Order Granting Exemptions From Certain Rules of Regulation SHO Related to Hurricane Sandy, 74891-74894 [2012-30427]

Download as PDF Federal Register / Vol. 77, No. 243 / Tuesday, December 18, 2012 / Notices emcdonald on DSK67QTVN1PROD with execute a FOF Participation Agreement with the Fund stating that their respective boards of directors or trustees and their investment advisers, or Trustee and Sponsor, as applicable, understand the terms and conditions of the order, and agree to fulfill their responsibilities under the order. At the time of its investment in shares of a Fund in excess of the limit in section 12(d)(1)(A)(i), an Investing Fund will notify the Fund of the investment. At such time, the Investing Fund will also transmit to the Fund a list of the names of each Investing Fund Affiliate and Underwriting Affiliate. The Investing Fund will notify the Fund of any changes to the list as soon as reasonably practicable after a change occurs. The Fund and the Investing Fund will maintain and preserve a copy of the order, the FOF Participation Agreement, and the list with any updated information for the duration of the investment and for a period of not less than six years thereafter, the first two years in an easily accessible place. 10. Before approving any advisory contract under section 15 of the Act, the board of directors or trustees of each Investing Management Company, including a majority of the disinterested directors or trustees, will find that the advisory fees charged under such contract are based on services provided that will be in addition to, rather than duplicative of, the services provided under the advisory contract(s) of any Fund in which the Investing Management Company may invest. These findings and their basis will be recorded fully in the minute books of the appropriate Investing Management Company. 11. Any sales charges and/or service fees charged with respect to shares of an Investing Fund will not exceed the limits applicable to a fund of funds as set forth in NASD Conduct Rule 2830. 12. No Fund relying on this section 12(d)(1) relief will acquire securities of any investment company or company relying on section 3(c)(1) or 3(c)(7) of the Act in excess of the limits contained in section 12(d)(1)(A) of the Act, except to the extent permitted by exemptive relief from the Commission permitting the Fund to purchase shares of other investment companies for short-term cash management purposes. For the Commission, by the Division of Investment Management, under delegated authority. Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2012–30380 Filed 12–17–12; 8:45 am] BILLING CODE 8011–01–P VerDate Mar<15>2010 15:29 Dec 17, 2012 Jkt 229001 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–68419; File No. TP 13–05] Order Granting Exemptions From Certain Rules of Regulation SHO Related to Hurricane Sandy December 12, 2012. I. Introduction Hurricane Sandy made landfall along the mid-Atlantic Coast on October 29, 2012. The Depository Trust & Clearing Corporation (‘‘DTCC’’) reported that its headquarters location in lower Manhattan sustained significant water damage as a result of storm flooding. In particular, DTCC reported that significant flooding and water damage occurred throughout DTCC’s vault at 55 Water Street (the ‘‘Vault’’), used as part of DTCC’s Custody Service for the safekeeping of physical certificates. DTCC has stated that restoration of the physical certificates will take some time, possibly months. As a result, the physical certificates are considered inaccessible.1 However, DTCC and The Securities Transfer Association, Inc. (‘‘STA’’) have recently announced an agreement on a protocol for the replacement and transfer of shares represented by the currently inaccessible physical certificates that were held in the Vault at the time Hurricane Sandy made landfall, facilitating DTCC’s ability to continue physical processing.2 Sales of owned securities, represented by physical certificates that were located in the Vault at the time Hurricane Sandy made landfall, whose settlement is dependent on the delivery of such physical certificates (or documentation with equivalent effect) (sales of ‘‘Vault Securities’’), may experience settlement delays as a result of the inaccessibility of such physical certificates.3 Such 1 See ‘‘DTCC Statement on Condition of Securities Vault,’’ DTCC Press Release (Nov. 14, 2012) at https://www.dtcc.com/news/press/releases/ 2012/statement_vault.php. 2 See ‘‘DTCC and STA Agree on Protocol for Presentment of Physical Securities,’’ DTCC Press Release (Nov. 20, 2012) at https://www.dtcc.com/ news/press/releases/2012/sta_statement.php. 3 As a result of Hurricane Sandy, DTCC did not receive any courier or mail shipments after October 26, 2012, and, as of November 1, 2012, made arrangements for all receipted packages to be routed to DTCC’s recovery facility in Brooklyn, New York. In addition, processing of physical certificates was suspended between October 30, 2012, and November 2, 2012. Accordingly, the term ‘‘Vault Securities’’ does not include physical certificates submitted to DTCC for custody on or after October 29, 2012, because the settlement of sales of such securities is not dependent on the delivery of physical certificates that were located in the Vault at the time Hurricane Sandy made landfall. See ‘‘DTCC Client Update on Superstorm Sandy— PO 00000 Frm 00068 Fmt 4703 Sfmt 4703 74891 settlement delays have implications for compliance with Regulation SHO under the Securities Exchange Act of 1934 (the ‘‘Exchange Act’’).4 SIFMA has requested relief from certain provisions of Regulation SHO in connection with the inaccessible physical certificates that were in the Vault at the time Hurricane Sandy made landfall.5 The Commission is providing certain exemptions from the ‘‘locate,’’ short sale price test, and close-out requirements of Regulation SHO for sales of Vault Securities. Absent further action by the Commission, these exemptions will expire on February 1, 2013. II. Regulation SHO A. Marking, ‘‘Locate,’’ and Short Sale Price Test Requirements Under Rules 200, 203, and 201 of Regulation SHO Rule 200(g) of Regulation SHO 6 provides that broker-dealers must mark all sell orders of any equity security as ‘‘long,’’ ‘‘short,’’ or ‘‘short exempt.’’ Under Rule 200(g)(1), a broker-dealer may mark an order to sell ‘‘long’’ only if the seller is deemed to own the security being sold pursuant to paragraphs (a) through (f) of Rule 200 and either: (1) The security to be delivered is in the physical possession or control of the broker-dealer; or (2) it Current and Ongoing Operations as Markets ReOpen; Physical Certificates,’’ Important Notice to All DTC, FICC and NSCC Participants (Oct. 30, 2012) at https://www.dtcc.com/downloads/legal/ imp_notices/2012/dtcc/z0033.pdf; ‘‘DTCC Client Update on Superstorm Sandy—Physical Processing and Custody Services,’’ Important Notice to All DTC and NSCC Participants (Nov. 1, 2012) at https:// www.dtcc.com/downloads/legal/imp_notices/2012/ dtcc/z0035.pdf; ‘‘DTCC Client Update on Superstorm Sandy,’’ Important Notice to All DTC, FICC and NSCC Participants (Nov. 2, 2012) at https://www.dtcc.com/downloads/legal/ imp_notices/2012/dtcc/z0036.pdf. 4 17 CFR 242.200 et seq. 5 See letter from Ira Hammerman, General Counsel, Securities Industry and Financial Markets Association, dated Dec. 12, 2012. In its letter, SIFMA requests relief from the close-out requirement of Rule 204 of Regulation SHO and seeks ‘‘clarification’’ with respect to order marking under Rule 200 and the short sale price test restriction under Rule 201. Further, the letter from SIFMA seeks ‘‘confirmation’’ that a short sale order of a Vault Security that a person is deemed to own would qualify for ‘‘short exempt’’ marking under Rule 201(d)(1) and would meet the terms of the exception to the ‘‘locate’’ requirement in Rule 203(b)(2)(ii). However, as discussed in this Exemptive Order, absent relief, a sale of a Vault Security would not necessarily qualify for ‘‘short exempt’’ marking under Rule 201(d)(1) or for the exception to the ‘‘locate’’ requirement under Rule 203(b)(2)(ii). See infra notes 12 to 15 and accompanying text. Thus, we are treating SIFMA’s request for ‘‘confirmation’’ as a request for relief from the ‘‘locate’’ requirement under Rule 203(b), the ‘‘short exempt’’ marking requirement under Rule 200(g)(2), and the close-out requirement under Rule 204. 