Surveillance and Examination of Regulation SHO Requirements
NASD will be closely monitoring member activity for compliance with the Regulation SHO requirements and members will be expected to be in compliance with the Regulation SHO requirements as of the January 3, 2005 compliance date. Among other things, NASD is developing surveillance programs that will track the level and duration of CNS fails by members. To the extent such fails are not closed out within the requisite time period, NASD will be reviewing the actions taken by the member to close out the fails, which should be clearly documented by the member. Similarly, NASD will be reviewing member activities to ensure that members have complied with the marking, locate, and pre-borrow requirements, as applicable. Accordingly, NASD's member examination program will include reviews for compliance with each applicable rule in Regulation SHO.
In addition, NASD Rule 3010 requires that members establish and maintain a supervisory system that is designed to ensure compliance with the NASD rules and the federal securities laws. Accordingly, NASD will be examining closely members' supervisory systems and written supervisory procedures relating to Regulation SHO and, where appropriate, will initiate disciplinary action against firms and their supervisory personnel for failure to adopt, implement, and enforce appropriate supervisory procedures.
