 
these revisions are intended to enhance communications between the 
prime broker and executing broker and to help ensure that the customer 
is providing accurate information to the executing broker. Furthermore, 
these revisions would provide the executing broker with the information 
necessary to make a determination of whether a customer's assurance is 
reasonable. 

As of April 2, 2009, Trading and Markets has not yet finalized the 
revised Prime Broker Letter to make it effective. Trading and Markets 
staff said that because SEC still is evaluating comments on the 
temporary rule and it remains subject to modification, they cannot sign 
the letter. According to these staff, the draft letter reflects 
Regulation SHO as adopted, and officials need to review the letter to 
determine whether any adjustments are necessary to reflect the 
provisions of the temporary rule, if it is adopted as final. The letter 
was revised in March 2007, prior to the issuance of the temporary rule 
in September 2008, and the information gap has existed since Regulation 
SHO became effective in January 2005. 

Without access to the information from prime brokers that would allow 
them to establish whether customer-provided locates are resulting in 
FTD, executing broker-dealers may not be able to achieve compliance 
with Regulation SHO. In addition, this information gap may create the 
perception that prime brokerage customers--typically, hedge funds or 
large investors--are allowed to circumvent Regulation SHO and naked 
short sell. SEC has said on several occasions that the perception that 
FTD may be indicative of manipulative naked short selling can damage 
investor confidence and the stability of the market. By completing its 
review and finalizing the revised 1994 Prime Broker Letter, SEC can 
ensure that this information gap is closed, and that the parties 
responsible for executing and clearing and settling trades (1) 
establish the communication processes necessary to comply with 
Regulation SHO and (2) make the appropriate determinations about 
customer-provided locates. 

Regulators Use Complaint Information, Surveillance, and Examinations to 
Identify Potential Manipulative Short Selling, but It Is Difficult to 
Prove Manipulation: 

Regulation SHO compliance violations do not necessarily indicate that 
manipulative naked short selling has occurred. If examiners identify 
indications of potential manipulative trading, OCIE or FINRA can pursue 
further investigation or refer the case to their respective Enforcement 
divisions for further investigation. For example, we reviewed one OCIE 
examination where possible Regulation SHO violations led to such a 
referral. As we have previously discussed, regulators have found 
Regulation SHO deficiencies to be nonsystemic and not indicative of 
abuse or attempts to manipulate individual securities. SRO staff stated 
that Regulation SHO is effective from an examination and enforcement 
perspective because it specifically identifies the parties responsible 
for obtaining a locate or closing out FTD and identifies when each of 
these responsibilities is to be completed. Furthermore, because 
Regulation SHO was designed to curb manipulation facilitated by naked 
short selling and address large and persistent FTD by imposing 
operational requirements on regulated entities, the SROs are able to 
bring regulatory actions against their members for Regulation SHO 
violations. 

SEC and the SROs rely on complaints, tips, and electronic market 
surveillance, among other things, to identify suspicious trading 
activity, including potential instances of manipulative naked short 
selling.[Footnote 93] Enforcement staff stated that while it is not 
difficult to determine whether there are FTD in a security, they have 
found through their experiences and discussions with the SROs that FTD 
are not a proxy for manipulative conduct and do not provide regulators 
with much information regarding possible manipulation. For example, a 
FTD could occur, but that information alone does not tell a regulator 
whether there was intent to fail to deliver or whether an appropriate 
locate was conducted. Also, as we have previously discussed, FTD may 
result from long or short sales. To determine if a trader was 
successful in manipulating the market through naked short selling, 
regulators must unwind FTD and trading activity, which requires 
considerable analysis of trading data and other supporting 
documentation, such as e-mails, and reliance on large amounts of 
circumstantial evidence. Furthermore, according to Enforcement and 
FINRA staffs, manipulation investigations, including manipulative naked 
short selling, are complex matters and the standard of proof, 
especially proving intent, to prevail in an enforcement action is high. 
Enforcement stated that quantifying the amount of manipulative 
activity, including manipulative naked short selling, that occurs in 
the market is difficult. 

According to FINRA, most market manipulation is identified through 
activities of the market surveillance divisions at the SROs that review 
market activity for aberrant price and volume movement in the security 
that can suggest manipulation. The SROs have established electronic 
surveillance systems that generate an alert if a security's price or 
volume of shares traded, among other things, moves outside of set 
parameters. These price and volume movements can indicate a number of 
illegal trading practices, including manipulative naked short selling. 
A significant factor in determining whether an aberrant movement was a 
case of potential manipulative naked short selling is if a FTD appears 
at NSCC 3 days after the aberrant movements. SRO staff review thousands 
of alerts annually to identify those that are most likely to involve 
fraud or warrant further investigation on the basis of a variety of 
factors, such as profit potential and news related to the security. In 
the course of a full investigation, the SROs gather information from 
their member broker-dealers, including the names of individuals and 
organizations that were active in trading during the time in 
question.[Footnote 94] When an SRO finds evidence of illegal trading 
involving its members, it can conduct disciplinary hearings and impose 
penalties ranging from disciplinary letters to fines to expulsion from 
trading and SRO membership. Because the SROs do not have jurisdiction 
over entities and individuals that are not part of their membership, 
they refer suspicious trading on the part of nonmembers, including 
customers, directly to SEC Enforcement. 

SEC Is Considering Finalizing the Temporary Rule by July 2009, but 
Implementation Issues and Inconsistent and Untimely Provision of 
Guidance Concern the Industry: 

Industry officials said that the stricter close-out requirements 
imposed through the September emergency order and the temporary rule 
have resulted in several unintended negative consequences on security 
prices and securities lending.[Footnote 95] Trading and Markets staff 
said they are reviewing these concerns to determine whether any changes 
to the requirements are warranted before the Commission considers 
finalizing the rule by July 2009. The industry also has experienced 
operational issues in implementing Regulation SHO and the temporary 
rule, but Trading and Markets responsiveness to industry requests for 
guidance on these issues has been mixed. 

Although Generally Supportive of SEC's Efforts to Prevent Abusive Naked 
Short Selling, Industry Officials Said That New Close-out Requirements 
Have Raised Operational Issues: 

According to several comment letters submitted to SEC on the temporary 
rule, the industry generally supported the fundamental tenets of the 
temporary rule, including a compressed mandatory close-out obligation 
for all equity securities. However, industry commenters cited several 
negative consequences that resulted from the temporary rule, noting 
that it potentially contributed to market volatility and price spikes 
at market open and to instability in the securities lending market. 
Industry commenters said that the requirement that broker-dealers close 
out FTD by the opening of trading on T+4 (for short sales) or T+6 (for 
long sales or bona fide market maker sales) inadvertently contributes 
to increased market volatility and price spikes at market open. For 
example, a large industry group's comment letter referenced 40 
instances in which these close-out requirements potentially created 
significant but temporary upward pressure on the price of certain hard- 
to-borrow optionable securities at the opening of trading. According to 
this letter, the price of these securities opened trading at least 15 
percent above the previous night's closing price, but prices receded 
back to approximately the previous night's closing price within 30 
minutes. 

Industry officials also said that the new close-out requirements are 
having a negative impact on the efficient operation of the securities 
lending market, leading potentially to reduced inventory of shares 
available for borrowing, increased borrowing costs, and reduced 
liquidity. According to an industry group comment letter, when a 
security that is out on loan is sold, the lending agent will first 
attempt to reallocate the loan by identifying other customers with 
shares available for lending. If that effort is not successful, the 
lending agent must recall the loaned shares from the borrower. The 
comment letter continues by explaining that the recall is typically 
done through a written notice and takes place 1 or 2 days after the 
trade, with the majority of the notices issued 2 days after the trade. 
The borrower then has 3 full days to return the securities--in effect, 
until the end of T+5. According to the comment letter, when the lending 
agent receives the shares late on T+5, it returns the shares to the 
lender or its agent, which must then deliver the shares for settlement. 
In many cases, the ultimate delivery of shares will not be processed 
until the morning of T+6. Under the temporary rule, FTD resulting from 
long sales--which include the sale of securities out on loan--are 
required to close out by the opening of trading on T+6. According to 
some comment letters and industry officials, this requirement leaves 
little or no time for securities lenders to deliver recalled shares in 
time to avoid being bought in at the opening of trading on T+6. 
Furthermore, two large industry trade groups commented that most 
current broker-dealer and clearing firm systems are unable to 
differentiate between FTD that resulted from long sales versus FTD that 
resulted from short sales, with one stating that any differentiation 
requires extensive manual processing that typically cannot be completed 
by the opening of trading on T+4. As a result, some industry comment 
letters and officials stated that some broker-dealers are closing out 
all FTD on T+4, regardless of whether they are the result of a long or 
short sale, which further increases securities lenders' risk of being 
bought-in and causes some lenders to exit or reduce their participation 
in the market. 

To resolve these concerns, several industry officials recommended that 
SEC require broker-dealers to close out all FTD, regardless of whether 
they result from long or short sales, by the close of trading on T+6. 
These commenters said that doing so would allow for those FTD that 
occur for processing reasons to be cleared up without the need to 
borrow and deliver or buy-in FTD. Furthermore, they said closing out 
all FTD by the close of trading on T+6 also would eliminate the need 
for broker-dealers to engage in complex; time-consuming; and, at times, 
imperfect processes in an effort to determine whether a FTD was due to 
a long or short sale, because all FTD would be treated the same. 
Several industry officials with whom we spoke also stated that it may 
not be possible to build systems capable of differentiating between FTD 
that resulted from long sales versus FTD that resulted from short sales 
prior to the opening of trading on T+4. However, because they are 
unsure about what the requirements will be after the rule is finalized, 
industry officials told us they are not yet attempting to build these 
systems. 

Some industry commenters also recommended that SEC change the close-out 
requirement to allow clearing broker-dealers to close out their FTD 
throughout trading on the required close-out day, instead of only in 
the morning at market open. According to one industry comment letter 
from a large industry trade group, as a practical matter, transactions 
effected at market open to close out FTD are no different than those 
effected later in the trading session because both types are part of 
the same clearance and settlement cycle. As such, the group said that 
this change would allow clearing broker-dealers to close out FTD as 
currently intended by the temporary rule, but eliminate the volatility 
and price spikes associated with all FTD being required to close out 
prior to or at the opening of trading. 

Although SEC and FINRA acknowledge that the industry may be required to 
make system changes to comply with the requirements of the temporary 
rule, they believe the industry is capable of accomplishing these 
system changes necessary for compliance. According to OCIE staff, 
during a recent sweep examination of prime brokers they found that one 
broker had already developed the capability of tracking its FTD back to 
the trade that caused the FTD and then identifying whether that trade 
was marked long or short. Examiners conducting these sweep examinations 
also stated that the prime brokers they reviewed are able to identify 
the customers that are failing to deliver to the prime brokers, and 
that determining whether a trade was marked as long or short would most 
likely not require much additional effort. However, they did note that 
each firm probably will have a different infrastructure with which to 
work so each firm's implementation of the requirements may be unique. 
Trading and Markets staff also said that while they are considering all 
of the comment letters and proposed amendments to the rule, any change 
to extend the current T+4 buy-in date for FTD resulting from short 
sales expands the time frame in which manipulative naked short selling 
could occur, potentially undermining the Commission's policy objective 
of curbing this type of abuse. 

Trading and Markets Responses to Industry Requests for Guidance Were 
Sometimes Inconsistent during Regulation SHO and the Emergency Orders 
or Were Not Timely: 

SROs and industry officials noted that SEC staff were responsive to 
some requests for implementation guidance regarding Regulation SHO and 
the recent emergency orders; however, in some instances where complex 
issues have arisen or the application of the rules to a particular 
scenario was unclear, industry officials and staff from one SRO with 
whom we spoke said that other requests went unanswered or experienced 
lengthy delays. Staff from one SRO said that Trading and Markets has 
issued numerous guidance and interpretive products and continuously 
updated these products. Trading and Markets can provide interpretive 
guidance to the SROs and industry through a number of publications, 
such as exemptive orders, no-action letters, compliance guides, staff 
legal bulletins, and answers to frequently asked questions. However, 
Trading and Markets staff do not have a formal (i.e., written) process 
to determine when requests from industry and SROs merit a formal 
response. Instead, staff have discretion to determine when SRO and 
industry request merit such a response. Staff from another SRO noted 
that SEC worked with them to approve an appropriate methodology to use 
to assess Regulation SHO exemption determinations. SRO staff told us 
that because the SROs do not have the authority to independently issue 
interpretative guidance on SEC rules, they must obtain this guidance 
from SEC for their own and members' consideration when necessary. The 
SRO staff cited an occasion when they attempted to put guidance in a 
compliance circular that used SRO interpretations to answer specific 
questions it or its membership had regarding Regulation SHO. This SRO 
was delayed in providing the guidance to its members because of the 
time that passed before SEC provided feedback on whether the SRO's 
interpretations were correct. In this example, the SRO submitted a list 
of technical operational questions, ranging from basic questions about 
the close-out requirement to hypothetical situations that were 
described to elicit the meaning of certain phrases to Trading and 
Markets. Although communication took place between the SRO and SEC, an 
extended period of time passed between the initial document being 
submitted to Trading and Markets and the SRO providing answers to its 
members. The SRO also stated that in some instances in which it had 
asked for guidance, Trading and Markets told the SRO that the 
regulation was clear and no additional guidance was necessary. 

Industry officials with whom we spoke also stated that the SEC staff's 
responses to their requests for implementation guidance, particularly 
for recent emergency orders, have been inconsistent. Several market 
participants said that because Regulation SHO was enacted after a 
lengthy comment period and firms were given many months to put systems 
and policies and procedures in place, many of the potential 
implementation issues were discovered and resolved prior to the 
regulation being enforced. However, the July and September emergency 
orders and the temporary rule were made effective the day they were 
issued, or soon thereafter, with little or no advanced warning. 
According to some industry officials, these orders required system 
changes, some on a global basis, and numerous implementation issues 
arose. Industry officials said that, in some cases, they were able to 
work quickly with Trading and Markets to resolve these issues. For 
example, 3 days after the July emergency order restricting short 
selling securities of certain financial firms, SEC amended the order to 
exempt bona fide market making from the requirement. Nevertheless, 
industry officials stated that, in other situations, SEC was not 
responsive to their requests for guidance. For example, industry 
officials stated that due to the rushed nature of the September 
emergency order and the temporary rule, there was a lot of uncertainty 
and confusion related to the scope and application of the new 
requirements. Although some issues were addressed promptly, other 
industry requests for clarification or additional guidance remained 
unresolved. 

Trading and Markets staff stated that they did not believe issuing 
formal guidance was appropriate for some of the requests for 
interpretive guidance on Regulation SHO, because they felt the 
regulation was clear or that the request was more for a change of rule 
that would require going back to the Commission than an interpretation. 
Trading and Markets staff also told us that they did not want to 
provide answers to some of the requests that asked for guidance in 
specific circumstances, because they felt such requests were attempts 
to find loopholes in Regulation SHO, rather than attempts at 
compliance. These staff stated that because the temporary rule is set 
to expire on July 31, 2009, they are focused on reviewing and analyzing 
the written comments received to provide a recommendation to the 
Commission about the final form of the rule. They also said that 
providing the industry with guidance on a rule the Commission is still 
attempting to finalize would be difficult, and that the staff do not 
have a process by which implementation issues that arise from temporary 
rules can be readily addressed. Furthermore, responding to some of the 
implementation issues could have potentially required changes to the 
temporary rule, something that Trading and Markets is not authorized to 
do. 

By the time that the Commission takes final action on the temporary 
rule, it will have been in effect for 10 months, during which time the 
industry may have been inconsistently implementing its requirements. 
Trading and Markets' varied and, at times, untimely responsiveness to 
industry and SRO requests for interpretive guidance on Regulation SHO 
and the emergency orders conflict with the goals articulated in SEC's 
current Strategic Plan.[Footnote 96] The plan states that SEC should 
write regulations that are clearly written, flexible, and relevant and 
do not impose unnecessary financial or reporting burdens. One potential 
measure for monitoring progress the plan outlines is the length of time 
to respond to no-action letters, exemptive applications, and 
interpretive requests. The Strategic Plan also states that as part of 
its efforts to ensure compliance with federal securities laws, SEC 
should work to enhance its interpretive guidance process to meet the 
needs of the staff, the public, and other external stakeholders. 
Without timely and clear interpretive guidance from SEC, SROs may be 
unable to effectively enforce SEC rules and regulations, and SEC cannot 
ensure the consistent implementation of the rules and regulations. 

Conclusions: 

FTD may undermine the confidence of investors, making them reluctant to 
commit capital to an issuer that they believe to be subject to such 
manipulative conduct. While our review of FTD data showed that the 
majority of securities graduated from the threshold list in a timely 
manner, we also found that about 80 percent of threshold securities 
returned to the list, and some securities persisted for considerable 
periods of time. We recognize that there are legitimate reasons why a 
security could persist on the threshold list, but the cause for 
extended FTD in any individual security only can be assessed through 
regulatory scrutiny and generally is not apparent to the investing 
public, which may have concerns that securities on the threshold list 
are the target of manipulative naked short selling. 

With the requirements of the temporary rule, SEC has made progress in 
facilitating the goal that all sellers of securities should promptly 
deliver, or arrange for delivery of, securities to the respective 
buyer, and that all buyers of securities have a right to expect prompt 
delivery of securities purchased. Of the threshold securities remaining 
in December 2008, about 50 percent were ETFs. SEC and SRO staffs have 
begun assessing the reasons for FTD in these securities, and they 
believe structural characteristics in the creation and redemption of 
these securities are a critical factor. While these staff said their 
assessments do not currently lead them to believe that these securities 
are vulnerable to manipulative naked short selling, continued scrutiny 
of these products should help SEC confirm this assessment and determine 
whether Commission action is needed to address the causes for FTD in 
these products. 

Although Trading and Markets staff are continuing to study the effects 
of the temporary rule, they and FINRA staff believe that the locate and 
close-out requirements of Regulation SHO, and particularly the enhanced 
close-out requirements of the temporary rule, have made it less likely 
for traders to effect short sales that result in persistent FTD. While 
we agree that the close-out requirements of the temporary rule likely 
have reduced the opportunity to create persistent FTD and, thus, the 
incentive to engage in manipulative naked short selling, some potential 
for this illegal conduct still may exist. In response to an alternate 
suggestion to implement a marketwide preborrow requirement, Trading and 
Markets and FINRA staffs said such a requirement might be costly to the 
industry because FTD represent a very small percentage of the dollar 
value of trades and only a small group of securities would likely be 
the target of any manipulative scheme. However, Enforcement and FINRA 
staffs said that market manipulation is difficult to detect and 
successfully prosecute, and the potential damage to an individual 
company could be severe. For these reasons, an important element of 
continued evaluation of the effects of the temporary rule will be a 
careful evaluation of whether the T+4 close-out requirement is 
sufficient to protect the most vulnerable firms from market 
manipulation. 

Another potentially important aspect of any SEC determination regarding 
whether to continue to rely on the current locate and close-out 
requirements for mitigating manipulative short selling will be an 
evaluation of the effectiveness of the current locate requirement in 
reducing FTD and the potential for market manipulation, with a 
particular focus on the reliability of easy-to-borrow lists--that is, 
these lists must represent securities that are available for borrowing. 
Regulation SHO lacks specific criteria regarding what constitutes an 
easy-to-borrow security, but SEC found that a few firms have not 
followed industry best practices, which call for decrementing their 
inventory as locates are provided. We note that unless firms follow 
such best practices, it is not clear how they can ensure that they are 
providing locates only on their available supply of securities and 
limiting the potential for FTD. However, because following industry 
practice is voluntary, the magnitude of firms overlocating or including 
securities that are not easy to borrow on the list is currently 
unclear. 

Our review also found that the industry currently faces challenges in 
complying with Regulation SHO's requirement to assess whether locates 
provided by customers are reasonable and not resulting in FTD, 
particularly in the context of prime brokerage. Regulation SHO 
currently does not provide executing brokers with access to information 
from prime brokers that would allow them to establish whether customer- 
provided locates are resulting in FTD. Although SEC worked with the 
industry to revise the 1994 Prime Broker Letter in 2007, it has not 
completed its review of the letter, citing its need to wait until the 
Commission determines whether to finalize the temporary rule. By 
finalizing the revised Prime Broker Letter, SEC would provide the means 
by which executing brokers could evaluate customer-provided locates to 
determine whether they are reasonable and thus comply with the locate 
requirement. Moreover, finalized guidance would help alleviate investor 
concerns that such conduct could occur. 

In implementing the new close-out requirements though emergency order 
and extending them through a temporary rule, SEC imposed requirements 
on the industry without first providing for the usual comment period. 
In their comment letters, market participants generally supported the 
fundamental tenets of the temporary rule, including a compressed 
maximum close-out obligation for all equity securities; however, they 
also have identified several operational issues and negative 
consequences caused by the implementation of the temporary rule. 
According to Trading and Markets staff, they had been unable to respond 
to some of these issues raised by the industry because the requirements 
were issued as a temporary rule and certain changes would require a 
rule change approved by the Commission. Furthermore, Trading and 
Markets staff said that it would be difficult to provide guidance to 
the industry about other issues until the Commission determines whether 
to finalize the temporary rule, which potentially will not occur until 
July 2009. We recognize that Trading and Markets staff currently may 
have limited ability to resolve issues arising from the implementation 
of a temporary rule without obtaining input or authorization from the 
Commission. Without a formal process in place that would give Trading 
and Markets staff a basis upon which to address implementation issues 
that arise in connection with interim final temporary rules in a timely 
manner, staff are unable to respond adequately to concerns of industry 
participants affected by the rule. Moreover, while providing formal 
responses to all requests for interpretive guidance may not be 
appropriate, establishing a formal process would provide a basis for 
consistently addressing matters relating to compliance with SEC 
regulations. Doing so also would help prevent negative impacts from 
temporary rules in the periods before expiry or finalizations. 
Furthermore, providing timely answers to SRO and industry requests is 
important for SROs and industry to help ensure consistent 
implementation of SEC rules and regulations. 

Recommendations for Executive Action: 

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, we recommend that the 
Chairman of the Securities and Exchange Commission take the following 
two steps: 

* finalize, in an expedited manner upon finalization of the temporary 
rule, the revised 1994 Prime Broker Letter and: 

* 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. 

Agency Comments and Our Evaluation: 

We provided a draft of the report to the Chairman of the Securities and 
Exchange Commission for her review and comment. We also provided 
relevant portions of the report to FINRA and CBOE for their review and 
comment. We received technical comments from SEC, FINRA, and CBOE, that 
were incorporated, where appropriate. SEC provided written comments 
that we reprinted in appendix IV. 

In its written comments, SEC stated that regarding our first 
recommendation, it will consider the need to clarify the communications 
between prime broker-dealers and executing broker-dealers that would 
facilitate Regulation SHO compliance in connection with its 
consideration of further action on the temporary rule. We encourage SEC 
to take the steps necessary to clarify this communication. In doing so, 
SEC would provide the means by which executing brokers could evaluate 
customer-provided locates to determine whether they are reasonable and 
facilitate compliance with the locate requirement. Moreover, finalized 
guidance would help alleviate investor concerns that such relationships 
could be exploited to engage in manipulative naked short selling. 
Regarding our second recommendation, SEC noted that it regularly 
provides guidance to the industry and outlines that routine rulemaking 
provides a time for comments prior to the adoption of the final rule. 
It also noted that, unlike routine rulemaking, when SEC promulgates a 
rule or regulation as an interim final temporary rule, the rule is 
adopted and in effect during the comment period. SEC stated that it is 
committed to engaging in a deliberative process to develop meaningful 
regulation of short selling and providing interpretive guidance to the 
industry to facilitate implementation, as appropriate. SEC also stated 
that it will evaluate whether there are additional steps that it can 
take, consistent with the Administrative Procedure Act, to address 
implementation issues raised by industry. Again, we encourage SEC to 
take the steps necessary to determine what additional steps can be 
taken to address implementation issues raised by the industry and SROs, 
especially regarding interim temporary final rules, which can be in 
effect for significant periods of time. While providing formal 
responses to all requests for interpretive guidance may not be 
appropriate, establishing a formal internal process consistent with the 
Administrative Procedure Act to facilitate providing timely answers to 
SRO and industry requests would help ensure effective administration of 
SEC rules and regulations. Furthermore, a formal process would help 
reduce the chances of negative consequences of temporary rules 
occurring during the periods before expiry or finalizations. 

As agreed with your offices, unless you publicly announce its contents 
earlier, we plan no further distribution until 30 days from the report 
date. At that time, we will send copies to interested congressional 
committees, the Chairman of the Securities and Exchange Commission, and 
other interested parties. The report also will be available at no 
charge on the GAO Web site at [hyperlink, http://www.gao.gov]. 

If you or your staffs have any questions about this report, please 
contact me at (202) 512-8678 or williamso@gao.gov. Contact points for 
our Offices of Congressional Relations and Public Affairs can be found 
on the last page of this report. Key contributors to this report are 
listed in appendix V. 

Signed by: 

Orice M. Williams: 
Director, Financial Markets and Community Investment: 

[End of section] 

Appendix I: Scope and Methodology: 

To provide an overview of the actions that the Securities and Exchange 
Commission (SEC) has taken to address manipulative naked short selling 
and failures to deliver (FTD), including Regulation SHO and the recent 
emergency orders--and the factors SEC considered in taking these 
actions, we reviewed Regulation SHO; the recent July and September 2008 
emergency orders, including associated amendments; and the interim 
final temporary rule (temporary rule) and interviewed staff from SEC's 
Division of Trading and Markets (Trading and Markets). We also obtained 
copies of related rules issued by the former NASD. 

To discuss the potential impact of Regulation SHO on FTD in threshold 
and nonthreshold securities using trend analysis, we obtained (through 
SEC) FTD data that the National Securities Clearing Corporation (NSCC) 
generated from April 1, 2004, to December 31, 2008.[Footnote 97] We 
chose to obtain data going back to April 1, 2004, because we wanted to 
identify any trends in FTD prior to the effective date of Regulation 
SHO in January 2005, and because April 1, 2004, was the earliest date 
SEC began receiving FTD data from NSCC. We also obtained the daily 
lists of threshold securities published by the equities self-regulatory 
organizations (SRO) from January 10, 2005 (the date the first threshold 
list was published), through December 31, 2008. 

From these data, we generated a number of graphics to illustrate trends 
in threshold securities, including the number of threshold securities 
and the level of outstanding and new FTD in these securities, both 
across the market and by individual markets. We generated other 
descriptive statistics from the data on threshold securities, such as 
the number of securities that had persisted for more than 90 days on 
the threshold list over this period. In addition, we generated graphics 
illustrating trends in FTD in all equity securities across the market 
and, by individual market, from April 1, 2004, through December 31, 
2008. In performing our analyses, we conducted a data reliability 
assessment of the NSCC data. To do so, we reviewed a 2005 SEC Office of 
Compliance Inspections and Examinations (OCIE) examination that, in 
part, assessed NSCC's processes for generating reports that are used to 
provide daily FTD data to SEC and the equities SROs. We also employed 
our own data reliability tests by taking a random sampling of trading 
dates and verifying that the listing of threshold securities provided 
to us by SEC matched those published by the New York Stock Exchange 
(NYSE), NASDAQ, and the American Stock Exchange (Amex). In addition, we 
reviewed these data for missing values and outliers as well as for the 
accuracy of pricing information. We determined that these data were 
reliable for our purposes. As part of our work, we also obtained and 
reviewed multiple studies of the same data conducted by SEC's Office of 
Economic Analysis (OEA). 