6 17 CFR 242.200(g). E:\FR\FM\18DEN1.SGM 18DEN1 74892 Federal Register / Vol. 77, No. 243 / Tuesday, December 18, 2012 / Notices is reasonably expected that the security will be in the physical possession or control of the broker-dealer no later than the settlement of the transaction. Pursuant to Rule 203(b) of Regulation SHO,7 a broker-dealer may not accept a short sale order in an equity security from another person, or effect a short sale in an equity security for its own account, unless the broker-dealer has: (1) Borrowed the security, or entered into a bona fide arrangement to borrow the security; or (2) reasonable grounds to believe that the security can be borrowed so that it can be delivered on the date delivery is due. This ‘‘locate’’ requirement must be met and documented prior to effecting a short sale.8 Rule 201 of Regulation SHO 9 establishes a short sale-related circuit breaker that, if triggered, imposes a restriction on the price at which a covered security 10 may be sold short (‘‘short sale price test’’). Paragraphs (c) and (d) of Rule 201 permit brokerdealers to mark certain short sale orders as ‘‘short exempt,’’ and trading centers’ policies and procedures must be reasonably designed to permit the execution or display of orders marked ‘‘short exempt’’ without regard to whether the order is at a permissible price under the short sale price test.11 Certain types of Vault Security sales necessarily involve processing delays, notwithstanding the current inaccessibility of physical certificates that were held in the Vault at the time Hurricane Sandy made landfall. For example, this could include the sale of formerly restricted securities pursuant to Rule 144 of the Securities Act of 1933, where the security may not be capable of being delivered on the settlement date due to processing delays to remove the restricted legend. Further, processing delays could arise where a convertible security, option, or warrant has been tendered for conversion or exchange, such that the underlying security is not reasonably expected to be received by settlement date. Under these circumstances, a broker-dealer generally would not have a reasonable expectation that the securities would be in its physical possession or control by 7 17 CFR 242.203(b). are certain exceptions to the ‘‘locate’’ requirement in Rule 203(b)(2). See 17 CFR 242.203(b)(2). 9 17 CFR 242.201. 10 The term ‘‘covered security’’ is defined as any NMS stock as defined in Rule 600(b)(47) of Regulation NMS. See 17 CFR 242.201(a)(1); 17 CFR 242.600(b)(47). 11 See 17 CFR 242.201(c), (d), (b)(1)(iii)(B). Under Rule 200(g)(2), a sale order shall be marked ‘‘short exempt’’ only if the provisions of Rule 201(c) or (d) are met. See 17 CFR 242.200(g)(2). emcdonald on DSK67QTVN1PROD with 8 There VerDate Mar<15>2010 15:29 Dec 17, 2012 Jkt 229001 the settlement date. These types of sell orders cannot be marked ‘‘long’’ and must be marked ‘‘short’’ or ‘‘short exempt.’’ 12 The Commission has provided specific exceptions from the ‘‘locate’’ requirement and the short sale price test requirement of Regulation SHO for sales of securities that the person is deemed to own pursuant to Rule 200 of Regulation SHO, provided that the person intends to deliver the securities as soon as all restrictions on delivery have been removed.13 In providing such exceptions, the Commission emphasized that these sales are treated as short sales solely because the seller is unable to deliver the security that it owns to its brokerdealer prior to settlement, based on circumstances outside the seller’s control and through no fault of the seller or the broker-dealer.14 In addition, due to the inaccessibility of physical certificates in the Vault as a result of flooding from Hurricane Sandy, other sell orders for Vault Securities also may not qualify for ‘‘long’’ marking under Rule 200(g)(1).15 In particular, a broker-dealer may not have a reasonable expectation that these Vault Securities will be in the physical possession or control of the broker-dealer by the settlement date. Absent relief, solely because the seller is unable to deliver the owned security to its broker-dealer prior to settlement due to the unusual circumstances of Hurricane Sandy that resulted in the current inaccessibility of physical certificates in the Vault, sales of these owned securities must be marked ‘‘short’’ or ‘‘short exempt’’ and may be subject to the ‘‘locate’’ and short sale price test requirements. As a result, we believe that the relief from the ‘‘locate’’ and short sale price test requirements of Regulation SHO 12 See Exchange Act Release No. 50103 (July 28, 2004), 69 FR 48008, 48012, 48015 (Aug. 6, 2004) (‘‘Regulation SHO Adopting Release’’). 13 See 17 CFR 242.203(b)(2)(ii); 242.201(d)(1); Regulation SHO Adopting Release, 69 FR at 48015; Exchange Act Release No. 61595 (Feb. 26, 2010), 75 FR 11232, 11266 (Mar. 10, 2010) (‘‘Rule 201 Adopting Release’’). Under Rule 201(d)(1), a brokerdealer may mark a short sale order ‘‘short exempt’’ if the broker-dealer has a reasonable basis to believe that the short sale order is by a person that is deemed to own the covered security pursuant to Rule 200 of Regulation SHO, provided that the person intends to deliver the security as soon as all restrictions on delivery have been removed. See 17 CFR 242.201(d)(1). 14 See Regulation SHO Adopting Release, 69 FR at 48015; Rule 201 Adopting Release, 75 FR at 11266. 15 Depending on the circumstances, certain sell orders of Vault Security may be marked ‘‘long.’’ Consistent with Rule 200(g)(1) of Regulation SHO, a broker-dealer may mark a sell order of a Vault Security ‘‘long’’ if the broker-dealer has a reasonable expectation that the Vault Securities will be in the physical possession or control of the broker-dealer by the settlement date. PO 00000 Frm 00069 Fmt 4703 Sfmt 4703 provided by this Exemptive Order is appropriate in the public interest and consistent with the protection of investors. Accordingly, it is ordered, pursuant to Section 36 of the Exchange Act,16 that a broker-dealer is exempt from the ‘‘locate’’ requirement of Rule 203(b), including the delivery requirement of Rule 203(b)(2)(ii),17 with respect to a short sale order in a Vault Security, and is exempt from Rule 200(g)(2) with respect to such order, and thus may mark such order ‘‘short exempt’’ for purposes of the short sale price test of Rule 201 without meeting the requirements of Rule 201(c) or (d),18 subject to the following conditions: (a) The broker-dealer determines, prior to accepting such short sale order from another person, or effecting such short sale for its own account, that the sale is a sale of a Vault Security 19 that the seller is deemed to own pursuant to Rule 200 of Regulation SHO; 20 and 16 Section 36 of the Exchange Act authorizes the Commission, by rule, regulation or order, to exempt, either conditionally or unconditionally, any person, security or transaction, or any class or classes of persons, securities or transactions, from any provision or provisions of the Exchange Act or any rule or regulation thereunder, to the extent that such exemption is necessary or appropriate in the public interest, and is consistent with the protection of investors. 15 U.S.C. 78mm(a). 