General Securities Sales Supervisor (Series10) Practice Exam

Which of the following statements is true under Regulation SHO?

1. It applies only to NYSE listed stocks

2. It requires the locate of shares for short sales

3. It does not apply to non-equity securities

4. It allows for unregulated short sales

The correct answer is: It requires the locate of shares for short sales

Under Regulation SHO, the requirement for obtaining a "locate" is crucial for facilitating short sales. This regulation mandates that before executing a short sale, a broker-dealer must locate the shares to ensure that they can borrow them. This is designed to prevent potential short selling of stocks that cannot be borrowed, thereby reducing the risk of a "naked short sell," which can lead to market manipulation and price distortion. The focus on requiring a locate helps maintain a more orderly and transparent market by ensuring that short selling is conducted with shares that are legitimately available, rather than allowing for speculative or unregulated practices. This contributes to the integrity and stability of the securities market, which is important for all market participants. While Regulation SHO applies comprehensively across various types of securities, it doesn't limit its scope to specific stock exchanges, nor does it permit unrestricted short selling without the requisite borrowing assurance. Therefore, the requirement to locate shares before short sales is a significant provision of Regulation SHO that underlines its role in market regulation.