FINRA Series 7Processes and Confirms TransactionsHard
A customer instructs a representative to sell short 500 shares of a thinly traded stock. Under Regulation SHO, what must the firm do before accepting this short sale order?
- AObtain a 'locate' establishing reasonable grounds that the shares can be borrowed for delivery
- BRequire the customer to deposit 100% of the sale proceeds in cash before entering the order
- CConfirm the customer has held the shares for at least six months
- DWait until the stock's price rises by at least a specified tick before executing
Show answer & explanationAnswer & explanation
Correct answer: A. Obtain a 'locate' establishing reasonable grounds that the shares can be borrowed for delivery
Regulation SHO requires a broker-dealer to have reasonable grounds to believe the security can be borrowed and delivered on settlement date—known as a 'locate'—before accepting or effecting a short sale order, particularly important for hard-to-borrow securities.
Why the other options are wrong
- B. Reg T governs margin requirements for short sales, not a 100% cash deposit rule.
- C. Holding period requirements apply to long sales, not short sales.
- D. The old uptick rule applies only to circuit-breaker situations, not general short sale acceptance.
Reg SHO Locate Requirement
Before executing a short sale, a broker-dealer must have reasonable grounds to believe the security can be borrowed and delivered by settlement date.
- Applies before accepting short sale orders
- Especially critical for hard-to-borrow securities
- Failure can result in a 'naked' short sale violation
Memory trick: No locate, no short — find the shares before you sell them.