17 The exception to the ‘‘locate’’ requirement in Rule 203(b)(2)(ii) provides that if the seller has not delivered the security that it is deemed to own pursuant to Rule 200 of Regulation SHO within 35 days after the trade date, the broker-dealer that effected the sale must borrow securities or close out the short position by purchasing securities of like kind and quantity. See 17 CFR 242.203(b)(2)(ii). As discussed above, certain sell orders of Vault Securities may qualify for the exception from the ‘‘locate’’ requirement under Rule 203(b)(2)(ii). See supra notes 12 to 14 and accompanying text. 18 We remind broker-dealers that, as a general matter, the ‘‘short exempt’’ marking provided by Rule 200(g)(2) is used to represent a short sale order that qualifies for an exception to the short sale price test requirement in Rule 201(d) or that meets the terms of the broker-dealer provision in Rule 201(c). The ‘‘short exempt’’ marking may not be used to represent that an exception to the ‘‘locate’’ requirement applies to the short sale order, unless the order can be marked ‘‘short exempt’’ pursuant to Rule 200(g)(2). See Rule 201 Adopting Release, 75 FR at 11266 n.472 (‘‘To the extent that an exception to Regulation SHO’s ‘locate’ requirement applies to a short sale order, such order must be marked ‘short’ in accordance with Rule 200(g) of Regulation SHO unless the order can be marked ‘short exempt’ pursuant to Rule 200(g)(2) of Regulation SHO.’’). 19 A Vault Security sale would include situations where the security to be sold, a security convertible into or exchangeable for it, or a right or warrant to subscribe to it, is represented by a physical certificate that was held in the Vault at the time Hurricane Sandy made landfall. Such determination could be based, for example, on records indicating that the sale involves a physical certificate custodied at DTCC and that the physical certificate was submitted to DTCC for custody on or before October 26, 2012. See supra note 3. 20 17 CFR 242.200. E:\FR\FM\18DEN1.SGM 18DEN1 Federal Register / Vol. 77, No. 243 / Tuesday, December 18, 2012 / Notices (b) The broker-dealer documents the determination made pursuant to condition (a) above. B. Close-Out Requirements Under Rule 204 of Regulation SHO Rule 204(a) of Regulation SHO 21 generally requires that participants of a registered clearing agency (‘‘Participants’’) close out fail to deliver positions at a registered clearing agency 22 in any equity security for a sale transaction in that equity security by no later than the beginning of trading on the next settlement day after a fail to deliver resulting from a short sale (generally T+4), and no later than the beginning of trading on the third settlement day after a fail to deliver resulting from a long sale or a sale resulting from bona fide market making activities at the time of the sale (generally T+6). A close out is effected by purchasing or borrowing shares of like kind and quantity. Rule 204(a)(2) provides an extended close-out timeframe (T+35) for fail to deliver positions at a registered clearing agency in any equity security resulting from a sale of a security that a person is deemed to own,23 similar to the exceptions to the ‘‘locate’’ requirement and short sale price test requirement discussed above.24 Thus, fails to deliver resulting from certain sales of Vault Securities would currently be eligible for the extended close-out timeframe provided by Rule 204(a)(2).25 21 17 CFR 242.204(a). term ‘‘registered clearing agency’’ means a clearing agency, as defined in Section 3(a)(23)(A) of the Exchange Act, that is registered as such pursuant to Section 17A of the Exchange Act. See 15 U.S.C. 78c(a)(23)(A); 15 U.S.C. 78q–1. The majority of equity trades in the United States are cleared and settled through systems administered by clearing agencies registered with the Commission. The National Securities Clearing Corporation (‘‘NSCC’’) clears and settles the majority of equity securities trades conducted on the exchanges and in the over-the-counter market. NSCC clears and settles trades through the Continuous Net Settlement (‘‘CNS’’) system, which nets the securities delivery and payment obligations of all of its members. See Exchange Act Release No. 60388 (July 27, 2009), 74 FR 38266, 38268 n.35 (July 31, 2009) (‘‘Rule 204 Adopting Release’’). 23 See 17 CFR 242.204(a)(2); see also Rule 204 Adopting Release, 74 FR at 38277 n.141. Under Rule 204(a)(2), a Participant that has a fail to deliver position resulting from a sale of a security that a person is deemed to own pursuant to Rule 200 of Regulation SHO and that such person intends to deliver as soon as all restrictions on delivery have been removed must, by no later than the beginning of regular trading hours on the thirty-fifth consecutive calendar day following the trade date for the transaction, immediately close out the fail to deliver position by purchasing or borrowing securities of like kind and quantity. See 17 CFR 242.204(a)(2). 24 See supra notes 12 to 14 and accompanying text. 25 See Rule 204 Adopting Release, 74 FR at 38277–38278. emcdonald on DSK67QTVN1PROD with 22 The VerDate Mar<15>2010 15:29 Dec 17, 2012 Jkt 229001 Pursuant to Rule 204(b) of Regulation SHO,26 a Participant that has not closed out a fail to deliver position in an equity security in accordance with Rule 204(a), and any broker-dealer from which the Participant receives trades for clearance and settlement, may not accept a short sale order in the equity security from another person or effect a short sale in the equity security for its own account, without first borrowing the security or entering into a bona fide arrangement to borrow the security, until the Participant closes out the fail to deliver position by purchasing securities of like kind and quantity and that purchase has cleared and settled at a registered clearing agency (the ‘‘Penalty Box’’). SIFMA has stated that there may be situations where, in connection with the inaccessibility of the physical certificates that were located in the Vault following flooding from Hurricane Sandy, Vault Security sales may result in a CNS fail to deliver, such that Participants would be required to close out the fail to deliver position pursuant to Rule 204(a) 27 and, if they did not, would be subject to the Penalty Box. Rule 204 is intended to help reduce fails to deliver and address potentially abusive ‘‘naked’’ short selling.28 In providing an extended close-out timeframe for sales of deemed to own securities, the Commission stated that additional time is warranted for these sales and such additional time would not undermine the goal of reducing fails to deliver because ‘‘these are sales of owned securities that cannot be delivered by settlement date due solely to processing delays outside the seller’s or broker-dealer’s control. Moreover, delivery will be made on such sales as soon as all restrictions on delivery have been removed.’’ 29 We believe that, due to the inaccessibility of physical certificates that were held in the Vault at the time Hurricane Sandy made landfall, sales of Vault Securities raise similar policy considerations at this time. We do not believe that the fails to deliver that may occur as a result of Vault Security sales, due to the unusual and exigent circumstances of Hurricane Sandy, raise the concerns that Rule 204 was designed to address. Thus, we believe that the relief from the close-out requirement of Regulation SHO provided by this Exemptive Order is appropriate in the public interest and 26 17 CFR 242.204(b). CFR 242.204(a). 28 See Rule 204 Adopting Release, 74 FR at 38267–38269. 29 Id. 27 17 PO 00000 Frm 00070 Fmt 4703 Sfmt 4703 74893 consistent with the protection of investors. Accordingly, it is further ordered, pursuant to Section 36 of the Exchange Act,30 that a Participant is exempt from the close-out requirement of Rule 204(a) 31 and the Penalty Box of Rule 204(b) 32 of Regulation SHO with respect to a fail to deliver position resulting from the sale of a Vault Security,33 subject to the following conditions: (a) The Participant must determine and document that the fail to deliver resulted from a sale of a Vault Security 34 that a person is deemed to own pursuant to Rule 200 of Regulation SHO; 35 (b) The Participant must check DTCC systems on a daily basis to determine when a Vault Security, the sale of which resulted in a fail to deliver position, is available for settlement; 36 (c) The Participant must deliver the Vault Security as soon as possible, and 30 See supra note 16. CFR 242.204(a). 