[This FAQ has been excerpted, in part or its entirety, from Division of Market Regulation: Key Points About Regulation SHO]

IV. Threshold Securities

A. The Basics

1. What is a Threshold Security?

Threshold securities are equity securities that have an aggregate fail to deliver position for:

Threshold securities only include issuers registered or required to file reports with the Commission ("reporting companies").17 Therefore, securities of issuers that are not registered or required to file reports with the Commission, which includes the majority of issuers on the Pink Sheets,18 cannot be threshold securities. This is because the SROs need to look to the total outstanding shares of the issuer in order to calculate whether or not the securities meet the definition of a "threshold security." For non-reporting companies, reliable information on total outstanding shares is difficult to determine.

2. Who is Responsible for Identifying Threshold Securities?

Regulation SHO requires the SROs to disseminate a daily list of threshold securities where such SRO, or its market center,19 is the primary listing venue for any such security.

3. Where Can I Find Threshold Lists?

Each SRO is responsible for providing the threshold securities list for those securities for which the SRO is the primary market. You can obtain SRO threshold lists at the following websites:

The Boston Stock Exchange, Philadelphia Stock Exchange and National Stock Exchange are not the primary listing exchange for any securities at this time and, therefore, are currently not publishing threshold securities lists.

4. Inclusion on, and Removal from, Threshold Lists.

At the conclusion of each settlement day, NSCC provides the SROs with data on securities that have aggregate fails to deliver at NSCC of 10,000 shares or more. For the securities for which an SRO is the primary market, that SRO calculates whether the level of fails for each security is equal to, or greater than, 0.5% of the issuer's total shares outstanding of the security. If, for five consecutive settlement days, such security satisfies these criteria, then such security is a threshold security. Each SRO includes such security on its daily threshold list until the aggregate fails level for the security falls below these levels for five consecutive days. (See below for a discussion as to why a security may appear or remain on a threshold list.)

5. Implementation Dates for Threshold Lists.

The SROs disseminated the first threshold lists on January 10, 2005. Regulation SHO does not require a broker or dealer to close-out the open fail position until a security appears on a threshold list for 13 consecutive settlement days and an open fail position for such security exists for each of those days.. Therefore, the first day on which a close-out action could have been required for a threshold security was January 28, 2005.

6. Mandatory Close-Outs of Threshold Securities.

Regulation SHO requires broker-dealers to close-out all failures to deliver that exist in threshold securities for thirteen consecutive settlement days by purchasing securities of like kind and quantity ("close-out").20

Until the position is closed out, the broker or dealer and any broker or dealer for which it clears transactions (for example, an introducing broker),21 may not effect further short sales in that threshold security without borrowing or entering into a bona fide agreement to borrow the security (known as a "pre-borrowing" requirement).

7. Key Points to Remember.

Any equity security of an issuer that is registered or required to file reports with the Commission could qualify as a threshold security. Therefore, threshold securities may include equity securities:

Whether or not a security is a threshold security does not affect the Commission's ability to prosecute manipulative or fraudulent activity that may have occurred before or after adoption of Regulation SHO.


15 The majority of equity trades in the U.S. are cleared and settled through systems administered by clearing agencies registered with the Commission. The National Securities Clearing Corporation ("NSCC"), the largest registered clearing agency for equity securities, clears and settles through its Continuous Net Settlement system ("CNS"). The CNS system nets the securities delivery obligations and the payment obligations of all clearing corporation participants. Clearing corporations notify participants of their securities delivery and payment obligations each day. In addition, the clearing corporation guarantees the completion of all transactions and interposes itself as the contraparty to both sides of any transaction. Clearance may be accomplished on a trade-by-trade basis or through netting of trades either bilaterally between the two counterparties or multilaterally among all members of a clearing corporation to yield balance orders reflecting a single day's trades or all open positions to date (continuous net settlement or "CNS"). See http://www.sec.gov/divisions/marketreg/mrclearing.shtml for more information on clearance and settlement.
16 Outstanding shares (or outstanding stock) are the total amount of shares of a corporation's stock that have been issued.
17 See http://www.sec.gov/answers/regis33.htm, http://www.sec.gov/investor/pubs/microcapstock.htm and http://www.sec.gov/info/smallbus/qasbsec.htm for more information on who is required to register and report.
18 See http://www.sec.gov/answers/pink.htm for more information about the Pink Sheets.
19 See http://www.sec.gov/answers/market.htm for information on market centers.
20 The requirement to close-out fail to deliver positions in threshold securities that remain for 13 consecutive settlement days does not apply to any positions that were established prior to the security becoming a threshold security. This is explained in more detail below.
21 Introducing brokers are typically brokers that perform all the functions of a broker except for the ability to accept money, securities, or property from a customer. They are usually not participants of registered clearing agencies. See Footnote 9 for more information about participants of a clearing agency.
22 See http://www.sec.gov/answers/market.htm for more information about the exchanges.
23 See http://www.sec.gov/answers/nasdaq.htm for more information about Nasdaq.
24 See http://www.sec.gov/answers/otcbb.htm for more information about the OTCBB.

Borrow Rates (per share)