Rule 204 PRA Supporting Statement - 2021

SUPPORTING STATEMENT
for the Paperwork Reduction Act Information Collection Submission for
Rule 204 of Regulation SHO
OMB Control No. 3235-0647

A.

JUSTIFICATION
1.

Information Collection Necessity
i.

Allocation Notification Requirement

Rule 204(d) of Regulation SHO imposes a notification requirement on a broker-dealer
that has been allocated responsibility for complying with the rule’s requirements to help ensure
that participants will be on notice if a broker-dealer for which they clear and settle trades has
become subject to Rule 204(b)’s pre-borrowing requirements.
ii.

Demonstration Requirement for Fails to Deliver on Long Sales

Rule 204(a)(1) of Regulation SHO allows a participant additional settlement days,
specifically, until no later than the beginning of regular trading hours on the third consecutive
settlement day following the settlement date, in which to close out the fail to deliver position that
resulted from a long sale, provided that the participant can demonstrate on its books and records
that the fail to deliver position resulted from a long sale.
iii.

Pre-Borrow Notification Requirement

Rule 204(c) of Regulation SHO requires that a participant notify any broker or dealer
from which it receives trades for clearance and settlement if the participant has a fail to deliver
position in an equity security at a registered clearing agency that has not been closed out in
accordance with Rule 204(a), and when the purchase that the participant has made to close out
the fail to deliver position has cleared and settled at a registered clearing agency. This
notification requirement is designed to help ensure that any broker or dealer that submits trades
for clearance and settlement to a participant that has a fail to deliver position in an equity
security that has not been closed out in accordance with Rule 204(a) will be on notice that short
sales in that equity security to be cleared or settled through that participant will be subject to the
pre-borrow requirements of Rule 204(b) until (A) the participant closes out the fail to deliver
position by purchasing securities of like kind and quantity and (B) that purchase has cleared and
settled at a registered clearing agency, unless the broker-dealer can demonstrate to the
participant, as specified in Rule 204(b), that it is not responsible for the fail to deliver position.
iv.

Certification Requirement

Rule 204(b) of Regulation SHO includes an exception from the rule’s pre-borrowing
requirements for any broker or dealer that timely certifies to the participant that it has not
incurred a fail to deliver position on settlement date for a long or short sale in an equity security

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for which the participant has a fail to deliver position at a registered clearing agency or that the
broker or dealer is in compliance with Rule 204(e). The certification provided by the broker or
dealer to the participant will help ensure that a broker or dealer will not be improperly subject to
the pre-borrowing requirements of the rule.
v.

Pre-Fail Credit Demonstration Requirement

Rule 204(e)’s pre-fail credit provision requires, among other things, that the broker or
dealer demonstrate that it has a net long position or net flat position on its books and records on
the day of the purchase or borrow of securities supporting its claim to pre-fail credit. The
information collected will enable the Commission and self-regulatory organizations (“SROs”) to
monitor more effectively whether a broker or dealer has complied with the requirements of Rule
204(e).
2.

Information Collection Purpose and Use

The information collected will help further the Commission’s goal of reducing fails to
deliver by maintaining the reductions in fails to deliver achieved by, among other actions, the
adoption of Interim Final Temporary Rule 204T (“temporary Rule 204T”), which had been
implemented via emergency order on September 17, 2008, and adopted as an interim final
temporary rule on October 14, 2008.1 Rule 204 made permanent the amendments contained in
temporary Rule 204T, with some limited modifications to address commenters’ concerns.2
The information collected under Rule 204 will continue to be retained and/or provided to
other entities pursuant to the specific rule provisions and will be available to the Commission
and SRO examiners upon request. The information collected will continue to aid the
Commission and SROs in monitoring compliance with these requirements. In addition, the
information collected will aid those subject to Rule 204 in complying with its requirements.
In addition, Rule 204 is intended to help further the Commission’s goal of addressing
potentially abusive “naked” short selling in all equity securities. By strengthening the close-out
requirements of Regulation SHO and promoting the prompt and accurate clearance and
settlement of transactions involving equity securities, Rule 204 is intended to help restrict the
practice of “naked” short selling. Rule 204 is intended to provide a disincentive to market
participants who, but for the rule, may have failed to deliver securities by settlement date.

