Reg SHO marking has nothing to do with actually "SHORTING" a stock, it is simply an OWNERSHIP marking as to who exactly owns the shares in the trade transaction on the initial leg of the trade transaction. If a broker Dealer is used the trade is going to be marked SHORT despite both retail being net LONG on the security.
I gave three outstanding examples yesterday as to what is marked LONG and what is marked SHORT. Anytime a broker cannot internalize an order it will be marked SHORT because it requires a broker dealer to complete the transaction. That broker dealer doesnt OWN the shares in the trade, and certainly doesnt have physical possession of those shares, the selling BROKER does.
Etrade is telling you that your shares in your account cannot be BORROWED against, that has nothing to do with REG SHO...