FINRA Regulatory Notice 12-38: SEC Approves Amendments to FINRA's Short-Interest Reporting Rule

The SEC approved amendments to FINRA Rule 4560 (Short-Interest Reporting). These amendments will:

• codify the requirement that member firms report only "gross" short interest existing in each proprietary and customer account;
• clarify that member firms' short-interest reports must reflect only those short positions which have reached settlement date by the close of the FINRA-designated reporting settlement date; and
• delete existing exceptions to Rule 4560 for stabilizing activity, domestic arbitrage and international arbitrage while retaining exceptions for (1) any sale by any person for an account in which (s)he has an interest, if the person owns the security sold and intends to deliver the security as soon as is possible without undue inconvenience or expense; and (2) any sale by an underwriter, or any member of a syndicate or group participating in the distribution of a security, in connection with an over-allotment of securities, or any lay-off sale by such a person in connection with a distribution of securities through rights or a standby underwriting commitment.

Regulatory Notice 12-38 also provides guidance on a number of points regarding the calculation and reporting of short interest under Rule 4560. Most generally, it provides that the short position, to be reported under Rule 4560, must result from either (i) a #8220;short sale,#8221; as defined in Rule 200(a) of SEC Regulation SHO, or (ii) a sale that was marked #8220;long,#8221; consistent with SEC Regulation SHO, due to the firm’s or the customer’s net long position at the time of the transaction (e.g., a long sale out of an aggregation unit that was long, even though the sale was a short viewed from the standpoint of the firm as a whole). The notice provides additional guidance as to the treatment of fail-to-receives, foreign-listed securities, error accounts, fractional shares, option exercises, and when issued but unsettled securities and the requirement to avoid duplicate reporting by introducing brokers and clearing brokers of the same short positions.

Effective Date: November 30, 2012

Cross Reference(s): See generally Lofchie's Guide to Broker-Dealer Regulation: Trading; FINRA Rule 4560.

View notice here(links externally to FINRA website).