1

Amendments to Regulation SHO, Exchange Act Release No. 58733 (Oct. 14, 2008), 73 FR 61706 (Oct.
17, 2008) (“Rule 204T Adopting Release”).
2

Amendments to Regulation SHO, Exchange Act Release No. 60388 (July 27, 2009), 74 FR 38265 (July
31, 2009) (“Rule 204 Adopting Release”).

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3.

Consideration Given to Information Technology

The compilation of this information must be done on an individual basis by each respondent
subject to any of the requirements discussed in item 1, above. Improvements in telecommunication
and data processing technology will likely enhance the efficiency of compiling information and
providing notifications and certifications pursuant to the Rule. The Commission is not aware of any
technological or legal obstacles to reducing the burden through the use of improved information
technology.
4.

Duplication

The Commission is not aware that the information collection requirement under the Rule
is duplicated elsewhere.
5.

Effect on Small Entities

The Commission does not expect that the collection of information necessary to ensure
compliance with the requirements of Rule 204 will adversely affect small entities because the Rule
imposes minimal reporting, record keeping, or compliance requirements, many of which were
required of small entities pursuant to the implementation of Regulation SHO and temporary Rule
204T.
6.

Consequences of Not Conducting Collection

To ensure compliance with Rule 204, a participant or broker-dealer subject to any of the
requirements discussed in item 1 above must collect the required information on a daily basis. Less
frequent or less individualized collection would impede the ability to verify compliance with Rule
204.
7.

Inconsistencies with Guidelines in 5 CFR 1320.5(d)(2)

There are no special circumstances. This collection is consistent with the guidelines in 5
CFR 1320.5(d)(2).
8.

Consultations Outside the Agency

The required Federal Register notice with a 60-day comment period soliciting comments
on this collection of information was published. No public comments were received.
9.

Payment or Gift

No payment or gift is provided to respondents.

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10.

Confidentiality

No assurance of confidentiality is provided.
11.

Sensitive Questions

The information collection does not collect personally identifiable information.
12.

Information Collection Burden

The Commission estimates that the information collection under Rule 204 will be as set forth in
the chart below. A more detailed description is immediately below the chart.
Rule 204
Requirement

Burden Type

Number of
Respondents

Allocation
Notification
Requirement

Recordkeeping
and
Third-Party
Disclosure
Recordkeeping
and
Third-Party
Disclosure
Recordkeeping
and
Third-Party
Disclosure
Recordkeeping
and
Third-Party
Disclosure
Recordkeeping
and
Third-Party
Disclosure

Demonstration
Requirement
for Fails to
Deliver on
Long Sales
Pre-Borrow
Notification
Requirement
Certification
Requirement

Pre-Fail
Credit
Demonstration
Requirement

Time per
Response
(Hours)

Total
Burden
(Hours)

