SEC Issues Risk Alert on Options Trading Used to Evade Regulation SHO (with Lofchie Comment)
The SEC Office of Compliance Inspections and Examinations (OCIE) has issued a Risk Alert to put broker-dealers on notice that they are required to institute procedures to detect and prevent options trading strategies that circumvent Regulation SHO ("Regulation of Short Sales").The alert begins by describing a number of options trading strategies that appeared to evade certain Regulation SHO requirements. The alert then describes strategies used by broker-dealers to detect and prevent trading intended to avoid the rule, as well as summarizes related enforcement actions.
Lofchie Comment: The notice is intended, among other things, to put broker-dealers on notice that they may be subject to a disciplinary action if they do not put into place procedures that are intended to detect customers using short-term, or matched, option strategies to avoid Regulation SHO requirements. See, in particular, page 12, where the staff lists procedures that firms should consider "to satisfy their supervisory obligations . . . under Reg SHO."