We also compared total new FTD in threshold securities listed on the 
NYSE, NASDAQ, and Amex with consolidated trading volume on those 
exchanges. We obtained consolidated trading volume data for all three 
exchanges from the Financial Industry Regulatory Authority (FINRA). In 
addition, we compared trends in FTD in these markets with trends in 
volatility, as measured by the Chicago Board Options Exchange (CBOE) 
Volatility Index (VIX); market performance, as measured by the S&P 500 
Total Return Index; and short interest. We obtained the VIX from Yahoo! 
Finance, the S&P 500 Total Return Index from Global Insight, and short 
interest from the midmonth short interest press releases from the three 
major exchanges. We did not conduct an assessment of the reliability of 
these measures. However, these sources are widely used in both finance 
and economics and are considered credible for the purposes in which we 
used them. In addition, these measures are used solely for descriptive 
purposes and not for the purpose of making recommendations or drawing 
conclusions about causality. We also identified the percentage of 
threshold securities in our review period that were exchange-traded 
funds (ETF). To identify these securities, we downloaded lists of ETFs 
from four separate sources--including Morningstar, Yahoo! Finance, MSN 
Money, and Bloomberg--and compared these lists to identify any 
differences. We found that differences between the sources amounted to 
less than 3 percent of ETFs appearing on each respective list. To have 
the most comprehensive list, we included ETFs that appear on at least 
three of these four sources. We have determined that these data were 
reliable for our purpose, which was to provide descriptive information. 

To discuss regulatory, industry, and other market participant views on 
the effectiveness of Regulation SHO and the recent emergency orders in 
curbing the potential for manipulative naked short selling, we reviewed 
and analyzed the requirements of Regulation SHO, the recent emergency 
orders, the temporary rule, and comment letters submitted to SEC. We 
also reviewed the results from an OEA study on the impact of the 
temporary preborrow requirement on the market in the July emergency 
order. While we found the results were based on a reasonable 
methodology, we note that is difficult to draw strong conclusions given 
a number of limitations, including the temporary nature of the 
emergency order. We also reviewed two private sector studies to better 
understand market trends during and after the implementation of the 
July emergency order. We did not evaluate or validate their findings 
because these private sector studies were reviewed primarily to provide 
additional descriptive information beyond the OEA study, and because 
neither conducted a rigorous causal investigation. In general, the 
inclusion of the OEA and private sector studies is purely for research 
purposes and does not imply that we deem them definitive. Furthermore, 
we obtained and reviewed comment letters submitted to SEC about 
Regulation SHO, the emergency orders, and the temporary rule. Finally, 
we conducted interviews with staffs from OEA, Trading and Markets, 
OCIE, SEC's Division of Enforcement, and FINRA; broker-dealers and two 
trade associations representing broker-dealers; securities lenders and 
a trade association representing securities lenders, securities lending 
consultants; an issuer and a trade association representing issuers; an 
investor; legal and subject area experts; and other market observers. 

To analyze SEC and SRO efforts to enforce industry compliance with 
Regulation SHO and to detect manipulative naked short selling, we 
reviewed a 2005 joint sweep examination that OCIE, NYSE, and the former 
NASD conducted. We obtained data from FINRA and CBOE on the number of 
Regulation SHO-related examinations that they conducted during calendar 
years 2005 through 2008, and the number of these examinations that 
resulted in Regulation SHO deficiencies. We conducted a data 
reliability assessment of the FINRA and CBOE data and determined they 
were reliable for our purpose. We also reviewed FINRA data on the 
periodic surveillance sweeps of FTD data that the authority conducted 
during this period to monitor its members for potential Regulation SHO 
violations. We obtained data from OCIE on the oversight and cause 
examinations conducted from January 1, 2005, through September 30, 
2008, that reviewed for Regulation SHO compliance. We conducted a data 
reliability assessment of these data and determined they were reliable 
for our purpose. From these data, we selected and reviewed 12 OCIE 
broker-dealer oversight or cause examination reports and 11 FINRA 
examination reports that resulted in findings of Regulation SHO 
deficiencies. We also reviewed a 2006 sweep examination conducted by 
CBOE of its options market makers, FINRA examination guidance, and the 
revised 1994 Prime Broker Letter. We conducted interviews with staffs 
from OCIE, Enforcement, FINRA, CBOE, and NYSE, and with broker-dealers 
and a trade association representing broker-dealers. 

To discuss industry experience regarding the implementation of the new 
and enhanced close-out requirements, we reviewed industry comment 
letters submitted to SEC, documentation related to SRO requests to SEC 
for guidance, and the 2004-2009 Strategic Plan. We also interviewed 
broker-dealers and a trade association representing broker-dealers; 
securities lenders and a trade association representing securities 
lenders; securities lending consultants; and staff from Trading and 
Markets and an SRO. 

We conducted this performance audit from March 2008 through May 2009 in 
accordance with generally accepted government auditing standards. Those 
standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe that 
the evidence obtained provides a reasonable basis for our findings and 
conclusions based on our audit objectives. 

[End of section] 

Appendix II: Clearing Agencies Settle Equity Securities Trades through 
a 3-Day Settlement Cycle and Continuous Net Settlement: 

According to the Depository Trust and Clearing Corporation (DTCC), most 
broker-to-broker equities securities trades in the United States are 
cleared and settled through its clearing agency subsidiaries, NSCC and 
the Depository Trust Company (DTC). As a clearing corporation, NSCC 
provides clearing and settlement, risk management, central counterparty 
services, and guarantee of trade completion in the event of a 
participant's default. As the central security depository and custodian 
in the United States, DTC acts as a custodian for the majority of 
securities issues and transfers ownership, in book-entry form, during 
settlement. 

Due to the volume and value of trading in today's markets, NSCC nets 
trades and payments among its participants, using its Continuous Net 
Settlement System (CNS System). The CNS System is a book-entry 
accounting system in which each NSCC participant's daily purchases and 
sales of securities, based on trade date, are automatically netted into 
one long position (right to receive) or one short position (obligation 
to deliver) for each securities issue purchased or sold.[Footnote 98] 
The participant's corresponding payment obligations are similarly 
netted into one obligation to pay or one obligation to receive money. 
[Footnote 99] For each participant with a short position on settlement 
date, NSCC instructs the securities depository designated by the 
participant--typically, DTC--to deliver securities from the 
participant's account at the depository to NSCC's account. NSCC then 
instructs the depository to deliver those securities from NSCC's 
account to participants with net long positions in the security. NSCC 
provides participants with multiple daily reports that detail their net 
long and short positions in each security. One example of such a report 
is the CNS Accounting Summary, which provides NSCC participants with 
its prior day's positions, settling trades during the day, closing 
positions, and the market value of its positions. Any unfulfilled net 
long or short position in a settlement cycle is carried forward to 
succeeding settlement cycles. 

Figures 10 and 11 illustrate the CNS process. Figure 10 illustrates a 
series of transactions between multiple brokers and the resulting CNS 
position. 

Figure 10: Trading Day Transactions and Broker CNS Positions: 

[Refer to PDF for image: illustration] 

Trading day: 

Broker A: 
Trade occurs: 10,000 shares sold to Broker B; 
End of trading day CNS System records: Long position of 9,000 shares; 

Broker B: 
Trade occurs: 5,000 shares sold to Broker C; 
Trade occurs: 2,000 shares sold to Broker D; 
End of trading day CNS System records: Long position of 3,000 shares; 

Broker C: 
End of trading day CNS System records: Long position of 5,000 shares; 

Broker D: 
Trade occurs: 1,000 shares sold to Broker A; 
End of trading day CNS System records: Long position of 5,000 shares. 

Sources: SEC (data); GAO (analysis). 

[End of figure] 

Figure 11 illustrates the transactions that occur on settlement day and 
the resulting CNS positions. This example assumes that the brokers 
shown in the graphic executed no other trades in the XYZ Company's 
security. 

Figure 11: Settlement Day and Broker CNS Positions: 

[Refer to PDF for image: illustration] 

Settlement Day (T+3): 

Broker A: 
9,000 shares to NSCC; 
End of trading day CNS System records: Flat position of 0 shares; 

Broker B: 
3,000 shares from NSCC; 
Trade occurs: 2,000 shares sold to Broker D; 
End of trading day CNS System records: Flat position of 0 shares; 

Broker C: 
5,000 shares from NSCC; 
End of trading day CNS System records: Flat position of 0 shares; 

Broker D: 
1,000 shares from NSCC; 
End of trading day CNS System records: Flat position of 0 shares. 

Sources: SEC (data); GAO (analysis). 

[End of figure] 

If a participant fails to deliver the total number of securities that 
it owes NSCC on a particular settlement date, NSCC may be unable to 
meet its delivery obligations, resulting in a failures to receive (FTR) 
for participants who have net long positions. NSCC uses the automated 
Stock Borrow Program (SBP) to borrow shares to meet as many of its 
delivery obligations as possible. This program allows participants to 
instruct NSCC on the specific securities from their DTC account that 
are available for borrowing to cover NSCC's CNS delivery shortfalls. 
Any shares that NSCC borrows are debited from the lending participant's 
DTC account; delivered to NSCC; and, subsequently, delivered to a NSCC 
participant with a net long position. NSCC creates a right to receive 
(net long) position for the lender in the CNS System to show that it is 
owed securities. Until the securities are returned, the lending 
participant no longer has ownership rights in them and, therefore, 
cannot relend them. Additionally, any delivery made using the SBP does 
not relieve the participant that fails to deliver from its delivery 
obligation to NSCC. 

Participants with a FTR position not filled through the SBP have three 
options for receiving the securities they are owed. First, the 
participant can choose to wait for the CNS System to allocate the 
securities that it is owed through the normal course of business. 
[Footnote 100] Second, the participant can request that NSCC give its 
FTR priority in the CNS System. This allows the participant's FTR 
position to be filled with any securities NSCC receives after all buy-
in requests are fulfilled, but before CNS begins allocating received 
shares to other participants with net long positions in the 
security.[Footnote 101] Third, the participant can initiate a buy-in. 
[Footnote 102] This process requires the participant to file paperwork 
with NSCC directing the corporation to request a net short participant 
to deliver securities to NSCC and for NSCC to deliver those securities 
to the net long participant. If the position remains unfilled, NSCC 
instructs the member to buy-in the unfilled position. NSCC has no 
authority under SEC rules to force a buy-in. DTCC officials explained 
to us that approximately 6,000 notices of intention to buy-in are filed 
each day, with approximately 20 notices resulting in execution. 
According to these officials, relatively few such notices are executed 
because FTD are generally resolved in the normal course of business. 

Trade clearance and settlement in the United States operate on a 
standard 3-day settlement cycle. On trade date (T), trade details are 
transmitted to NSCC for processing. According to DTCC, an estimated 
99.9 percent of equity transactions are transmitted to the clearing 
agency as "locked-in," meaning that the security exchange has already 
compared the buyer's account with the seller's account of the trade 
details (e.g., share quantity, price, and security) and has determined 
that they match. On the first day following the trade date (T+1), NSCC 
assumes the role of central counterparty by taking on the buyer's 
credit risk and the seller's delivery risk. On the second day (T+2), 
NSCC provides summaries of all compared trades to its participant 
broker-dealers, including information on the net positions of each 
security due or owed for settlement. On the third day (T+3), securities 
are delivered and payments of money are made to the respective parties 
through NSCC and DTC. Figure 12 summarizes the clearance and settlement 
process for equity securities trades in the United States. 

Figure 12: Clearance and Settlement Process for Equity Securities 
Trades in the United States: 

[Refer to PDF for image: illustration] 

Trade day: 
* Buyer: Customer A purchases 100 shares of stock at $10 a share 
through Broker A; 
* Broker A: Trade occurs at the Exchange and trade data is sent via 
computer to NSCC; 
* Seller: Customer B directs Broker B to sell 100 shares at $10 a 
share. 

Trade day + 1: 
* NSCC reports the confirmation of the trade with Broker A; 
* NSCC reports the confirmation of the trade with Broker B. 

Trade day + 2: 
NSCC reports the settlement position to Broker A; 
NSCC reports the settlement position to Broker B. 

Trade day + 3: 
* Equity share settlement: DTC is instructed by NSCC to conduct 
settlement via book entry. Settlement occurs when DTC deducts 100 
shares from the seller’s account (Broker B) and places them in NSCC’s 
account: NSCC then transfers the 100 shares to the net buyer (Broker 
A); 
* Money settlement: Payment is performed through settlement banks over 
Fedwire. NSCC requests payment from Broker A via its settlement bank. 
Broker A’s buyer’s settlement bank pays $1,000 to NSCC’s settlement 
bank. Broker B’s seller’s settlement bank receives $1,000 from NSCC’s 
settlement bank. 

Sources: NSCC (data), GAO (analysis), and Art Explosion (images). 

[End of figure] 

[End of section] 

Appendix III: Additional Trend Data on FTD in Threshold Securities, and 
All Equity Securities: 

SEC has taken several actions in recent years that were intended to 
address FTD and manipulative naked short selling. In August 2004, SEC 
adopted Regulation SHO, which was intended to address large and 
persistent FTD and curb the potential for manipulative naked short 
selling.[Footnote 103] Among other things, Regulation SHO imposed 
delivery requirements on broker-dealers for equity securities in which 
a substantial amount of FTD had occurred, which the regulation 
designated as "threshold securities." Regulation SHO required broker- 
dealers that have FTD in these securities lasting for 10 consecutive 
days to "close out" the FTD by purchasing securities of like kind and 
quantity in the market by the beginning of regular trading hours, the 
next morning (T+14), with some exceptions.[Footnote 104] In July 2008, 
SEC issued an emergency order (July emergency order) to temporarily 
restrict naked short selling and FTD in the publicly traded securities 
of 19 large financial firms, with limited exceptions. In September 
2008, SEC took more comprehensive action to curb the potential for 
manipulative naked short selling when it issued another emergency order 
(September emergency order) that temporarily enhanced close-out 
requirements on the sale of all equity securities. The September 
emergency order required broker-dealers to deliver securities resulting 
from short sales in any equity security (not just threshold securities) 
by the settlement date (T+3), or, if they have FTD on the settlement 
date, to take action to purchase or borrow securities to close out the 
FTD by the beginning of regular trading hours the next morning (T+4), 
with limited exceptions.[Footnote 105] Broker dealers that can show 
that the FTD resulted from a long sale were allowed until the beginning 
of regular trading hours on T+6 to close out the FTD.[Footnote 106] 
Upon expiration of the emergency order, SEC extended this temporary 
requirement until July 31, 2009, as part of the interim final temporary 
rule (temporary rule). 

Figures 13 through 24 illustrate the trends in threshold securities and 
their FTD between the effective date of Regulation SHO in January 2005 
through December 2008, by the market on which these securities were 
trading. These markets include the New York Stock Exchange (NYSE), 
NASDAQ, and the American Stock Exchange (Amex). We have also generated 
trends for threshold securities trading on NYSE Arca, the Over-The- 
Counter Bulletin Board (OTCBB), and Pink Quote under the "Other 
Securities" category. We also generated trends in FTD in all securities 
(both threshold and nonthreshold), by market, over the review period 
(figures 25 through 36). 

Figure 13: Average Number of NYSE-listed Threshold Securities, per 
Month, by Number of Days on the Threshold List, from January 2005 
through December 2008: 

[Refer to PDF for image: line graph] 

Month and Year: 2005, January (Compliance date); 
Average number of NYSE-listed threshold securities: 72.94. 

Month and Year: 2005, February; 
Average number of NYSE-listed threshold securities: 57.58. 

Month and Year: 2005, March; 
Average number of NYSE-listed threshold securities: 56.73. 

Month and Year: 2005, April; 
Average number of NYSE-listed threshold securities: 47.1. 

Month and Year: 2005, May; 
Average number of NYSE-listed threshold securities: 49.67. 

Month and Year: 2005, June;
Average number of NYSE-listed threshold securities: 52.23. 

Month and Year: 2005, July; 
Average number of NYSE-listed threshold securities: 46.6. 

Month and Year: 2005, August;
Average number of NYSE-listed threshold securities: 40.61. 

Month and Year: 2005, September; 
Average number of NYSE-listed threshold securities: 33.9. 

Month and Year: 2005, October; 
Average number of NYSE-listed threshold securities: 35.85. 

Month and Year: 2005, November; 
Average number of NYSE-listed threshold securities: 38.5. 

Month and Year: 2005, December; 
Average number of NYSE-listed threshold securities: 42.52. 

Month and Year: 2006, January; 
Average number of NYSE-listed threshold securities: 37.2. 

Month and Year: 2006, February; 
Average number of NYSE-listed threshold securities: 41.58. 

Month and Year: 2006, March; 
Average number of NYSE-listed threshold securities: 47.96. 

Month and Year: 2006, April; 
Average number of NYSE-listed threshold securities: 42.89. 

Month and Year: 2006, May; 
Average number of NYSE-listed threshold securities: 51.14. 

Month and Year: 2006, June; 
Average number of NYSE-listed threshold securities: 48.23. 

Month and Year: 2006, July; 	
Average number of NYSE-listed threshold securities: 48.7. 

Month and Year: 2006, August; 
Average number of NYSE-listed threshold securities: 40.35. 

Month and Year: 2006, September; 
Average number of NYSE-listed threshold securities: 40.45. 

Month and Year: 2006, October; 
Average number of NYSE-listed threshold securities: 43.1. 

Month and Year: 2006, November; 
Average number of NYSE-listed threshold securities: 52.29. 

Month and Year: 2006, December; 
Average number of NYSE-listed threshold securities: 54.35. 

Month and Year: 2007, January; 
Average number of NYSE-listed threshold securities: 41.2. 

Month and Year: 2007, February; 
Average number of NYSE-listed threshold securities: 50.0. 

Month and Year: 2007, March; 
Average number of NYSE-listed threshold securities: 51.82. 

Month and Year: 2007, April; 
Average number of NYSE-listed threshold securities: 66.65. 

Month and Year: 2007, May; 
Average number of NYSE-listed threshold securities: 66.86. 

Month and Year: 2007, June; 
Average number of NYSE-listed threshold securities: 70.71. 

Month and Year: 2007, July; 
Average number of NYSE-listed threshold securities: 85.05. 

Month and Year: 2007, August; 
Average number of NYSE-listed threshold securities: 102.43. 

Month and Year: 2007, September; 
Average number of NYSE-listed threshold securities: 74.0. 

Month and Year: 2007, October (Elimination of grandfather exception); 
Average number of NYSE-listed threshold securities: 73.59. 

Month and Year: 2007, November; 
Average number of NYSE-listed threshold securities: 82.29. 

Month and Year: 2007, December; 
Average number of NYSE-listed threshold securities: 75.75. 

Month and Year: 2008, January; 
Average number of NYSE-listed threshold securities: 79.76. 

Month and Year: 2008, February;	
Average number of NYSE-listed threshold securities: 74.7. 

Month and Year: 2008, March; 
Average number of NYSE-listed threshold securities: 87.85. 

Month and Year: 2008, April; 
Average number of NYSE-listed threshold securities: 105.41. 

Month and Year: 2008, May; 
Average number of NYSE-listed threshold securities: 95.19. 

Month and Year: 2008, June; 
Average number of NYSE-listed threshold securities: 97.14. 

Month and Year: 2008, July (July emergency order); 	
Average number of NYSE-listed threshold securities: 121.41. 

Month and Year: 2008, August; 
Average number of NYSE-listed threshold securities: 110.1. 

Month and Year: 2008, September (September emergency order); 
Average number of NYSE-listed threshold securities: 91.43. 

Month and Year: 2008, October; 
Average number of NYSE-listed threshold securities: 44.45. 

Month and Year: 2008, November; 
Average number of NYSE-listed threshold securities: 6.11. 

Month and Year: 2008, December; 
Average number of NYSE-listed threshold securities: 3.32. 

Sources: SEC (data); GAO (analysis). 

[End of figure] 

Figure 14: Average Number of NASDAQ-listed Threshold Securities, per 
Month, by Number of Days on the Threshold List, from January 2005 
through December 2008: 

[Refer to PDF for image: line graph] 

Month and Year: 2005, January (Compliance date); 
Average number of NASDAQ-listed threshold securities: 106.06. 

Month and Year: 2005, February; 
Average number of NASDAQ-listed threshold securities: 103.21. 

Month and Year: 2005, March; 
Average number of NASDAQ-listed threshold securities: 94.77. 

Month and Year: 2005, April; 
Average number of NASDAQ-listed threshold securities: 84.67. 

Month and Year: 2005, May; 
Average number of NASDAQ-listed threshold securities: 84.71. 

Month and Year: 2005, June;
Average number of NASDAQ-listed threshold securities: 89.09. 

Month and Year: 2005, July; 
Average number of NASDAQ-listed threshold securities: 92.55. 

Month and Year: 2005, August;
Average number of NASDAQ-listed threshold securities: 88.96. 

Month and Year: 2005, September; 
Average number of NASDAQ-listed threshold securities: 82.43. 

Month and Year: 2005, October; 
Average number of NASDAQ-listed threshold securities: 76.1. 

Month and Year: 2005, November; 
Average number of NASDAQ-listed threshold securities: 69.0. 

Month and Year: 2005, December; 
Average number of NASDAQ-listed threshold securities: 64.1. 

Month and Year: 2006, January; 
Average number of NASDAQ-listed threshold securities: 73.05. 

Month and Year: 2006, February; 
Average number of NASDAQ-listed threshold securities: 89.42. 

Month and Year: 2006, March; 
Average number of NASDAQ-listed threshold securities: 79.96. 

Month and Year: 2006, April; 
Average number of NASDAQ-listed threshold securities: 86.58. 

Month and Year: 2006, May; 
Average number of NASDAQ-listed threshold securities: 82.27. 

Month and Year: 2006, June; 
Average number of NASDAQ-listed threshold securities: 72.18. 

Month and Year: 2006, July; 	
Average number of NASDAQ-listed threshold securities: 81.45. 

Month and Year: 2006, August; 
Average number of NASDAQ-listed threshold securities: 68.39. 

Month and Year: 2006, September; 
Average number of NASDAQ-listed threshold securities: 66.4. 

Month and Year: 2006, October; 
Average number of NASDAQ-listed threshold securities: 67.57. 

Month and Year: 2006, November; 
Average number of NASDAQ-listed threshold securities: 68.24. 

Month and Year: 2006, December; 
Average number of NASDAQ-listed threshold securities: 79.9. 

Month and Year: 2007, January; 
Average number of NASDAQ-listed threshold securities: 63.35. 

Month and Year: 2007, February; 
Average number of NASDAQ-listed threshold securities: 65.21. 

Month and Year: 2007, March; 
Average number of NASDAQ-listed threshold securities: 79.68. 

Month and Year: 2007, April; 
Average number of NASDAQ-listed threshold securities: 83.2. 

Month and Year: 2007, May; 
Average number of NASDAQ-listed threshold securities: 98.41. 

Month and Year: 2007, June; 
Average number of NASDAQ-listed threshold securities: 94.62. 

Month and Year: 2007, July; 
Average number of NASDAQ-listed threshold securities: 111.33. 

Month and Year: 2007, August; 
Average number of NASDAQ-listed threshold securities: 131.13. 

Month and Year: 2007, September; 
Average number of NASDAQ-listed threshold securities: 71.53. 

Month and Year: 2007, October (Elimination of grandfather exception); 
Average number of NASDAQ-listed threshold securities: 86.73. 

Month and Year: 2007, November; 
Average number of NASDAQ-listed threshold securities: 94.29. 

Month and Year: 2007, December; 
Average number of NASDAQ-listed threshold securities: 95.8. 

Month and Year: 2008, January; 
Average number of NASDAQ-listed threshold securities: 91.95. 

Month and Year: 2008, February;	
Average number of NASDAQ-listed threshold securities: 103.5. 

Month and Year: 2008, March; 
Average number of NASDAQ-listed threshold securities: 126.85. 

Month and Year: 2008, April; 
Average number of NASDAQ-listed threshold securities: 161.23. 

Month and Year: 2008, May; 
Average number of NASDAQ-listed threshold securities: 149.19. 

Month and Year: 2008, June; 
Average number of NASDAQ-listed threshold securities: 153.29. 

Month and Year: 2008, July (July emergency order); 	
Average number of NASDAQ-listed threshold securities: 207.18. 

Month and Year: 2008, August; 
Average number of NASDAQ-listed threshold securities: 171.19. 

Month and Year: 2008, September (September emergency order); 
Average number of NASDAQ-listed threshold securities: 139.29. 

Month and Year: 2008, October; 
Average number of NASDAQ-listed threshold securities: 68.68. 

Month and Year: 2008, November; 
Average number of NASDAQ-listed threshold securities: 9.11. 

Month and Year: 2008, December; 
Average number of NASDAQ-listed threshold securities: 6.68. 

Sources: SEC (data); GAO (analysis). 

[End of figure] 

Figure 15: Average Number of Amex-listed Threshold Securities, per 
Month, by Number of Days on the Threshold List, from January 2005 
through December 2008: 

[Refer to PDF for image: line graph] 

Month and Year: 2005, January (Compliance date); 
Average number of Amex-listed threshold securities: 77.12. 

Month and Year: 2005, February; 
Average number of Amex-listed threshold securities: 55.36. 

Month and Year: 2005, March; 
Average number of Amex-listed threshold securities: 59.68. 

Month and Year: 2005, April; 
Average number of Amex-listed threshold securities: 58.0. 

Month and Year: 2005, May; 
Average number of Amex-listed threshold securities: 47.95. 

Month and Year: 2005, June;
Average number of Amex-listed threshold securities: 41.54. 

Month and Year: 2005, July; 
Average number of Amex-listed threshold securities: 41.75. 

Month and Year: 2005, August;
Average number of Amex-listed threshold securities: 44.52. 

Month and Year: 2005, September; 
Average number of Amex-listed threshold securities: 48.33. 

Month and Year: 2005, October; 
Average number of Amex-listed threshold securities: 47.95. 

Month and Year: 2005, November; 
Average number of Amex-listed threshold securities: 53.25. 

Month and Year: 2005, December; 
Average number of Amex-listed threshold securities: 55.52. 

Month and Year: 2006, January; 
Average number of Amex-listed threshold securities: 58.55. 

Month and Year: 2006, February; 
Average number of Amex-listed threshold securities: 64.57. 

Month and Year: 2006, March; 
Average number of Amex-listed threshold securities: 60.26. 

Month and Year: 2006, April; 
Average number of Amex-listed threshold securities: 48.0. 

Month and Year: 2006, May; 
Average number of Amex-listed threshold securities: 51.77. 

Month and Year: 2006, June; 
Average number of Amex-listed threshold securities: 45.5. 

Month and Year: 2006, July; 	
Average number of Amex-listed threshold securities: 51.5. 

Month and Year: 2006, August; 
Average number of Amex-listed threshold securities: 46.42. 

Month and Year: 2006, September; 
Average number of Amex-listed threshold securities: 49.85. 

Month and Year: 2006, October; 
Average number of Amex-listed threshold securities: 67.28. 

Month and Year: 2006, November; 
Average number of Amex-listed threshold securities: 59.61. 

Month and Year: 2006, December; 
Average number of Amex-listed threshold securities: 64.05. 

Month and Year: 2007, January; 
Average number of Amex-listed threshold securities: 60.7. 

Month and Year: 2007, February; 
Average number of Amex-listed threshold securities: 59.36. 