3,551

Number of
Annual
Responses
per
Respondent
531.3

.16

301,864

127

7,337

.16

149,088

127

14,927

.16

303,317

3,551

531.3

.16

301,864

3,551

531.3

.16

301,864

Total Aggregate Burden

1,357,997

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i. Allocation Notification Requirement
Consistent with the most recent Paperwork Reduction Act (“PRA”) renewal for Rule 204,
the Commission estimates that it will take a broker or dealer no more than approximately 0.16
hours (10 minutes) to notify a participant that the broker or dealer has become subject to the
requirements of Rule 204(b) of Regulation SHO.3 Rule 204 was adopted in 2009, and the
communication mechanisms developed by brokers or dealers to comply with the notification
requirement of Rule 204(d), and the time estimates for completing the procedures involved,
likely evolved from the broker’s or dealer’s legacy Rule 203(b) Threshold Securities
communication mechanisms and legacy Rule 204T communication mechanisms. Accordingly,
the Commission believes the estimated time frame for notification by the broker or dealer would
remain consistent with the time frame stated in the prior PRA Supporting Statement for Rule
204.
As of December 31, 2020, there were 3,551 registered broker-dealers.4 Each of these
broker-dealers could clear trades through a participant of a registered clearing agency and,
therefore, become subject to the notification requirements of Rule 204(d). If a participant
allocates a fail to deliver position to a broker or dealer pursuant to Rule 204(d), the broker or
dealer that has been allocated the fail to deliver position in an equity security must determine
whether such fail to deliver position was closed out in accordance with Rule 204(a). If such
broker or dealer does not comply with the provisions of Rule 204(a), such broker or dealer must
immediately notify the participant that it has become subject to the requirements of Rule 204(b).
The Commission estimates that a broker or dealer could have to make such determination and
notification with respect to approximately 2.1 equity securities per day.5
The Commission estimates a total of 1,886,646 potential notifications in accordance
with Rule 204(d) across all registered broker-dealers that could be allocated responsibility
to close out a fail to deliver position per year (3,551 registered broker-dealers notifying
participants once per day6 on 2.1 equity securities, multiplied by 253 trading days in 2020).
The total estimated annual burden hours per year will be approximately 301,864 (1,886,646
potential notifications multiplied by 0.16 hours/notification). The Commission estimates
3

See Rule 204 Adopting Release, supra note 2 (making permanent the amendments to Regulation SHO
contained in Interim Final Temporary Rule 204T and incorporating by reference the time estimates from
the Rule 204T Adopting Release for compliance with the notification, demonstration, and certification
requirements of Rule 204).
The Commission’s Division of Economic and Risk Analysis (“DERA”) estimates that there were
approximately 3,551 registered broker-dealers as of December 31, 2020, based on FOCUS filings data.
4

5

DERA estimates that there were approximately 7,450 average daily fail to deliver positions during 2020.
Across 3,551 registered broker-dealers, the number of equity securities per registered broker-dealer per
trading day is approximately 2.1 (7,450 ÷ 3,551) equity securities.
6

Because failure to comply with the close-out requirements of Rule 204(a) is a violation of the rule, the
Commission believes that a broker or dealer would make the notification to a participant that it is subject
to the borrowing requirements of Rule 204(b) at most once per day.

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that the paperwork compliance for the allocation notification requirement for each brokerdealer will be approximately 85 burden hours per year (301,864 ÷ 3,551).
ii.

Demonstration Requirement for Fails to Deliver on Long Sales

Given no change in this requirement since the most recent PRA renewal for Rule 204, the
Commission estimates, consistent with the time estimates in the Supporting Statement for that
PRA renewal, that it will take a participant of a registered clearing agency no more than
approximately 0.16 hours (10 minutes) to demonstrate on its books and records that it has a fail
to deliver position at a registered clearing agency in an equity security that resulted from a long
sale. Since Rule 204 was adopted in 2009, participants have developed the necessary
mechanisms to comply with the demonstration requirement of Rule 204(a). These Rule 204(a)
processes, and the time estimates for completing those processes, were likely developed based on
the participant’s legacy Rule 204T processes. Accordingly, the Commission believes the
estimated time frame for demonstration by the participant would remain consistent with the time
frame stated in the prior PRA Supporting Statement for Rule 204.
As of December 31, 2020, there were 127 participants of NSCC that were registered as
broker-dealers. If a participant of a registered clearing agency has a fail to deliver position in an
equity security at a registered clearing agency and determined that such fail to deliver position
resulted from a long sale, the Commission estimates that a participant of a registered clearing
agency will have to make such determination with respect to approximately 29 securities per
day.7
The Commission estimates a total of 931,799 potential demonstrations in accordance
with Rule 204(a)(1) across all broker-dealer participants per year (127 participants
checking for compliance once per day on 29 securities, multiplied by 253 trading days in
2020). The total approximate estimated annual burden hours per year will be
approximately 149,088 (931,799 multiplied by 0.16 hours/demonstration). The Commission
estimates that the paperwork burden for the temporary demonstration provision for each
broker-dealer participant will be approximately 1,174 burden hours per year (149,088 ÷
127).
iii.

