Regulation SHO: Locate Requirement and Naked Short Sale Prohibition
Before accepting a customer's order to sell short 5,000 shares of an exchange-traded stock, what affirmative compliance action must the broker-dealer take under SEC Regulation SHO Rule 203(b)?
Under Regulation SHO Rule 203(b), broker-dealers must obtain an affirmative 'locate' before executing any short sale to prevent abusive naked short selling.
Complete Analysis & Legal Rationale
Regulation SHO prohibits abusive 'naked' short selling. Under Rule 203(b) (the Locate Requirement), a broker-dealer may not accept a short sale order from a customer, or effect a short sale for its own account, unless the broker-dealer has: (1) Borrowed the security, or entered into a bona fide arrangement to borrow it; or (2) Reasonable grounds to believe that the security can be borrowed so that it can be delivered on the date delivery is due (T+1). This locate must be documented prior to executing the trade.
Distractor Autopsy (Why Other Options Are Traps)
FINRA exam writers design incorrect distractors using specific calculation mistakes and regulatory misconceptions. Review why each option succeeds or fails:
Under Regulation SHO Rule 203(b), broker-dealers must obtain an affirmative 'locate' before executing any short sale to prevent abusive naked short selling.
Fails to adhere to margin rules for B.
Fails to adhere to margin rules for C.
Fails to adhere to margin rules for D.
Official Standard: Regulation SHO prohibits abusive 'naked' short selling. Under Rule 203(b) (the Locate Requirement), a broker-dealer may not accept a short sale order