Month and Year: 2007, March; 
Average number of Amex-listed threshold securities: 71.0. 

Month and Year: 2007, April; 
Average number of Amex-listed threshold securities: 62.45. 

Month and Year: 2007, May; 
Average number of Amex-listed threshold securities: 76.86. 

Month and Year: 2007, June; 
Average number of Amex-listed threshold securities: 91.71. 

Month and Year: 2007, July; 
Average number of Amex-listed threshold securities: 99.52. 

Month and Year: 2007, August; 
Average number of Amex-listed threshold securities: 103.0. 

Month and Year: 2007, September; 
Average number of Amex-listed threshold securities: 76.05. 

Month and Year: 2007, October (Elimination of grandfather exception); 
Average number of Amex-listed threshold securities: 83.31. 

Month and Year: 2007, November; 
Average number of Amex-listed threshold securities: 81.80. 

Month and Year: 2007, December; 
Average number of Amex-listed threshold securities: 101.85. 

Month and Year: 2008, January; 
Average number of Amex-listed threshold securities: 103.19. 

Month and Year: 2008, February;	
Average number of Amex-listed threshold securities: 95.65. 

Month and Year: 2008, March; 
Average number of Amex-listed threshold securities: 100.85. 

Month and Year: 2008, April; 
Average number of Amex-listed threshold securities: 94.77. 

Month and Year: 2008, May; 
Average number of Amex-listed threshold securities: 91.19. 

Month and Year: 2008, June; 
Average number of Amex-listed threshold securities: 104.61. 

Month and Year: 2008, July (July emergency order); 	
Average number of Amex-listed threshold securities: 112.90. 

Month and Year: 2008, August; 
Average number of Amex-listed threshold securities: 91.14. 

Month and Year: 2008, September (September emergency order); 
Average number of Amex-listed threshold securities: 73.0. 

Month and Year: 2008, October; 
Average number of Amex-listed threshold securities: 28.90. 

Month and Year: 2008, November; 
Average number of Amex-listed threshold securities: 6.47. 

Sources: SEC (data); GAO (analysis). 

[End of figure] 

Figure 16: Average Number of Other Securities, per Month, by Number of 
Days on the Threshold List, from January 2005 through December 2008: 

[Refer to PDF for image: line graph] 

Month and Year: 2005, January (Compliance date); 
Average number of other threshold securities: 167. 

Month and Year: 2005, February; 
Average number of other threshold securities: 169. 

Month and Year: 2005, March; 
Average number of other threshold securities: 148.1. 

Month and Year: 2005, April; 
Average number of other threshold securities: 127.8. 

Month and Year: 2005, May; 
Average number of other threshold securities: 114.6. 

Month and Year: 2005, June;
Average number of other threshold securities: 105.5. 

Month and Year: 2005, July; 
Average number of other threshold securities: 117.7. 

Month and Year: 2005, August;
Average number of other threshold securities: 133.4. 

Month and Year: 2005, September; 
Average number of other threshold securities: 125.2. 

Month and Year: 2005, October; 
Average number of other threshold securities: 115.2. 

Month and Year: 2005, November; 
Average number of other threshold securities: 109.9. 

Month and Year: 2005, December; 
Average number of other threshold securities: 119.5. 

Month and Year: 2006, January; 
Average number of other threshold securities: 105.5. 

Month and Year: 2006, February; 
Average number of other threshold securities: 128.5. 

Month and Year: 2006, March; 
Average number of other threshold securities: 136.4. 

Month and Year: 2006, April; 
Average number of other threshold securities: 131.2. 

Month and Year: 2006, May; 
Average number of other threshold securities: 112.3. 

Month and Year: 2006, June; 
Average number of other threshold securities: 86.0. 

Month and Year: 2006, July; 	
Average number of other threshold securities: 73.1. 

Month and Year: 2006, August; 
Average number of other threshold securities: 75.7. 

Month and Year: 2006, September; 
Average number of other threshold securities: 82.2. 

Month and Year: 2006, October; 
Average number of other threshold securities: 86.7. 

Month and Year: 2006, November; 
Average number of other threshold securities: 96.9. 

Month and Year: 2006, December; 
Average number of other threshold securities: 96.4. 

Month and Year: 2007, January; 
Average number of other threshold securities: 91.2. 

Month and Year: 2007, February; 
Average number of other threshold securities: 96.3. 

Month and Year: 2007, March; 
Average number of other threshold securities: 108.5. 

Month and Year: 2007, April; 
Average number of other threshold securities: 105.3. 

Month and Year: 2007, May; 
Average number of other threshold securities: 119.0. 

Month and Year: 2007, June; 
Average number of other threshold securities: 116.0. 

Month and Year: 2007, July; 
Average number of other threshold securities: 120.0. 

Month and Year: 2007, August; 
Average number of other threshold securities: 122.9. 

Month and Year: 2007, September; 
Average number of other threshold securities: 116.3. 

Month and Year: 2007, October (Elimination of grandfather exception); 
Average number of other threshold securities: 123.3. 

Month and Year: 2007, November; 
Average number of other threshold securities: 122.3. 

Month and Year: 2007, December; 
Average number of other threshold securities: 121.9. 

Month and Year: 2008, January; 
Average number of other threshold securities: 131.7. 

Month and Year: 2008, February;	
Average number of other threshold securities: 130.2. 

Month and Year: 2008, March; 
Average number of other threshold securities: 150.8. 

Month and Year: 2008, April; 
Average number of other threshold securities: 171.0. 

Month and Year: 2008, May; 
Average number of other threshold securities: 155.5. 

Month and Year: 2008, June; 
Average number of other threshold securities: 148.5. 

Month and Year: 2008, July (July emergency order); 	
Average number of other threshold securities: 140.1. 

Month and Year: 2008, August; 
Average number of other threshold securities: 127.6. 

Month and Year: 2008, September (September emergency order); 
Average number of other threshold securities: 109.7. 

Month and Year: 2008, October; 
Average number of other threshold securities: 53.4. 

Month and Year: 2008, November; 
Average number of other threshold securities: 50.6. 

Month and Year: 2008, December; 
Average number of other threshold securities: 71.7. 

Sources: SEC (data); GAO (analysis). 

[End of figure] 

Figure 17: Average Outstanding FTD, per Month, for NYSE-listed 
Threshold Securities, from January 2005 through December 2008 (in 
millions): 

[Refer to PDF for image: line graph] 

Month and Year: 2005, January (Compliance date); 
Average outstanding FTD for NYSE-listed threshold securities: 31.9. 

Month and Year: 2005, February; 
Average outstanding FTD for NYSE-listed threshold securities: 20.8. 

Month and Year: 2005, March; 
Average outstanding FTD for NYSE-listed threshold securities: 21.7. 

Month and Year: 2005, April; 
Average outstanding FTD for NYSE-listed threshold securities: 22.8. 

Month and Year: 2005, May; 
Average outstanding FTD for NYSE-listed threshold securities: 31.9. 

Month and Year: 2005, June;
Average outstanding FTD for NYSE-listed threshold securities: 17.9. 

Month and Year: 2005, July; 
Average outstanding FTD for NYSE-listed threshold securities: 11.2. 

Month and Year: 2005, August;
Average outstanding FTD for NYSE-listed threshold securities: 19.6. 

Month and Year: 2005, September; 
Average outstanding FTD for NYSE-listed threshold securities: 17.6. 

Month and Year: 2005, October; 
Average outstanding FTD for NYSE-listed threshold securities: 17.1. 

Month and Year: 2005, November; 
Average outstanding FTD for NYSE-listed threshold securities: 14.2. 

Month and Year: 2005, December; 
Average outstanding FTD for NYSE-listed threshold securities: 14.5. 

Month and Year: 2006, January; 
Average outstanding FTD for NYSE-listed threshold securities: 11.9. 

Month and Year: 2006, February; 
Average outstanding FTD for NYSE-listed threshold securities: 14.7. 

Month and Year: 2006, March; 
Average outstanding FTD for NYSE-listed threshold securities: 16.5. 

Month and Year: 2006, April; 
Average outstanding FTD for NYSE-listed threshold securities: 15.5. 

Month and Year: 2006, May; 
Average outstanding FTD for NYSE-listed threshold securities: 15.5. 

Month and Year: 2006, June; 
Average outstanding FTD for NYSE-listed threshold securities: 14.9. 

Month and Year: 2006, July; 	
Average outstanding FTD for NYSE-listed threshold securities: 20.8. 

Month and Year: 2006, August; 
Average outstanding FTD for NYSE-listed threshold securities: 11.8. 

Month and Year: 2006, September; 
Average outstanding FTD for NYSE-listed threshold securities: 11.6. 

Month and Year: 2006, October; 
Average outstanding FTD for NYSE-listed threshold securities: 12.9. 

Month and Year: 2006, November; 
Average outstanding FTD for NYSE-listed threshold securities: 15.3. 

Month and Year: 2006, December; 
Average outstanding FTD for NYSE-listed threshold securities: 18.1. 

Month and Year: 2007, January; 
Average outstanding FTD for NYSE-listed threshold securities: 19.3. 

Month and Year: 2007, February; 
Average outstanding FTD for NYSE-listed threshold securities: 31.8. 

Month and Year: 2007, March; 
Average outstanding FTD for NYSE-listed threshold securities: 48.1. 

Month and Year: 2007, April; 
Average outstanding FTD for NYSE-listed threshold securities: 37.2. 

Month and Year: 2007, May; 
Average outstanding FTD for NYSE-listed threshold securities: 23.6. 

Month and Year: 2007, June; 
Average outstanding FTD for NYSE-listed threshold securities: 25.9. 

Month and Year: 2007, July; 
Average outstanding FTD for NYSE-listed threshold securities: 35.1. 

Month and Year: 2007, August; 
Average outstanding FTD for NYSE-listed threshold securities: 57.2. 

Month and Year: 2007, September; 
Average outstanding FTD for NYSE-listed threshold securities: 38.0. 

Month and Year: 2007, October (Elimination of grandfather exception); 
Average outstanding FTD for NYSE-listed threshold securities: 36.4. 

Month and Year: 2007, November; 
Average outstanding FTD for NYSE-listed threshold securities: 44.5. 

Month and Year: 2007, December; 
Average outstanding FTD for NYSE-listed threshold securities: 54.9. 

Month and Year: 2008, January; 
Average outstanding FTD for NYSE-listed threshold securities: 52.7. 

Month and Year: 2008, February;	
Average outstanding FTD for NYSE-listed threshold securities: 50.5. 

Month and Year: 2008, March; 
Average outstanding FTD for NYSE-listed threshold securities: 61.4. 

Month and Year: 2008, April; 
Average outstanding FTD for NYSE-listed threshold securities: 67.4. 

Month and Year: 2008, May; 
Average outstanding FTD for NYSE-listed threshold securities: 48.2. 

Month and Year: 2008, June; 
Average outstanding FTD for NYSE-listed threshold securities: 53.2. 

Month and Year: 2008, July (July emergency order); 	
Average outstanding FTD for NYSE-listed threshold securities: 93.8. 

Month and Year: 2008, August; 
Average outstanding FTD for NYSE-listed threshold securities: 75.2. 

Month and Year: 2008, September (September emergency order); 
Average outstanding FTD for NYSE-listed threshold securities: 90.9. 

Month and Year: 2008, October; 
Average outstanding FTD for NYSE-listed threshold securities: 24.8. 

Month and Year: 2008, November; 
Average outstanding FTD for NYSE-listed threshold securities: 1.3. 

Month and Year: 2008, December; 
Average outstanding FTD for NYSE-listed threshold securities: 5.8. 

Sources: SEC (data); GAO (analysis). 

[End of figure] 

Figure 18: Average Outstanding FTD, per Month, for NASDAQ-listed 
Threshold Securities, from January 2005 through December 2008 (in 
millions): 

[Refer to PDF for image: line graph] 

Month and Year: 2005, January (Compliance date); 
Average outstanding FTD for NASDAQ-listed threshold securities: 46.7. 

Month and Year: 2005, February; 
Average outstanding FTD for NASDAQ-listed threshold securities: 35.0. 

Month and Year: 2005, March; 
Average outstanding FTD for NASDAQ-listed threshold securities: 27.9. 

Month and Year: 2005, April; 
Average outstanding FTD for NASDAQ-listed threshold securities: 25.8. 

Month and Year: 2005, May; 
Average outstanding FTD for NASDAQ-listed threshold securities: 28.5. 

Month and Year: 2005, June;
Average outstanding FTD for NASDAQ-listed threshold securities: 25.8. 

Month and Year: 2005, July; 
Average outstanding FTD for NASDAQ-listed threshold securities: 24.1. 

Month and Year: 2005, August;
Average outstanding FTD for NASDAQ-listed threshold securities: 23.0. 

Month and Year: 2005, September; 
Average outstanding FTD for NASDAQ-listed threshold securities: 26.2. 

Month and Year: 2005, October; 
Average outstanding FTD for NASDAQ-listed threshold securities: 18.8. 

Month and Year: 2005, November; 
Average outstanding FTD for NASDAQ-listed threshold securities: 21.2. 

Month and Year: 2005, December; 
Average outstanding FTD for NASDAQ-listed threshold securities: 22.2. 

Month and Year: 2006, January; 
Average outstanding FTD for NASDAQ-listed threshold securities: 24.0. 

Month and Year: 2006, February; 
Average outstanding FTD for NASDAQ-listed threshold securities: 30.7. 

Month and Year: 2006, March; 
Average outstanding FTD for NASDAQ-listed threshold securities: 31.4. 

Month and Year: 2006, April; 
Average outstanding FTD for NASDAQ-listed threshold securities: 29.2. 

Month and Year: 2006, May; 
Average outstanding FTD for NASDAQ-listed threshold securities: 24.2. 

Month and Year: 2006, June; 
Average outstanding FTD for NASDAQ-listed threshold securities: 24.6. 

Month and Year: 2006, July; 	
Average outstanding FTD for NASDAQ-listed threshold securities: 28.3 

Month and Year: 2006, August; 
Average outstanding FTD for NASDAQ-listed threshold securities: 23.1. 

Month and Year: 2006, September; 
Average outstanding FTD for NASDAQ-listed threshold securities: 21.1. 

Month and Year: 2006, October; 
Average outstanding FTD for NASDAQ-listed threshold securities: 19.2. 

Month and Year: 2006, November; 
Average outstanding FTD for NASDAQ-listed threshold securities: 24.7. 

Month and Year: 2006, December; 
Average outstanding FTD for NASDAQ-listed threshold securities: 26.6. 

Month and Year: 2007, January; 
Average outstanding FTD for NASDAQ-listed threshold securities: 22.8. 

Month and Year: 2007, February; 
Average outstanding FTD for NASDAQ-listed threshold securities: 28.7. 

Month and Year: 2007, March; 
Average outstanding FTD for NASDAQ-listed threshold securities: 45.0. 

Month and Year: 2007, April; 
Average outstanding FTD for NASDAQ-listed threshold securities: 56.1. 

Month and Year: 2007, May; 
Average outstanding FTD for NASDAQ-listed threshold securities: 66.3. 

Month and Year: 2007, June; 
Average outstanding FTD for NASDAQ-listed threshold securities: 4.9. 

Month and Year: 2007, July; 
Average outstanding FTD for NASDAQ-listed threshold securities: 62.8. 

Month and Year: 2007, August; 
Average outstanding FTD for NASDAQ-listed threshold securities: 63.8. 

Month and Year: 2007, September; 
Average outstanding FTD for NASDAQ-listed threshold securities: 34.0. 

Month and Year: 2007, October (Elimination of grandfather exception); 
Average outstanding FTD for NASDAQ-listed threshold securities: 39.4. 

Month and Year: 2007, November; 
Average outstanding FTD for NASDAQ-listed threshold securities: 45.3. 

Month and Year: 2007, December; 
Average outstanding FTD for NASDAQ-listed threshold securities: 50.7. 

Month and Year: 2008, January; 
Average outstanding FTD for NASDAQ-listed threshold securities: 49.2. 

Month and Year: 2008, February;	
Average outstanding FTD for NASDAQ-listed threshold securities: 54.9. 

Month and Year: 2008, March; 
Average outstanding FTD for NASDAQ-listed threshold securities: 72.9. 

Month and Year: 2008, April; 
Average outstanding FTD for NASDAQ-listed threshold securities: 80.2. 

Month and Year: 2008, May; 
Average outstanding FTD for NASDAQ-listed threshold securities: 78.6. 

Month and Year: 2008, June; 
Average outstanding FTD for NASDAQ-listed threshold securities: 91.0. 

Month and Year: 2008, July (July emergency order); 	
Average outstanding FTD for NASDAQ-listed threshold securities: 120.7. 

Month and Year: 2008, August; 
Average outstanding FTD for NASDAQ-listed threshold securities: 89.3. 

Month and Year: 2008, September (September emergency order); 
Average outstanding FTD for NASDAQ-listed threshold securities: 72.9. 

Month and Year: 2008, October; 
Average outstanding FTD for NASDAQ-listed threshold securities: 25.7. 

Month and Year: 2008, November; 
Average outstanding FTD for NASDAQ-listed threshold securities: 1.8. 

Month and Year: 2008, December; 
Average outstanding FTD for NASDAQ-listed threshold securities: 2.5. 

Sources: SEC (data); GAO (analysis). 

[End of figure] 

Figure 19: Average Outstanding FTD, per Month, for Amex-listed 
Threshold Securities, from January 2005 through December 2008 (in 
millions): 

[Refer to PDF for image: line graph] 

Month and Year: 2005, January (Compliance date); 
Average outstanding FTD for Amex-listed threshold securities: 18.3. 

Month and Year: 2005, February; 
Average outstanding FTD for Amex-listed threshold securities: 17.8. 

Month and Year: 2005, March; 
Average outstanding FTD for Amex-listed threshold securities: 16.8. 

Month and Year: 2005, April; 
Average outstanding FTD for Amex-listed threshold securities: 12.9. 

Month and Year: 2005, May; 
Average outstanding FTD for Amex-listed threshold securities: 12.9. 

Month and Year: 2005, June;
Average outstanding FTD for Amex-listed threshold securities: 11.9. 

Month and Year: 2005, July; 
Average outstanding FTD for Amex-listed threshold securities: 4.2. 

Month and Year: 2005, August;
Average outstanding FTD for Amex-listed threshold securities: 7.1. 

Month and Year: 2005, September; 
Average outstanding FTD for Amex-listed threshold securities: 13.7. 

Month and Year: 2005, October; 
Average outstanding FTD for Amex-listed threshold securities: 7.8. 

Month and Year: 2005, November; 
Average outstanding FTD for Amex-listed threshold securities: 8.3. 

Month and Year: 2005, December; 
Average outstanding FTD for Amex-listed threshold securities: 10.7. 

Month and Year: 2006, January; 
Average outstanding FTD for Amex-listed threshold securities: 9.2. 

Month and Year: 2006, February; 
Average outstanding FTD for Amex-listed threshold securities: 11.7. 

Month and Year: 2006, March; 
Average outstanding FTD for Amex-listed threshold securities: 9.6. 

Month and Year: 2006, April; 
Average outstanding FTD for Amex-listed threshold securities: 9.7. 

Month and Year: 2006, May; 
Average outstanding FTD for Amex-listed threshold securities: 17.2. 

Month and Year: 2006, June; 
Average outstanding FTD for Amex-listed threshold securities: 7.5. 

Month and Year: 2006, July; 	
Average outstanding FTD for Amex-listed threshold securities: 9.1. 

Month and Year: 2006, August; 
Average outstanding FTD for Amex-listed threshold securities: 5.9. 

Month and Year: 2006, September; 
Average outstanding FTD for Amex-listed threshold securities: 7.5. 

Month and Year: 2006, October; 
Average outstanding FTD for Amex-listed threshold securities: 7.0. 

Month and Year: 2006, November; 
Average outstanding FTD for Amex-listed threshold securities: 5.7. 

Month and Year: 2006, December; 
Average outstanding FTD for Amex-listed threshold securities: 6.8. 

Month and Year: 2007, January; 
Average outstanding FTD for Amex-listed threshold securities: 5.3. 

Month and Year: 2007, February; 
Average outstanding FTD for Amex-listed threshold securities: 7.9. 

Month and Year: 2007, March; 
Average outstanding FTD for Amex-listed threshold securities: 18.2. 

Month and Year: 2007, April; 
Average outstanding FTD for Amex-listed threshold securities: 8.4. 

Month and Year: 2007, May; 
Average outstanding FTD for Amex-listed threshold securities: 12.5. 

Month and Year: 2007, June; 
Average outstanding FTD for Amex-listed threshold securities: 17.1. 

Month and Year: 2007, July; 
Average outstanding FTD for Amex-listed threshold securities: 19.1. 

Month and Year: 2007, August; 
Average outstanding FTD for Amex-listed threshold securities: 23.4. 

Month and Year: 2007, September; 
Average outstanding FTD for Amex-listed threshold securities: 14.6. 

Month and Year: 2007, October (Elimination of grandfather exception); 
Average outstanding FTD for Amex-listed threshold securities: 20.2. 

Month and Year: 2007, November; 
Average outstanding FTD for Amex-listed threshold securities: 25.1. 

Month and Year: 2007, December; 
Average outstanding FTD for Amex-listed threshold securities: 19.1. 

Month and Year: 2008, January; 
Average outstanding FTD for Amex-listed threshold securities: 16.1. 

Month and Year: 2008, February;	
Average outstanding FTD for Amex-listed threshold securities: 19.9. 

Month and Year: 2008, March; 
Average outstanding FTD for Amex-listed threshold securities: 21.1. 

Month and Year: 2008, April; 
Average outstanding FTD for Amex-listed threshold securities: 17.2. 

Month and Year: 2008, May; 
Average outstanding FTD for Amex-listed threshold securities: 22.1. 

Month and Year: 2008, June; 
Average outstanding FTD for Amex-listed threshold securities: 35.0. 

Month and Year: 2008, July (July emergency order); 	
Average outstanding FTD for Amex-listed threshold securities: 45.1. 

Month and Year: 2008, August; 
Average outstanding FTD for Amex-listed threshold securities: 29.1. 

Month and Year: 2008, September (September emergency order); 
Average outstanding FTD for Amex-listed threshold securities: 19.1. 

Month and Year: 2008, October; 
Average outstanding FTD for Amex-listed threshold securities: 5.3. 

Month and Year: 2008, November; 
Average outstanding FTD for Amex-listed threshold securities: 0.9. 

Month and Year: 2008, December; 
Average outstanding FTD for Amex-listed threshold securities: 1.4. 

Sources: SEC (data); GAO (analysis). 

[End of figure] 

Figure 20: Average Outstanding FTD, per Month, for Other Threshold 
Securities, from January 2005 through December 2008 (in millions): 

[Refer to PDF for image: line graph] 

Month and Year: 2005, January (Compliance date); 
Average outstanding FTD for other threshold securities: 121.6. 

Month and Year: 2005, February; 
Average outstanding FTD for other threshold securities: 152.3. 

Month and Year: 2005, March; 
Average outstanding FTD for other threshold securities: 130.3. 

Month and Year: 2005, April; 
Average outstanding FTD for other threshold securities: 108.8. 

Month and Year: 2005, May; 
Average outstanding FTD for other threshold securities: 131.1. 

Month and Year: 2005, June;
Average outstanding FTD for other threshold securities: 171.5. 

Month and Year: 2005, July; 
Average outstanding FTD for other threshold securities: 113.5. 

Month and Year: 2005, August;
Average outstanding FTD for other threshold securities: 123.0. 

Month and Year: 2005, September; 
Average outstanding FTD for other threshold securities: 113.5. 

Month and Year: 2005, October; 
Average outstanding FTD for other threshold securities: 91.1. 

Month and Year: 2005, November; 
Average outstanding FTD for other threshold securities: 85.3. 

Month and Year: 2005, December; 
Average outstanding FTD for other threshold securities: 143.6. 

Month and Year: 2006, January; 
Average outstanding FTD for other threshold securities: 117.3. 

Month and Year: 2006, February; 
Average outstanding FTD for other threshold securities: 145.5. 

Month and Year: 2006, March; 
Average outstanding FTD for other threshold securities: 230.3. 

Month and Year: 2006, April; 
Average outstanding FTD for other threshold securities: 94.4. 

Month and Year: 2006, May; 
Average outstanding FTD for other threshold securities: 143.7. 

Month and Year: 2006, June; 
Average outstanding FTD for other threshold securities: 136.4. 

Month and Year: 2006, July; 	
Average outstanding FTD for other threshold securities: 135.6. 

Month and Year: 2006, August; 
Average outstanding FTD for other threshold securities: 63.3. 

Month and Year: 2006, September; 
Average outstanding FTD for other threshold securities: 85.9. 

Month and Year: 2006, October; 
Average outstanding FTD for other threshold securities: 187.5. 

Month and Year: 2006, November; 
Average outstanding FTD for other threshold securities: 163.6. 

Month and Year: 2006, December; 
Average outstanding FTD for other threshold securities: 120.9. 

Month and Year: 2007, January; 
Average outstanding FTD for other threshold securities: 75.4. 

Month and Year: 2007, February; 
Average outstanding FTD for other threshold securities: 130.4. 

Month and Year: 2007, March; 
Average outstanding FTD for other threshold securities: 126.2. 

Month and Year: 2007, April; 
Average outstanding FTD for other threshold securities: 201.7. 

Month and Year: 2007, May; 
Average outstanding FTD for other threshold securities: 144.2. 

Month and Year: 2007, June; 
Average outstanding FTD for other threshold securities: 232.2. 

Month and Year: 2007, July; 
Average outstanding FTD for other threshold securities: 347.0. 

Month and Year: 2007, August; 
Average outstanding FTD for other threshold securities: 463.8. 

Month and Year: 2007, September; 
Average outstanding FTD for other threshold securities: 330.5. 

Month and Year: 2007, October (Elimination of grandfather exception); 
Average outstanding FTD for other threshold securities: 440.4. 

Month and Year: 2007, November; 
Average outstanding FTD for other threshold securities: 418.1. 

Month and Year: 2007, December; 
Average outstanding FTD for other threshold securities: 216.2. 

Month and Year: 2008, January; 
Average outstanding FTD for other threshold securities: 192.1. 

Month and Year: 2008, February;	
Average outstanding FTD for other threshold securities: 358.2. 

Month and Year: 2008, March; 
Average outstanding FTD for other threshold securities: 4200.1. 

Month and Year: 2008, April; 
Average outstanding FTD for other threshold securities: 290.3. 

Month and Year: 2008, May; 
Average outstanding FTD for other threshold securities: 297.8. 

Month and Year: 2008, June; 
Average outstanding FTD for other threshold securities: 219.8. 

Month and Year: 2008, July (July emergency order); 	
Average outstanding FTD for other threshold securities: 680.0. 

Month and Year: 2008, August; 
Average outstanding FTD for other threshold securities: 202.9. 

Month and Year: 2008, September (September emergency order); 
Average outstanding FTD for other threshold securities: 245.6. 

Month and Year: 2008, October; 
Average outstanding FTD for other threshold securities: 137.0. 

Month and Year: 2008, November; 
Average outstanding FTD for other threshold securities: 141.7. 

Month and Year: 2008, December; 
Average outstanding FTD for other threshold securities: 141.2. 

Sources: SEC (data); GAO (analysis). 

[End of figure] 

Figure 21: Total New FTD, per Month, for NYSE-listed Threshold 
Securities, from January 2005 through December 2008: 

[Refer to PDF for image: line graph] 

Month and Year: 2005, January (Compliance date); 
Total new FTD for NYSE-listed threshold securities: 22.2. 

