As reported in the March 20 edition of the Corporate & Financial Weekly Digest, the staff of the Securities and Exchange Commission’s Division of Trading and Markets (Staff) issued new frequently asked questions (FAQs) relating to Regulation SHO. As discussed below, during recent discussions with Katten, the Staff clarified that the scope of new FAQ 2.5(B) is limited to the specific scenario set forth in the Staff’s guidance.
In new FAQ 2.5(B), the Staff stated that sale orders may only be marked “long” to the extent of a seller’s net long position. If a seller is net long 1,000 shares and simultaneously enters multiple orders to sell 1,000 shares owned, only one such order would constitute a long sale. Any additional orders to sell the same shares must be marked “short.” According to the guidance in new FAQ 2.5(B), an unexecuted order to sell a security is presumed to decrease a seller’s net long position, unless there is no realistic possibility that such sale order will be executed. The Staff offered one example to illustrate when an unexecuted order is unlikely to be executed and thus would not be presumed to decrease a seller’s net long position. Specifically, a seller may calculate its net position without decrementing for a market maker peg offer if such offer is set at the maximum allowable price away from the inside market, which is significantly higher than the inside offer and as a result will never or rarely be executed. A seller that does not decrement a market maker peg offer would be required to demonstrate, upon request, that such sale order is never or rarely executed.
During recent discussions with Katten, the Staff stated that the market maker peg offer scenario in new FAQ 2.5(B) may be the only scenario in which a sale order would not be presumed to decrease a seller’s net long position. The Staff indicated that firms should not rely on the FAQ for other scenarios without more guidance from the Staff. Anyone intending to make use of the guidance in new FAQ 2.5(B) under circumstances other than those in the above scenario should contact Katten for further clarification.
New FAQ 2.5(B) is available here.