32 17 CFR 242.204(b). 33 Rule 203(b)(3) of Regulation SHO provides that if a Participant has a fail to deliver position at a registered clearing agency in a threshold security, as defined by Rule 203(c)(6), for thirteen consecutive settlement days, the Participant shall immediately thereafter close out the fail to deliver position by purchasing securities of like kind and quantity. If the sale of a Vault Security resulted in a fail to deliver position in a threshold security and that fail to deliver position persisted for thirteen consecutive settlement days because the close-out date applicable under this Exemptive Order had not yet arrived, Rule 203(b)(3) would nonetheless require the Participant to close out the fail to deliver position. Accordingly, Participants are exempt from the close-out requirements of Rule 203(b)(3) with respect to fail to deliver positions in threshold securities resulting from Vault Security sales, provided that the Participants close out the fail to deliver positions in compliance with this Exemptive Order. See 17 CFR 242.203(b)(3). 34 A Vault Security sale would include situations where the security sold, a security convertible into or exchangeable for it, or a right or warrant to subscribe to it, is represented by a physical certificate that was held in the Vault at the time Hurricane Sandy made landfall. Such determination could be based, for example, on records indicating that the sale involves a physical certificate custodied at DTCC and that the physical certificate was submitted to DTCC for custody on or before October 26, 2012. See supra note 3. 35 17 CFR 242.200. 36 We understand that DTCC systems (including the Participant Browser System and the Participant Terminal System) enable Participants to verify their positions in Vault Securities and issue withdrawal instructions. We understand that these systems permit Participants, in conjunction with the Participant’s own books and records, to track when Vault Securities have been debited (withdrawn) and sent to the transfer agent and when the Vault Securities are available for settlement after they have been returned to DTCC and are available for Participant pickup, are mailed directly to the customer, or are set up as a Direct Registration System account, and that Participants check these systems for completed status of physical certificate processing on a daily basis. 31 17 E:\FR\FM\18DEN1.SGM 18DEN1 74894 Federal Register / Vol. 77, No. 243 / Tuesday, December 18, 2012 / Notices in any event must deliver the Vault Security or close out the fail to deliver position resulting from the Vault Security sale by purchasing or borrowing securities of like kind and quantity by no later than the beginning of regular trading hours on the fourth settlement day following the date on which the Participant determines, in accordance with condition (b) above, that the Vault Security, the sale of which resulted in the fail to deliver position, is available for settlement; 37 and (d) The Participant’s books and records must reflect that it made delivery of the Vault Security or closed out the fail to deliver position resulting from the Vault Security sale within the applicable time period, consistent with this Exemptive Order. III. Modification, Revocation, and Expiration of Exemptions The exemptions granted herein are subject to modification or revocation if at any time the Commission determines that such action is necessary or appropriate in furtherance of the purposes of the Exchange Act, and, absent further action by the Commission, will expire on February 1, 2013. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.38 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2012–30427 Filed 12–17–12; 8:45 am] emcdonald on DSK67QTVN1PROD with BILLING CODE 8011–01–P 37 For example, a Participant submitted a sale on October 16, 2012, for clearance and settlement with an original expected settlement date of October 19, 2012. The security sold was a restricted Vault Security under Rule 144 whose physical certificate was located in the Vault. The Participant determines, as a result of the daily check of DTCC systems for status of the Vault Securities, that the Vault Security is available for settlement on December 12, 2012. Normally Rule 204(a)(2) would apply and the Participant would be required to close out the resulting fail to deliver position thirtyfive calendar days after trade date, on November 20, 2012. Because the Vault Security was not available due to Hurricane Sandy on November 20th, the Participant would be able to avail itself of the adjusted close-out timeframe provided in condition (c) above. In this limited instance, pursuant to this Exemptive Order, the Participant would be required to deliver the Vault Security as soon as possible, and in any event must deliver the Vault Security or close out the fail to deliver position by no later than the beginning of regular trading hours on December 18, 2012. 38 See 17 CFR 200.30–3(a)(11). VerDate Mar<15>2010 15:29 Dec 17, 2012 Jkt 229001 SECURITIES AND EXCHANGE COMMISSION SECURITIES AND EXCHANGE COMMISSION Sunshine Act Meeting [Release No. 34–68417; File No. SR–CBOE– 2012–119] Notice is hereby given, pursuant to the provisions of the Government in the Sunshine Act, Public Law 94–409, that the Securities and Exchange Commission will hold a Closed Meeting on Thursday, December 20, 2012 at 2:00 p.m. Commissioners, Counsel to the Commissioners, the Secretary to the Commission, and recording secretaries will attend the Closed Meeting. Certain staff members who have an interest in the matters also may be present. The General Counsel of the Commission, or his designee, has certified that, in his opinion, one or more of the exemptions set forth in 5 U.S.C. 552b(c)(3), (5), (7), 9(B) and (10) and 17 CFR 200.402(a)(3), (5), (7), 9(ii) and (10), permit consideration of the scheduled matters at the Closed Meeting. Commissioner Walter, as duty officer, voted to consider the items listed for the Closed Meeting in a closed session. The subject matter of the Closed Meeting will be: Adjudicatory matters; Institution and settlement of injunctive actions; Institution and settlement of administrative proceedings; and Other matters relating to enforcement proceedings. At times, changes in Commission priorities require alterations in the scheduling of meeting items. For further information and to ascertain what, if any, matters have been added, deleted or postponed, please contact: The Office of the Secretary at (202) 551–5400. Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the CBOE Stock Exchange Fees Schedule Dated: December 13, 2012. Elizabeth M. Murphy, Secretary. [FR Doc. 2012–30552 Filed 12–14–12; 4:15 pm] Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on December 6, 2012, Chicago Board Options Exchange, Incorporated (the ‘‘Exchange’’ or ‘‘CBOE’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I, II and III below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend the Fees Schedule for its CBOE Stock Exchange (‘‘CBSX’’). The text of the proposed rule change is available on the Exchange’s Web site (www.cboe.com/ AboutCBOE/ CBOELegalRegulatoryHome.aspx), at the Exchange’s Office of the Secretary, and at the Commission. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change BILLING CODE 8011–01–P PO 00000 December 12, 2012. 1. Purpose CBSX proposes to increase the Initial Regulatory Review Fee from $3,000 to 1 15 2 17 Frm 00071 Fmt 4703 Sfmt 4703 E:\FR\FM\18DEN1.SGM U.S.C. 78s(b)(1). CFR 240.19b–4. 18DEN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 77, Number 243 (Tuesday, December 18, 2012)]
[Notices]
[Pages 74891-74894]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-30427]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68419; File No. TP 13-05]