Month and Year: 2005, February; 
Total new FTD for NYSE-listed threshold securities: 19.2. 

Month and Year: 2005, March; 
Total new FTD for NYSE-listed threshold securities: 22.4. 

Month and Year: 2005, April; 
Total new FTD for NYSE-listed threshold securities: 27.3. 

Month and Year: 2005, May; 
Total new FTD for NYSE-listed threshold securities: 43.2. 

Month and Year: 2005, June;
Total new FTD for NYSE-listed threshold securities: 31.1. 

Month and Year: 2005, July; 
Total new FTD for NYSE-listed threshold securities: 13.7. 

Month and Year: 2005, August;
Total new FTD for NYSE-listed threshold securities: 28.1. 

Month and Year: 2005, September; 
Total new FTD for NYSE-listed threshold securities: 28.5. 

Month and Year: 2005, October; 
Total new FTD for NYSE-listed threshold securities: 14.9. 

Month and Year: 2005, November; 
Total new FTD for NYSE-listed threshold securities: 13.3. 

Month and Year: 2005, December; 
Total new FTD for NYSE-listed threshold securities: 19.1. 

Month and Year: 2006, January; 
Total new FTD for NYSE-listed threshold securities: 11.7. 

Month and Year: 2006, February; 
Total new FTD for NYSE-listed threshold securities: 14.9. 

Month and Year: 2006, March; 
Total new FTD for NYSE-listed threshold securities: 15.7. 

Month and Year: 2006, April; 
Total new FTD for NYSE-listed threshold securities: 14.7. 

Month and Year: 2006, May; 
Total new FTD for NYSE-listed threshold securities: 23.0. 

Month and Year: 2006, June; 
Total new FTD for NYSE-listed threshold securities: 20.6. 

Month and Year: 2006, July; 	
Total new FTD for NYSE-listed threshold securities: 30.7. 

Month and Year: 2006, August; 
Total new FTD for NYSE-listed threshold securities: 11.0. 

Month and Year: 2006, September; 
Total new FTD for NYSE-listed threshold securities: 13.9. 

Month and Year: 2006, October; 
Total new FTD for NYSE-listed threshold securities: 17.0. 

Month and Year: 2006, November; 
Total new FTD for NYSE-listed threshold securities: 23.1. 

Month and Year: 2006, December; 
Total new FTD for NYSE-listed threshold securities: 17.6. 

Month and Year: 2007, January; 
Total new FTD for NYSE-listed threshold securities: 17.9. 

Month and Year: 2007, February; 
Total new FTD for NYSE-listed threshold securities: 27.7. 

Month and Year: 2007, March; 
Total new FTD for NYSE-listed threshold securities: 50.8. 

Month and Year: 2007, April; 
Total new FTD for NYSE-listed threshold securities: 80.7. 

Month and Year: 2007, May; 
Total new FTD for NYSE-listed threshold securities: 68.3. 

Month and Year: 2007, June; 
Total new FTD for NYSE-listed threshold securities: 84.1. 

Month and Year: 2007, July; 
Total new FTD for NYSE-listed threshold securities: 112.2. 

Month and Year: 2007, August; 
Total new FTD for NYSE-listed threshold securities: 245.1. 

Month and Year: 2007, September; 
Total new FTD for NYSE-listed threshold securities: 111.5. 

Month and Year: 2007, October (Elimination of grandfather exception); 
Total new FTD for NYSE-listed threshold securities: 120.4. 

Month and Year: 2007, November; 
Total new FTD for NYSE-listed threshold securities: 163.9. 

Month and Year: 2007, December; 
Total new FTD for NYSE-listed threshold securities: 192.3. 

Month and Year: 2008, January; 
Total new FTD for NYSE-listed threshold securities: 215.1. 

Month and Year: 2008, February;	
Total new FTD for NYSE-listed threshold securities: 173.5. 

Month and Year: 2008, March; 
Total new FTD for NYSE-listed threshold securities: 239.8. 

Month and Year: 2008, April; 
Total new FTD for NYSE-listed threshold securities: 186.6. 

Month and Year: 2008, May; 
Total new FTD for NYSE-listed threshold securities: 124.1. 

Month and Year: 2008, June; 
Total new FTD for NYSE-listed threshold securities: 184.6. 

Month and Year: 2008, July (July emergency order); 	
Total new FTD for NYSE-listed threshold securities: 366.5. 

Month and Year: 2008, August; 
Total new FTD for NYSE-listed threshold securities: 183.5. 

Month and Year: 2008, September (September emergency order); 
Total new FTD for NYSE-listed threshold securities: 299.1. 

Month and Year: 2008, October; 
Total new FTD for NYSE-listed threshold securities: 136.3. 

Month and Year: 2008, November; 
Total new FTD for NYSE-listed threshold securities: 7.7. 

Month and Year: 2008, December; 
Total new FTD for NYSE-listed threshold securities: 38.8. 

Sources: SEC (data); GAO (analysis). 

[End of figure] 

Figure 22: Total New FTD, per Month, for NASDAQ-listed Threshold 
Securities, from January 2005 through December 2008: 

[Refer to PDF for image: line graph] 

Month and Year: 2005, January (Compliance date); 
Total new FTD for NASDAQ-listed threshold securities: 50.0. 

Month and Year: 2005, February; 
Total new FTD for NASDAQ-listed threshold securities: 52.6. 

Month and Year: 2005, March; 
Total new FTD for NASDAQ-listed threshold securities: 44.1. 

Month and Year: 2005, April; 
Total new FTD for NASDAQ-listed threshold securities: 35.3. 

Month and Year: 2005, May; 
Total new FTD for NASDAQ-listed threshold securities: 52.8. 

Month and Year: 2005, June;
Total new FTD for NASDAQ-listed threshold securities: 45.9. 

Month and Year: 2005, July; 
Total new FTD for NASDAQ-listed threshold securities: 30.0. 

Month and Year: 2005, August;
Total new FTD for NASDAQ-listed threshold securities: 26.2. 

Month and Year: 2005, September; 
Total new FTD for NASDAQ-listed threshold securities: 27.2. 

Month and Year: 2005, October; 
Total new FTD for NASDAQ-listed threshold securities: 22.4. 

Month and Year: 2005, November; 
Total new FTD for NASDAQ-listed threshold securities: 28.9. 

Month and Year: 2005, December; 
Total new FTD for NASDAQ-listed threshold securities: 35.1. 

Month and Year: 2006, January; 
Total new FTD for NASDAQ-listed threshold securities: 26.8. 

Month and Year: 2006, February; 
Total new FTD for NASDAQ-listed threshold securities: 27.7. 

Month and Year: 2006, March; 
Total new FTD for NASDAQ-listed threshold securities: 49.4. 

Month and Year: 2006, April; 
Total new FTD for NASDAQ-listed threshold securities: 27.2. 

Month and Year: 2006, May; 
Total new FTD for NASDAQ-listed threshold securities: 27.4. 

Month and Year: 2006, June; 
Total new FTD for NASDAQ-listed threshold securities: 37.8. 

Month and Year: 2006, July; 	
Total new FTD for NASDAQ-listed threshold securities: 26.2. 

Month and Year: 2006, August; 
Total new FTD for NASDAQ-listed threshold securities: 24.0. 

Month and Year: 2006, September; 
Total new FTD for NASDAQ-listed threshold securities: 20.9. 

Month and Year: 2006, October; 
Total new FTD for NASDAQ-listed threshold securities: 26.4. 

Month and Year: 2006, November; 
Total new FTD for NASDAQ-listed threshold securities: 31.5. 

Month and Year: 2006, December; 
Total new FTD for NASDAQ-listed threshold securities: 30.2. 

Month and Year: 2007, January; 
Total new FTD for NASDAQ-listed threshold securities: 28.9. 

Month and Year: 2007, February; 
Total new FTD for NASDAQ-listed threshold securities: 51.3. 

Month and Year: 2007, March; 
Total new FTD for NASDAQ-listed threshold securities: 92.7. 

Month and Year: 2007, April; 
Total new FTD for NASDAQ-listed threshold securities: 134.9. 

Month and Year: 2007, May; 
Total new FTD for NASDAQ-listed threshold securities: 234.3. 

Month and Year: 2007, June; 
Total new FTD for NASDAQ-listed threshold securities: 209.3. 

Month and Year: 2007, July; 
Total new FTD for NASDAQ-listed threshold securities: 160.2. 

Month and Year: 2007, August; 
Total new FTD for NASDAQ-listed threshold securities: 203.7. 

Month and Year: 2007, September; 
Total new FTD for NASDAQ-listed threshold securities: 83.9. 

Month and Year: 2007, October (Elimination of grandfather exception); 
Total new FTD for NASDAQ-listed threshold securities: 130.2. 

Month and Year: 2007, November; 
Total new FTD for NASDAQ-listed threshold securities: 133.6. 

Month and Year: 2007, December; 
Total new FTD for NASDAQ-listed threshold securities: 145.5. 

Month and Year: 2008, January; 
Total new FTD for NASDAQ-listed threshold securities: 170.5. 

Month and Year: 2008, February;	
Total new FTD for NASDAQ-listed threshold securities: 169.4. 

Month and Year: 2008, March; 
Total new FTD for NASDAQ-listed threshold securities: 249.5. 

Month and Year: 2008, April; 
Total new FTD for NASDAQ-listed threshold securities: 190.2. 

Month and Year: 2008, May; 
Total new FTD for NASDAQ-listed threshold securities: 212.8. 

Month and Year: 2008, June; 
Total new FTD for NASDAQ-listed threshold securities: 324.4. 

Month and Year: 2008, July (July emergency order); 	
Total new FTD for NASDAQ-listed threshold securities: 353.9. 

Month and Year: 2008, August; 
Total new FTD for NASDAQ-listed threshold securities: 178.0. 

Month and Year: 2008, September (September emergency order); 
Total new FTD for NASDAQ-listed threshold securities: 165.5. 

Month and Year: 2008, October; 
Total new FTD for NASDAQ-listed threshold securities: 64.4. 

Month and Year: 2008, November; 
Total new FTD for NASDAQ-listed threshold securities: 5.9. 

Month and Year: 2008, December; 
Total new FTD for NASDAQ-listed threshold securities: 8.1. 

Sources: SEC (data); GAO (analysis). 

[End of figure] 

Figure 23: Total New FTD, per Month, for Amex-listed Threshold 
Securities, from January 2005 through December 2008: 

[Refer to PDF for image: line graph] 

Month and Year: 2005, January (Compliance date); 
Total new FTD for Amex-listed threshold securities: 19.6. 

Month and Year: 2005, February; 
Total new FTD for Amex-listed threshold securities: 21.2. 

Month and Year: 2005, March; 
Total new FTD for Amex-listed threshold securities: 52.1. 

Month and Year: 2005, April; 
Total new FTD for Amex-listed threshold securities: 44.2. 

Month and Year: 2005, May; 
Total new FTD for Amex-listed threshold securities: 50.4. 

Month and Year: 2005, June;
Total new FTD for Amex-listed threshold securities: 64.4. 

Month and Year: 2005, July; 
Total new FTD for Amex-listed threshold securities: 12.9. 

Month and Year: 2005, August;
Total new FTD for Amex-listed threshold securities: 27.4. 

Month and Year: 2005, September; 
Total new FTD for Amex-listed threshold securities: 60.4. 

Month and Year: 2005, October; 
Total new FTD for Amex-listed threshold securities: 27.2. 

Month and Year: 2005, November; 
Total new FTD for Amex-listed threshold securities: 24.3. 

Month and Year: 2005, December; 
Total new FTD for Amex-listed threshold securities: 22.9. 

Month and Year: 2006, January; 
Total new FTD for Amex-listed threshold securities: 15.3. 

Month and Year: 2006, February; 
Total new FTD for Amex-listed threshold securities: 37.8. 

Month and Year: 2006, March; 
Total new FTD for Amex-listed threshold securities: 38.7. 

Month and Year: 2006, April; 
Total new FTD for Amex-listed threshold securities: 25.9. 

Month and Year: 2006, May; 
Total new FTD for Amex-listed threshold securities: 62.8. 

Month and Year: 2006, June; 
Total new FTD for Amex-listed threshold securities: 39.3. 

Month and Year: 2006, July; 	
Total new FTD for Amex-listed threshold securities: 49.4. 

Month and Year: 2006, August; 
Total new FTD for Amex-listed threshold securities: 17.0. 

Month and Year: 2006, September; 
Total new FTD for Amex-listed threshold securities: 13.6. 

Month and Year: 2006, October; 
Total new FTD for Amex-listed threshold securities: 19.6. 

Month and Year: 2006, November; 
Total new FTD for Amex-listed threshold securities: 10.6. 

Month and Year: 2006, December; 
Total new FTD for Amex-listed threshold securities: 13.2. 

Month and Year: 2007, January; 
Total new FTD for Amex-listed threshold securities: 17.5. 

Month and Year: 2007, February; 
Total new FTD for Amex-listed threshold securities: 26.1. 

Month and Year: 2007, March; 
Total new FTD for Amex-listed threshold securities: 75.3. 

Month and Year: 2007, April; 
Total new FTD for Amex-listed threshold securities: 32.9. 

Month and Year: 2007, May; 
Total new FTD for Amex-listed threshold securities: 62.7. 

Month and Year: 2007, June; 
Total new FTD for Amex-listed threshold securities: 119.9. 

Month and Year: 2007, July; 
Total new FTD for Amex-listed threshold securities: 141.4. 

Month and Year: 2007, August; 
Total new FTD for Amex-listed threshold securities: 141.7. 

Month and Year: 2007, September; 
Total new FTD for Amex-listed threshold securities: 74.2. 

Month and Year: 2007, October (Elimination of grandfather exception); 
Total new FTD for Amex-listed threshold securities: 119.7. 

Month and Year: 2007, November; 
Total new FTD for Amex-listed threshold securities: 181.7. 

Month and Year: 2007, December; 
Total new FTD for Amex-listed threshold securities: 97.1. 

Month and Year: 2008, January; 
Total new FTD for Amex-listed threshold securities: 83.6. 

Month and Year: 2008, February;	
Total new FTD for Amex-listed threshold securities: 114.6. 

Month and Year: 2008, March; 
Total new FTD for Amex-listed threshold securities: 130.9. 

Month and Year: 2008, April; 
Total new FTD for Amex-listed threshold securities: 66.8. 

Month and Year: 2008, May; 
Total new FTD for Amex-listed threshold securities: 95.1. 

Month and Year: 2008, June; 
Total new FTD for Amex-listed threshold securities: 224.2. 

Month and Year: 2008, July (July emergency order); 	
Total new FTD for Amex-listed threshold securities: 127.7. 

Month and Year: 2008, August; 
Total new FTD for Amex-listed threshold securities: 85.3. 

Month and Year: 2008, September (September emergency order); 
Total new FTD for Amex-listed threshold securities: 144.3. 

Month and Year: 2008, October; 
Total new FTD for Amex-listed threshold securities: 35.2. 

Month and Year: 2008, November; 
Total new FTD for Amex-listed threshold securities: 3.8. 

Month and Year: 2008, December; 
Total new FTD for Amex-listed threshold securities: 0.2. 

Sources: SEC (data); GAO (analysis). 

[End of figure] 

Figure 24: Total New FTD, per Month, for Other Threshold Securities, 
from January 2005 through December 2008: 

[Refer to PDF for image: line graph] 

Month and Year: 2005, January (Compliance date); 
Total new FTD for other threshold securities: 172.5. 

Month and Year: 2005, February; 
Total new FTD for other threshold securities: 101.5. 

Month and Year: 2005, March; 
Total new FTD for other threshold securities: 60.4. 

Month and Year: 2005, April; 
Total new FTD for other threshold securities: 90.1 

Month and Year: 2005, May; 
Total new FTD for other threshold securities: 84.5. 

Month and Year: 2005, June;
Total new FTD for other threshold securities: 171.0. 

Month and Year: 2005, July; 
Total new FTD for other threshold securities: 282.6. 

Month and Year: 2005, August;
Total new FTD for other threshold securities: 152.5. 

Month and Year: 2005, September; 
Total new FTD for other threshold securities: 101.9. 

Month and Year: 2005, October; 
Total new FTD for other threshold securities: 147.2. 

Month and Year: 2005, November; 
Total new FTD for other threshold securities: 126.4. 

Month and Year: 2005, December; 
Total new FTD for other threshold securities: 173.9. 

Month and Year: 2006, January; 
Total new FTD for other threshold securities: 197.6. 

Month and Year: 2006, February; 
Total new FTD for other threshold securities: 308.6. 

Month and Year: 2006, March; 
Total new FTD for other threshold securities: 283.7. 

Month and Year: 2006, April; 
Total new FTD for other threshold securities: 110.8. 

Month and Year: 2006, May; 
Total new FTD for other threshold securities: 107.1. 

Month and Year: 2006, June; 
Total new FTD for other threshold securities: 437.6. 

Month and Year: 2006, July; 	
Total new FTD for other threshold securities: 52.2. 

Month and Year: 2006, August; 
Total new FTD for other threshold securities: 99.7. 

Month and Year: 2006, September; 
Total new FTD for other threshold securities: 178.3. 

Month and Year: 2006, October; 
Total new FTD for other threshold securities: 223.1. 

Month and Year: 2006, November; 
Total new FTD for other threshold securities: 265.2. 

Month and Year: 2006, December; 
Total new FTD for other threshold securities: 54.3. 

Month and Year: 2007, January; 
Total new FTD for other threshold securities: 105.0. 

Month and Year: 2007, February; 
Total new FTD for other threshold securities: 338.6. 

Month and Year: 2007, March; 
Total new FTD for other threshold securities: 175.3. 

Month and Year: 2007, April; 
Total new FTD for other threshold securities: 582.5. 

Month and Year: 2007, May; 
Total new FTD for other threshold securities: 615.0. 

Month and Year: 2007, June; 
Total new FTD for other threshold securities: 922.5. 

Month and Year: 2007, July; 
Total new FTD for other threshold securities: 964.3. 

Month and Year: 2007, August; 
Total new FTD for other threshold securities: 1216.6. 

Month and Year: 2007, September; 
Total new FTD for other threshold securities: 936.5. 

Month and Year: 2007, October (Elimination of grandfather exception); 
Total new FTD for other threshold securities: 1187.8. 

Month and Year: 2007, November; 
Total new FTD for other threshold securities: 10.62.5. 

Month and Year: 2007, December; 
Total new FTD for other threshold securities: 672.6. 

Month and Year: 2008, January; 
Total new FTD for other threshold securities: 611.1. 

Month and Year: 2008, February;	
Total new FTD for other threshold securities: 1405.1. 

Month and Year: 2008, March; 
Total new FTD for other threshold securities: 902.4. 

Month and Year: 2008, April; 
Total new FTD for other threshold securities: 1038.0. 

Month and Year: 2008, May; 
Total new FTD for other threshold securities: 625.7. 

Month and Year: 2008, June; 
Total new FTD for other threshold securities: 692.4. 

Month and Year: 2008, July (July emergency order); 	
Total new FTD for other threshold securities: 2498.1. 

Month and Year: 2008, August; 
Total new FTD for other threshold securities: 399.5. 

Month and Year: 2008, September (September emergency order); 
Total new FTD for other threshold securities: 695.9. 

Month and Year: 2008, October; 
Total new FTD for other threshold securities: 538.8. 

Month and Year: 2008, November; 
Total new FTD for other threshold securities: 421.3. 

Month and Year: 2008, December; 
Total new FTD for other threshold securities: 710.5. 

Sources: SEC (data); GAO (analysis). 

[End of figure] 

Figure 25: Average Daily Number of Securities with Outstanding and New 
FTD, per Month, for NYSE-listed Securities, from April 2004 through 
December 2008: 

[Refer to PDF for image: line graph] 

Month and Year: 2004, April; 
Average daily number of securities, outstanding FTD: 339.1;
Average daily number of securities, new FTD: 446.1. 

Month and Year: 2004, May; 
Average daily number of securities, outstanding FTD: 421.6;
Average daily number of securities, new FTD: 545.5. 

Month and Year: 2004, June;
Average daily number of securities, outstanding FTD: 404.2;
Average daily number of securities, new FTD: 524.9. 

Month and Year: 2004, July; 
Average daily number of securities, outstanding FTD: 440.3;
Average daily number of securities, new FTD: 562.2. 

Month and Year: 2004, August;
Average daily number of securities, outstanding FTD: 450.9;
Average daily number of securities, new FTD: 578.8. 

Month and Year: 2004, September; 
Average daily number of securities, outstanding FTD: 443.1;
Average daily number of securities, new FTD: 570.9. 

Month and Year: 2004, October; 
Average daily number of securities, outstanding FTD: 409.6;
Average daily number of securities, new FTD: 532.8. 

Month and Year: 2004, November; 
Average daily number of securities, outstanding FTD: 407.0;
Average daily number of securities, new FTD: 525.7. 

Month and Year: 2004, December; 
Average daily number of securities, outstanding FTD: 424.2;
Average daily number of securities, new FTD: 560.0. 

Month and Year: 2005, January (Compliance date); 
Average daily number of securities, outstanding FTD: 381.2;
Average daily number of securities, new FTD: 510.1. 

Month and Year: 2005, February; 
Average daily number of securities, outstanding FTD: 385.4;
Average daily number of securities, new FTD: 502.9. 

Month and Year: 2005, March; 
Average daily number of securities, outstanding FTD: 399.4;
Average daily number of securities, new FTD: 521.9. 

Month and Year: 2005, April; 
Average daily number of securities, outstanding FTD: 360.8;
Average daily number of securities, new FTD: 487.3. 

Month and Year: 2005, May; 
Average daily number of securities, outstanding FTD: 362.1;
Average daily number of securities, new FTD: 480.8. 

Month and Year: 2005, June;
Average daily number of securities, outstanding FTD: 405.0;
Average daily number of securities, new FTD: 539.7. 

Month and Year: 2005, July; 
Average daily number of securities, outstanding FTD: 365.9;
Average daily number of securities, new FTD: 503.0. 

Month and Year: 2005, August;
Average daily number of securities, outstanding FTD: 376.2;
Average daily number of securities, new FTD: 510.7. 

Month and Year: 2005, September; 
Average daily number of securities, outstanding FTD: 367.2;
Average daily number of securities, new FTD: 486.0. 

Month and Year: 2005, October; 
Average daily number of securities, outstanding FTD: 376.2;
Average daily number of securities, new FTD: 480.3. 

Month and Year: 2005, November; 
Average daily number of securities, outstanding FTD: 357.9;
Average daily number of securities, new FTD: 457.6. 

Month and Year: 2005, December; 
Average daily number of securities, outstanding FTD: 369.1;
Average daily number of securities, new FTD: 470.1. 

Month and Year: 2006, January; 
Average daily number of securities, outstanding FTD: 355.6;
Average daily number of securities, new FTD: 448.9. 

Month and Year: 2006, February; 
Average daily number of securities, outstanding FTD: 385.5;
Average daily number of securities, new FTD: 485.0. 

Month and Year: 2006, March; 
Average daily number of securities, outstanding FTD: 352.0;
Average daily number of securities, new FTD: 454.3. 

Month and Year: 2006, April; 
Average daily number of securities, outstanding FTD: 371.8;
Average daily number of securities, new FTD: 471.7. 

Month and Year: 2006, May; 
Average daily number of securities, outstanding FTD: 411.0;
Average daily number of securities, new FTD: 517.5. 

Month and Year: 2006, June; 
Average daily number of securities, outstanding FTD: 427.4;
Average daily number of securities, new FTD: 546.9. 

Month and Year: 2006, July; 	
Average daily number of securities, outstanding FTD: 401.7;
Average daily number of securities, new FTD: 509. 

Month and Year: 2006, August; 
Average daily number of securities, outstanding FTD: 354.5;
Average daily number of securities, new FTD: 455.9. 

Month and Year: 2006, September; 
Average daily number of securities, outstanding FTD: 345.9;
Average daily number of securities, new FTD: 441.6. 

Month and Year: 2006, October; 
Average daily number of securities, outstanding FTD: 363.2;
Average daily number of securities, new FTD: 464.2. 

Month and Year: 2006, November; 
Average daily number of securities, outstanding FTD: 396.2;
Average daily number of securities, new FTD: 513.0. 

Month and Year: 2006, December; 
Average daily number of securities, outstanding FTD: 417.9;
Average daily number of securities, new FTD: 529.6. 

Month and Year: 2007, January; 
Average daily number of securities, outstanding FTD: 373.9;
Average daily number of securities, new FTD: 473.7. 

Month and Year: 2007, February; 
Average daily number of securities, outstanding FTD: 432.8;
Average daily number of securities, new FTD: 535.3. 

Month and Year: 2007, March; 
Average daily number of securities, outstanding FTD: 458.6;
Average daily number of securities, new FTD: 570.2. 

Month and Year: 2007, April; 
Average daily number of securities, outstanding FTD: 476.3;
Average daily number of securities, new FTD: 530.1. 

Month and Year: 2007, May; 
Average daily number of securities, outstanding FTD: 583.5;
Average daily number of securities, new FTD: 630.3. 

Month and Year: 2007, June; 
Average daily number of securities, outstanding FTD: 601.4;
Average daily number of securities, new FTD: 642.5. 

Month and Year: 2007, July; 
Average daily number of securities, outstanding FTD: 598.3;
Average daily number of securities, new FTD: 636.7. 

Month and Year: 2007, August; 
Average daily number of securities, outstanding FTD: 733.5;
Average daily number of securities, new FTD: 777.1. 

Month and Year: 2007, September; 
Average daily number of securities, outstanding FTD: 601.1;
Average daily number of securities, new FTD: 640.1. 

Month and Year: 2007, October (Elimination of grandfather exception); 
Average daily number of securities, outstanding FTD: 538;
Average daily number of securities, new FTD: 569.7. 

Month and Year: 2007, November; 
Average daily number of securities, outstanding FTD: 644.3;
Average daily number of securities, new FTD: 676.5. 

Month and Year: 2007, December; 
Average daily number of securities, outstanding FTD: 594.7;
Average daily number of securities, new FTD: 624.8. 

Month and Year: 2008, January; 
Average daily number of securities, outstanding FTD: 637.0;
Average daily number of securities, new FTD: 666.0. 

Month and Year: 2008, February;	
Average daily number of securities, outstanding FTD: 636.2;
Average daily number of securities, new FTD: 667.5. 

Month and Year: 2008, March; 
Average daily number of securities, outstanding FTD: 765;
Average daily number of securities, new FTD: 796.2. 

Month and Year: 2008, April; 
Average daily number of securities, outstanding FTD: 628.2;
Average daily number of securities, new FTD: 659.7. 

Month and Year: 2008, May; 
Average daily number of securities, outstanding FTD: 645.7;
Average daily number of securities, new FTD: 672.5. 

Month and Year: 2008, June; 
Average daily number of securities, outstanding FTD: 700;
Average daily number of securities, new FTD: 733.3. 

Month and Year: 2008, July (July emergency order); 	
Average daily number of securities, outstanding FTD: 737.9;
Average daily number of securities, new FTD: 771.2. 

Month and Year: 2008, August; 
Average daily number of securities, outstanding FTD: 626.5;
Average daily number of securities, new FTD: 659. 

Month and Year: 2008, September (September emergency order); 
Average daily number of securities, outstanding FTD: 766.4;
Average daily number of securities, new FTD: 812.0. 

