Client Notice

Regulation SHO: Long and Short Sale Buy-In Obligations

In October 2008, the U.S. Securities and Exchange Commission ("SEC") adopted Rule 204T of Regulation SHO as an interim final temporary rule to address "naked" short selling and failures to timely deliver securities by settlement date, also known as "fails to deliver" or "FTDs" in all equity securities. Rule 204T was effective through July 31, 2009. The SEC has issued Rule 204, its final version of the rule.  Rule 204 continues, largely unchanged, the prior requirements of Rule 204T for clearing firms such as Citigroup Global Markets Inc. (the “Firm”) to close out FTD positions that result from either short sales or long sales. Clients may sustain a loss in connection with any buy-ins required to cover an FTD in connection with their account.

Rule 204 includes the following general requirements:

• FTDs Resulting from Short Sales – The Firm is generally required to close out FTD positions resulting from short sales in a client's account, by no later than the beginning of regular trading hours on T+4.
• FTDs Resulting from Long Sales – The Firm is generally required to close out FTD positions resulting from long sales in a client's account, by no later than the beginning of regular trading hours on T+6.
• Borrow or Arrange to Borrow Requirements - To the extent that the Firm is not able to comply with the above close-out requirements, the Firm, and any broker-dealer from which it receives trades for clearance and settlement, will be unable to effect further short sales in the particular security without first borrowing or arranging to borrow the security. This remains in effect until the FTD position is closed and has settled.

Most provisions of the final Rule 204 remain the same as the temporary Rule 204T. However, there are a few minor changes to the new rule, including clarification of the class of securities eligible for an extended 35-calender day close-out period to include certain securities the seller is “deemed to own” and intends to deliver, such as securities not yet received after exercising an option or warrant.

What this means for you:

In order to avoid a potential buy-in in your account, you need to ensure timely delivery of your securities to the Firm. To the extent that the securities are not delivered to the Firm under the timeframes set out in Rule 204, the Firm's regulatory obligations may require it to execute a buy-in against your account.  You will be held responsible for any costs and/or losses that the Firm may incur in connection with executing any buy-ins to close out open FTD positions.

For options, if an exercise of long puts or an assignment of short calls results in a short stock position that the client would like to maintain, then shares must be available at the Firm to cover the position on T+3. If such shares are not available, the position must be bought in.

The rule is available at: http://www.sec.gov/rules/final/2009/34-60388.pdf