Series 24: 5.12.1.2. Close-Outs Of Sales Of Threshold Securities

5.12.1.2. Close-Outs of Sales of Threshold Securities

Rule 203’s close-out provisions apply specifically to short sales of threshold securities. Threshold securities are equity securities for which there are fails-to-deliver of 10,000 shares or more at the exchange’s clearing agency for five consecutive business days, with the fails exceeding 0.5% of the issuer’s total outstanding shares. A seller with any fails-to-deliver for a threshold security must complete a close-out by T + 13.

As with Rule 204, the deadline is extended to 35 days in cases such as Rule 144 sales and other sales involving the transfer of restricted securities. Also like Rule 204, if a fail-to-deliver is not closed out by the required date, the seller is prohibited from any short sale activity in that security unless it first borrows the security or enters into a bona fide arrangement to borrow the security.

Note: Rule 204 also applies to threshold securities, and it is stricter than Rule 203 when it comes to how soon a close-out must be completed. In most cases, by the time Rule 203’s close-out provisions become relevant, Rule 204’s deadline for completing the close-out has already passed. This has to do with the fact that Rule 203’s close-out provisions predate the adoption of Rule 204. However, both may be on the exam.

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