Month and Year: 2008, October; 
Average daily number of securities, outstanding FTD: 416;
Average daily number of securities, new FTD: 452.2. 

Month and Year: 2008, November; 
Average daily number of securities, outstanding FTD: 305.7;
Average daily number of securities, new FTD: 317.2. 

Month and Year: 2008, December; 
Average daily number of securities, outstanding FTD: 249.0;
Average daily number of securities, new FTD: 257.9. 

Sources: SEC (data); GAO (analysis). 

Note: Prior to September 16, 2008, SEC received FTD data on equity 
securities with aggregate FTD of 10,000 or more. After this date, SEC 
began receiving data on all FTD in every equity security. For a 
consistent comparison, our sample includes securities with aggregate 
FTD of 10,000 or more for the entire review period. 

[End of figure] 

Figure 26: Average Daily Number of Securities with Outstanding and New 
FTD, per Month, for NASDAQ-listed Securities, from April 2004 through 
December 2008: 

[Refer to PDF for image: line graph] 

Month and Year: 2004, April; 
Average daily number of securities, outstanding FTD: 466.7;
Average daily number of securities, new FTD: 630.9. 

Month and Year: 2004, May; 
Average daily number of securities, outstanding FTD: 506.4;
Average daily number of securities, new FTD: 667.8. 

Month and Year: 2004, June;
Average daily number of securities, outstanding FTD: 510.2;
Average daily number of securities, new FTD: 683.8. 

Month and Year: 2004, July; 
Average daily number of securities, outstanding FTD: 542.2;
Average daily number of securities, new FTD: 716.6. 

Month and Year: 2004, August;
Average daily number of securities, outstanding FTD: 491.8;
Average daily number of securities, new FTD: 655.4. 

Month and Year: 2004, September; 
Average daily number of securities, outstanding FTD: 460.9;
Average daily number of securities, new FTD: 630.4. 

Month and Year: 2004, October; 
Average daily number of securities, outstanding FTD: 452.7;
Average daily number of securities, new FTD: 602.6. 

Month and Year: 2004, November; 
Average daily number of securities, outstanding FTD: 456.1;
Average daily number of securities, new FTD: 601.8. 

Month and Year: 2004, December; 
Average daily number of securities, outstanding FTD: 490.3;
Average daily number of securities, new FTD: 660.1. 

Month and Year: 2005, January (Compliance date); 
Average daily number of securities, outstanding FTD: 460.0;
Average daily number of securities, new FTD: 637.9. 

Month and Year: 2005, February; 
Average daily number of securities, outstanding FTD: 447.9;
Average daily number of securities, new FTD: 606.7. 

Month and Year: 2005, March; 
Average daily number of securities, outstanding FTD: 460.6;
Average daily number of securities, new FTD: 625.1. 

Month and Year: 2005, April; 
Average daily number of securities, outstanding FTD: 434.0;
Average daily number of securities, new FTD: 596.4. 

Month and Year: 2005, May; 
Average daily number of securities, outstanding FTD: 428;
Average daily number of securities, new FTD: 576.1. 

Month and Year: 2005, June;
Average daily number of securities, outstanding FTD: 454.9;
Average daily number of securities, new FTD: 597.6. 

Month and Year: 2005, July; 
Average daily number of securities, outstanding FTD: 425.6;
Average daily number of securities, new FTD: 575.9. 

Month and Year: 2005, August;
Average daily number of securities, outstanding FTD: 430.1;
Average daily number of securities, new FTD: 582.2. 

Month and Year: 2005, September; 
Average daily number of securities, outstanding FTD: 407;
Average daily number of securities, new FTD: 542.4. 

Month and Year: 2005, October; 
Average daily number of securities, outstanding FTD: 433.9;
Average daily number of securities, new FTD: 557.6. 

Month and Year: 2005, November; 
Average daily number of securities, outstanding FTD: 391.0;
Average daily number of securities, new FTD: 508.2. 

Month and Year: 2005, December; 
Average daily number of securities, outstanding FTD: 420.7;
Average daily number of securities, new FTD: 536.6. 

Month and Year: 2006, January; 
Average daily number of securities, outstanding FTD: 402.7;
Average daily number of securities, new FTD: 519.6. 

Month and Year: 2006, February; 
Average daily number of securities, outstanding FTD: 423.3;
Average daily number of securities, new FTD: 554.2. 

Month and Year: 2006, March; 
Average daily number of securities, outstanding FTD: 418.4;
Average daily number of securities, new FTD: 542.6. 

Month and Year: 2006, April; 
Average daily number of securities, outstanding FTD: 426.5;
Average daily number of securities, new FTD: 548.6. 

Month and Year: 2006, May; 
Average daily number of securities, outstanding FTD: 491.0;
Average daily number of securities, new FTD: 632.5. 

Month and Year: 2006, June; 
Average daily number of securities, outstanding FTD: 487.6;
Average daily number of securities, new FTD: 627. 

Month and Year: 2006, July; 	
Average daily number of securities, outstanding FTD: 498.8;
Average daily number of securities, new FTD: 648.4. 

Month and Year: 2006, August; 
Average daily number of securities, outstanding FTD: 419.6;
Average daily number of securities, new FTD: 555.1. 

Month and Year: 2006, September; 
Average daily number of securities, outstanding FTD: 414.5;
Average daily number of securities, new FTD: 542.0. 

Month and Year: 2006, October; 
Average daily number of securities, outstanding FTD: 427.6;
Average daily number of securities, new FTD: 554.8. 

Month and Year: 2006, November; 
Average daily number of securities, outstanding FTD: 439.5;
Average daily number of securities, new FTD: 557.7. 

Month and Year: 2006, December; 
Average daily number of securities, outstanding FTD: 460.3;
Average daily number of securities, new FTD: 591.6. 

Month and Year: 2007, January; 
Average daily number of securities, outstanding FTD: 414.7
Average daily number of securities, new FTD: 537.7. 

Month and Year: 2007, February; 
Average daily number of securities, outstanding FTD: 466.5;
Average daily number of securities, new FTD: 579.0. 

Month and Year: 2007, March; 
Average daily number of securities, outstanding FTD: 516.1;
Average daily number of securities, new FTD: 643.1. 

Month and Year: 2007, April; 
Average daily number of securities, outstanding FTD: 526.5;
Average daily number of securities, new FTD: 583.4. 

Month and Year: 2007, May; 
Average daily number of securities, outstanding FTD: 664.0;
Average daily number of securities, new FTD: 709.3. 

Month and Year: 2007, June; 
Average daily number of securities, outstanding FTD: 682.0;
Average daily number of securities, new FTD: 730.3. 

Month and Year: 2007, July; 
Average daily number of securities, outstanding FTD: 655.9;
Average daily number of securities, new FTD: 702.3. 

Month and Year: 2007, August; 
Average daily number of securities, outstanding FTD: 788.6;
Average daily number of securities, new FTD: 839.4. 

Month and Year: 2007, September; 
Average daily number of securities, outstanding FTD: 566.5;
Average daily number of securities, new FTD: 612.2. 

Month and Year: 2007, October (Elimination of grandfather exception); 
Average daily number of securities, outstanding FTD: 548.6;
Average daily number of securities, new FTD: 598.7. 

Month and Year: 2007, November; 
Average daily number of securities, outstanding FTD: 628.1;
Average daily number of securities, new FTD: 675.5. 

Month and Year: 2007, December; 
Average daily number of securities, outstanding FTD: 617.2;
Average daily number of securities, new FTD: 666.9. 

Month and Year: 2008, January; 
Average daily number of securities, outstanding FTD: 682.7;
Average daily number of securities, new FTD: 733.7. 

Month and Year: 2008, February;	
Average daily number of securities, outstanding FTD: 660.6;
Average daily number of securities, new FTD: 713.2. 

Month and Year: 2008, March; 
Average daily number of securities, outstanding FTD: 786.8;
Average daily number of securities, new FTD: 845.4. 

Month and Year: 2008, April; 
Average daily number of securities, outstanding FTD: 653.8;
Average daily number of securities, new FTD: 709.5. 

Month and Year: 2008, May; 
Average daily number of securities, outstanding FTD: 686.5;
Average daily number of securities, new FTD: 737.0. 

Month and Year: 2008, June; 
Average daily number of securities, outstanding FTD: 730.8;
Average daily number of securities, new FTD: 782.1. 

Month and Year: 2008, July (July emergency order); 	
Average daily number of securities, outstanding FTD: 776.1;
Average daily number of securities, new FTD: 833.9. 

Month and Year: 2008, August; 
Average daily number of securities, outstanding FTD: 645.6;
Average daily number of securities, new FTD: 703.0. 

Month and Year: 2008, September (September emergency order); 
Average daily number of securities, outstanding FTD: 703.4;
Average daily number of securities, new FTD: 775.9. 

Month and Year: 2008, October; 
Average daily number of securities, outstanding FTD: 338.7;
Average daily number of securities, new FTD: 402.7. 

Month and Year: 2008, November; 
Average daily number of securities, outstanding FTD: 203.1;
Average daily number of securities, new FTD: 221.6. 

Month and Year: 2008, December; 
Average daily number of securities, outstanding FTD: 180.2;
Average daily number of securities, new FTD: 196.9. 

Sources: SEC (data); GAO (analysis). 

Note: Prior to September 16, 2008, SEC received FTD data on equity 
securities with aggregate FTD of 10,000 or more. After this date, SEC 
began receiving data on all FTD in every equity security. For a 
consistent comparison, our sample includes securities with aggregate 
FTD of 10,000 or more for the entire review period. 

[End of figure] 

Figure 27: Average Daily Number of Securities with Outstanding and New 
FTD, per Month, for Amex-listed Securities, from April 2004 through 
December 2008: 

[Refer to PDF for image: line graph] 

Month and Year: 2004, April; 
Average daily number of securities, outstanding FTD: 129.3;
Average daily number of securities, new FTD: 231.6. 

Month and Year: 2004, May; 
Average daily number of securities, outstanding FTD: 129.6;
Average daily number of securities, new FTD: 233.8. 

Month and Year: 2004, June;
Average daily number of securities, outstanding FTD: 123.2;
Average daily number of securities, new FTD: 230.6. 

Month and Year: 2004, July; 
Average daily number of securities, outstanding FTD: 112.5;
Average daily number of securities, new FTD: 213.8. 

Month and Year: 2004, August;
Average daily number of securities, outstanding FTD: 106.3;
Average daily number of securities, new FTD: 215.4. 

Month and Year: 2004, September; 
Average daily number of securities, outstanding FTD: 115.5;
Average daily number of securities, new FTD: 226.4. 

Month and Year: 2004, October; 
Average daily number of securities, outstanding FTD: 118.8;
Average daily number of securities, new FTD: 228.1. 

Month and Year: 2004, November; 
Average daily number of securities, outstanding FTD: 129.7;
Average daily number of securities, new FTD: 233.6. 

Month and Year: 2004, December; 
Average daily number of securities, outstanding FTD: 133.8;
Average daily number of securities, new FTD: 246.3. 

Month and Year: 2005, January (Compliance date); 
Average daily number of securities, outstanding FTD: 117.7;
Average daily number of securities, new FTD: 216.7. 

Month and Year: 2005, February; 
Average daily number of securities, outstanding FTD: 114.2;
Average daily number of securities, new FTD: 204.2. 

Month and Year: 2005, March; 
Average daily number of securities, outstanding FTD: 124.5;
Average daily number of securities, new FTD: 218.3. 

Month and Year: 2005, April; 
Average daily number of securities, outstanding FTD: 113.6;
Average daily number of securities, new FTD: 203.0. 

Month and Year: 2005, May; 
Average daily number of securities, outstanding FTD: 111.7;
Average daily number of securities, new FTD: 197.7. 

Month and Year: 2005, June;
Average daily number of securities, outstanding FTD: 110.9;
Average daily number of securities, new FTD: 195.4. 

Month and Year: 2005, July; 
Average daily number of securities, outstanding FTD: 106.1;
Average daily number of securities, new FTD: 190.6. 

Month and Year: 2005, August;
Average daily number of securities, outstanding FTD: 114.3;
Average daily number of securities, new FTD: 196.1. 

Month and Year: 2005, September; 
Average daily number of securities, outstanding FTD: 112.8;
Average daily number of securities, new FTD: 190.8. 

Month and Year: 2005, October; 
Average daily number of securities, outstanding FTD: 123.7;
Average daily number of securities, new FTD: 209. 

Month and Year: 2005, November; 
Average daily number of securities, outstanding FTD: 125.2;
Average daily number of securities, new FTD: 210.4. 

Month and Year: 2005, December; 
Average daily number of securities, outstanding FTD: 125.7;
Average daily number of securities, new FTD: 210.8. 

Month and Year: 2006, January; 
Average daily number of securities, outstanding FTD: 133.6;
Average daily number of securities, new FTD: 217.3. 

Month and Year: 2006, February; 
Average daily number of securities, outstanding FTD: 139.7;
Average daily number of securities, new FTD: 225.1. 

Month and Year: 2006, March; 
Average daily number of securities, outstanding FTD: 133.7;
Average daily number of securities, new FTD: 216.2. 

Month and Year: 2006, April; 
Average daily number of securities, outstanding FTD: 141.9;
Average daily number of securities, new FTD: 220.2. 

Month and Year: 2006, May; 
Average daily number of securities, outstanding FTD: 149.1;
Average daily number of securities, new FTD: 230.7. 

Month and Year: 2006, June; 
Average daily number of securities, outstanding FTD: 124.1;
Average daily number of securities, new FTD: 199. 

Month and Year: 2006, July; 	
Average daily number of securities, outstanding FTD: 134.4;
Average daily number of securities, new FTD: 218.5. 

Month and Year: 2006, August; 
Average daily number of securities, outstanding FTD: 130.9;
Average daily number of securities, new FTD: 213.8. 

Month and Year: 2006, September; 
Average daily number of securities, outstanding FTD: 140.8;
Average daily number of securities, new FTD: 223.8. 

Month and Year: 2006, October; 
Average daily number of securities, outstanding FTD: 144;
Average daily number of securities, new FTD: 243.5. 

Month and Year: 2006, November; 
Average daily number of securities, outstanding FTD: 139.8;
Average daily number of securities, new FTD: 238.2. 

Month and Year: 2006, December; 
Average daily number of securities, outstanding FTD: 151.9;
Average daily number of securities, new FTD: 250.1. 

Month and Year: 2007, January; 
Average daily number of securities, outstanding FTD: 137.1; 
Average daily number of securities, new FTD: 236.1. 

Month and Year: 2007, February; 
Average daily number of securities, outstanding FTD: 149.1;
Average daily number of securities, new FTD: 241.4. 

Month and Year: 2007, March; 
Average daily number of securities, outstanding FTD: 154.6;
Average daily number of securities, new FTD: 245. 

Month and Year: 2007, April; 
Average daily number of securities, outstanding FTD: 190.2;
Average daily number of securities, new FTD: 239.7. 

Month and Year: 2007, May; 
Average daily number of securities, outstanding FTD: 225.7;
Average daily number of securities, new FTD: 269.5. 

Month and Year: 2007, June; 
Average daily number of securities, outstanding FTD: 224.1;
Average daily number of securities, new FTD: 274.1. 

Month and Year: 2007, July; 
Average daily number of securities, outstanding FTD: 221.8;
Average daily number of securities, new FTD: 266.2. 

Month and Year: 2007, August; 
Average daily number of securities, outstanding FTD: 234.6;
Average daily number of securities, new FTD: 278.5. 

Month and Year: 2007, September; 
Average daily number of securities, outstanding FTD: 206.0;
Average daily number of securities, new FTD: 246.4. 

Month and Year: 2007, October (Elimination of grandfather exception); 
Average daily number of securities, outstanding FTD: 206.8;
Average daily number of securities, new FTD: 248.8. 

Month and Year: 2007, November; 
Average daily number of securities, outstanding FTD: 231.5;
Average daily number of securities, new FTD: 276.1. 

Month and Year: 2007, December; 
Average daily number of securities, outstanding FTD: 242.5;
Average daily number of securities, new FTD: 285.0. 

Month and Year: 2008, January; 
Average daily number of securities, outstanding FTD: 242.3;
Average daily number of securities, new FTD: 280.9. 

Month and Year: 2008, February;	
Average daily number of securities, outstanding FTD: 233.5;
Average daily number of securities, new FTD: 269.5. 

Month and Year: 2008, March; 
Average daily number of securities, outstanding FTD: 240.4;
Average daily number of securities, new FTD: 279.1. 

Month and Year: 2008, April; 
Average daily number of securities, outstanding FTD: 223.4;
Average daily number of securities, new FTD: 266.3. 

Month and Year: 2008, May; 
Average daily number of securities, outstanding FTD: 234.2;
Average daily number of securities, new FTD: 277. 

Month and Year: 2008, June; 
Average daily number of securities, outstanding FTD: 235.3;
Average daily number of securities, new FTD: 276.0. 

Month and Year: 2008, July (July emergency order); 	
Average daily number of securities, outstanding FTD: 239.5;
Average daily number of securities, new FTD: 279.7. 

Month and Year: 2008, August; 
Average daily number of securities, outstanding FTD: 211.7;
Average daily number of securities, new FTD: 248.3. 

Month and Year: 2008, September (September emergency order); 
Average daily number of securities, outstanding FTD: 205.0;
Average daily number of securities, new FTD: 243.2. 

Month and Year: 2008, October; 
Average daily number of securities, outstanding FTD: 120.1;
Average daily number of securities, new FTD: 142.5. 

Month and Year: 2008, November; 
Average daily number of securities, outstanding FTD: 66.7;
Average daily number of securities, new FTD: 75.7. 

Month and Year: 2008, December; 
Average daily number of securities, outstanding FTD: 59.6;
Average daily number of securities, new FTD: 69.3. 

Sources: SEC (data); GAO (analysis). 

Note: Prior to September 16, 2008, SEC received FTD data on equity 
securities with aggregate FTD of 10,000 or more. After this date, SEC 
began receiving data on all FTD in every equity security. For a 
consistent comparison, our sample includes securities with aggregate 
FTD of 10,000 or more for the entire review period. 

[End of figure] 

Figure 28: Average Daily Number of Securities with Outstanding and New 
FTD, per Month, for Other Securities, from April 2004 through December 
2008: 

[Refer to PDF for image: line graph] 

Month and Year: 2004, April; 
Average daily number of securities, outstanding FTD: 580.1;
Average daily number of securities, new FTD: 1440.7. 

Month and Year: 2004, May; 
Average daily number of securities, outstanding FTD: 488.4;
Average daily number of securities, new FTD: 1335.0. 

Month and Year: 2004, June;
Average daily number of securities, outstanding FTD: 450.1;
Average daily number of securities, new FTD: 1290.3. 

Month and Year: 2004, July; 
Average daily number of securities, outstanding FTD: 442.6;
Average daily number of securities, new FTD: 1255.2. 

Month and Year: 2004, August;
Average daily number of securities, outstanding FTD: 426.6;
Average daily number of securities, new FTD: 1227.3. 

Month and Year: 2004, September; 
Average daily number of securities, outstanding FTD: 460.4;
Average daily number of securities, new FTD: 1276.9. 

Month and Year: 2004, October; 
Average daily number of securities, outstanding FTD: 517.3;
Average daily number of securities, new FTD: 1322.2. 

Month and Year: 2004, November; 
Average daily number of securities, outstanding FTD: 539.8;
Average daily number of securities, new FTD: 1342.7. 

Month and Year: 2004, December; 
Average daily number of securities, outstanding FTD: 555.1;
Average daily number of securities, new FTD: 1377.0. 

Month and Year: 2005, January (Compliance date); 
Average daily number of securities, outstanding FTD: 506.9;
Average daily number of securities, new FTD: 1266.8. 

Month and Year: 2005, February; 
Average daily number of securities, outstanding FTD: 530.2;
Average daily number of securities, new FTD: 1225.2. 

Month and Year: 2005, March; 
Average daily number of securities, outstanding FTD: 527.7;
Average daily number of securities, new FTD: 1260.6. 

Month and Year: 2005, April; 
Average daily number of securities, outstanding FTD: 477.7;
Average daily number of securities, new FTD: 1182. 

Month and Year: 2005, May; 
Average daily number of securities, outstanding FTD: 458.9;
Average daily number of securities, new FTD: 1152.2. 

Month and Year: 2005, June;
Average daily number of securities, outstanding FTD: 446.8;
Average daily number of securities, new FTD: 1157.1. 

Month and Year: 2005, July; 
Average daily number of securities, outstanding FTD: 469.4;
Average daily number of securities, new FTD: 1185.6. 

Month and Year: 2005, August;
Average daily number of securities, outstanding FTD: 492.2;
Average daily number of securities, new FTD: 1217.3. 

Month and Year: 2005, September; 
Average daily number of securities, outstanding FTD: 483.1;
Average daily number of securities, new FTD: 1205.7. 

Month and Year: 2005, October; 
Average daily number of securities, outstanding FTD: 470.9;
Average daily number of securities, new FTD: 1186.8. 

Month and Year: 2005, November; 
Average daily number of securities, outstanding FTD: 462.9;
Average daily number of securities, new FTD: 1183.6. 

Month and Year: 2005, December; 
Average daily number of securities, outstanding FTD: 523.3;
Average daily number of securities, new FTD: 1296.8. 

Month and Year: 2006, January; 
Average daily number of securities, outstanding FTD: 587.3;
Average daily number of securities, new FTD: 1371.4. 

Month and Year: 2006, February; 
Average daily number of securities, outstanding FTD: 632.6;
Average daily number of securities, new FTD: 1417.1. 

Month and Year: 2006, March; 
Average daily number of securities, outstanding FTD: 633.3;
Average daily number of securities, new FTD: 1444. 

Month and Year: 2006, April; 
Average daily number of securities, outstanding FTD: 696.1;
Average daily number of securities, new FTD: 1548.0. 

Month and Year: 2006, May; 
Average daily number of securities, outstanding FTD: 680.9;
Average daily number of securities, new FTD: 1543.6. 

Month and Year: 2006, June; 
Average daily number of securities, outstanding FTD: 539.3;
Average daily number of securities, new FTD: 1329.8. 

Month and Year: 2006, July; 	
Average daily number of securities, outstanding FTD: 501.4;
Average daily number of securities, new FTD: 1241.3. 

Month and Year: 2006, August; 
Average daily number of securities, outstanding FTD: 477.8;
Average daily number of securities, new FTD: 1219.3. 

Month and Year: 2006, September; 
Average daily number of securities, outstanding FTD: 496.7;
Average daily number of securities, new FTD: 1226.5. 

Month and Year: 2006, October; 
Average daily number of securities, outstanding FTD: 519.9;
Average daily number of securities, new FTD: 1262.4. 

Month and Year: 2006, November; 
Average daily number of securities, outstanding FTD: 563.9;
Average daily number of securities, new FTD: 1307.1. 

Month and Year: 2006, December; 
Average daily number of securities, outstanding FTD: 610.6;
Average daily number of securities, new FTD: 1365.8. 

Month and Year: 2007, January; 
Average daily number of securities, outstanding FTD: 537.6; 
Average daily number of securities, new FTD: 1276.3. 

Month and Year: 2007, February; 
Average daily number of securities, outstanding FTD: 592.8;
Average daily number of securities, new FTD: 1335.2. 

Month and Year: 2007, March; 
Average daily number of securities, outstanding FTD: 589.5;
Average daily number of securities, new FTD: 1364.86. 

Month and Year: 2007, April; 
Average daily number of securities, outstanding FTD: 833.1;
Average daily number of securities, new FTD: 1402.5. 

Month and Year: 2007, May; 
Average daily number of securities, outstanding FTD: 936.4;
Average daily number of securities, new FTD: 1513.6. 

Month and Year: 2007, June; 
Average daily number of securities, outstanding FTD: 857.2;
Average daily number of securities, new FTD: 1400.9. 

Month and Year: 2007, July; 
Average daily number of securities, outstanding FTD: 824.3;
Average daily number of securities, new FTD: 1371.1. 

Month and Year: 2007, August; 
Average daily number of securities, outstanding FTD: 853.9;
Average daily number of securities, new FTD: 1445.5. 

Month and Year: 2007, September; 
Average daily number of securities, outstanding FTD: 801.6;
Average daily number of securities, new FTD: 1339.2. 

Month and Year: 2007, October (Elimination of grandfather exception); 
Average daily number of securities, outstanding FTD: 882;
Average daily number of securities, new FTD: 1435.9. 

Month and Year: 2007, November; 
Average daily number of securities, outstanding FTD: 955.5;
Average daily number of securities, new FTD: 1550.4. 

Month and Year: 2007, December; 
Average daily number of securities, outstanding FTD: 885.3;
Average daily number of securities, new FTD: 1452.8. 

Month and Year: 2008, January; 
Average daily number of securities, outstanding FTD: 862.5;
Average daily number of securities, new FTD: 1410.9. 

Month and Year: 2008, February;	
Average daily number of securities, outstanding FTD: 894.1;
Average daily number of securities, new FTD: 1462.8. 

Month and Year: 2008, March; 
Average daily number of securities, outstanding FTD: 945.7;
Average daily number of securities, new FTD: 1561.8. 

Month and Year: 2008, April; 
Average daily number of securities, outstanding FTD: 906.3;
Average daily number of securities, new FTD: 1528.1. 

Month and Year: 2008, May; 
Average daily number of securities, outstanding FTD: 905.0;
Average daily number of securities, new FTD: 1510.4. 

Month and Year: 2008, June; 
Average daily number of securities, outstanding FTD: 877.5;
Average daily number of securities, new FTD: 1525.2. 

Month and Year: 2008, July (July emergency order); 	
Average daily number of securities, outstanding FTD: 849.5;
Average daily number of securities, new FTD: 1518.9. 

Month and Year: 2008, August; 
Average daily number of securities, outstanding FTD: 783.6;
Average daily number of securities, new FTD: 1499.6. 

Month and Year: 2008, September (September emergency order); 
Average daily number of securities, outstanding FTD: 748.4;
Average daily number of securities, new FTD: 1460.5. 

Month and Year: 2008, October; 
Average daily number of securities, outstanding FTD: 450.4;
Average daily number of securities, new FTD: 778.1. 

Month and Year: 2008, November; 
Average daily number of securities, outstanding FTD: 445.5;
Average daily number of securities, new FTD: 717.2. 

Month and Year: 2008, December; 
Average daily number of securities, outstanding FTD: 480.7;
Average daily number of securities, new FTD: 766.6. 

Sources: SEC (data); GAO (analysis). 

Note: Prior to September 16, 2008, SEC received FTD data on equity 
securities with aggregate FTD of 10,000 or more. After this date, SEC 
began receiving data on all FTD in every equity security. For a 
consistent comparison, our sample includes securities with aggregate 
FTD of 10,000 or more for the entire review period. 

[End of figure] 

Figure 29: Total New FTD, per Month, for All NYSE-listed Securities, 
from April 2004 through December 2008 (in millions): 

[Refer to PDF for image: line graph] 

Month and Year: 2004, April; 
Total new FTD for all NYSE-listed securities: 228.4. 

Month and Year: 2004, May; 
Total new FTD for all NYSE-listed securities: 294.5. 

Month and Year: 2004, June;
Total new FTD for all NYSE-listed securities: 293.7. 

Month and Year: 2004, July; 
Total new FTD for all NYSE-listed securities: 317.8. 

Month and Year: 2004, August;
Total new FTD for all NYSE-listed securities: 341.0. 