Order Granting Exemptions From Certain Rules of Regulation SHO 
Related to Hurricane Sandy

December 12, 2012.

I. Introduction

    Hurricane Sandy made landfall along the mid-Atlantic Coast on 
October 29, 2012. The Depository Trust & Clearing Corporation 
(``DTCC'') reported that its headquarters location in lower Manhattan 
sustained significant water damage as a result of storm flooding. In 
particular, DTCC reported that significant flooding and water damage 
occurred throughout DTCC's vault at 55 Water Street (the ``Vault''), 
used as part of DTCC's Custody Service for the safekeeping of physical 
certificates. DTCC has stated that restoration of the physical 
certificates will take some time, possibly months. As a result, the 
physical certificates are considered inaccessible.\1\ However, DTCC and 
The Securities Transfer Association, Inc. (``STA'') have recently 
announced an agreement on a protocol for the replacement and transfer 
of shares represented by the currently inaccessible physical 
certificates that were held in the Vault at the time Hurricane Sandy 
made landfall, facilitating DTCC's ability to continue physical 
processing.\2\ Sales of owned securities, represented by physical 
certificates that were located in the Vault at the time Hurricane Sandy 
made landfall, whose settlement is dependent on the delivery of such 
physical certificates (or documentation with equivalent effect) (sales 
of ``Vault Securities''), may experience settlement delays as a result 
of the inaccessibility of such physical certificates.\3\ Such 
settlement delays have implications for compliance with Regulation SHO 
under the Securities Exchange Act of 1934 (the ``Exchange Act'').\4\ 
SIFMA has requested relief from certain provisions of Regulation SHO in 
connection with the inaccessible physical certificates that were in the 
Vault at the time Hurricane Sandy made landfall.\5\
---------------------------------------------------------------------------

    \1\ See ``DTCC Statement on Condition of Securities Vault,'' 
DTCC Press Release (Nov. 14, 2012) at https://www.dtcc.com/news/press/releases/2012/statement_vault.php.
    \2\ See ``DTCC and STA Agree on Protocol for Presentment of 
Physical Securities,'' DTCC Press Release (Nov. 20, 2012) at https://www.dtcc.com/news/press/releases/2012/sta_statement.php.
    \3\ As a result of Hurricane Sandy, DTCC did not receive any 
courier or mail shipments after October 26, 2012, and, as of 
November 1, 2012, made arrangements for all receipted packages to be 
routed to DTCC's recovery facility in Brooklyn, New York. In 
addition, processing of physical certificates was suspended between 
October 30, 2012, and November 2, 2012. Accordingly, the term 
``Vault Securities'' does not include physical certificates 
submitted to DTCC for custody on or after October 29, 2012, because 
the settlement of sales of such securities is not dependent on the 
delivery of physical certificates that were located in the Vault at 
the time Hurricane Sandy made landfall. See ``DTCC Client Update on 
Superstorm Sandy--Current and Ongoing Operations as Markets Re-Open; 
Physical Certificates,'' Important Notice to All DTC, FICC and NSCC 
Participants (Oct. 30, 2012) at https://www.dtcc.com/downloads/legal/imp_notices/2012/dtcc/z0033.pdf; ``DTCC Client Update on Superstorm 
Sandy--Physical Processing and Custody Services,'' Important Notice 
to All DTC and NSCC Participants (Nov. 1, 2012) at https://www.dtcc.com/downloads/legal/imp_notices/2012/dtcc/z0035.pdf; 
``DTCC Client Update on Superstorm Sandy,'' Important Notice to All 
DTC, FICC and NSCC Participants (Nov. 2, 2012) at https://www.dtcc.com/downloads/legal/imp_notices/2012/dtcc/z0036.pdf.
    \4\ 17 CFR 242.200 et seq.
    \5\ See letter from Ira Hammerman, General Counsel, Securities 
Industry and Financial Markets Association, dated Dec. 12, 2012. In 
its letter, SIFMA requests relief from the close-out requirement of 
Rule 204 of Regulation SHO and seeks ``clarification'' with respect 
to order marking under Rule 200 and the short sale price test 
restriction under Rule 201. Further, the letter from SIFMA seeks 
``confirmation'' that a short sale order of a Vault Security that a 
person is deemed to own would qualify for ``short exempt'' marking 
under Rule 201(d)(1) and would meet the terms of the exception to 
the ``locate'' requirement in Rule 203(b)(2)(ii). However, as 
discussed in this Exemptive Order, absent relief, a sale of a Vault 
Security would not necessarily qualify for ``short exempt'' marking 
under Rule 201(d)(1) or for the exception to the ``locate'' 
requirement under Rule 203(b)(2)(ii). See infra notes 12 to 15 and 
accompanying text. Thus, we are treating SIFMA's request for 
``confirmation'' as a request for relief from the ``locate'' 
requirement under Rule 203(b), the ``short exempt'' marking 
requirement under Rule 200(g)(2), and the close-out requirement 
under Rule 204.
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    The Commission is providing certain exemptions from the ``locate,'' 
short sale price test, and close-out requirements of Regulation SHO for 
sales of Vault Securities. Absent further action by the Commission, 
these exemptions will expire on February 1, 2013.

