Short Sale Restrictions

Short Sale Restrictions
Short Sale Restrictions
A short sale is generally a sale of a security by an investor who does not actually own the stock. To deliver the security to the purchaser, the short seller will borrow the security. The short seller later closes out the position by returning the security to the lender, typically by purchasing securities on the open market. In general, short selling is utilized to profit from an expected downward price movement, to provide liquidity in response to buyer demand, or to hedge the risk of a long position in the same or a related security.
The SEC has traditionally held the belief that protections against abusive short selling are important for issuer and investor confidence and has enacted prophylactic rules designed to curb manipulative behavior. For information on short sale restrictions — and short sales generally — please read Key Points About Regulation SHO, which the staff of the Division of Market Regulation prepared. This document describes short sales (including naked short sales), discusses legal and compliance issues, and provides links to helpful resources. If you scroll down to Section V, you’ll also find answers to the questions investors most frequently ask about short sales.
In addition, Rule 105 of Regulation M governs short sales immediately prior to offerings where the sales are covered with offering shares. Specifically, Rule 105 prevents persons from covering short sales with offering securities purchased from an underwriter, broker, or dealer participating in the offering if the short sale was effected during the Rule's restricted period, which is typically five days prior to pricing and ending with pricing. Its aim is to promote offering prices that are based upon open market prices determined by supply and demand rather than artificial forces. In this way, the Rule safeguards the integrity of the capital raising process.