Month and Year: 2004, September; 
Total new FTD for all NYSE-listed securities: 273.0. 

Month and Year: 2004, October; 
Total new FTD for all NYSE-listed securities: 324.0. 

Month and Year: 2004, November; 
Total new FTD for all NYSE-listed securities: 286.7. 

Month and Year: 2004, December; 
Total new FTD for all NYSE-listed securities: 348.4. 

Month and Year: 2005, January (Compliance date); 
Total new FTD for all NYSE-listed securities: 253.4. 

Month and Year: 2005, February; 
Total new FTD for all NYSE-listed securities: 282.8. 

Month and Year: 2005, March; 
Total new FTD for all NYSE-listed securities: 342.2. 

Month and Year: 2005, April; 
Total new FTD for all NYSE-listed securities: 274.9. 

Month and Year: 2005, May; 
Total new FTD for all NYSE-listed securities: 303.1. 

Month and Year: 2005, June;
Total new FTD for all NYSE-listed securities: 333.1. 

Month and Year: 2005, July; 
Total new FTD for all NYSE-listed securities: 219.4. 

Month and Year: 2005, August;
Total new FTD for all NYSE-listed securities: 300.5. 

Month and Year: 2005, September; 
Total new FTD for all NYSE-listed securities: 288.9. 

Month and Year: 2005, October; 
Total new FTD for all NYSE-listed securities: 270.7. 

Month and Year: 2005, November; 
Total new FTD for all NYSE-listed securities: 360.1. 

Month and Year: 2005, December; 
Total new FTD for all NYSE-listed securities: 367.4. 

Month and Year: 2006, January; 
Total new FTD for all NYSE-listed securities: 392.0. 

Month and Year: 2006, February; 
Total new FTD for all NYSE-listed securities: 280.9. 

Month and Year: 2006, March; 
Total new FTD for all NYSE-listed securities: 321.2. 

Month and Year: 2006, April; 
Total new FTD for all NYSE-listed securities: 284.9. 

Month and Year: 2006, May; 
Total new FTD for all NYSE-listed securities: 378.6. 

Month and Year: 2006, June; 
Total new FTD for all NYSE-listed securities: 395.0. 

Month and Year: 2006, July; 	
Total new FTD for all NYSE-listed securities: 314.7. 

Month and Year: 2006, August; 
Total new FTD for all NYSE-listed securities: 283.3. 

Month and Year: 2006, September; 
Total new FTD for all NYSE-listed securities: 236.6. 

Month and Year: 2006, October; 
Total new FTD for all NYSE-listed securities: 326.8. 

Month and Year: 2006, November; 
Total new FTD for all NYSE-listed securities: 315.0. 

Month and Year: 2006, December; 
Total new FTD for all NYSE-listed securities: 337.1. 

Month and Year: 2007, January; 
Total new FTD for all NYSE-listed securities: 306.4. 

Month and Year: 2007, February; 
Total new FTD for all NYSE-listed securities: 376.5. 

Month and Year: 2007, March; 
Total new FTD for all NYSE-listed securities: 510.8. 

Month and Year: 2007, April; 
Total new FTD for all NYSE-listed securities: 522.5. 

Month and Year: 2007, May; 
Total new FTD for all NYSE-listed securities: 624.9. 

Month and Year: 2007, June; 
Total new FTD for all NYSE-listed securities: 699.9. 

Month and Year: 2007, July; 
Total new FTD for all NYSE-listed securities: 764.6. 

Month and Year: 2007, August; 
Total new FTD for all NYSE-listed securities: 1218.7. 

Month and Year: 2007, September; 
Total new FTD for all NYSE-listed securities: 638.8. 

Month and Year: 2007, October (Elimination of grandfather exception); 
Total new FTD for all NYSE-listed securities: 706.9. 

Month and Year: 2007, November; 
Total new FTD for all NYSE-listed securities: 868.8. 

Month and Year: 2007, December; 
Total new FTD for all NYSE-listed securities: 792.6. 

Month and Year: 2008, January; 
Total new FTD for all NYSE-listed securities: 970.2. 

Month and Year: 2008, February;	
Total new FTD for all NYSE-listed securities: 706.7. 

Month and Year: 2008, March; 
Total new FTD for all NYSE-listed securities: 1159.0. 

Month and Year: 2008, April; 
Total new FTD for all NYSE-listed securities: 821.5. 

Month and Year: 2008, May; 
Total new FTD for all NYSE-listed securities: 751.5. 

Month and Year: 2008, June; 
Total new FTD for all NYSE-listed securities: 1069.3. 

Month and Year: 2008, July (July emergency order); 	
Total new FTD for all NYSE-listed securities: 1359.1. 

Month and Year: 2008, August; 
Total new FTD for all NYSE-listed securities: 810.4. 

Month and Year: 2008, September (September emergency order); 
Total new FTD for all NYSE-listed securities: 1405.4. 

Month and Year: 2008, October; 
Total new FTD for all NYSE-listed securities: 925.1. 

Month and Year: 2008, November; 
Total new FTD for all NYSE-listed securities: 432.1. 

Month and Year: 2008, December; 
Total new FTD for all NYSE-listed securities: 457.7. 

Sources: SEC (data); GAO (analysis). 

Note: Prior to September 16, 2008, SEC received FTD data on equity 
securities with aggregate FTD of 10,000 or more. After this date, SEC 
began receiving data on all FTD in every equity security. For a 
consistent comparison, our sample includes securities with aggregate 
FTD of 10,000 or more for the entire review period. 

[End of figure] 

Figure 30: Total New FTD, per Month, for All NASDAQ-listed Securities, 
from April 2004 through December 2008 (in millions): 

[Refer to PDF for image: line graph] 

Month and Year: 2004, April; 
Total new FTD for all NASDAQ-listed securities: 287.1. 

Month and Year: 2004, May; 
Total new FTD for all NASDAQ-listed securities: 313.8. 

Month and Year: 2004, June;
Total new FTD for all NASDAQ-listed securities: 317.4. 

Month and Year: 2004, July; 
Total new FTD for all NASDAQ-listed securities: 314. 

Month and Year: 2004, August;
Total new FTD for all NASDAQ-listed securities: 285.7. 

Month and Year: 2004, September; 
Total new FTD for all NASDAQ-listed securities: 249.0. 

Month and Year: 2004, October; 
Total new FTD for all NASDAQ-listed securities: 271.7. 

Month and Year: 2004, November; 
Total new FTD for all NASDAQ-listed securities: 290.0. 

Month and Year: 2004, December; 
Total new FTD for all NASDAQ-listed securities: 389.7. 

Month and Year: 2005, January (Compliance date); 
Total new FTD for all NASDAQ-listed securities: 278.9. 

Month and Year: 2005, February; 
Total new FTD for all NASDAQ-listed securities: 272.7. 

Month and Year: 2005, March; 
Total new FTD for all NASDAQ-listed securities: 317.7. 

Month and Year: 2005, April; 
Total new FTD for all NASDAQ-listed securities: 255.5. 

Month and Year: 2005, May; 
Total new FTD for all NASDAQ-listed securities: 273.8. 

Month and Year: 2005, June;
Total new FTD for all NASDAQ-listed securities: 374.7. 

Month and Year: 2005, July; 
Total new FTD for all NASDAQ-listed securities: 250.8. 

Month and Year: 2005, August;
Total new FTD for all NASDAQ-listed securities: 292.4. 

Month and Year: 2005, September; 
Total new FTD for all NASDAQ-listed securities: 265.2. 

Month and Year: 2005, October; 
Total new FTD for all NASDAQ-listed securities: 270.8. 

Month and Year: 2005, November; 
Total new FTD for all NASDAQ-listed securities: 281.6. 

Month and Year: 2005, December; 
Total new FTD for all NASDAQ-listed securities: 310.8. 

Month and Year: 2006, January; 
Total new FTD for all NASDAQ-listed securities: 261.4. 

Month and Year: 2006, February; 
Total new FTD for all NASDAQ-listed securities: 263.9. 

Month and Year: 2006, March; 
Total new FTD for all NASDAQ-listed securities: 361.9. 

Month and Year: 2006, April; 
Total new FTD for all NASDAQ-listed securities: 280.2. 

Month and Year: 2006, May; 
Total new FTD for all NASDAQ-listed securities: 349.7. 

Month and Year: 2006, June; 
Total new FTD for all NASDAQ-listed securities: 329.6. 

Month and Year: 2006, July; 	
Total new FTD for all NASDAQ-listed securities: 446.6. 

Month and Year: 2006, August; 
Total new FTD for all NASDAQ-listed securities: 277.3. 

Month and Year: 2006, September; 
Total new FTD for all NASDAQ-listed securities: 301.7. 

Month and Year: 2006, October; 
Total new FTD for all NASDAQ-listed securities: 317.9. 

Month and Year: 2006, November; 
Total new FTD for all NASDAQ-listed securities: 296.7. 

Month and Year: 2006, December; 
Total new FTD for all NASDAQ-listed securities: 299.3. 

Month and Year: 2007, January; 
Total new FTD for all NASDAQ-listed securities: 306.3. 

Month and Year: 2007, February; 
Total new FTD for all NASDAQ-listed securities: 359.3. 

Month and Year: 2007, March; 
Total new FTD for all NASDAQ-listed securities: 424.4. 

Month and Year: 2007, April; 
Total new FTD for all NASDAQ-listed securities: 532. 

Month and Year: 2007, May; 
Total new FTD for all NASDAQ-listed securities: 763.5. 

Month and Year: 2007, June; 
Total new FTD for all NASDAQ-listed securities: 762.2. 

Month and Year: 2007, July; 
Total new FTD for all NASDAQ-listed securities: 682.3. 

Month and Year: 2007, August; 
Total new FTD for all NASDAQ-listed securities: 919.9. 

Month and Year: 2007, September; 
Total new FTD for all NASDAQ-listed securities: 419.0. 

Month and Year: 2007, October (Elimination of grandfather exception); 
Total new FTD for all NASDAQ-listed securities: 567.9. 

Month and Year: 2007, November; 
Total new FTD for all NASDAQ-listed securities: 665.0. 

Month and Year: 2007, December; 
Total new FTD for all NASDAQ-listed securities: 594.3. 

Month and Year: 2008, January; 
Total new FTD for all NASDAQ-listed securities: 703.2. 

Month and Year: 2008, February;	
Total new FTD for all NASDAQ-listed securities: 639.1. 

Month and Year: 2008, March; 
Total new FTD for all NASDAQ-listed securities: 971.7. 

Month and Year: 2008, April; 
Total new FTD for all NASDAQ-listed securities: 676.8. 

Month and Year: 2008, May; 
Total new FTD for all NASDAQ-listed securities: 726.5. 

Month and Year: 2008, June; 
Total new FTD for all NASDAQ-listed securities: 855.7. 

Month and Year: 2008, July (July emergency order); 	
Total new FTD for all NASDAQ-listed securities: 949.5. 

Month and Year: 2008, August; 
Total new FTD for all NASDAQ-listed securities: 552.0. 

Month and Year: 2008, September (September emergency order); 
Total new FTD for all NASDAQ-listed securities: 714.8. 

Month and Year: 2008, October; 
Total new FTD for all NASDAQ-listed securities: 424.6. 

Month and Year: 2008, November; 
Total new FTD for all NASDAQ-listed securities: 213.0. 

Month and Year: 2008, December; 
Total new FTD for all NASDAQ-listed securities: 194.4. 

Sources: SEC (data); GAO (analysis). 

Note: Prior to September 16, 2008, SEC received FTD data on equity 
securities with aggregate FTD of 10,000 or more. After this date, SEC 
began receiving data on all FTD in every equity security. For a 
consistent comparison, our sample includes securities with aggregate 
FTD of 10,000 or more for the entire review period. 

[End of figure] 

Figure 31: Total New FTD, per Month, for All Amex-listed Securities, 
from April 2004 through December 2008: 

[Refer to PDF for image: line graph] 

Month and Year: 2004, April; 
Total new FTD for all Amex-listed securities: 152.8. 

Month and Year: 2004, May; 
Total new FTD for all Amex-listed securities: 162.0. 

Month and Year: 2004, June;
Total new FTD for all Amex-listed securities: 168.1. 

Month and Year: 2004, July; 
Total new FTD for all Amex-listed securities: 100.6. 

Month and Year: 2004, August; 
Total new FTD for all Amex-listed securities: 119.4. 

Month and Year: 2004, September; 
Total new FTD for all Amex-listed securities: 119.8. 

Month and Year: 2004, October; 
Total new FTD for all Amex-listed securities: 87.3. 

Month and Year: 2004, November; 
Total new FTD for all Amex-listed securities: 99.2. 

Month and Year: 2004, December; 
Total new FTD for all Amex-listed securities: 140.7. 

Month and Year: 2005, January (Compliance date); 
Total new FTD for all Amex-listed securities: 110.2. 

Month and Year: 2005, February; 
Total new FTD for all Amex-listed securities: 108.9. 

Month and Year: 2005, March; 
Total new FTD for all Amex-listed securities: 196.0. 

Month and Year: 2005, April; 
Total new FTD for all Amex-listed securities: 133.5. 

Month and Year: 2005, May; 
Total new FTD for all Amex-listed securities: 152.3. 

Month and Year: 2005, June;
Total new FTD for all Amex-listed securities: 183.8. 

Month and Year: 2005, July; 
Total new FTD for all Amex-listed securities: 102.8. 

Month and Year: 2005, August;
Total new FTD for all Amex-listed securities: 142.4. 

Month and Year: 2005, September; 
Total new FTD for all Amex-listed securities: 177.3. 

Month and Year: 2005, October; 
Total new FTD for all Amex-listed securities: 158.9. 

Month and Year: 2005, November; 
Total new FTD for all Amex-listed securities: 150.6. 

Month and Year: 2005, December; 
Total new FTD for all Amex-listed securities: 164.9. 

Month and Year: 2006, January; 
Total new FTD for all Amex-listed securities: 139.1. 

Month and Year: 2006, February; 
Total new FTD for all Amex-listed securities: 137.5. 

Month and Year: 2006, March; 
Total new FTD for all Amex-listed securities: 188.6. 

Month and Year: 2006, April; 
Total new FTD for all Amex-listed securities: 141.8. 

Month and Year: 2006, May; 
Total new FTD for all Amex-listed securities: 214.0. 

Month and Year: 2006, June; 
Total new FTD for all Amex-listed securities: 150.8. 

Month and Year: 2006, July; 	
Total new FTD for all Amex-listed securities: 169.1. 

Month and Year: 2006, August; 
Total new FTD for all Amex-listed securities: 97.2. 

Month and Year: 2006, September; 
Total new FTD for all Amex-listed securities: 149.6. 

Month and Year: 2006, October; 
Total new FTD for all Amex-listed securities: 106.8. 

Month and Year: 2006, November; 
Total new FTD for all Amex-listed securities: 92.9. 

Month and Year: 2006, December; 
Total new FTD for all Amex-listed securities: 138.6. 

Month and Year: 2007, January; 
Total new FTD for all Amex-listed securities: 110.4. 

Month and Year: 2007, February; 
Total new FTD for all Amex-listed securities: 141.8. 

Month and Year: 2007, March; 
Total new FTD for all Amex-listed securities: 223.1. 

Month and Year: 2007, April; 
Total new FTD for all Amex-listed securities: 199.1. 

Month and Year: 2007, May; 
Total new FTD for all Amex-listed securities: 279.5. 

Month and Year: 2007, June; 
Total new FTD for all Amex-listed securities: 401.4. 

Month and Year: 2007, July; 
Total new FTD for all Amex-listed securities: 339.9. 

Month and Year: 2007, August; 
Total new FTD for all Amex-listed securities: 318.7. 

Month and Year: 2007, September; 
Total new FTD for all Amex-listed securities: 218.5. 

Month and Year: 2007, October (Elimination of grandfather exception); 
Total new FTD for all Amex-listed securities: 326.5. 

Month and Year: 2007, November; 
Total new FTD for all Amex-listed securities: 402.7. 

Month and Year: 2007, December; 
Total new FTD for all Amex-listed securities: 276.5. 

Month and Year: 2008, January; 
Total new FTD for all Amex-listed securities: 259.4. 

Month and Year: 2008, February;	
Total new FTD for all Amex-listed securities: 319.2. 

Month and Year: 2008, March; 
Total new FTD for all Amex-listed securities: 377.7. 

Month and Year: 2008, April; 
Total new FTD for all Amex-listed securities: 214.0. 

Month and Year: 2008, May; 
Total new FTD for all Amex-listed securities: 306.4. 

Month and Year: 2008, June; 
Total new FTD for all Amex-listed securities: 478.0. 

Month and Year: 2008, July (July emergency order); 	
Total new FTD for all Amex-listed securities: 329.7. 

Month and Year: 2008, August; 
Total new FTD for all Amex-listed securities: 239.6. 

Month and Year: 2008, September (September emergency order); 
Total new FTD for all Amex-listed securities: 485.1. 

Month and Year: 2008, October; 
Total new FTD for all Amex-listed securities: 196. 

Month and Year: 2008, November; 
Total new FTD for all Amex-listed securities: 63.3. 

Month and Year: 2008, December; 
Total new FTD for all Amex-listed securities: 73.9. 

Sources: SEC (data); GAO (analysis). 

Note: Prior to September 16, 2008, SEC received FTD data on equity 
securities with aggregate FTD of 10,000 or more. After this date, SEC 
began receiving data on all FTD in every equity security. For a 
consistent comparison, our sample includes securities with aggregate 
FTD of 10,000 or more for the entire review period. 

[End of figure] 

Figure 32: Total New FTD, per Month, for All Other Securities, from 
April 2004 through December 2008 (in millions): 

[Refer to PDF for image: line graph] 

Month and Year: 2004, April; 
Total new FTD for all other securities: 1220.9. 

Month and Year: 2004, May; 
Total new FTD for all other securities: 798.6. 

Month and Year: 2004, June;
Total new FTD for all other securities: 1178.9. 

Month and Year: 2004, July; 
Total new FTD for all other securities: 1065.7. 

Month and Year: 2004, August; 
Total new FTD for all other securities: 1120.4. 

Month and Year: 2004, September; 
Total new FTD for all other securities: 2448.0. 

Month and Year: 2004, October; 
Total new FTD for all other securities: 1957.2. 

Month and Year: 2004, November; 
Total new FTD for all other securities: 909.7. 

Month and Year: 2004, December; 
Total new FTD for all other securities: 1229.9. 

Month and Year: 2005, January (Compliance date); 
Total new FTD for all other securities: 1124.2. 

Month and Year: 2005, February; 
Total new FTD for all other securities: 913.2. 

Month and Year: 2005, March; 
Total new FTD for all other securities: 894.0. 

Month and Year: 2005, April; 
Total new FTD for all other securities: 1223.8. 

Month and Year: 2005, May; 
Total new FTD for all other securities: 786.1. 

Month and Year: 2005, June;
Total new FTD for all other securities: 956.3. 

Month and Year: 2005, July; 
Total new FTD for all other securities: 1111.8. 

Month and Year: 2005, August;
Total new FTD for all other securities: 964.6. 

Month and Year: 2005, September; 
Total new FTD for all other securities: 916.6. 

Month and Year: 2005, October; 
Total new FTD for all other securities: 1950.4. 

Month and Year: 2005, November; 
Total new FTD for all other securities: 905.0. 

Month and Year: 2005, December; 
Total new FTD for all other securities: 1193.2. 

Month and Year: 2006, January; 
Total new FTD for all other securities: 1402.8. 

Month and Year: 2006, February; 
Total new FTD for all other securities: 1473.3. 

Month and Year: 2006, March; 
Total new FTD for all other securities: 1878.7. 

Month and Year: 2006, April; 
Total new FTD for all other securities: 1538.7. 

Month and Year: 2006, May; 
Total new FTD for all other securities: 1955.0. 

Month and Year: 2006, June; 
Total new FTD for all other securities: 2147.7. 

Month and Year: 2006, July; 	
Total new FTD for all other securities: 1333.1. 

Month and Year: 2006, August; 
Total new FTD for all other securities: 1572.1. 

Month and Year: 2006, September; 
Total new FTD for all other securities: 1497.4. 

Month and Year: 2006, October; 
Total new FTD for all other securities: 1257.1. 

Month and Year: 2006, November; 
Total new FTD for all other securities: 1899.5. 

Month and Year: 2006, December; 
Total new FTD for all other securities: 1348.2. 

Month and Year: 2007, January; 
Total new FTD for all other securities: 1551.1. 

Month and Year: 2007, February; 
Total new FTD for all other securities: 2648.7. 

Month and Year: 2007, March; 
Total new FTD for all other securities: 2326.4. 

Month and Year: 2007, April; 
Total new FTD for all other securities: 3529.4. 

Month and Year: 2007, May; 
Total new FTD for all other securities: 4953.2. 

Month and Year: 2007, June; 
Total new FTD for all other securities: 4594.3. 

Month and Year: 2007, July; 
Total new FTD for all other securities: 4252. 

Month and Year: 2007, August; 
Total new FTD for all other securities: 4443.4. 

Month and Year: 2007, September; 
Total new FTD for all other securities: 4570.0. 

Month and Year: 2007, October (Elimination of grandfather exception); 
Total new FTD for all other securities: 3790.5. 

Month and Year: 2007, November; 
Total new FTD for all other securities: 3882.8. 

Month and Year: 2007, December; 
Total new FTD for all other securities: 3044.6. 

Month and Year: 2008, January; 
Total new FTD for all other securities: 3322.1. 

Month and Year: 2008, February;	
Total new FTD for all other securities: 3847.1. 

Month and Year: 2008, March; 
Total new FTD for all other securities: 4319.2. 

Month and Year: 2008, April; 
Total new FTD for all other securities: 3655.6. 

Month and Year: 2008, May; 
Total new FTD for all other securities: 4427.9. 

Month and Year: 2008, June; 
Total new FTD for all other securities: 4265.9. 

Month and Year: 2008, July (July emergency order); 	
Total new FTD for all other securities: 5253.1. 

Month and Year: 2008, August; 
Total new FTD for all other securities: 3481. 

Month and Year: 2008, September (September emergency order); 
Total new FTD for all other securities: 2777.1. 

Month and Year: 2008, October; 
Total new FTD for all other securities: 2246.9. 

Month and Year: 2008, November; 
Total new FTD for all other securities: 2368.9. 

Month and Year: 2008, December; 
Total new FTD for all other securities: 3362.4. 

Sources: SEC (data); GAO (analysis). 

Note: Prior to September 16, 2008, SEC received FTD data on equity 
securities with aggregate FTD of 10,000 or more. After this date, SEC 
began receiving data on all FTD in every equity security. For a 
consistent comparison, our sample includes securities with aggregate 
FTD of 10,000 or more for the entire review period. 

[End of figure] 

Figure 33: Average Outstanding FTD, per Month, for All NYSE-listed 
Securities, from April 2004 through December 2008 (in millions): 

[Refer to PDF for image: line graph] 

Month and Year: 2004, April; 
Average outstanding FTD for all NYSE-listed securities: 56.2. 

Month and Year: 2004, May; 
Average outstanding FTD for all NYSE-listed securities: 67.5. 

Month and Year: 2004, June;
Average outstanding FTD for all NYSE-listed securities: 79.4. 

Month and Year: 2004, July; 
Average outstanding FTD for all NYSE-listed securities: 76.8. 

Month and Year: 2004, August; 
Average outstanding FTD for all NYSE-listed securities: 85.5. 

Month and Year: 2004, September; 
Average outstanding FTD for all NYSE-listed securities: 79.6. 

Month and Year: 2004, October; 
Average outstanding FTD for all NYSE-listed securities: 88.6. 

Month and Year: 2004, November; 
Average outstanding FTD for all NYSE-listed securities: 81.8. 

Month and Year: 2004, December; 
Average outstanding FTD for all NYSE-listed securities: 80.6. 

Month and Year: 2005, January (Compliance date); 
Average outstanding FTD for all NYSE-listed securities: 60.9. 

Month and Year: 2005, February; 
Average outstanding FTD for all NYSE-listed securities: 55.4. 

Month and Year: 2005, March; 
Average outstanding FTD for all NYSE-listed securities: 58.8. 

Month and Year: 2005, April; 
Average outstanding FTD for all NYSE-listed securities: 56.3. 

Month and Year: 2005, May; 
Average outstanding FTD for all NYSE-listed securities: 65.0. 

Month and Year: 2005, June;
Average outstanding FTD for all NYSE-listed securities: 54.1. 

Month and Year: 2005, July; 
Average outstanding FTD for all NYSE-listed securities: 41.9. 

Month and Year: 2005, August;
Average outstanding FTD for all NYSE-listed securities: 52.5. 

Month and Year: 2005, September; 
Average outstanding FTD for all NYSE-listed securities: 46.8. 

Month and Year: 2005, October; 
Average outstanding FTD for all NYSE-listed securities: 48.9. 

Month and Year: 2005, November; 
Average outstanding FTD for all NYSE-listed securities: 51.4. 

Month and Year: 2005, December; 
Average outstanding FTD for all NYSE-listed securities: 55.6. 

Month and Year: 2006, January; 
Average outstanding FTD for all NYSE-listed securities: 46.3. 

Month and Year: 2006, February; 
Average outstanding FTD for all NYSE-listed securities: 47.5. 

Month and Year: 2006, March; 
Average outstanding FTD for all NYSE-listed securities: 48.7. 

Month and Year: 2006, April; 
Average outstanding FTD for all NYSE-listed securities: 49.1. 

Month and Year: 2006, May; 
Average outstanding FTD for all NYSE-listed securities: 52.7. 

Month and Year: 2006, June; 
Average outstanding FTD for all NYSE-listed securities: 54.3. 

Month and Year: 2006, July; 	
Average outstanding FTD for all NYSE-listed securities: 55.1. 

Month and Year: 2006, August; 
Average outstanding FTD for all NYSE-listed securities: 40.6. 

Month and Year: 2006, September; 
Average outstanding FTD for all NYSE-listed securities: 37.5. 

Month and Year: 2006, October; 
Average outstanding FTD for all NYSE-listed securities: 43.3. 

Month and Year: 2006, November; 
Average outstanding FTD for all NYSE-listed securities: 48.4. 

Month and Year: 2006, December; 
Average outstanding FTD for all NYSE-listed securities: 53.1. 

Month and Year: 2007, January; 
Average outstanding FTD for all NYSE-listed securities: 47.4. 

Month and Year: 2007, February; 
Average outstanding FTD for all NYSE-listed securities: 73.1. 

Month and Year: 2007, March; 
Average outstanding FTD for all NYSE-listed securities: 105.2. 

Month and Year: 2007, April; 
Average outstanding FTD for all NYSE-listed securities: 80.5. 

Month and Year: 2007, May; 
Average outstanding FTD for all NYSE-listed securities: 70.0. 

Month and Year: 2007, June; 
Average outstanding FTD for all NYSE-listed securities: 75.0. 

Month and Year: 2007, July; 
Average outstanding FTD for all NYSE-listed securities: 86.7. 

Month and Year: 2007, August; 
Average outstanding FTD for all NYSE-listed securities: 131.9. 

Month and Year: 2007, September; 
Average outstanding FTD for all NYSE-listed securities: 87.8. 

Month and Year: 2007, October (Elimination of grandfather exception); 
Average outstanding FTD for all NYSE-listed securities: 86.1. 

Month and Year: 2007, November; 
Average outstanding FTD for all NYSE-listed securities: 109.4. 

