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SEC Provides Limited Exemptive Relief from Reg. SHO Requirements Due to COVID-19

The SEC provided limited exemptive relief from the “locate” and "close-out" requirements under its short sale regulations ("Regulation SHO"). The relief was provided because of COVID-19 related intermittent suspension of physical securities processing by the Depository Trust Company ("DTC"). The relief applies to the sales of equity securities that the seller is "deemed to own" and for which the settlement is contingent on the delivery of physical certificates ("to-be-delivered physical securities").

SEC Rule 203(b)(2)(ii) requires that sales of "to-be-delivered" physical securities are excepted from the Regulation SHO "locate" requirements, provided that the seller intends to deliver the securities as soon as all restrictions on delivery have been removed, and provided, further, that if the seller has not delivered such securities within 35 days after the trade date, the broker-dealer that effected the sale must borrow the securities or otherwise close out the resulting short position. However, due to the DTC's intermittent suspensions and delays of physical securities processing, the SEC noted that delivery failures, with respect to such to-be-delivered physical securities, may persist for longer than the 35-day delivery requirement. In order to avoid undue burdens on market participants, the SEC provided temporary exempted relief from the "locate" requirements and the corresponding 35-day delivery requirement for sales of such to-be-delivered physical securities.

Similarly, the SEC provided participants of registered clearing agencies with an exemption from the close-out requirements for persistent delivery failures for to-be-delivered physical securities under SEC Rules 204(a) and (b).

The relief is set to expire on December 31, 2020.


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