Series 24: SEC Rule 203

SEC Rule 203

Rule 203 was put into place to curb naked short selling. The rule states that before a broker-dealer can execute a short sale, they must locate the securities that will be borrowed to cover the short sale. In this context, locate means:

• • The securities have already been borrowed or there is a bona fide agreement to borrow the securities, or
• • The broker-dealer has “reasonable grounds” to believe that the security can be borrowed by the settlement date. A broker-dealer has reasonable grounds if the security is on a firm’s “Easy to Borrow” list that is less than 24 hours old. The process of “locating” the security must be documented.

The locate requirement applies to equity securities, not bonds, but doe