Month and Year: 2007, December; 
Average outstanding FTD for all NYSE-listed securities: 108.4. 

Month and Year: 2008, January; 
Average outstanding FTD for all NYSE-listed securities: 118.3. 

Month and Year: 2008, February;	
Average outstanding FTD for all NYSE-listed securities: 103.3. 

Month and Year: 2008, March; 
Average outstanding FTD for all NYSE-listed securities: 147.8. 

Month and Year: 2008, April; 
Average outstanding FTD for all NYSE-listed securities: 125.3. 

Month and Year: 2008, May; 
Average outstanding FTD for all NYSE-listed securities: 110.0. 

Month and Year: 2008, June; 
Average outstanding FTD for all NYSE-listed securities: 134.5. 

Month and Year: 2008, July (July emergency order); 	
Average outstanding FTD for all NYSE-listed securities: 183.2. 

Month and Year: 2008, August; 
Average outstanding FTD for all NYSE-listed securities: 139.0. 

Month and Year: 2008, September (September emergency order); 
Average outstanding FTD for all NYSE-listed securities: 199.7. 

Month and Year: 2008, October; 
Average outstanding FTD for all NYSE-listed securities: 86.4. 

Month and Year: 2008, November; 
Average outstanding FTD for all NYSE-listed securities: 34.2. 

Month and Year: 2008, December; 
Average outstanding FTD for all NYSE-listed securities: 32.3. 

Sources: SEC (data); GAO (analysis). 

Note: Prior to September 16, 2008, SEC received FTD data on equity 
securities with aggregate FTD of 10,000 or more. After this date, SEC 
began receiving data on all FTD in every equity security. For a 
consistent comparison, our sample includes securities with aggregate 
FTD of 10,000 or more for the entire review period. 

[End of figure] 

Figure 34: Average Outstanding FTD, per Month, for All NASDAQ-listed 
Securities, from April 2004 through December 2008 (in millions): 

[Refer to PDF for image: line graph] 

Month and Year: 2004, April; 
Average outstanding FTD for all NASDAQ-listed securities: 118.7. 

Month and Year: 2004, May; 
Average outstanding FTD for all NASDAQ-listed securities: 112.5. 

Month and Year: 2004, June;
Average outstanding FTD for all NASDAQ-listed securities: 83.5. 

Month and Year: 2004, July; 
Average outstanding FTD for all NASDAQ-listed securities: 88.4. 

Month and Year: 2004, August; 
Average outstanding FTD for all NASDAQ-listed securities: 81.7. 

Month and Year: 2004, September; 
Average outstanding FTD for all NASDAQ-listed securities: 77.0. 

Month and Year: 2004, October; 
Average outstanding FTD for all NASDAQ-listed securities: 83.3. 

Month and Year: 2004, November; 
Average outstanding FTD for all NASDAQ-listed securities: 96.5. 

Month and Year: 2004, December; 
Average outstanding FTD for all NASDAQ-listed securities: 127.8. 

Month and Year: 2005, January (Compliance date); 
Average outstanding FTD for all NASDAQ-listed securities: 87.4. 

Month and Year: 2005, February; 
Average outstanding FTD for all NASDAQ-listed securities: 75.0. 

Month and Year: 2005, March; 
Average outstanding FTD for all NASDAQ-listed securities: 72.2. 

Month and Year: 2005, April; 
Average outstanding FTD for all NASDAQ-listed securities: 64.4. 

Month and Year: 2005, May; 
Average outstanding FTD for all NASDAQ-listed securities: 66.9. 

Month and Year: 2005, June;
Average outstanding FTD for all NASDAQ-listed securities: 71.7. 

Month and Year: 2005, July; 
Average outstanding FTD for all NASDAQ-listed securities: 62.5. 

Month and Year: 2005, August;
Average outstanding FTD for all NASDAQ-listed securities: 63.9. 

Month and Year: 2005, September; 
Average outstanding FTD for all NASDAQ-listed securities: 65.0. 

Month and Year: 2005, October; 
Average outstanding FTD for all NASDAQ-listed securities: 57.3. 

Month and Year: 2005, November; 
Average outstanding FTD for all NASDAQ-listed securities: 56.0. 

Month and Year: 2005, December; 
Average outstanding FTD for all NASDAQ-listed securities: 59.4. 

Month and Year: 2006, January; 
Average outstanding FTD for all NASDAQ-listed securities: 59.5. 

Month and Year: 2006, February; 
Average outstanding FTD for all NASDAQ-listed securities: 67.8. 

Month and Year: 2006, March; 
Average outstanding FTD for all NASDAQ-listed securities: 71.3. 

Month and Year: 2006, April; 
Average outstanding FTD for all NASDAQ-listed securities: 70.4. 

Month and Year: 2006, May; 
Average outstanding FTD for all NASDAQ-listed securities: 64.8. 

Month and Year: 2006, June; 
Average outstanding FTD for all NASDAQ-listed securities: 62.4. 

Month and Year: 2006, July; 	
Average outstanding FTD for all NASDAQ-listed securities: 78.9. 

Month and Year: 2006, August; 
Average outstanding FTD for all NASDAQ-listed securities: 58.6. 

Month and Year: 2006, September; 
Average outstanding FTD for all NASDAQ-listed securities: 57.5. 

Month and Year: 2006, October; 
Average outstanding FTD for all NASDAQ-listed securities: 57.2. 

Month and Year: 2006, November; 
Average outstanding FTD for all NASDAQ-listed securities: 61.1. 

Month and Year: 2006, December; 
Average outstanding FTD for all NASDAQ-listed securities: 67.2. 

Month and Year: 2007, January; 
Average outstanding FTD for all NASDAQ-listed securities: 59.1. 

Month and Year: 2007, February; 
Average outstanding FTD for all NASDAQ-listed securities: 71. 

Month and Year: 2007, March; 
Average outstanding FTD for all NASDAQ-listed securities: 91.4. 

Month and Year: 2007, April; 
Average outstanding FTD for all NASDAQ-listed securities: 98.8. 

Month and Year: 2007, May; 
Average outstanding FTD for all NASDAQ-listed securities: 118.3. 

Month and Year: 2007, June; 
Average outstanding FTD for all NASDAQ-listed securities: 119.0. 

Month and Year: 2007, July; 
Average outstanding FTD for all NASDAQ-listed securities: 110.8. 

Month and Year: 2007, August; 
Average outstanding FTD for all NASDAQ-listed securities: 127.2. 

Month and Year: 2007, September; 
Average outstanding FTD for all NASDAQ-listed securities: 70.1. 

Month and Year: 2007, October (Elimination of grandfather exception); 
Average outstanding FTD for all NASDAQ-listed securities: 79.2. 

Month and Year: 2007, November; 
Average outstanding FTD for all NASDAQ-listed securities: 96.7. 

Month and Year: 2007, December; 
Average outstanding FTD for all NASDAQ-listed securities: 97.9. 

Month and Year: 2008, January; 
Average outstanding FTD for all NASDAQ-listed securities: 101.9. 

Month and Year: 2008, February;	
Average outstanding FTD for all NASDAQ-listed securities: 110.2. 

Month and Year: 2008, March; 
Average outstanding FTD for all NASDAQ-listed securities: 152.5. 

Month and Year: 2008, April; 
Average outstanding FTD for all NASDAQ-listed securities: 132.3. 

Month and Year: 2008, May; 
Average outstanding FTD for all NASDAQ-listed securities: 137.5. 

Month and Year: 2008, June; 
Average outstanding FTD for all NASDAQ-listed securities: 154.6. 

Month and Year: 2008, July (July emergency order); 	
Average outstanding FTD for all NASDAQ-listed securities: 187.7. 

Month and Year: 2008, August; 
Average outstanding FTD for all NASDAQ-listed securities: 135.2. 

Month and Year: 2008, September (September emergency order); 
Average outstanding FTD for all NASDAQ-listed securities: 131.2. 

Month and Year: 2008, October; 
Average outstanding FTD for all NASDAQ-listed securities: 58.1. 

Month and Year: 2008, November; 
Average outstanding FTD for all NASDAQ-listed securities: 18.8. 

Month and Year: 2008, December; 
Average outstanding FTD for all NASDAQ-listed securities: 15.8. 

Sources: SEC (data); GAO (analysis). 

Note: Prior to September 16, 2008, SEC received FTD data on equity 
securities with aggregate FTD of 10,000 or more. After this date, SEC 
began receiving data on all FTD in every equity security. For a 
consistent comparison, our sample includes securities with aggregate 
FTD of 10,000 or more for the entire review period. 

[End of figure] 

Figure 35: Average Outstanding FTD, per Month, for All Amex-listed 
Securities, from April 2004 through December 2008 (in millions): 

[Refer to PDF for image: line graph] 

Month and Year: 2004, April; 
Average outstanding FTD for all Amex-listed securities: 67.9. 

Month and Year: 2004, May; 
Average outstanding FTD for all Amex-listed securities: 64.6. 

Month and Year: 2004, June;
Average outstanding FTD for all Amex-listed securities: 64.3. 

Month and Year: 2004, July; 
Average outstanding FTD for all Amex-listed securities: 45.9. 

Month and Year: 2004, August; 
Average outstanding FTD for all Amex-listed securities: 43.6. 

Month and Year: 2004, September; 
Average outstanding FTD for all Amex-listed securities: 44.3. 

Month and Year: 2004, October; 
Average outstanding FTD for all Amex-listed securities: 40.2. 

Month and Year: 2004, November; 
Average outstanding FTD for all Amex-listed securities: 37.6. 

Month and Year: 2004, December; 
Average outstanding FTD for all Amex-listed securities: 41.5. 

Month and Year: 2005, January (Compliance date); 
Average outstanding FTD for all Amex-listed securities: 33.9. 

Month and Year: 2005, February; 
Average outstanding FTD for all Amex-listed securities: 34.1. 

Month and Year: 2005, March; 
Average outstanding FTD for all Amex-listed securities: 37.4. 

Month and Year: 2005, April; 
Average outstanding FTD for all Amex-listed securities: 29.3. 

Month and Year: 2005, May; 
Average outstanding FTD for all Amex-listed securities: 30.7. 

Month and Year: 2005, June;
Average outstanding FTD for all Amex-listed securities: 27.2. 

Month and Year: 2005, July; 
Average outstanding FTD for all Amex-listed securities: 17.7. 

Month and Year: 2005, August;
Average outstanding FTD for all Amex-listed securities: 24.4. 

Month and Year: 2005, September; 
Average outstanding FTD for all Amex-listed securities: 30.4. 

Month and Year: 2005, October; 
Average outstanding FTD for all Amex-listed securities: 27.0. 

Month and Year: 2005, November; 
Average outstanding FTD for all Amex-listed securities: 27.4. 

Month and Year: 2005, December; 
Average outstanding FTD for all Amex-listed securities: 27.7. 

Month and Year: 2006, January; 
Average outstanding FTD for all Amex-listed securities: 27.3. 

Month and Year: 2006, February; 
Average outstanding FTD for all Amex-listed securities: 29.2. 

Month and Year: 2006, March; 
Average outstanding FTD for all Amex-listed securities: 28.6. 

Month and Year: 2006, April; 
Average outstanding FTD for all Amex-listed securities: 27.9. 

Month and Year: 2006, May; 
Average outstanding FTD for all Amex-listed securities: 35.7. 

Month and Year: 2006, June; 
Average outstanding FTD for all Amex-listed securities: 23.3. 

Month and Year: 2006, July; 	
Average outstanding FTD for all Amex-listed securities: 27.2. 

Month and Year: 2006, August; 
Average outstanding FTD for all Amex-listed securities: 19.9. 

Month and Year: 2006, September; 
Average outstanding FTD for all Amex-listed securities: 27.0. 

Month and Year: 2006, October; 
Average outstanding FTD for all Amex-listed securities: 20.2. 

Month and Year: 2006, November; 
Average outstanding FTD for all Amex-listed securities: 19.3. 

Month and Year: 2006, December; 
Average outstanding FTD for all Amex-listed securities: 24.6. 

Month and Year: 2007, January; 
Average outstanding FTD for all Amex-listed securities: 18.8. 

Month and Year: 2007, February; 
Average outstanding FTD for all Amex-listed securities: 24.9. 

Month and Year: 2007, March; 
Average outstanding FTD for all Amex-listed securities: 43.4. 

Month and Year: 2007, April; 
Average outstanding FTD for all Amex-listed securities: 27.8. 

Month and Year: 2007, May; 
Average outstanding FTD for all Amex-listed securities: 33.6. 

Month and Year: 2007, June; 
Average outstanding FTD for all Amex-listed securities: 42.4. 

Month and Year: 2007, July; 
Average outstanding FTD for all Amex-listed securities: 38.7. 

Month and Year: 2007, August; 
Average outstanding FTD for all Amex-listed securities: 41.3. 

Month and Year: 2007, September; 
Average outstanding FTD for all Amex-listed securities: 30.6. 

Month and Year: 2007, October (Elimination of grandfather exception); 
Average outstanding FTD for all Amex-listed securities: 40.6. 

Month and Year: 2007, November; 
Average outstanding FTD for all Amex-listed securities: 49.3. 

Month and Year: 2007, December; 
Average outstanding FTD for all Amex-listed securities: 37.9. 

Month and Year: 2008, January; 
Average outstanding FTD for all Amex-listed securities: 34.3. 

Month and Year: 2008, February;	
Average outstanding FTD for all Amex-listed securities: 41.5. 

Month and Year: 2008, March; 
Average outstanding FTD for all Amex-listed securities: 45.7. 

Month and Year: 2008, April; 
Average outstanding FTD for all Amex-listed securities: 32.4. 

Month and Year: 2008, May; 
Average outstanding FTD for all Amex-listed securities: 44.4. 

Month and Year: 2008, June; 
Average outstanding FTD for all Amex-listed securities: 59.9. 

Month and Year: 2008, July (July emergency order); 	
Average outstanding FTD for all Amex-listed securities: 72.4. 

Month and Year: 2008, August; 
Average outstanding FTD for all Amex-listed securities: 37.2. 

Month and Year: 2008, September (September emergency order); 
Average outstanding FTD for all Amex-listed securities: 52.3. 

Month and Year: 2008, October; 
Average outstanding FTD for all Amex-listed securities: 20.9. 

Month and Year: 2008, November; 
Average outstanding FTD for all Amex-listed securities: 6.5. 

Month and Year: 2008, December; 
Average outstanding FTD for all Amex-listed securities: 8.3. 

Sources: SEC (data); GAO (analysis). 

Note: Prior to September 16, 2008, SEC received FTD data on equity 
securities with aggregate FTD of 10,000 or more. After this date, SEC 
began receiving data on all FTD in every equity security. For a 
consistent comparison, our sample includes securities with aggregate 
FTD of 10,000 or more for the entire review period. 

[End of figure] 

Figure 36: Average Outstanding FTD, per Month, for All Other 
Securities, from April 2004 through December 2008 (in millions): 

[Refer to PDF for image: line graph] 

Month and Year: 2004, April; 
Average outstanding FTD for all other securities: 584.1. 

Month and Year: 2004, May; 
Average outstanding FTD for all other securities: 386.4. 

Month and Year: 2004, June;
Average outstanding FTD for all other securities: 385.7. 

Month and Year: 2004, July; 
Average outstanding FTD for all other securities: 438.7. 

Month and Year: 2004, August; 
Average outstanding FTD for all other securities: 941.1. 

Month and Year: 2004, September; 
Average outstanding FTD for all other securities: 887.5. 

Month and Year: 2004, October; 
Average outstanding FTD for all other securities: 641.2. 

Month and Year: 2004, November; 
Average outstanding FTD for all other securities: 462.2. 

Month and Year: 2004, December; 
Average outstanding FTD for all other securities: 531.2. 

Month and Year: 2005, January (Compliance date); 
Average outstanding FTD for all other securities: 490.3. 

Month and Year: 2005, February; 
Average outstanding FTD for all other securities: 408.8. 

Month and Year: 2005, March; 
Average outstanding FTD for all other securities: 339.8. 

Month and Year: 2005, April; 
Average outstanding FTD for all other securities: 374.3. 

Month and Year: 2005, May; 
Average outstanding FTD for all other securities: 318.0. 

Month and Year: 2005, June;
Average outstanding FTD for all other securities: 358.7. 

Month and Year: 2005, July; 
Average outstanding FTD for all other securities: 351.4. 

Month and Year: 2005, August;
Average outstanding FTD for all other securities: 281.5. 

Month and Year: 2005, September; 
Average outstanding FTD for all other securities: 300.7. 

Month and Year: 2005, October; 
Average outstanding FTD for all other securities: 331.0. 

Month and Year: 2005, November; 
Average outstanding FTD for all other securities: 277.6. 

Month and Year: 2005, December; 
Average outstanding FTD for all other securities: 390.8. 

Month and Year: 2006, January; 
Average outstanding FTD for all other securities: 341.8. 

Month and Year: 2006, February; 
Average outstanding FTD for all other securities: 530.8. 

Month and Year: 2006, March; 
Average outstanding FTD for all other securities: 603.5. 

Month and Year: 2006, April; 
Average outstanding FTD for all other securities: 370.5. 

Month and Year: 2006, May; 
Average outstanding FTD for all other securities: 486.8. 

Month and Year: 2006, June; 
Average outstanding FTD for all other securities: 420.4. 

Month and Year: 2006, July; 	
Average outstanding FTD for all other securities: 415.2. 

Month and Year: 2006, August; 
Average outstanding FTD for all other securities: 431.6. 

Month and Year: 2006, September; 
Average outstanding FTD for all other securities: 476.0. 

Month and Year: 2006, October; 
Average outstanding FTD for all other securities: 609.5. 

Month and Year: 2006, November; 
Average outstanding FTD for all other securities: 628.9. 

Month and Year: 2006, December; 
Average outstanding FTD for all other securities: 495.8. 

Month and Year: 2007, January; 
Average outstanding FTD for all other securities: 436.7. 

Month and Year: 2007, February; 
Average outstanding FTD for all other securities: 712.9. 

Month and Year: 2007, March; 
Average outstanding FTD for all other securities: 495.3. 

Month and Year: 2007, April; 
Average outstanding FTD for all other securities: 567.9. 

Month and Year: 2007, May; 
Average outstanding FTD for all other securities: 747.3. 

Month and Year: 2007, June; 
Average outstanding FTD for all other securities: 723.6. 

Month and Year: 2007, July; 
Average outstanding FTD for all other securities: 837.8. 

Month and Year: 2007, August; 
Average outstanding FTD for all other securities: 994.8. 

Month and Year: 2007, September; 
Average outstanding FTD for all other securities: 895.6. 

Month and Year: 2007, October (Elimination of grandfather exception); 
Average outstanding FTD for all other securities: 865.3. 

Month and Year: 2007, November; 
Average outstanding FTD for all other securities: 814.8. 

Month and Year: 2007, December; 
Average outstanding FTD for all other securities: 619.5. 

Month and Year: 2008, January; 
Average outstanding FTD for all other securities: 574.6. 

Month and Year: 2008, February;	
Average outstanding FTD for all other securities: 754.2. 

Month and Year: 2008, March; 
Average outstanding FTD for all other securities: 956.7. 

Month and Year: 2008, April; 
Average outstanding FTD for all other securities: 727.6. 

Month and Year: 2008, May; 
Average outstanding FTD for all other securities: 726.1. 

Month and Year: 2008, June; 
Average outstanding FTD for all other securities: 722.0. 

Month and Year: 2008, July (July emergency order); 	
Average outstanding FTD for all other securities: 1129.8. 

Month and Year: 2008, August; 
Average outstanding FTD for all other securities: 729.0. 

Month and Year: 2008, September (September emergency order); 
Average outstanding FTD for all other securities: 644.7. 

Month and Year: 2008, October; 
Average outstanding FTD for all other securities: 416.1. 

Month and Year: 2008, November; 
Average outstanding FTD for all other securities: 438.1. 

Month and Year: 2008, December; 
Average outstanding FTD for all other securities: 444.9. 

Sources: SEC (data); GAO (analysis). 

Note: Prior to September 16, 2008, SEC received FTD data on equity 
securities with aggregate FTD of 10,000 or more. After this date, SEC 
began receiving data on all FTD in every equity security. For a 
consistent comparison, our sample includes securities with aggregate 
FTD of 10,000 or more for the entire review period. 

[End of figure] 

[End of section] 

Appendix IV: Comments from the Securities and Exchange Commission: 

The Chairman: 
United States Securities And Exchange Commission: 
Washington, D.C. 20549: 

April 30, 2009: 

Ms. Orice Williams: 
Director: 
Financial Markets and Community Investments: 
U.S. Government Accountability Office: 
441 G Street, NW: 
Washington, DC 20548: 

Dear Ms. Williams: 

Thank you for providing us with the opportunity to respond to the draft 
report prepared by the Government Accountability Office entitled 
Regulation SHO: Recent Actions Appear to Have Immediately Reduced 
Failures to Deliver but More Industry Guidance is Needed, dated May 
2009 ("Report"). As part of its mission to protect investors, maintain 
fair, orderly. and efficient markets, and facilitate capital formation, 
the Securities and Exchange Commission ("Commission") has been focused 
on improving market confidence and reducing the potential for 
manipulative short selling by reducing fails to deliver ("FTDs") 
through focused and proactive measures, including adoption of 
Regulation SHO. As the Report notes, our actions have successfully 
reduced FTDs across the market in all securities. 

I appreciate the GAO's recommendation to provide guidance for prime 
brokerage arrangements in light of Regulation SHO. As the Report 
observes, Commission staff has been working with industry to develop 
guidance on the information flow between prime broker-dealers and 
executing broker-dealers regarding customer representations pertaining 
to a sale of securities. In connection with consideration of further 
action on Rule 204T, I anticipate that the Commission will consider the 
need to clarify the communications between prime broker-dealers and 
executing broker-dealers that would facilitate Regulation SHO 
compliance. 

The GAO also recommends that the Commission develop a process for 
addressing operational issues that arise from implementing Commission 
regulations, such as interim final temporary rules. I note that the 
staff regularly provides guidance to the industry. For instance. the 
staff published (on the Commission Internet Web site) numerous 
responses to frequently asked questions ("FAQ") concerning Regulation 
SHO beginning in 2005, as well as a number of interpretations of the 
September 2008 emergency orders. 

During a routine rulemaking, pursuant to the Administrative Procedure 
Act ("APA"), the Commission proposes a rule, solicits comments, which 
often reflect the industry's operational concerns, and addresses the 
comments in connection with adoption of a final rule. Unlike routine 
rulemaking, interim final temporary rules are unique and are generally 
adopted in exigent circumstances such as the market downturn that 
occurred in the fall of 2008. Following adoption of an interim final 
temporary rule, the Commission solicits comment, but the rule is in 
effect during the comment period. 

During the comment process for interim final temporary Rule 204T, the 
industry raised a number of operational issues. The Commission and 
staff are in the process of evaluating these comments with a view 
towards considering further action in this area over the next several 
months, prior to expiration of the interim final temporary rule. The 
staff has kept the industry apprised of this approach. 

We are committed to engaging in a deliberative process to develop 
meaningful regulation of short selling, while also providing 
interpretive guidance to the industry to facilitate implementation, as 
appropriate. As noted in the Report, in some instances, Commission 
staff may be unable to provide requested guidance sought by market 
participants - for example, in cases in which requested relief may lead 
to the use of strategies that would circumvent rules, or undermine the 
purposes for such rules. Going forward, we will evaluate whether there 
are additional steps that we can take, consistent with the APA, to 
address implementation issues raised by industry. 

The Commission is committed to maintaining fair, orderly, and efficient 
markets. I greatly appreciate the GAO's review and recommendations 
provided with an eye towards helping us to achieve these goals. If you 
have any questions, please feel free to contact me at (202) 551-2100, 
or contact the Deputy Director for the Division of Trading and Markets, 
James Brigagliano, at (202) 551-5700. [Footnote 108] 

Sincerely, 

Signed by: 

Mary L. Schapiro: 
Chairman: 

[End of section] 

Appendix V: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Orice M. Williams, (202) 512-8678 or williamso@gao.gov: 

Staff Acknowledgments: 

In addition to the contact named above, Karen Tremba (Assistant 
Director), Lawrance Evans, Stefanie Jonkman, Matthew Keeler, Marc 
Molino, Carl Ramirez, Barbara Roesmann, Jeremy Schwartz, and Paul 
Thompson made key contributions to this report. 

[End of section] 

Footnotes: 

[1] We use the term "days" in this report when referring to settlement 
days, or those business days on which deliveries of securities and 
payments of money may be made through the facilities of a registered 
clearing agency. 

[2] According to DTCC, its subsidiaries settle most broker-to-broker 
equity securities trades in the U.S. equity markets. This report does 
not address those trades that are cleared and settled outside of the 
clearing agency (ex-clearing). 

[3] A "short sale" is the sale of a security that the seller does not 
own or any sale that is consummated by the delivery of a security 
borrowed by, or for the account of, the seller. In general, short 
selling is used to profit from an expected downward price movement, 
provide liquidity in response to unanticipated demand, or hedge the 
risk of a long position (i.e., ownership) in the same or related 
security. 

[4] See 69 Fed. Reg. 48008 (Aug. 6, 2004). Regulation SHO was adopted 
to update short sale regulation in light of numerous market 
developments since short sale regulation was first adopted in 1938. 

[5] Regulation SHO defines a "threshold security" as an equity security 
where, for 5 consecutive settlement days, (1) there are aggregate FTD 
at a registered clearing agency of 10,000 shares or more, (2) the level 
of FTD is equal to at least one-half of 1 percent of the issuer's total 
shares or more, and (3) the security is included on a list published by 
self-regulatory organizations. To be removed from the threshold list, 
the level of FTD in a security must not exceed the threshold for 5 
consecutive settlement days. See 17 C.F.R. § 242.203. 

[6] Specifically, the close-out requirement is triggered when the FTD 
(which occurs on T+3) persists for 10 consecutive days, or until T+13. 
Broker-dealers must close out the FTD by the next morning, or by T+14. 

[7] Trading and Markets was known as the Division of Market Regulation 
until November 2007. 

[8] 73 Fed. Reg. 42379 (July 21, 2008). 

[9] 73 Fed. Reg. 54875 (Sept. 23, 2008). 

[10] A "long sale" is one in which the seller owns the securities that 
were sold. 

[11] 73 Fed. Reg. 61706 (Oct. 17, 2008). 

[12] We found that the overall number of securities across the market 
with FTD and the level of these FTD appeared to have been declining 
since at least April 2004--the earliest date we could obtain FTD data-
-and 8 months before the effective date of the regulation's locate and 
delivery requirements and continued after their implementation. 
Regulation SHO may have accelerated this trend with respect to 
threshold securities. 

[13] "Short interest" refers to the total number of shares of a 
security that has been sold short, but not covered or closed out, and 
often is used as a proxy for the volume of short selling. 

[14] The number of securities with FTD across the market declined 
significantly after the implementation of the July and September 
emergency orders that applied the close-out requirements to FTD in all 
securities. 

[15] The persistence of some securities on the threshold list over the 
review period did not necessarily signify that violations of the close- 
out provision or manipulative naked short selling were occurring, since 
securities legitimately could persist for several reasons. For example, 
FTD in these securities could have been exempt from the close-out rule 
while the former grandfather and options market maker exceptions were 
in effect. Additionally, participants could have closed out their FTD 
in compliance with the close-out requirements of Regulation SHO, but 
other participants may have created new FTD at the same time, thus 
keeping the security on the threshold list. 