Pre-Borrow Notification Requirement

Given no change in this requirement since the most recent PRA renewal for Rule 204, the
Commission estimates, consistent with the time estimates in the Supporting Statement for that
PRA renewal, that it will take a participant of a registered clearing agency no more than
approximately 0.16 hours (10 minutes) to notify all broker-dealers from which the participant
receives trades for clearance and settlement (1) that the participant has a fail to deliver position in
an equity security at a registered clearing agency that has not been closed out in accordance with
7

DERA estimates that during 2020 approximately 49.2% of trade volume was long. DERA estimates
that there were approximately 7,450 average daily fail to deliver positions during 2020. Across 127
broker-dealer participants of the NSCC, the number of securities per participant per day is approximately
59 (7,450 ÷ 127) equity securities. 49.2% of 59 equity securities per trading day equals approximately 29
securities per day.

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the requirements of Rule 204(a), and (2) when the purchase that the participant has made to close
out the fail to deliver position has cleared and settled at a registered clearing agency. Since Rule
204 was adopted in 2009, participants have developed the necessary communication mechanisms
to comply with the notification requirement of Rule 204(c). These Rule 204(c) communication
mechanisms, and the time estimates for completing the procedures involved, likely evolved from
the participant’s legacy Rule 203(b) Threshold Securities communication mechanisms and
legacy Rule 204T communication mechanisms. Accordingly, the Commission believes the
estimated time frame for notification by the participant would remain consistent with the time
frame stated in the prior PRA Supporting Statement for Rule 204.
As of December 31, 2020, there were 127 participants of NSCC that were registered as
broker-dealers. If a participant of a registered clearing agency has a fail to deliver position in an
equity security, the participant must determine whether the fail to deliver position was closed out
in accordance with Rule 204(a). The Commission estimates that a participant of a registered
clearing agency will have to make such determination with respect to approximately 59 equity
securities per day.8
The Commission estimates a total of 1,895,729 potential notifications in accordance
with Rule 204(c) across all participants per year (127 broker-dealer participants notifying
broker-dealers once per day on 59 securities, multiplied by 253 trading days in 2020). The
total estimated annual burden hours per year will be approximately 303,317 (1,895,729
multiplied by 0.16 hours/notification). The Commission estimates that the paperwork
burden for the notification requirement for each broker-dealer participant will be
approximately 2,388 burden hours per year (303,317 ÷ 127).
iv.

Certification Requirement

Given no change in this requirement since the most recent PRA renewal for Rule 204,
the Commission estimates, consistent with the time estimates in the Supporting Statement for
that PRA renewal, that it will take a broker or dealer no more than approximately 0.16 hours (10
minutes) to certify to the participant that it has not incurred a fail to deliver position on
settlement date for a long or short sale in an equity security for which the participant has a fail to
deliver position at a registered clearing agency or that the broker or dealer is in compliance with
the requirements set forth in the pre-fail credit provision of Rule 204(e). Since Rule 204 was
adopted in 2009, brokers or dealers have developed the necessary communication mechanisms in
order to comply with the certification requirement of Rule 204(b). These Rule 204(b)
communication mechanisms, and the time estimates for completing the procedures involved,
likely evolved from the broker’s or dealer’s legacy Rule 203(b) Threshold Securities
communication mechanisms and legacy Rule 204T communication mechanisms. Accordingly,
the Commission believes the estimated time frame for certification by the broker or dealer would
remain consistent with the time frame stated in the prior PRA Supporting Statement for Rule
204.

8

See supra note 7.

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As of December 31, 2020, there were 3,551 registered broker-dealers. Each of these
broker-dealers may clear trades through a participant of a registered clearing agency. If the
broker-dealer determines that it has not incurred a fail to deliver position on settlement date for a
long or short sale in an equity security for which the participant has a fail to deliver position at a
registered clearing agency or has purchased or borrowed securities in accordance with the
pre-fail credit provision of Rule 204(e), the Commission estimates that a broker-dealer could
have to make such determination with respect to approximately 2.1 securities per day.9 The
Commission estimates that each such registered broker-dealer could have to certify to a
participant that the broker-dealer has not incurred a fail to deliver position on settlement date for
a long or short sale in an equity security for which the participant has a fail to deliver position at
a registered clearing agency or, alternatively, that the broker-dealer is in compliance with the
requirements set forth in the pre-fail credit provision of Rule 204(e) a total of 1,886,646 times
per year across all such registered broker-dealers (3,551 registered broker-dealers certifying once
per day on 2.1 securities, multiplied by 253 trading days in 2020). The total approximate
estimated annual burden hours per year will be approximately 301,864 (1,886,646
multiplied by 0.16 hours/certification). The Commission estimates that the paperwork
burden for the certification provision for each registered broker-dealer will be
approximately 85 burden hours per year (301,864 ÷ 3,551).
v.