II. Regulation SHO

A. Marking, ``Locate,'' and Short Sale Price Test Requirements Under 
Rules 200, 203, and 201 of Regulation SHO

    Rule 200(g) of Regulation SHO \6\ provides that broker-dealers must 
mark all sell orders of any equity security as ``long,'' ``short,'' or 
``short exempt.'' Under Rule 200(g)(1), a broker-dealer may mark an 
order to sell ``long'' only if the seller is deemed to own the security 
being sold pursuant to paragraphs (a) through (f) of Rule 200 and 
either: (1) The security to be delivered is in the physical possession 
or control of the broker-dealer; or (2) it

[[Page 74892]]

is reasonably expected that the security will be in the physical 
possession or control of the broker-dealer no later than the settlement 
of the transaction.
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    \6\ 17 CFR 242.200(g).
---------------------------------------------------------------------------

    Pursuant to Rule 203(b) of Regulation SHO,\7\ a broker-dealer may 
not accept a short sale order in an equity security from another 
person, or effect a short sale in an equity security for its own 
account, unless the broker-dealer has: (1) Borrowed the security, or 
entered into a bona fide arrangement to borrow the security; or (2) 
reasonable grounds to believe that the security can be borrowed so that 
it can be delivered on the date delivery is due. This ``locate'' 
requirement must be met and documented prior to effecting a short 
sale.\8\
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    \7\ 17 CFR 242.203(b).
    \8\ There are certain exceptions to the ``locate'' requirement 
in Rule 203(b)(2). See 17 CFR 242.203(b)(2).
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    Rule 201 of Regulation SHO \9\ establishes a short sale-related 
circuit breaker that, if triggered, imposes a restriction on the price 
at which a covered security \10\ may be sold short (``short sale price 
test''). Paragraphs (c) and (d) of Rule 201 permit broker-dealers to 
mark certain short sale orders as ``short exempt,'' and trading 
centers' policies and procedures must be reasonably designed to permit 
the execution or display of orders marked ``short exempt'' without 
regard to whether the order is at a permissible price under the short 
sale price test.\11\
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    \9\ 17 CFR 242.201.
    \10\ The term ``covered security'' is defined as any NMS stock 
as defined in Rule 600(b)(47) of Regulation NMS. See 17 CFR 
242.201(a)(1); 17 CFR 242.600(b)(47).
    \11\ See 17 CFR 242.201(c), (d), (b)(1)(iii)(B). Under Rule 
200(g)(2), a sale order shall be marked ``short exempt'' only if the 
provisions of Rule 201(c) or (d) are met. See 17 CFR 242.200(g)(2).
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    Certain types of Vault Security sales necessarily involve 
processing delays, notwithstanding the current inaccessibility of 
physical certificates that were held in the Vault at the time Hurricane 
Sandy made landfall. For example, this could include the sale of 
formerly restricted securities pursuant to Rule 144 of the Securities 
Act of 1933, where the security may not be capable of being delivered 
on the settlement date due to processing delays to remove the 
restricted legend. Further, processing delays could arise where a 
convertible security, option, or warrant has been tendered for 
conversion or exchange, such that the underlying security is not 
reasonably expected to be received by settlement date. Under these 
circumstances, a broker-dealer generally would not have a reasonable 
expectation that the securities would be in its physical possession or 
control by the settlement date. These types of sell orders cannot be 
marked ``long'' and must be marked ``short'' or ``short exempt.'' \12\ 
The Commission has provided specific exceptions from the ``locate'' 
requirement and the short sale price test requirement of Regulation SHO 
for sales of securities that the person is deemed to own pursuant to 
Rule 200 of Regulation SHO, provided that the person intends to deliver 
the securities as soon as all restrictions on delivery have been 
removed.\13\ In providing such exceptions, the Commission emphasized 
that these sales are treated as short sales solely because the seller 
is unable to deliver the security that it owns to its broker-dealer 
prior to settlement, based on circumstances outside the seller's 
control and through no fault of the seller or the broker-dealer.\14\
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    \12\ See Exchange Act Release No. 50103 (July 28, 2004), 69 FR 
48008, 48012, 48015 (Aug. 6, 2004) (``Regulation SHO Adopting 
Release'').
    \13\ See 17 CFR 242.203(b)(2)(ii); 242.201(d)(1); Regulation SHO 
Adopting Release, 69 FR at 48015; Exchange Act Release No. 61595 
(Feb. 26, 2010), 75 FR 11232, 11266 (Mar. 10, 2010) (``Rule 201 
Adopting Release''). Under Rule 201(d)(1), a broker-dealer may mark 
a short sale order ``short exempt'' if the broker-dealer has a 
reasonable basis to believe that the short sale order is by a person 
that is deemed to own the covered security pursuant to Rule 200 of 
Regulation SHO, provided that the person intends to deliver the 
security as soon as all restrictions on delivery have been removed. 
See 17 CFR 242.201(d)(1).
    \14\ See Regulation SHO Adopting Release, 69 FR at 48015; Rule 
201 Adopting Release, 75 FR at 11266.
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    In addition, due to the inaccessibility of physical certificates in 
the Vault as a result of flooding from Hurricane Sandy, other sell 
orders for Vault Securities also may not qualify for ``long'' marking 
under Rule 200(g)(1).\15\ In particular, a broker-dealer may not have a 
reasonable expectation that these Vault Securities will be in the 
physical possession or control of the broker-dealer by the settlement 
date. Absent relief, solely because the seller is unable to deliver the 
owned security to its broker-dealer prior to settlement due to the 
unusual circumstances of Hurricane Sandy that resulted in the current 
inaccessibility of physical certificates in the Vault, sales of these 
owned securities must be marked ``short'' or ``short exempt'' and may 
be subject to the ``locate'' and short sale price test requirements. As 
a result, we believe that the relief from the ``locate'' and short sale 
price test requirements of Regulation SHO provided by this Exemptive 
Order is appropriate in the public interest and consistent with the 
protection of investors.
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    \15\ Depending on the circumstances, certain sell orders of 
Vault Security may be marked ``long.'' Consistent with Rule 
200(g)(1) of Regulation SHO, a broker-dealer may mark a sell order 
of a Vault Security ``long'' if the broker-dealer has a reasonable 
expectation that the Vault Securities will be in the physical 
possession or control of the broker-dealer by the settlement date.
---------------------------------------------------------------------------