[16] ETF are similar to index funds in that they primarily invest in 
the securities of companies that are included in a selected market 
index, but the shares of the ETF are traded on a stock exchange. ETF do 
not sell individual shares directly to investors and only issue their 
shares in large blocks known as creation units. 

[17] These commenters represented the views of some issuers, an 
industry trade association of small broker-dealers, and a securities 
lending consultant that we either spoke with or whose written comments 
to SEC we reviewed. 

[18] These industry officials represented the views of several broker- 
dealers and a large industry trade association with whom we spoke. 

[19] Most equity trades in the United States are settled on a 
continuous net basis, meaning that all of a broker-dealer's sales and 
purchases of a security are netted daily so that the firm either makes 
a delivery of securities on settlement day, or receives securities on a 
settlement day. If a broker-dealer effected more purchases than sales 
of a security on a particular trading day, it would stand to receive 
securities on settlement day. See appendix II for additional 
information on the clearance and settlement process. 

[20] "Prime brokerage" is a system developed by full-service broker- 
dealers to facilitate the clearance and settlement of securities trades 
for substantial retail and institutional investors that are active 
market participants. Prime brokerage involves three distinct parties: 
the prime broker, the executing broker, and the customer. The prime 
broker is a registered broker-dealer that clears and finances the 
customer trades executed by one or more other registered broker-dealers 
(the executing broker) at the behest of the customer. 

[21] See 1994 SEC No-Act. LEXIS 466 (Jan. 25, 1994). SEC staff issued 
the letter to clarify the obligations and responsibilities under the 
Exchange Act of each of the parties involved in prime brokerage. 

[22] Although short selling serves useful market purposes and the vast 
majority of short sales are legal, short selling also may be used to 
illegally manipulate the prices of securities. Generally speaking, it 
is prohibited for any person to engage in a series of transactions to 
create actual or apparent active trading in a security or to depress 
the price of a security for the purpose of inducing the purchase or 
sale of the security by others. One example of a manipulative trading 
strategy using short selling is the "bear raid," in which an equity 
security is sold short in an effort to drive down the price of the 
security by creating an imbalance of sell-side interest. Furthermore, 
unrestricted short selling can exacerbate a declining market in a 
security by increasing pressure from the sell-side, eliminating bids, 
and causing a further reduction in the price of a security by creating 
an appearance that the security price is falling for fundamental 
reasons. 

[23] A "specialist" is a member of a stock exchange, such as the New 
York Stock Exchange, that performs several functions. Specialists must 
make a market in the security they trade by displaying their best bid 
and ask prices to the market during trading hours. 

[24] An "OTC security" is a security that is not traded on a formal 
stock exchange, but instead is traded by broker-dealers that negotiate 
directly with one another over computer networks and by telephone. In 
general, a security is traded OTC because the company that issued it is 
small, making it unable to meet exchange listing requirements. New and 
small companies are considered to be more vulnerable to manipulative 
naked short selling than large companies, because they have a small 
number of total shares outstanding and it is relatively easier to drive 
down the price by flooding the market with naked short sales. Also, new 
companies may not have had the time to establish a reputation for 
themselves in the capital markets, potentially making it easier for 
manipulative naked short sellers to use rumors to increase the downward 
pressure on the security. 

[25] See appendix II for additional information on the CNS System and 
the T+3 settlement cycle. 

[26] An individual or entity not certain about whether a particular 
product, service, or action would constitute a violation of the federal 
securities law also may request a no-action letter from SEC staff. Most 
no-action letters describe the request; analyze the particular facts 
and circumstances involved; discuss applicable laws and rules; and, if 
the staff grant the request for no action, conclude that the SEC staff 
would not recommend that the Commission take enforcement action against 
the requester on the basis of the facts and representations described 
in the individual's or entity's original letter. SEC staff sometimes 
respond in the form of a no-action letter to requests for clarification 
of the legality of certain activities. 

[27] See 69 Fed. Reg. 48008, 48014-48017 (Aug. 6, 2004). In addition to 
establishing uniform locate and delivery requirements, Regulation SHO 
also suspended Commission and SRO short sale price tests in a group of 
securities as part of a pilot program to evaluate the overall 
effectiveness and necessity of such restrictions for limiting short 
sale abuses. These price tests generally allowed an exchange-listed 
security to be sold short only at a price above the immediately 
preceding reported price or at the last sale price if it was higher 
than the last differently reported price. SEC eliminated the price 
tests in June 2007 after considering the results of the pilot program. 

[28] Before the adoption of Regulation SHO, SROs had rules requiring 
their members to locate borrowable stock before effecting short sales. 
For example, the New York Stock Exchange required its member to make a 
"diligent effort" to borrow the necessary securities to make delivery. 
NASD rules required its members to make an "affirmative determination" 
that the member could borrow the securities or otherwise provide for 
delivery of the securities by settlement date. SEC stated that one of 
the reasons it proposed Regulation SHO was to provide uniform locate 
requirements. 

[29] Regulation SHO requires that the information used to generate 
these lists must be less than 24 hours old, and be readily available so 
that it would be unlikely that a FTD would occur. SEC stated that 
repeated FTD in securities that are included on an easy-to-borrow list 
would indicate that reliance on such lists would not satisfy the 
reasonable grounds standard. 

[30] Regulation SHO does not define bona fide market making activities. 
However, in the adopting release, SEC provided some examples that would 
indicate that a market maker is not engaged in bona fide market making. 
For example, SEC said that bona fide market making does not include 
activity related to speculative selling strategies or investment 
purposes of the broker-dealer and disproportionate to the usual market 
making patterns or practices of the broker-dealer in that security. See 
69 Fed. Reg. at 48015. SEC later described factors that would 
characterize bona fide market making, such as whether the market maker 
incurred any economic or market risk with respect to the securities 
(e.g., by putting the market maker's own capital at risk to provide 
continuous two-sided quotes in markets). However, SEC said that 
determining whether a market maker is engaged in bona fide market 
making would depend on the facts and circumstances of the particular 
activity. See SEC Exchange Act Release No. 34-58775 (October 2008). 

[31] The "no fault" qualification is described in the original 
Regulation SHO Federal Register release. See 69 Fed. Reg. at 48015. 

[33] Clearing broker-dealers are responsible for ensuring delivery and 
receipt of funds and securities from the clearing agency. Some broker- 
dealers act as both executing and clearing broker-dealers. 

[33] 69 Fed. Reg. at 48016. 

[34] The close-out requirements apply to reporting securities, those 
registered with SEC under the Securities Act of 1933. Effective in July 
2006, SEC approved a NASD rule that applied substantially similar close-
out requirements to nonreporting OTC securities. Similar to Regulation 
SHO, NASD rule 3210 also required clearing firms to close out all FTD 
in nonreporting threshold securities that have existed for 13 
consecutive days. Because regulators do not have accurate information 
about the total outstanding shares issued in nonreporting securities, 
NASD defined them as any equity security that is not a reporting 
security, and for 5 consecutive settlement days, has (1) aggregate FTD 
of 10,000 shares or more and (2) a reported last sale during normal 
market hours on that settlement day that would value the aggregate FTD 
at $50,000 or more. NASDAQ includes nonreporting threshold securities 
in the daily threshold lists it publishes on behalf of FINRA. 

[35] The grandfather exception applied in the following two situations: 
(1) FTD occurring before January 3, 2005, Regulation SHO's effective 
date, and (2) FTD established on or after January 3, 2005, but prior to 
the security appearing on a threshold securities list. See 69 Fed. Reg. 
at 48018. 

[36] "Short squeeze" refers to the pressure on short sellers to cover 
their positions as a result of sharp price increases or difficulty in 
borrowing the security the sellers are short. The rush by short sellers 
to cover their positions produces additional upward pressure on the 
price of the security, which then can cause an even greater squeeze. 

[37] 69 Fed. Reg. at 48018-48019. 

[38] 69 Fed. Reg. at 48012 n. 26. 

[39] See 72 Fed. Reg. 45544 (Aug. 14, 2007). The amendment became 
effective on October 15, 2007. 

[40] 72 Fed. Reg. at 45545-45548. 

[41] 73 Fed. Reg. 42379 (July 21, 2008). 

[42] SEC issued the amendment in response to implementation issues 
raised by the industry. The amendment also excepted sales of restricted 
securities from the preborrow and delivery requirements. See 73 Fed. 
Reg. 42837 (July 23, 2008). 

[43] According to the July emergency order, during the week of March 
10, 2008, rumors spread about liquidity problems at Bear Stearns that 
eroded investor confidence in the firm. As the price of Bear Stearns' 
securities fell, its counterparties became concerned, and a crisis of 
confidence occurred late in the week. In particular, counterparties to 
Bear Stearns were unwilling to make secured funding available to Bear 
Stearns on customary terms. 

[44] In April 2008, SEC charged a trader with securities fraud and 
market manipulation for intentionally disseminating a false rumor 
concerning the Blackstone Group's acquisition of Alliance Data Systems 
Corp. 

[45] Trading and Markets staff told us that Treasury Department and 
Federal Reserve officials had held high-level talks with the former SEC 
Chairman to develop a coordinated federal response to the various 
crises in the marketplace. In January 2009, the former Chairman 
resigned, and the new Chairman was sworn in. 

[46] 73 Fed. Reg. 54875 (Sept. 23, 2008). 

[47] 73 Fed. Reg. 61706 (Oct. 17, 2008). 

[48] 73 Fed. Reg. 61666 (Oct. 17, 2008). 

[49] SEC Exchange Act Release No. 58775 (Oct. 14, 2008). 

[50] According to a review conducted by several SROs in May through 
July, 2006, options market makers claimed 598 exceptions covering 58 
threshold securities, for a total of 11,759,799 FTD. 

[51] 73 Fed. Reg. 61690 (Oct. 17, 2008). 

[52] 73 Fed. Reg. 55169 (Sept. 24, 2008). SEC later amended the order 
to provide that the SROs select the financial institutions covered by 
the order. 

[53] Because Regulation SHO created a class of securities designated as 
threshold securities, our trend analysis is restricted to the period 
after its implementation in January 2005. On the other hand, OEA 
applied the rule to historical data and generated an unofficial 
threshold list for the April 1, 2004, through December 31, 2004, 
period. In comparing this period with the January 1, 2005, through May 
1, 2006, period, OEA found that the average daily number of securities 
on the threshold list declined 38 percent. This approach has certain 
limitations. For example, if the 189 days that make up the prerule 
period is abnormal, we could attribute changes to Regulation SHO that 
merely reflect a return to normalcy. Additional data prior to April 1, 
2004, and a methodology that controls for existing trends in the data 
and a potential "regression to the mean" effect would provide a more 
valid assessment of the effectiveness of Regulation SHO in curbing 
large and persistent FTD. Moreover, neither the OEA methodology nor the 
trend analysis that we employ for threshold securities controls for 
other important factors that can also influence FTD, such as volume, 
volatility, or short interest. 

[54] See appendix III for FTD trends in threshold securities by 
individual market. 

[55] The new FTDs during the month were related to 2 OTC securities 
that accounted for 409 million shares of the total. Without these 2 
securities, new FTD would have totaled 126 million shares, a decrease 
of 94 million from May 2006. 

[56] Given that we had some marketwide FTD data predating Regulation 
SHO, we also conducted an econometric analysis to assess the impact of 
Regulation SHO on new FTD, outstanding FTD, and fail positions by 
controlling for factors thought to influence FTD, including trading 
volume, volatility, market performance, and short interest. We did not 
find any evidence that the regulation had a significant impact on any 
of these measures until SEC implemented the September emergency order 
and related temporary rule in 2008. 

[57] SEC adopted Regulation SHO in August 2004, which effectively 
provides an announcement date, although it is difficult to know whether 
short sellers would react by beginning to adhere to the new rules early 
or by aggressively taking advantage of the temporary opportunities 
under the less restrictive regime. For this reason and the concerns 
that we have previously discussed, the April 2004 through December 2004 
period may not provide an ideal baseline to judge the effectiveness of 
the rule. 

[58] According to the Forbes Financial Glossary, a synthetic is a 
customized hybrid instrument created by blending an underlying price on 
a cash instrument with the price of a derivative instrument. For 
example, a synthetic stock can be created by purchasing a call option 
and simultaneously selling a put option on the same stock. A synthetic 
short position benefits from the decline of a security's price in the 
same way that directly selling the stock short would benefit. 
Additionally, the options market maker typically will sell the stock 
(long or short, depending on the market maker's position) to hedge the 
long synthetic position it established in the trade with the short 
seller. 

[59] FTD data generated by NSCC include FTD resulting from long and 
short sales, but do not distinguish between the two types of sales. 
Therefore, we cannot determine the cause of FTD from these data. 

[60] VIX is a key measure of market expectations of near-term 
volatility conveyed by S&P 500 stock index option prices. 

[61] We found evidence of a positive and statistically significant 
relationship between short interest and failed positions, as well as 
new FTD, even after controlling for a number of other important 
factors. 

[62] Post-December 2008 data were not available at the time of our 
analysis. 

[63] For participants with open FTD in threshold securities, the close- 
out process must start no later than the beginning of trading on T+14. 
A closeout begun on T+14 will affect FTD on T+17. For a threshold 
security to graduate from the threshold list, the level of FTD must be 
below the trigger level for that security for 5 consecutive days. Thus, 
for those participants waiting until T+14 to close out their FTD, the 
earliest we would expect to see securities graduating from the list 
would be T+22. Participants may also choose to close out their FTD 
earlier. In that case, the earliest securities could graduate from the 
threshold list would be 6 days, because Regulation SHO requires that 
securities remain on the threshold list until their FTD levels are 
below the threshold trigger for 5 consecutive trading days. 

[64] In 2007, the SROs identified multiple options traders that were 
using an illegal options trading strategy to avoid the close-out 
requirement of Regulation SHO in threshold stocks. We discuss these 
cases in greater detail later in this report. 

[65] According to data compiled by the Investment Company Institute and 
the Strategic Insight Simfund, the number of ETFs trading at year-end 
grew from 204 in 2005 to 728 in 2008. 

[66] The underlying basket of securities generally reflects the 
contents of the ETF's portfolio and is equal in value to the aggregate 
net asset value (NAV) of the ETF shares in the creation unit. According 
to SEC, the ability of financial institutions to purchase and redeem 
creation units at each day's NAV creates arbitrage opportunities that 
may help keep the market price of ETF shares near the NAV per share of 
the ETF. For example, if ETF shares begin trading on national 
securities exchanges at a price below the fund's NAV per share, 
financial institutions can purchase ETF shares in secondary market 
transactions and, after accumulating enough shares to comprise a 
creation unit, redeem them from the ETF in exchange for the more 
valuable securities in the ETF's redemption basket. Those purchases 
create greater market demand for the ETF shares and, thus, tend to 
drive up the market price of the shares to a level closer to the NAV. 
Conversely, if the market price for ETF shares exceeds the NAV per 
share of the ETF itself, a financial institution can deposit a basket 
of securities in exchange for the more valuable creation unit of ETF 
shares, and then sell the individual shares in the market to realize 
its profit. These sales would increase the supply of ETF shares in the 
secondary market and, thus, would tend to drive down the price of the 
ETF shares to a level closer to the NAV of the ETF share. 

[67] Financial institutions buy creation units with a basket of 
securities that generally mirrors the ETF's portfolio. After purchasing 
a creation unit, the institution often splits it up and sells the 
individual shares on a secondary market. This permits retail investors 
to purchase and trade the individual shares instead of creation units. 
ETF shares are not redeemable from the ETF except in creation units. 
The financial institution acquires (through purchases on national 
securities exchanges, principal transactions, or private transactions) 
the number of ETF shares that comprise a creation unit, and redeems the 
creation unit from the ETF in exchange for a "redemption basket" of 
securities and other assets. 

[68] These commenters represented the views of some issuers, an 
industry trade association of small broker-dealers, and a securities 
lending consultant that we either spoke with or whose written comments 
to SEC we reviewed. 

[69] As we have previously discussed, Regulation SHO provides an 
exception to the locate requirement for market makers engaged in bona 
fide market making. SEC staff do not know the percentage of short sales 
that are effected by market makers. 

[70] Examinations that we reviewed confirmed these practices. 

[71] The securities lending consultant told us that because it costs 
nothing to locate shares, a large amount of locating occurs with the 
knowledge that borrowing and actual short selling will not take place. 

[72] A buy-in occurs when the seller does not deliver the securities on 
time and the buyer is forced to obtain the securities elsewhere (e.g., 
by purchasing them in the open market). The costs of conducting the buy-
in, including any transaction costs and difference in the price of the 
security, can be passed to the seller. 

[73] The fifth firm used a proprietary system to assist in complying 
with the short sale locate requirement. This system also required users 
to call the securities lending desk if the system identified the 
security as hard to borrow. 

[74] Industry officials told us that they do not accept customer- 
provided locates from retail investors. 

[75] Officials from several clearing broker-dealers told us that they 
generally are not able to link a FTD on a particular day for a 
particular security to an individual trade. As we have previously 
discussed, clearing broker-dealers settle their trades in individual 
securities on a net basis. If the clearing broker-dealer does not 
deliver sufficient securities to NSCC and FTD result, these officials 
said that they could not identify the particular trade responsible, 
particularly if the security is a liquid security and there have been 
many trades that day. These officials noted one exception--generally 
they can identify an individual trade responsible for FTD if securities 
are very illiquid. For example, they said that if a particular security 
had four trades on a particular day, they could more easily determine 
how the FTD occurred. 

[76] An "open short position" refers to a short seller that has 
executed a short sale, but has not yet purchased securities in the open 
market to return the borrowed securities used to settle the trade. 
Until the borrowed securities are returned, the short seller is said to 
have an open short position. 

[77] The emergency order was announced on July 15, 2008; became 
effective on July 21, 2008; and, after an extension, expired on August 
12, 2008. OEA compared the changes in selected market statistics from 
the period when the order was in effect to a prior period. OEA defined 
the preorder period from June 12, 2008, to July 11, 2008; the 
transition period (the week when the order was announced) from July 14, 
2008, to July 18, 2008; and the postorder period from July 21, 2008, to 
August 12, 2008. 

[78] Some caution should be used in interpreting these results because 
the July emergency order was in effect for only 17 days. Moreover, 
because the special treatment these 19 financial firms received may 
have been perceived as adverse information, it is difficult to conclude 
that it was the temporary rules and not investor reaction to perceived 
differences that caused security lending rates to rise for the 19 
firms. Therefore, it is not clear whether the results would be the same 
if all firms were subject to similar restrictions. 

[79] OEA found that securities lending rates over the review period 
increased around the time that the order went into effect for all 
groups examined, but the change was only statistically significant for 
the securities listed in the order. 

[80] In a loan contract, the borrower agrees to put up cash collateral 
of 102 percent to 105 percent of the value of the shares borrowed. The 
lender agrees to pay the borrower a portion of the interest earned on 
the collateral. The lender keeps the rest of the interest as payment 
for supplying the loan. The payment from the lender to the borrower is 
called a "rebate," and the rate agreed upon is the "rebate rate." In 
general, the more the lender keeps, the lower the rebate rate. 
Therefore, lower rebate rates mean higher security lending rates. 

[81] The following two studies in the private sector also reviewed the 
impact of the July emergency order on the securities lending market: 
Spitalfields Advisors, "A Review of the Securities and Exchange 
Commission's (SEC) Emergency Order Concerning "Naked" Short Selling" 
(August 2008); and Sungard Astec Analytics, "Analysis of the Effect of 
the SEC's Special Order on the Securities Lending Market" (Aug. 14, 
2008). These studies also found that borrowing costs increased in the 
securities of the 19 firms subject to the order, and that many firms 
overborrowed securities to ensure the prompt settlement of short sales. 

[82] While borrowing increased significantly for the securities of the 
19 financial firms, it appeared to be temporary. One research firm 
specializing in securities lending reported that two-thirds of the 
securities borrowed after the rule was announced were returned to their 
original owners by August 12, 2008. According to the firm's report, the 
increase in securities on loan indicated that the borrowing was a 
"precautionary measure to guard against overly stringent 
interpretations of the rule, a possible lack of exemption for market 
makers, and a potential dearth of shares within a market governed by a 
new paradigm." See Analysis of the Effect of the SEC's Special Order. 

[83] See SEC Press Release 2009-76. 

[84] In July 2007, NASD (which regulated the OTC market for exchange- 
listed and non-exchange-listed securities and provided regulatory 
services to markets, such as Amex and NASDAQ) merged with the member 
regulation, enforcement, and arbitration functions of NYSE to form 
FINRA. 

[85] The order-marking requirement states that broker-dealers are to 
mark the sale of each security correctly as either long or short. 
Examiners test compliance with this requirement to ensure that broker- 
dealers are not mismarking trades to evade compliance with other 
provisions of Regulation SHO, such as the locate requirement, or other 
SEC rules. 

[86] According to OCIE officials, approximately half of these 90 
examinations were broker-dealer oversight examinations and half were 
cause. Of the cause examinations, none were originated to review 
Regulation SHO, but in many instances examiners included a review after 
preliminary examination work revealed concerns. 

[87] We chose examinations for review on the basis of the general 
business model of the broker-dealer, the perceived size of the broker- 
dealer, and the year in which the examination took place. 

[88] However, SEC has charged other violations in settled matters where 
the conduct was similar to that prohibited by Regulation SHO. In the 
Matter of Sandell Asset Management Corp., et al., Securities Act 
Release No. 8857, October 10, 2007, and in the Matter of Goldman Sachs 
Execution & Clearing, L.P., Securities Exchange Act Release No. 55464, 
March 14, 2007. Neither of these administrative proceedings were the 
result of examination findings. 

[89] FINRA conducts the Risk Oversight and Operational Regulation 
Program, the Sales Practice Examination Program, and the Trading and 
Market Surveillance Program examinations of member firms every 1, 2, or 
4 years, depending on FINRA's risk assessment of the member firm. 
Larger firms that cover a significant share of the marketplace and 
firms that have other high-risk attributes, such as a prior enforcement 
action or serious deficiencies, are considered high risk and examined 
every year. FINRA's Market Regulation Short Sale Section conducts 
automated surveillance to assess member compliance with FINRA's monthly 
short position reporting and to detect potentially abusive practices 
associated with short sales. The effectiveness of this surveillance 
depends on whether members are accurately marking their sale orders. 

[90] FINRA's uses various methods for selecting a sample of trades for 
review. For example, the Trading and Market Surveillance Program had 
developed a sampling process that selects trades that may be indicative 
of Regulation SHO violations. 

[91] CBOE officials stated that member firm examinations are conducted 
every year for the largest clearing firms and for those firms that 
conduct business with public customers. The remaining members are 
examined up to every other year. The total number of violations exceeds 
the number of examinations with Regulation SHO findings because some 
examinations contained more than one type of violation. 

[92] Disciplinary Panel, American Stock Exchange LLC, Case No. 07-174 
(Brian A. Arenstein and ALA Trading LLC) and Case No. 07-71 (Scott H. 
Arenstein and SBA Trading LLC). According to the findings of Amex, each 
options trader utilized the market maker exemption to impermissibly 
engage in naked short selling by failing to locate securities to borrow 
and then engaged in a series of close-out transactions designed to 
circumvent Regulation SHO delivery obligations in such securities by 
creating the appearance of a bona fide repurchase of the securities the 
trader initially had sold short. In both proceedings, it was found that 
as a result of this trading activity, each trader was able to maintain 
impermissible naked short positions in a number of Regulation SHO 
threshold securities for a virtually unlimited period of time. 

[93] For a detailed description of how the SROs and SEC investigate 
potential market manipulation cases and of the process that SEC uses to 
respond to complaints, see GAO, Securities and Exchange Commission: 
Opportunities Exist to Improve Oversight of Self-Regulatory 
Organizations, [hyperlink, http://www.gao.gov/products/GAO-08-33] 
(Washington, D.C.: Nov. 15, 2007). The SEC Inspector General also 
recently issued a report on SEC's process for responding to 
manipulative naked short selling complaints and referrals. See SEC, 
Office of Audits, Practices Related to Naked Short Selling Complaints 
and Referrals. Report No. 450 (Mar. 18, 2009). 

[94] The SROs gather this information through a variety of processes, 
including "bluesheeting." When bluesheeting a broker-dealer, the SROs 
request detailed information about trades performed by the firm and its 
client, including the security's name, the date traded, price, and 
transaction size. The questionnaires that the SROs use originally were 
printed on blue paper, hence, the name blue sheets. Today, due to the 
high volume of trades, this information is provided electronically. 

[95] These industry officials represented the views of several broker- 
dealers and a large industry trade association with whom we spoke. 

[96] SEC, 2004-2009 Strategic Plan. 

[97] A threshold security is an equity security where, for 5 
consecutive settlement days, (1) aggregate FTD at a registered clearing 
agency constitute 10,000 shares or more; (2) the level of FTD is equal 
to at least one-half of 1 percent of the issuer's total shares or more; 
and (3) the security is included on a list published by the SROs. To be 
removed from the threshold list, the level of FTD in a security must 
not exceed the threshold for 5 consecutive settlement days. 

[98] CNS positions do not represent ownership. Only DTC account 
positions represent ownership. 

[99] According to NSCC, the CNS System reduces the value of securities 
and payments that need to be exchanged by an average of 98 percent each 
day. 

[100] The fact that a participant fails to receive securities that it 
purchased on behalf of a retail customer does not mean that the 
customer's purchase is not completed until the participant's FTR is 
cured. Under Article 8 of the Uniform Commercial Code, a securities 
broker-dealer may credit a customer's account with a security even 
though that security has not yet been delivered to the broker-dealer's 
account at DTC by NSCC. In that event, the customer receives what is 
defined under the code as a "securities entitlement," which requires 
the broker-dealer to treat the person for whom the account is 
maintained as entitled to exercise the rights that comprise the 
security. 

[101] NSCC employs an algorithm to allocate shares to participants with 
net short positions. The algorithm is based on priority groups in 
descending order, the age of position within priority groups, and 
random numbers within age groups. 

[102] A buy-in occurs when the seller does not deliver the securities 
on time, and the buyer is forced to obtain the securities elsewhere 
(e.g., by purchasing them in the open market). The costs of conducting 
the buy-in, including any transaction costs and difference in the price 
of the security, generally are passed to the seller. 

[103] 69 Fed. Reg. 48008 (Aug. 6, 2004). 

[104] For example, SEC stated that the close-out requirement did not 
apply to any FTD that were established prior to the security becoming a 
threshold security. SEC termed this exception the grandfather 
exception. However, after later considering data showing that 
substantial and persistent FTD in a small number of threshold 
securities were not being closed out due to reliance on the grandfather 
exception, SEC amended Regulation SHO in August 2007 to eliminate the 
exception. 

[105] 73 Fed. Reg. 54875 (Sept. 23, 2008). 

[106] A "long sale" is the sale of securities in which the seller owns 
the securities that were sold. 

[107] OTCBB is a regulated electronic trading service that shows real- 
time quotes, last-sale prices, and volume information for over the 
counter (OTC) equity securities. Pink OTC Markets, Inc., operates Pink 
Quote (formerly known as Pink Sheets), an electronic quotation system 
that displays quotes from many broker-dealers for many OTC securities. 
Broker-dealers use Pink Quote to publish their bid and ask prices of 
OTC stocks. There are no listing requirements for a company to start 
trading on OTCBB or Pink Quote. 

[108] Commission staff is separately providing technical comments on 
the Report to GAO staff. 

[End of section] 

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