Trader Information - Amex Notice
Rulings and Interpretations
December 15, 2004
Contact: David Fisch - 212-306-1450
Bill Love (Amex Office of General Counsel)- 212-306-1789.
REG 2004-54
Regulation SHO Order-Marking Requirements
On July 28, 2004, the SEC adopted Regulation SHO, Short Sales, under the Securities Exchange Act of 1934.1 Among other things, Regulation SHO specifies new requirements for marking all sell orders of all equity-traded securities (including listed and unlisted stocks, closed-end funds, ETFs, HOLDRs, structured products, etc.). The new order-marking requirements take effect on January 3, 2005. They differentiate between "long," "short," and "short exempt" orders and completely replace the former order-marking requirements of SEC Rules 10a-1(c) and (d). In the SEC's view, the new requirements codify current industry practice for exchange-listed and Nasdaq securities and extend order-marking requirements to OTCBB and Pink Sheet securities.
Specifically, Rule 200(g) of Regulation SHO states: "A broker or dealer must mark all sell orders of any security as 'long,' 'short,' or 'short exempt.'"
The standard for marking an order "long" has been changed. Under the new standard, an order to sell may be marked long only if the seller is "deemed to own" (see below) the security being sold and either (i) the security to be delivered is in the physical possession or control of the broker or dealer or (ii) it is reasonably expected that the security will be in the physical possession or control of the broker or dealer no later than settlement. If a person is deemed to own the security sold but does not reasonably believe that the security will be in the possession or control of the broker or dealer prior to settlement, then the sale should be marked "short" because securities will have to be borrowed to make delivery.
A short sale order must> be marked "short exempt" if the seller is entitled to rely on an exception from the "tick" test of SEC Rule 10a-1, or an exception from any short sale price test of any exchange or national securities association. There is no exception to this requirement to mark an exempt short sale "short exempt" in the new rule. However, it is expected that the SEC will grant exemptive relief from this marking requirement for short sale orders in ETFs and certain other securities that are exempt from the "tick" test (or other short sale price test) based on the type of the security itself (rather than on the type of transaction). If such relief is granted, short sale orders in these securities that are marked "short" rather than "short exempt" will not be deemed to violate the order marking requirements of Regulation SHO. Members and member firms are responsible for determining the securities to which this type of exemptive relief will apply. While the Amex will make every effort to provide notification regarding the securities to which this type of exemptive relief will apply, members and member firms have an obligation to look to other sources for this information, such as the SEC and/or the Securities Industry Association.
Ownership
For purposes of applying Regulation SHO, a person is "deemed to own" a security if:
1.  The person or his agent has title to it; or
2.  The person has purchased it, or has entered into an unconditional binding contract to purchase it, but has not yet received it; or
3.  The person owns a security convertible into or exchangeable for it and has tendered that security for conversion or exchange; or
4.  The person has an option to purchase or acquire it and has exercised that option; or
5.  The person has rights or warrants to subscribe to it and has exercised such rights or warrants; or
6.  The person holds a security futures contract to purchase it and has received notice that the position will be physically settled and is irrevocably bound to receive the underlying security.
Additionally, a person will be "deemed to own" securities only to the extent that the person has a net long position in those securities, with exceptions for (i) securities acquired while acting as a block positioner and (ii) sales of securities in connection with the unwinding of an index arbitrage position. (See Rule 200(d) and (e) of Regulation SHO for the specific conditions applicable to these exceptions.) Rule 200(f) of Regulation SHO also permits an "independent trading unit" within a broker or dealer to aggregate all of its positions in a security to determine the unit's net position for every security that it trades, without consideration of the security positions of other units within the firm, if certain conditions are met.
Questions regarding the above may be directed to me, David Fisch, at (212) 306-1450 or to Bill Love in the Office of General Counsel at (212) 306-1789.
1 Release No. 34-50103.