    Accordingly, it is ordered, pursuant to Section 36 of the Exchange 
Act,\16\ that a broker-dealer is exempt from the ``locate'' requirement 
of Rule 203(b), including the delivery requirement of Rule 
203(b)(2)(ii),\17\ with respect to a short sale order in a Vault 
Security, and is exempt from Rule 200(g)(2) with respect to such order, 
and thus may mark such order ``short exempt'' for purposes of the short 
sale price test of Rule 201 without meeting the requirements of Rule 
201(c) or (d),\18\ subject to the following conditions:
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    \16\ Section 36 of the Exchange Act authorizes the Commission, 
by rule, regulation or order, to exempt, either conditionally or 
unconditionally, any person, security or transaction, or any class 
or classes of persons, securities or transactions, from any 
provision or provisions of the Exchange Act or any rule or 
regulation thereunder, to the extent that such exemption is 
necessary or appropriate in the public interest, and is consistent 
with the protection of investors. 15 U.S.C. 78mm(a).
    \17\ The exception to the ``locate'' requirement in Rule 
203(b)(2)(ii) provides that if the seller has not delivered the 
security that it is deemed to own pursuant to Rule 200 of Regulation 
SHO within 35 days after the trade date, the broker-dealer that 
effected the sale must borrow securities or close out the short 
position by purchasing securities of like kind and quantity. See 17 
CFR 242.203(b)(2)(ii). As discussed above, certain sell orders of 
Vault Securities may qualify for the exception from the ``locate'' 
requirement under Rule 203(b)(2)(ii). See supra notes 12 to 14 and 
accompanying text.
    \18\ We remind broker-dealers that, as a general matter, the 
``short exempt'' marking provided by Rule 200(g)(2) is used to 
represent a short sale order that qualifies for an exception to the 
short sale price test requirement in Rule 201(d) or that meets the 
terms of the broker-dealer provision in Rule 201(c). The ``short 
exempt'' marking may not be used to represent that an exception to 
the ``locate'' requirement applies to the short sale order, unless 
the order can be marked ``short exempt'' pursuant to Rule 200(g)(2). 
See Rule 201 Adopting Release, 75 FR at 11266 n.472 (``To the extent 
that an exception to Regulation SHO's `locate' requirement applies 
to a short sale order, such order must be marked `short' in 
accordance with Rule 200(g) of Regulation SHO unless the order can 
be marked `short exempt' pursuant to Rule 200(g)(2) of Regulation 
SHO.'').
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    (a) The broker-dealer determines, prior to accepting such short 
sale order from another person, or effecting such short sale for its 
own account, that the sale is a sale of a Vault Security \19\ that the 
seller is deemed to own pursuant to Rule 200 of Regulation SHO; \20\ 
and
---------------------------------------------------------------------------

    \19\ A Vault Security sale would include situations where the 
security to be sold, a security convertible into or exchangeable for 
it, or a right or warrant to subscribe to it, is represented by a 
physical certificate that was held in the Vault at the time 
Hurricane Sandy made landfall. Such determination could be based, 
for example, on records indicating that the sale involves a physical 
certificate custodied at DTCC and that the physical certificate was 
submitted to DTCC for custody on or before October 26, 2012. See 
supra note 3.
    \20\ 17 CFR 242.200.

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[[Page 74893]]

    (b) The broker-dealer documents the determination made pursuant to 
condition (a) above.

B. Close-Out Requirements Under Rule 204 of Regulation SHO

    Rule 204(a) of Regulation SHO \21\ generally requires that 
participants of a registered clearing agency (``Participants'') close 
out fail to deliver positions at a registered clearing agency \22\ in 
any equity security for a sale transaction in that equity security by 
no later than the beginning of trading on the next settlement day after 
a fail to deliver resulting from a short sale (generally T+4), and no 
later than the beginning of trading on the third settlement day after a 
fail to deliver resulting from a long sale or a sale resulting from 
bona fide market making activities at the time of the sale (generally 
T+6). A close out is effected by purchasing or borrowing shares of like 
kind and quantity.
---------------------------------------------------------------------------

    \21\ 17 CFR 242.204(a).
    \22\ The term ``registered clearing agency'' means a clearing 
agency, as defined in Section 3(a)(23)(A) of the Exchange Act, that 
is registered as such pursuant to Section 17A of the Exchange Act. 
See 15 U.S.C. 78c(a)(23)(A); 15 U.S.C. 78q-1. The majority of equity 
trades in the United States are cleared and settled through systems 
administered by clearing agencies registered with the Commission. 
The National Securities Clearing Corporation (``NSCC'') clears and 
settles the majority of equity securities trades conducted on the 
exchanges and in the over-the-counter market. NSCC clears and 
settles trades through the Continuous Net Settlement (``CNS'') 
system, which nets the securities delivery and payment obligations 
of all of its members. See Exchange Act Release No. 60388 (July 27, 
2009), 74 FR 38266, 38268 n.35 (July 31, 2009) (``Rule 204 Adopting 
Release'').
---------------------------------------------------------------------------

    Rule 204(a)(2) provides an extended close-out timeframe (T+35) for 
fail to deliver positions at a registered clearing agency in any equity 
security resulting from a sale of a security that a person is deemed to 
own,\23\ similar to the exceptions to the ``locate'' requirement and 
short sale price test requirement discussed above.\24\ Thus, fails to 
deliver resulting from certain sales of Vault Securities would 
currently be eligible for the extended close-out timeframe provided by 
Rule 204(a)(2).\25\
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    \23\ See 17 CFR 242.204(a)(2); see also Rule 204 Adopting 
Release, 74 FR at 38277 n.141. Under Rule 204(a)(2), a Participant 
that has a fail to deliver position resulting from a sale of a 
security that a person is deemed to own pursuant to Rule 200 of 
Regulation SHO and that such person intends to deliver as soon as 
all restrictions on delivery have been removed must, by no later 
than the beginning of regular trading hours on the thirty-fifth 
consecutive calendar day following the trade date for the 
transaction, immediately close out the fail to deliver position by 
purchasing or borrowing securities of like kind and quantity. See 17 
CFR 242.204(a)(2).
    \24\ See supra notes 12 to 14 and accompanying text.
    \25\ See Rule 204 Adopting Release, 74 FR at 38277-38278.
---------------------------------------------------------------------------

    Pursuant to Rule 204(b) of Regulation SHO,\26\ a Participant that 
has not closed out a fail to deliver position in an equity security in 
accordance with Rule 204(a), and any broker-dealer from which the 
Participant receives trades for clearance and settlement, may not 
accept a short sale order in the equity security from another person or 
effect a short sale in the equity security for its own account, without 
first borrowing the security or entering into a bona fide arrangement 
to borrow the security, until the Participant closes out the fail to 
deliver position by purchasing securities of like kind and quantity and 
that purchase has cleared and settled at a registered clearing agency 
(the ``Penalty Box'').
---------------------------------------------------------------------------

    \26\ 17 CFR 242.204(b).
---------------------------------------------------------------------------