Pre-Fail Credit Demonstration Requirement

Given no change in this requirement since the most recent PRA renewal for Rule 204, the
Commission estimates, consistent with the time estimates in the Supporting Statement for that
PRA renewal, that it will take a broker-dealer no more than approximately 0.16 hours (10
minutes) to demonstrate that it has a net long position or net flat position on its books and
records on the day of the purchase or borrow of securities supporting its claim to pre-fail credit.
Since Rule 204 was adopted in 2009, brokers or dealers have developed the necessary
mechanisms to comply with the demonstration requirement of Rule 204(e). These Rule 204(e)
mechanisms, and the time estimates for completing the procedures involved, likely evolved from
the broker’s or dealer’s legacy Rule 203(b) Threshold Securities communication mechanisms
and legacy Rule 204T communication mechanisms. Accordingly, the Commission believes the
estimated time frame for demonstration by the broker or dealer would remain consistent with the
time frame stated in the prior PRA Supporting Statement for Rule 204.
As of December 31, 2020, there were 3,551 registered broker-dealers. If a broker-dealer
purchased or borrowed securities in accordance with the conditions specified in Rule 204(e) and
determined that it had a net long position or net flat position on the settlement day for which the
broker-dealer is claiming pre-fail credit, the Commission estimates that a broker-dealer could
have to make such determination with respect to approximately 2.1 securities per day.10
The Commission estimates that the total number of times per year that such registered brokerdealers could have to demonstrate on their respective books and records that the broker-dealer has a net
long position or net flat position on the settlement day for which the broker-dealer is claiming pre-fail
9

See supra note 5.

10

See supra note 5.

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credit is 1,886,646 (3,551 registered broker-dealers checking for compliance once per day on 2.1
equity securities, multiplied by 253 trading days in 2020). The total approximate estimated annual
burden hours per year will be 301,864 (1,886,646 multiplied by 0.16 hours/demonstration). We
estimate that the paperwork burden for compliance with the demonstration requirement of Rule
204(e)(4) for each registered broker-dealer will be approximately 85 burden hours per year
(301,864 ÷ 3,551).
13.

Costs to Respondents

Rule 204 was adopted in 2009. It is not anticipated that respondents will have to incur any
additional one-time capital or startup costs or ongoing operations and maintenance costs to comply with
Rule 204, as participants should already have in place the mechanisms that are necessary to comply with
Rule 204.
14.

Costs to Federal Government

Not applicable. Rule 204 does not require any contracting, IT and project or web development
costs.
15.

Changes in Burden

In 2020, the total aggregate annual record keeping and third-party disclosure burden for the
collection of information undertaken pursuant to the notification, demonstration, and certification
requirements of Rule 204 is 1,357,997 hours per year (301,864 + 149,088 + 303,317 + 301,864 +
301,864).11 In 2017, the total aggregate annual record keeping and third-party disclosure burden for the
collection of information undertaken pursuant to those requirements was 1,276,087 hours per year
(275,164 + 174,937 + 275,658 + 275,164 + 275,164). The increase in total aggregate burden hours from
1,276,087 to 1,357,997 is largely due to an increase in the number of average daily fail to deliver positions
from 6,868 during 2017 to 7,450 in 2020.
16.

Information Collection Planned for Statistical Purposes

Not applicable. The information collection is not used for statistical purposes.
17.

Approval to Omit OMB Expiration Date

The Commission is not seeking approval to omit the expiration date.
18.

Exceptions to Certification for Paperwork Reduction Act Submissions

This collection complies with the requirements in 5 CFR 1320.9.

11

This information is summarized in the chart in section 12 above.

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B.

COLLECTIONS OF INFORMATION EMPLOYING STATISTICAL METHODS
This collection does not involve statistical methods.