    SIFMA has stated that there may be situations where, in connection 
with the inaccessibility of the physical certificates that were located 
in the Vault following flooding from Hurricane Sandy, Vault Security 
sales may result in a CNS fail to deliver, such that Participants would 
be required to close out the fail to deliver position pursuant to Rule 
204(a) \27\ and, if they did not, would be subject to the Penalty Box.
---------------------------------------------------------------------------

    \27\ 17 CFR 242.204(a).
---------------------------------------------------------------------------

    Rule 204 is intended to help reduce fails to deliver and address 
potentially abusive ``naked'' short selling.\28\ In providing an 
extended close-out timeframe for sales of deemed to own securities, the 
Commission stated that additional time is warranted for these sales and 
such additional time would not undermine the goal of reducing fails to 
deliver because ``these are sales of owned securities that cannot be 
delivered by settlement date due solely to processing delays outside 
the seller's or broker-dealer's control. Moreover, delivery will be 
made on such sales as soon as all restrictions on delivery have been 
removed.'' \29\ We believe that, due to the inaccessibility of physical 
certificates that were held in the Vault at the time Hurricane Sandy 
made landfall, sales of Vault Securities raise similar policy 
considerations at this time. We do not believe that the fails to 
deliver that may occur as a result of Vault Security sales, due to the 
unusual and exigent circumstances of Hurricane Sandy, raise the 
concerns that Rule 204 was designed to address. Thus, we believe that 
the relief from the close-out requirement of Regulation SHO provided by 
this Exemptive Order is appropriate in the public interest and 
consistent with the protection of investors.
---------------------------------------------------------------------------

    \28\ See Rule 204 Adopting Release, 74 FR at 38267-38269.
    \29\ Id.
---------------------------------------------------------------------------

    Accordingly, it is further ordered, pursuant to Section 36 of the 
Exchange Act,\30\ that a Participant is exempt from the close-out 
requirement of Rule 204(a) \31\ and the Penalty Box of Rule 204(b) \32\ 
of Regulation SHO with respect to a fail to deliver position resulting 
from the sale of a Vault Security,\33\ subject to the following 
conditions:
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    \30\ See supra note 16.
    \31\ 17 CFR 242.204(a).
    \32\ 17 CFR 242.204(b).
    \33\ Rule 203(b)(3) of Regulation SHO provides that if a 
Participant has a fail to deliver position at a registered clearing 
agency in a threshold security, as defined by Rule 203(c)(6), for 
thirteen consecutive settlement days, the Participant shall 
immediately thereafter close out the fail to deliver position by 
purchasing securities of like kind and quantity. If the sale of a 
Vault Security resulted in a fail to deliver position in a threshold 
security and that fail to deliver position persisted for thirteen 
consecutive settlement days because the close-out date applicable 
under this Exemptive Order had not yet arrived, Rule 203(b)(3) would 
nonetheless require the Participant to close out the fail to deliver 
position. Accordingly, Participants are exempt from the close-out 
requirements of Rule 203(b)(3) with respect to fail to deliver 
positions in threshold securities resulting from Vault Security 
sales, provided that the Participants close out the fail to deliver 
positions in compliance with this Exemptive Order. See 17 CFR 
242.203(b)(3).
---------------------------------------------------------------------------

    (a) The Participant must determine and document that the fail to 
deliver resulted from a sale of a Vault Security \34\ that a person is 
deemed to own pursuant to Rule 200 of Regulation SHO; \35\
---------------------------------------------------------------------------

    \34\ A Vault Security sale would include situations where the 
security sold, a security convertible into or exchangeable for it, 
or a right or warrant to subscribe to it, is represented by a 
physical certificate that was held in the Vault at the time 
Hurricane Sandy made landfall. Such determination could be based, 
for example, on records indicating that the sale involves a physical 
certificate custodied at DTCC and that the physical certificate was 
submitted to DTCC for custody on or before October 26, 2012. See 
supra note 3.
    \35\ 17 CFR 242.200.
---------------------------------------------------------------------------

    (b) The Participant must check DTCC systems on a daily basis to 
determine when a Vault Security, the sale of which resulted in a fail 
to deliver position, is available for settlement; \36\
---------------------------------------------------------------------------

    \36\ We understand that DTCC systems (including the Participant 
Browser System and the Participant Terminal System) enable 
Participants to verify their positions in Vault Securities and issue 
withdrawal instructions. We understand that these systems permit 
Participants, in conjunction with the Participant's own books and 
records, to track when Vault Securities have been debited 
(withdrawn) and sent to the transfer agent and when the Vault 
Securities are available for settlement after they have been 
returned to DTCC and are available for Participant pickup, are 
mailed directly to the customer, or are set up as a Direct 
Registration System account, and that Participants check these 
systems for completed status of physical certificate processing on a 
daily basis.
---------------------------------------------------------------------------

    (c) The Participant must deliver the Vault Security as soon as 
possible, and

[[Page 74894]]

in any event must deliver the Vault Security or close out the fail to 
deliver position resulting from the Vault Security sale by purchasing 
or borrowing securities of like kind and quantity by no later than the 
beginning of regular trading hours on the fourth settlement day 
following the date on which the Participant determines, in accordance 
with condition (b) above, that the Vault Security, the sale of which 
resulted in the fail to deliver position, is available for settlement; 
\37\ and
---------------------------------------------------------------------------

    \37\ For example, a Participant submitted a sale on October 16, 
2012, for clearance and settlement with an original expected 
settlement date of October 19, 2012. The security sold was a 
restricted Vault Security under Rule 144 whose physical certificate 
was located in the Vault. The Participant determines, as a result of 
the daily check of DTCC systems for status of the Vault Securities, 
that the Vault Security is available for settlement on December 12, 
2012. Normally Rule 204(a)(2) would apply and the Participant would 
be required to close out the resulting fail to deliver position 
thirty-five calendar days after trade date, on November 20, 2012. 
Because the Vault Security was not available due to Hurricane Sandy 
on November 20th, the Participant would be able to avail itself of 
the adjusted close-out timeframe provided in condition (c) above. In 
this limited instance, pursuant to this Exemptive Order, the 
Participant would be required to deliver the Vault Security as soon 
as possible, and in any event must deliver the Vault Security or 
close out the fail to deliver position by no later than the 
beginning of regular trading hours on December 18, 2012.
---------------------------------------------------------------------------

    (d) The Participant's books and records must reflect that it made 
delivery of the Vault Security or closed out the fail to deliver 
position resulting from the Vault Security sale within the applicable 
time period, consistent with this Exemptive Order.

III. Modification, Revocation, and Expiration of Exemptions

    The exemptions granted herein are subject to modification or 
revocation if at any time the Commission determines that such action is 
necessary or appropriate in furtherance of the purposes of the Exchange 
Act, and, absent further action by the Commission, will expire on 
February 1, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\38\
---------------------------------------------------------------------------

    \38\ See 17 CFR 200.30-3(a)(11).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-30427 Filed 12-17-12; 8:45 am]
BILLING CODE 8011-01-P

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